IS 483 Information Systems Management

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IS 483Information Systems Management

• James Nowotarski
• 22 May 2003

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Todays Objectives

• Recap risk management and RFP
• Understand IT Outsourcing

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Todays agenda

• Topic Duration
• Recap risk management/RFP 15 minutes
• Assignment 2 reports 20 minutes
• Quiz 15 minutes
• Break 15 minutes
• IT Outsourcing 90 minutes
• Assignment 2 reports 20 minutes

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Todays agenda

• Topic Duration
• Recap risk management/RFP 15 minutes
• Assignment 2 reports 20 minutes
• Quiz 15 minutes
• Break 15 minutes
• IT Outsourcing 90 minutes
• Assignment 2 reports 20 minutes

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IT Risk Management
Major Categories of Risk

• Economic
• Technical
• Organizational
• Legal
• Terrorism

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IT Risk Management
Major Categories of Risk

• Economic
• Technical
• Organizational
• Legal
• Terrorism

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IT Risk Management
Major Categories of Risk

• Economic
• Technical
• Organizational
• Legal
• Terrorism

• Risks that can potentially result from lack of
  acceptance of a system
• low morale
• decline in effectiveness/efficiency

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IT Risk Management
Major Categories of Risk

• Economic
• Technical
• Organizational
• Legal
• Terrorism

• Risks arising from potential lawsuits and
  liabilities associated with implementation of a
  project
• shareholder lawsuits
• data privacy
• Foreign Corrupt Practices Act (FCPA)

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IT Risk Management
Major Categories of Risk

• Economic
• Technical
• Organizational
• Legal
• Terrorism

• Risks arising from intentional destruction or
  malevolent modification of
• physical equipment
• data
• software
• network

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IT Risk Management
Risk Management

• The process in which potential risks to a
  business are identified, analyzed and mitigated,
• along with
• the process of balancing the cost of protecting
  the company against a risk vs. the cost of
  exposure to that risk.

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Risk Frameworks
Fidelitys Risk Cube
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Risk Frameworks
---------- Fidelity Risk Cube
----------
Risk Measurement
Risk Awareness
Risk Management
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Risk Frameworks
RISK Cube - Key Questions

• R is for Return
• Are we achieving an appropriate return for the
  risks we take?
• I is for Immunization
• Do we have controls and limits in place to limit
  downside risk?
• S is for Systems
• Do we have systems in place to measure and report
  risk?
• K is for Knowledge
• Do we have the right people, skills, culture, and
  incentives for effective risk management?

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Risk Management Approaches
Risk Management Approaches

• Interdisciplinary Approach
• Portfolio Approach
• Options Thinking
• Chaos Theory

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Risk vs. Technology Maturity
Impact of Technology Maturity
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Risk Management at Project Level
Steps Taken by Prudent Managers

• List the risks that could occur and when they
  could occur
• Determine what detection method can alert IS that
  risk occurred
• Establish detection method
• Estimate each risks probability of occurring
• Formulate plans that can mitigate each risk
• Establish teams that will monitor and mitigate
  the risk

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Procurement - Process
RFP Process
Objective Identify best solution to meet stated
business need while minimizing cost and risk
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Todays agenda

• Topic Duration
• Recap risk management/RFP 15 minutes
• Assignment 2 reports 20 minutes
• Quiz 15 minutes
• Break 15 minutes
• IT Outsourcing 90 minutes
• Assignment 2 reports 20 minutes

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Todays agenda

• Topic Duration
• Recap risk management/RFP 15 minutes
• Assignment 2 reports 20 minutes
• Quiz 15 minutes
• Break 15 minutes
• IT Outsourcing 90 minutes
• Assignment 2 reports 20 minutes

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Todays agenda

• Topic Duration
• Recap risk management/RFP 15 minutes
• Assignment 2 reports 20 minutes
• Quiz 15 minutes
• Break 15 minutes
• IT Outsourcing 90 minutes
• Assignment 2 reports 20 minutes

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IT Outsourcing
Information technology (IT) outsourcing is widely
accepted by most commercial organizations

• On average, commercial organizations outsource
  40 of their IT budgets
• Outsourcing is one of the greatest
  organizational and industry structure shifts of
  the 20th century -- James Brian Quinn, Amos
  Tuck School, Dartmouth

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IT Outsourcing
Information technology (IT) outsourcing is the
use of a third party to provide services rather
than using those in-house.
Drivers

• Cost reduction -- Perception of IT as a cost
  burden coupled with availability of cheaper
  sources of services (e.g., near-shore and
  offshore)
• Cost predictability
• Require improved performance levels (e.g., speed
  of delivery, customer satisfaction, quality,
  etc.)
• Refocus on corporate core competencies
• Desire to have in-house IT resources focus on
  strategic systems and/or technology
• Lack of ability and/or willingness to hire/retain
  IT skills

