IT Outsourcing
 Until 1990, the major drivers for outsourcing were:
 Cost-effective access to specialized or occasionally
needed computing power or systems development
skills
 Avoidance of building in-house IT skills and skill sets,
primarily an issue for small and very low-technology
organizations
 Access to special functional capabilities. Outsourcing
during this period was important but, in retrospect,
largely peripheral to the main IT activities that took
place in mid-sized and large organizations.
IT Outsourcing
 Recent IT Outsourcing Agreements
 Billions of $
 Two factors have affected the growth of IT
outsourcing
 Recognition of strategic alliances
 Changes in the technological environment
IT Outsourcing
 Acceptance of Strategic Alliances
 Finding a strong organization partner to complement
an area of weakness gives an organization an island
of stability in a turbulent environment.
 It is difficult to fight on all simultaneously on all fronts
 Alliances allow a company to simplify its management
agenda safely.
 Alliance allow a firm to leverage a key part of the
value chain by bringing in a strong partner that
complements its skills.
 Both firms should legitimately be benefiting
IT Outsourcing
 IT Changing Environment
 Today, firms are not focusing IT only on internal
processing systems: but, in a network fashion, integrating internal system with those of customers,
suppliers, - to be more efficient in globally market place.
 This integration places extraordinary pressures on firms
trying to keep the old system services running while
developing the interconnections and services demanded
by the new environment.
 On the one hand, firm are looking for low-cost
maintenance of the old systems to ensure they operate
reliably, while, on the other hand, gaining access to new
skills to permit their transformation to new model.
IT Outsourcing
 Contracting ?
 “Contracting is the purchasing of goods or services
when the buyer owns the process.” Bendor-Samuel
 If the buyer owns a process but purchases time,
products or services to facilitate that process, then
the buyer is in a contractual relationship.
 Outsourcing?
 “Outsourcing takes place when an organization
transfer the ownership of a business process to a
supplier” Bendor-Samuel
 . The key is the concept of transfer of control or
transfer of ownership.
 This is why IT outsourcing is very challenging and
often a painful process.
IT Outsourcing

What drives Outsourcing

Concern for cost and quality

Can we get our existing services for a reduced price at
acceptable quality standard? (cost reduction)
Can we get new systems developed faster?

Access to capabilities not otherwise available

To free internal resources for other purposes


Concentrating on core competence?
Improved company focus

E.g. General Dynamics received $200m for transferring its
hardware/software to EDS.
Cash infusion

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Breakdown in IT performance
Intense Supplier pressure
Simplified GM Agenda
Financial factors (make capital available)

IT Outsourcing
 What drives Outsourcing
 To reduce cycle time
 Some kind of process improvement (BPR/TQM)
 Corporate culture
 Turn fixed cost into variable cost
 Eliminating Internal Irritant
 Engage an outside agent in the change process.
IT Outsourcing
 Disadvantages of IT Outsourcing
 Can Increase Costs
 Locks Company to a Provider
 Switching Costs in outsourcing vs. contracting

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Terminating charges
Resume responsibility for process itself
Rebuild infrastructure
Recapture the process expertise
Removes Knowledge of Processes from the Company
Time and materials, and other capital investments
 Decreases Ability to Use Information Technology
Strategically
 Losing control over process
 Risk involved in establishing IT process group from
scratch
IT Outsourcing
 Why Outsourcing Alliances are so Difficult
 Length of relationship
 Long term contracts (8-10 years.) in fast moving
technical and business environment. A deal that make
sense in the beginning might make less sense three
years after and requires adjustments to functions
 Resulting into negotiation and misunderstanding
 Outsourcing is relatively easy but in-sourcing again is
very difficult
 Initial process ownership investment, ?, etc
IT Outsourcing
 Difficulties with IT Outsourcing
 Measuring results
 In the first year the outputs closely resemble
those anticipated in the contract. In
subsequent year, however, the contract
payment stream becomes less and less tied to
the initial set of planned outputs as the world
changes
 Supplier power
 The longer the outsourcing-relationship
continued, the more the power shifts to the
supplier, why?
IT Outsourcing
 The Nature of IT Outsourcing Relationship
 Alliance
 Partnership
 Relationship (strategic)
 Marriage
 Integration

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“The term outsourcing is inappropriate. This is really more of an
integration of two separate businesses”
“We wanted to take the best parts of each culture and put them
together. The same goes for structure, strategy and people.”
Jagdish Dalal Head of Xerox’s Global outsourcing in 1994.

