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Chapter 8

• Managing IT Outsourcing

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Overview

• Companies outsource for a variety of reasons
• Cost and quality
• Lagging IT performance
• Access to special technical application skills
• Strategic alliances are common and accepted
• Like marriages, outsourcing deals are easier to
  enter into than to sustain or dissolve
• Long-term management of the alliance is a
  challenge

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Difficulties

• Why are outsourcing alliances difficult (who
  could have thought that they would be ease?)
• Many are designed for the long-term in a fast
  changing world
• 8-10 year contracts
• Chip performance improves by 20-30 per year
• Many upper level IT department executives lack
  the exposure to decipher technology trends
• Timing of benefits
• Initial benefits (first year) accrue to the
  customer
• Outsourcing firm makes it up on the back end

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Difficulties

• There are few outsourcing firms that can handle
  really big jobs
• Low competition
• These firms have more experience setting up deals
  than their customers (the car salesman problem)
• Insourcing can be a NIGHTMARE scenario
• Shipping employees out of the area
• Loyalty lost
• The strategic relevance of IT to a firm can shift

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Outsourcing History

• Popular since the 1960s
• Computer service bureaus ran financial and
  operations support programs (general ledger,
  payroll, inventory control)
• Mainframes were expensive
• Expertise in programming was rare and costly
• Popular with small and mid-sized firms
• ADP was one of the first
• started with punch-card payrolls in 1949
• Now does 4 billion

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Outsourcing History

• Kodak outsourcing in 1990
• Turning point in the industry
• The CIO had been a general manager, not technical
• Outsourced Mainframes, Telecom, and PCs
• Businessland went under, damaging the deal
• Kodak had not internal IT personnel to forewarn
  them of the impending digital photo explosion
• IT outsourcing is reminiscent of Accounting firms
  moving outside the organization

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2 Factors Affecting Outsourcing Growth

• Acceptance of Strategic Alliances
• Finding a strong partner to complement an area of
  weakness
• Must be a WIN-WIN situation
• Changing IT Environment
• Pressure to keep legacy systems running while
  optimizing new technology and techniques
• Comfort with packaged software (e.g. PCs)
• Operating systems, email, browsers, office
  automation, compilers
• Y2K

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Factors Driving IT Outsourcing

• General Manager concerns about Cost and Quality
• IT performance breakdown
• (Intense) Supplier pressure (i.e., lobbying)
• Simplified General Management Agenda
• Firm does not see IT as a core competency
• Intense environmental pressure
• See no future IT upside
• Financial Factors
• Quick cash infusion
• Get a large cost off the books

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Factors Driving IT Outsourcing

• Financial Factors (contd.)
• Lowers personnel costs (IT people are very
  expensive vis-à-vis the rest of the firm)
• Costs are left for a successor in some firms
• Corporate Culture
• Eliminating an Internal irritant
• Solve (?) end-user friction
• High cost of IT staff
• Career path concerns of the IT staff
• Other
• Attracting and retaining staff

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5 Factors When Not to Outsourcing

• Position on the Strategic Grid
• Outsource
• The contract is critical to the outsourcer
• Maintenance is a large part of the portfolio
• Keep
• IT is critical to the firm
• New systems are critical to success
• Development Portfolio
• Organizational Learning
• You must adapt to the contract
• BPR

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5 Factors When Not to Outsourcing

• Firms Position in the Market
• If your technology is very old, outsourcing is a
  good way to catch-up
• If you are fairly current, outsourcing gains you
  little
• Current IT Organization
• If IT development and IT operations are separate,
  outsourcing is easy
• It is also easy to negotiate and manage the
  contract
• Integrated IT makes outsourcing difficult

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Structuring the Alliance

• This is a contract
• Established parameters at the beginning
• A proper structure is a necessary but not
  sufficient requirement for success
• Contract Flexibility
• Must be able to deal with evolving technology
• Outsourcer wants a contract as structured and
  close-ended as possible
• Standards and Control
• Some areas are common water, power, phone
• It is a loss of creative control and future
  thoughts

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Managing the Alliance

• CIO Function
• Partnership/contract management
• Architecture planning
• Emerging Technologies
• Continuous learning
• Performance management
• Customer-Outsourcer Interface
• Oversight can not be delegated
• Managers for the relationship on both sides of
  the deal

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Questions on Chapter 8?