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IT Outsourcing
A desire to focus on core competencies is
frequently the strongest driver to outsource
get rid of context and focus on core - Billy
McCarter, former CIO of Firemans Fund, who
reduced IT staff from 1,100 to 600 with much of
the work outsourced to offshore workers
allows me and my staff to focus on fun areas .
. . be more productive, more visible to the
business, understand what the business needs
versus worrying about whether one of the servers
needs additional RAM - Daniel Sheehan, CIO at
Advo, Inc. (infoweek, 4/14/03)
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IT Outsourcing
IT is often viewed as a commodity and, thus, not
core

• IT is like electric power -- a commodity that is
  required by all but provides distinction to none
• IT capability is broadly accessible and
  affordable
• New or proprietary technologies offer opportunity
  for companies to gain a step, but this advantage
  is short-lived
• Further evidence of IT commoditization
• overcapacity
• price drops
• vendors positioning selves as utilities
• bursting of the investment bubble

Carr, N. IT Doesnt Matter. Harvard Business
Review. May 2003.
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IT Outsourcing
Processes once considered core are now candidates
for outsourcing.
Examples

• Chipmakers no longer make chips
• Pharmaceuticals outsource new drug research
• Government outsources prisons
• Apparel firms outsource apparel manufacturing

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IT Outsourcing
What parts of IT to outsource?

• Data center operations
• Network operations
• Application maintenance
• Desktop workstations
• Help desk/Support
• Application development
• Business process execution

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IT Outsourcing
To what extent should you outsource?

• Transitional Outsourcing
• Selective Outsourcing
• Total Outsourcing

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IT Outsourcing
Transitional Outsourcing

• What is it
• Outsource legacy systems
• Focus in-house staff on development of new
  world
• Outsourced activity may return in house at some
  point

• Advantages
• Legacy systems are well-understood, facilitates
  specifying outsourcing contract terms
• In-house organization moves on to next new thing
  (Tarzan grabbing the next rope in the IT jungle)
• Contract may be shorter term

• Disadvantages
• Vulnerable to loss of vendor support if new
  system is delayed
• More vulnerable to vendor manipulation of
  pricing, maintenance costs

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IT Outsourcing
Selective Outsourcing

• What is it
• Select the best-of-breed for an activity

• Advantages
• Creates a competitive environment
• Enables staff to be retained and redeployed
• Provides flexibility to adapt to changes
• Less risky than total outsourcing

• Disadvantages
• Overhead associated with multiple
  evaluations,multiple contract negotiations, and
  multiple vendors to manage and coordinate
• Dividing up pieces of infrastructure (e.g., help
  desk and network management) can lead to trouble
  since the pieces are integrated

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IT Outsourcing
Selective Outsourcing
Global access to Enterprise Service Providers
(ESPs) with low cost structures is accelerating
outsourcing adoption rates, leading to the
proliferation of mixed-sourcing delivery models
in which the best provider of a particular
service wins. (Gartner 2003)
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IT Outsourcing
Selective Outsourcing

• Today, businesses look to "selective sourcing
  services" for their IT infrastructure, operations
  and management needs. With selective sourcing the
  focus is on securing services for very specific
  needs. Using managed contracts, selective
  sourcing has proved very successful in limiting
  risk, motivating vendor performance and achieving
  goals. With selective sourcing/services
  organizations have the best of both worlds with
  the flexibility to select a best practice
  supplier while maintaining overall control of
  their IT practices. -- Strategic Sourcing
  Advisory Council, http//www.ssacouncil.org/

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IT Outsourcing
Selective Outsourcing

• I dont believe you should have a dozen
  partners, because then its not a real
  relationship -- Mukesh Mehta, VP of IT at
  Metropolitan Life, InformationWeek, 23 December
  2002

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IT Outsourcing
Total Outsourcing

• What is it
• Use one vendor for many activities
• Extreme outsourcing At least 50 of IT
  functions outsourced

• Advantages
• Consistency and stability with same vendor for
  many activities
• Lower overhead because there is only one vendor

• Disadvantages
• More vulnerable to vendor manipulation and loss
  of vendor support
• Lack of competition between suppliers
• One vendor cannot be best across the whole
  spectrum
• Needs can change dramatically after 1-2 years