“Integration could only be achived if they developed a high degree
of cooperation” Mike Reed Xerox outsourcing team
IT Outsourcing
 When to Outsource IT and What could
be Outsourced?
IT Outsourcing
 When do the benefit of outsourcing
outweigh the risks?
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Development portfolio
A firm’s position in the market
Current IT organization
Make, Buy, Outsource
Partnership Strategies
Resource dependence theory
IT Outsourcing
 Development Portfolio

The higher the percentage of the systems development portfolio
in maintenance or high-structured projects, the more the
portfolio is a candidate for outsourcing

Outsourcers with access to high-quality, cheap labor pools (e.g.
in Russia, India or Ireland) and good project management skills
can consistently outperform, on both cost and quality, a local
unit that is caught in a “high-cost” geographic area and lacks
the contacts, skills and confidence to manage extended
relationship

The growth of global fiber-optic networks has made all
conventional thinking on where work should be done obsolete

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Research have pointed out that more than 150,000
programmers are working in India on software development for
US and European countries
Large, low-structured projects pose very difficult coordination
problems for outsourcing.
IT Outsourcing
 A Firm’s Position in the market
 The further a company is from the network era
in its internal use of IT, the more useful
outsourcing can be to close the gap
 Firms still in the DP era and early micro era do
not have the IT leadership, staff skills, or
architecture to move ahead
 The outsourcer, by contrast, cannot just keep its
old systems running, but must drive forward
with contemporary practices and technology.
IT Outsourcing
 Current IT Organization
 The more IT development and operations are
already segregated, in the organization and in
accounting, the easier it is to negotiate an
enduring outsourcing contract.
 A stand-alone differentiated IT unit has already
developed the integrating organizational and
control mechanisms that are the foundation for
an outsourcing contract.
 Separate functions and their ways of integrating
with the rest of the organization already exist.
Make, Buy or Outsource
Rands (1993)
Company’s Skills Related to Best External Source
Low
Low
Buy/Outsource
Strategic
Importance
High
Strategic
Alliances
Equal
Make or
Buy/Out.
Tend to make
High
Tend to make
Make
Make or buy decision
Decision Criteria
Business strategy
Core competence
Information/ process
security and
confidentiality
Availability of suitable
partners
Availability of packaged
software or solutions
Cost/benefit analysis
Time frame for
implementation
Evolution and
complexity of the
technology
Ease of implementation
Pressure to “Make/Own”
IT application or infrastructure
provides proprietary
competitive advantage
Pressure to “Buy”
IT application or infrastructure
supports strategy or operations,
but is not considered strategic in
its own right
Sourcing Strategies
High
In-house
solution
Cost sharing or strategic
alliance/
Selective outsourcing
Need for tailor
made support
True spin-Off or
outsourcing
Low
Low
Market Potential
to provide the
support
High
Resource Dependence Theory
Strategic Choice Framework for the IT Professional Resource
High
Degree of
Resource
Dependence
Low
In-house
solution
Cost sharing or
strategic alliance
Outsource
Low
True spin-Off or
outsourcing
High
Degree of volatility
Stages
Performing / Strategic
Focus (Not just focusing
on cost)
5
Norming / Proactive Cost Focus
(Beginning to form norms and
actively focusing and proactively
using outsourcing for cost saving
including offshore. Outsourcing
20-40% of IT activities)
4
Storming / Strategic
decision point
(Organization leaders
share conflicting ideas
about outsourcing and
pursuing different strategy
to provide IT services)
3
2
1
Forming /
experimenting stage
(outsourcing between
10-20% of IT
activities)
Insourcing / Bystander
(outsourcing between
1-5% of IT. Mostly
purchasing of IT
functions).
Time
Accounting for Information
Technology Costs
 Unallocated Cost Center
 Allocated Cost Center
 Profit Center
Accounting for Information
Technology Costs
Allocated Method
Description
Advantage
Disadvantage
Unallocated cost
center
All IS costs are
considered an
organizational expense
Experiments with
technology can occur
User can request the
development of new
systems
IS can develop systems
regardless of economic
benefit.
Costs can get out of
control.
IS professionals cannot
easily allocate their budget
among conflicting requests.
Allocated cost
center
IS department allocates
costs to departments that
use its services.
User request only
beneficial services.
It works well in
organization where
changes are made regularly
to all internal customers
Profit center
IS charges internal and
external users the same
and attempts to get both
kinds of business.
IS can have problems
determining allocation of
costs
Friction among user
departments and between
them and IS can occur
IS has no reason to
operate efficiently.
Outsourcing may become
more common.
Fees may be higher than
with other methods.
Users can choose who
will perform their IT
service.
IS department has
incentives to operate
efficiently.
Staffing the Technical
Functions