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
 IT Outsourcing Evolution
 EDS
 Regulated, then to non regulated industries
 CSC
 First to governments then to industries GD
 ADP
 Payroll, data center, etc
 IBM
 The “big bang” internationalization, etc.
 Others
 (Gap Gemini, Perot Systems, Digital Equipment
Corporation, Andersen Consulting, AT&T
Solutions etc. ?)
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.

Outsourcing?
 “As the handling over of assets, resources, activities and/or people
to third party management to achieve agreed performance
outcomes”

Willcocks and Lacity (2006)
IT Outsourcing
 What drives Outsourcing
 Back Office Transformation
 The goal of back office is radically:


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Reduce cost
Improve service
Increase revenue
 Practice to achieving it:

Centralization, standardization, re-orientation of staff,
technology enablement, and process redesign
IT Outsourcing

What drives Outsourcing


Back Office Transformation
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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
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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


“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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1.
2.
3.
4.
5.
6.
7.
8.
Position in the strategic grid
Development portfolio
Organizational learning
A firm’s position in the market
Current IT organization
Make, Buy, Outsource
Sourcing Strategies
Resource dependence theory
Outsourcing
High
Factory-uninterrupted service-oriented Strategic information resources
information resources management
management
Outsourcing Presumption: Yes,
Outsourcing Presumption: No.
unless company is huge
and well managed
Reasons to consider outsourcing
•Rescue an out-of-control internal IT unit
Reasons to consider outsourcing
•Tap source of cash
•Higher -quality services and backup
•Facilitate cost flexibility
•Management focus facilitated
•Facilitate management of divestiture
Low
Support -oriented information
resources management
Outsourcing Presumption: Yes.
Turnaround information resources
management
Outsourcing Presumption: No.
Reasons to consider outsourcing
•Access to consider IT professionalism
•Access to current IT technologies
•Risk of inappropriate IT architecture
•reduced
Reasons to consider outsourcing
•Internal IT unit not capable in required
technologies
•Internal IT unit not capable in required
project management skill
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


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
 Organizational Learning

“Many times people will change just the structure and the
reporting relationships. But if you want to change a company,
you’d better change more than that. There’s the formal
structure and then there’s the way the company really works.
You have to change the way it really works” Allaire Xerox CEO
1992
 The more experience the firm has had in
implementing redesign the easier the outsourcing will
be
 Process reengineering seeks to install very different
procedures for handling transactions and doing the
firms work. Responsibility for such development work
(low structure by its very nature) is the hardest to
outsource.
 A significant component of many firms’ applications
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
Sourcing Strategies
High
In-house
solution
Need for tailor
made support
Joint Venture/Enterprise
Partnership/ or strategic
alliance/
Selective outsourcing
True spin-Off or outsourcing/Net
sourcing/ASP
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
Outsourcing Learning Curve
Phase 3
Institutionalization
Focus on value-added
transformation
Size of
Market
Customer
Learning
Phase 3
Market matures
Richer practices emerges
Focus on quality
Phase 1
Hype and fear
Phase 2
Early adopters
Best and worst
practices emerges
Focus on cost
Time
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