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IT Outsourcing
Survey Results
Type of sourcing Success Failure Mixed
Total outsourcing 38 35 27
Selective outsourcing 77 20 3
In house 76 24 0
Source Study of 116 companies by college
professors Mary Lacity and Leslie Willcocks,
Computerworld, 10 May 1999
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IT Outsourcing
Consider business, economic, and technical
factors in deciding whether to outsource
Business Considerations
Insource
Critical
Strategic Importance
Outsource
Useful
Commodity
Differential
Potential for Differentiation
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IT Outsourcing
Consider business, economic, and technical
factors in deciding whether to outsource (cont.)
Economic Considerations
Insource
Leading
Managerial Practices
Outsource
Lagging
Subcritical
Critical
In-House Economies of Scale
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IT Outsourcing
Consider business, economic, and technical
factors in deciding whether to outsource (cont.)
Technical Considerations
High
Insource
Degree of Technology Integration
Outsource
Low
Low
High
Degree of Technology Maturity
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IT Outsourcing
Give examples of applications that would be good
candidates for insourcing and outsourcing based
on technical considerations
Technical Considerations
High
Insource
Degree of Technology Integration
Outsource
Low
Low
High
Degree of Technology Maturity
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IT Outsourcing Offshore

• IT organizations and solutions providers are
  increasing their offshore capabilities for both
  maintenance and development

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IT Outsourcing Offshore
Cost and quality are the two main reasons for
going offshore

• Reduce cost
• 40-50 savings, according to Merrill Lynch CTO
• Higher quality/capability
• Approximately 50 out of 70 CMM Level 5 systems
  development organizations are in India

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IT Outsourcing Offshore
India is the leading location for offshore
sourcing
Reasons

• Highly capable workforce
• Focus on process and product quality
• Low labor and infrastructure costs
• Government commitment and support
• English language skills

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IT Outsourcing Offshore
Wall Streets top firms are investing heavily in
offshore outsourcing of IT and operations

• North American brokerage firms spent 417 million
  on offshore contracts in 2002 and will spend
  1.31 billion by 2005 (a compound annual growth
  rate of 46.4 percent)
• In cumulative terms, 8,150 U.S. Wall Street IT
  jobs (or 15 percent of the four-year moving
  average IT headcount) will head offshore between
  2002 and 2005.
• India's share of outsourced work from U.S.
  securities firms will rise in 2003 to 94 percent,
  but will settle at 84 percent by 2004 as other
  offshore locations (including China) gain ground
• Reasons cited for Indias success
• Low labor costs
• Sophisticated processes to manage offshore
  projects
• Highly certified staff
• (Source Intelligent Outsourcing Strategies,
  March 24, 2003)

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IT Outsourcing Offshore
Wall Streets top firms are investing heavily in
offshore outsourcing of IT and operations (cont.)

• U.S. financial-services companies plan to
  transfer 500,000 jobs, or 8 of total industry
  employment, to foreign countries in the next 5
  years
• Involves a wide range of work, including
  financial analysis, regulatory reporting,
  accounting, and graphic design
• Example of cost savings A Wall Street
  researcher with a college business degree and a
  few years experience can earn as much as 250K,
  compared with 20K in India.
• Corporate chiefs list India as the most
  attractive country, followed by China,
  Philippines, Canada, Czech Republic, Mexico
• Among the most aggressive U.S. companies GE
  Capital, Citicorp, American Express.
• Wall Street Journal, 1 May 2003

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IT Outsourcing
Wall Streets top firms are investing heavily in
offshore outsourcing of IT and operations (cont.)

• High costs associated with white collar labor
• Heavy data processing that financial firms face
• Not only IT services
• Outsourcing business processes such as check
  processing (7-8/hour vs. 12-16 for U.S. worker)
• U.S. and Indian services firms are pairing up to
  provide onshore/offshore model to financial
  services companies

- InformationWeek, 12 May 2003
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IT Outsourcing Offshore
Indias advantage is beginning to erode
Reasons

• Salary costs in India are going up
• Undervalued currency (rupee) could gain 20-30
  against the dollar
• Vietnam, China, and Philippines are training
  armies of programmers to compete with India

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IT Outsourcing Offshore
Need to manage risks of offshore outsourcing
Potential Risk Areas

• English or language difficulties
• Lack of industry-specific knowledge
• Distrust
• Communication/Coordination
• Outsourcing is prone to failure because of
  breakdowns in communications between outsourcing
  providers and their clients, according to
  Gartner (InformationWeek, 3/31/03)

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Discuss
Outsourcing offloads a burdensome technical responsibility and allows management to focus on its core business. Outsourcing strips a company of an important core competence -- IT know-how. 

•   Which statement do you agree with and why? 

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Discuss

•   Some industry watchers believe that certain
  functions ought always to be retained in-house.
  For instance, application maintenance is the
  most dangerous thing to take out. This is very
  subtle, but its the glue that sticks everything
  together. If you outsource it, you lose the
  ability to understand and change your
  environment.
• Peter Bendor-Samuel, president of Everest
  Software Corp., Dallas-based outsourcing
  consulting company, Software Magazine, July 1998 

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Discuss

•   Outsourcers are good with day-to-day
  repetitive tasks, but not with implementing
  bleeding-edge technology. Those who are
  successful focused on infrastructure, which is
  80 of an IT operating budget. Infrastructure is
  a lot easier to outsource than application
  development.
• Mary C. Lacity, associate professor of management
  information systems at the University of Missouri
  in St. Louis, Computerworld, 10 May 1999. 

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IT Outsourcing
There are several risks to be managed
Risks

• Losing skills in functions/processes that are
  outsourced
• Internal backlash from staff who fear outsourcing
• Loss of control over quality and timing of
  outputs
• Provider may sell or leak buyers solutions to
  competitors
• Lack of face-to-face communication can hinder
  applications development

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Discuss

•   What are the implications of all this on IT
  managers?

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IT Outsourcing Trends
Trends

• More outsourcing of things that were
  traditionally mission-critical, such as billing
  services (optimize, 12/02)
• It takes 3-6 months for offshore IT project
  managers to gain authorization to visit the
  client companys US offices . . . last year the
  typical waiting period was 1 month
  (InformationWeek, 3/31/03)

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IT Outsourcing Trends
A Growing Market

• Technology Business Research analyst Humberto
  Andrade says he expects revenue generated by IT
  outsourcing deals to increase 12 to 15 this
  year compared with last year (Source
  InformationWeek, 11 April 2003)
• Almost one in five companies plan to increase
  their spending on IT outsourcing in 2003 (Source
  Internet World, 23 December 2002)

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IT Outsourcing Trends
Recent News

• HP will manage IT infrastructure, data center,
  desktop, and user support, network management,
  and application development at Procter Gamble
  Co. operations worldwide. It sealed the
  3billion, 10-year deal last week
  (InformationWeek, 14 April 2003)
• Motorola farming out much of its IT
  infrastructure to Computer Sciences Corp. in a
  deal valued at 1.6B . . . CSC will run desktop
  and midrange technology, including global
  help-desk and network operations. IT will also
  acquire some of Motorolas physical IT
  infrastructure and network assets
  (InformationWeek, 14 April 2003)

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• End of slides

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5. Vendor Selection

• Vendor site visits
• Weighted score method
• Final cost, value, and risk analysis
• Costs
• -- one-time vs. recurring
• -- fixed vs. variable
• Benefits
• -- tangible vs. intangible

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6. Procurement Methods

• Purchase
• not that popular because of fear of obsolescence
• longest-term commitment of these 3 methods
• Rent
• usually less than 1 year in duration
• only need to give 30 days notice to cancel
• more expensive than purchase or leasing
• Lease
• usually 12-36 months in duration
• often done with an option to buy
• middle of the pack in terms of cost and ability
  to get out

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7. ROI Analysis

• Must be able to calculate the income stream in
• Not usually able to calculate for
• Strategic investments
• Informational investments
• Infrastructure investments
• Usually able to calculate for
• Transactional investments

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8. Contract Negotiation

• Dos
• Include vendor responses to RFP in the contract
• Keep lawyers at bay until Statement of Work is
  complete
• Leverage outside expertise in negotiations
• Provide incentives/penalties
• Donts
• Buy vaporware instead of proven solutions
• Purchase low bid unless the value is there
• Settle on final offer prematurely

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8. Contract Negotiation
Statement of Work

• Agreement between firm and vendor
• Was outlined in the RFP, now it gets finalized
• Includes
• Software characteristics
• Implementation plan
• Technical architecture
• Training strategy
• Maintenance and support
• Service levels (SLA items)
• Cost schedule

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You Get What You Measure

• Incentives can bring vendor behavior in line
  with a client's expectations, thereby improving
  performance, but they can also distort it,
  causing performance to drop

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Statement of Work
Approach to Quality and Measurement
1. Identify quality standards and goals
Plan
2. Measure project performance
6. Eliminate causes of deficient performance -
fix defects - fix root causes
Do
Act
Check
3. Compare metrics against goals 4. Conduct
quality reviews, e.g., peer reviews 5. Test for
defects
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Statement of Work
Quality Metrics
Progress Measures the amount of work accomplished by the development team in each phase
Quality Evaluation Effort Measures the percentage of the development effort spent on internal quality evaluation efforts
Test Coverage Measures the amount of the software system covered by the testing process
Defect Detection Efficiency Measure percentage of the actual defects originating in a stage of the project that were actually detected in that stage
Requirements Traceability Measures the percentage of the requirements that have been addressed by the system
Defect Removal Rate Measures the number of defects detected and removed over time
Defect Density Identifies defect-prone components of the system
Customer Satisfaction Measures customer satisfaction using objective surveys.
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Procurement - Process
RFP Process