Managing IT

Outsourcing

MIS 4133

Software Systems

Outline

Outsourcing Strategy

Sourcing Options

Forms of Outsourcing

Outsourcing Characteristics

Vendor Choices

Advantages/Disadvantages

Hidden Costs

Challenges/Risks

Managing Outsourced Staff

Offshore Outsourcing

Outsourcing – hired outside services to perform some of

a company’s IS operations

Application service providers (ASPs) – provide total

systems to organizations, ranging from competitive

intelligence systems to broad ERP applications

Determining an Outsourcing Strategy

Sourcing Options

Insource

Outsource

Selfsource

Multisource

Forms of Outsourcing

Your

Organization

Purchase existing

software.

Outsource the

development of an

entirely new and unique

system for which no

software exists.

Purchase existing

software and pay

publisher to make

certain modifications.

Purchase software

and pay publisher for

the right to make

changes yourself.

Allows an organization to pay only for what it uses

Trend might relate to the position of the CIO

Popular, largely due to:

Fast pace of technological change

Dissatisfaction and costs related to past in-house

services

Must be both a remedy for service failures/costs

and a strategic choice

Should not be used for strategic information

systems with security or privacy issues

Outsourcing Characteristics

Vendor reputation

Quality of service

Flexible pricing

Vendor knowing company business/industry

Vendor’s ability to make sound technology decisions

Vendor’s ability to allow for expansion and growth

Vendor operates over full geographic area of the

company’s operations

Key Factors in Selecting an Outsourcing Vendor

Outsourcing Advantages

Focus on unique core competencies

Exploit the intellect of other organizations

Better predict future costs

Acquire leading-edge technology

Reduce costs

Improve performance accountability

Outsourcing Disadvantages

Reduces technical know-how for future

innovations

Reduces degree of control

Increases vulnerability of strategic information

Increases dependency on other organizations

Hidden Costs

Benchmarking/analysis to determine if

outsourcing is right choice

Investigating/selecting a vendor

Transitioning knowledge/work to outsourcer

Layoffs and associated HR issues

Ongoing staffing/mgmt of outsourcing

relationship

Challenges/Risks

Managing a mixture of people

Achieving goals/objectives

Using resources effectively

Establishing and maintaining communications

Establishing and maintaining trust

Maintaining security

Risks: financial, technical, managerial,

behavioral, legal

Outsourcing Examples

Cinergy Corp.

Enterprise-wide database administration services outsourced

Allowed for technology shift to data warehouse and data mart

Summit Information Systems

Disaster recovery for data center outsourced

During hurricane in Florida, data center stayed up

JM Family Enterprises

Mainframe hardware, software and operations outsourced

Gained efficiencies and were able to deliver reports faster

Managing Software Projects Using

Outsourced Staff

Helps keep software development costs down

Uses technical expertise not available in-house

Can often complete projects more quickly

Off-site outsourcing: Onshore – within same country or region

Offshore – not within same country or region

Managing Software Projects Using

Outsourced Staff

Guidelines for managing an offsite outsourcer:

Manage expectations, not staff

Take explicit actions to integrate the offsite workers

Communicate frequently

Focus on formal processes – should result in higher

quality of the final product

Managing Software Projects Using

Outsourced Staff

Offshore alternative good option when:

System requirements well-defined and remain stable

Time is of essence and 24x7 availability of resources a

good idea

Cost of project important

Key Trends of Offshore Outsourcing

Offshore development centers – permanent

offshore presence (could be called “Offshore

Insourcing”)

Near-shore sourcing – outsourcing to countries

close to home and overlapping time zones

Multisourcing – relying on multiple service providers

in a number of companies, based on price and skills

Offshore Outsourcing Benefits

Cost savings

Additional skilled IT personnel

Fixed IT cost reductions

Time to market improvements

Expertise not available in own market

Overestimated cost savings

Loss of strategic control

Increased security concerns

Loss of domestic market jobs

Offshore Outsourcing Drawbacks

Offshore Outsourcing Examples

AOL

Philippines

24-hr customer service facility staffed by 500 Filipino

employees

Microsoft

India

Product development and R&D center; $100 million investment

Goldman Sachs

India

IT, equity research, and administrative operations partially located

in India with 250 IT and administrative staff

General Atlantic

India

$400 million investment in software services; 1700 employees

Outsourcing Trends

Outcome-based pricing (rather than upfront, one time

costs)

Labor-as-a-service approach (smart robots on the

cloud)

Standardization in outsourcing (as new technologies

become the norm)

Renegotiation of outsourcing contracts (focused on

the cloud)

Use of multiple outside sources

Data and analytics central to all outsourcing

decisions

References

Haag, S. and Cummings, M. (2013). Management Information Systems for the Information Age, 9th edition, McGraw-Hill Companies, Inc., New York.

Kliem, R. (2004). “Managing the Risks of Offshore IT Development Projects,” Information Systems Management, pp. 22-27.

Laudon, K.C. and Laudon, J.P. (2006). Management Information Systems: Managing the Digital Firm, Pearson Education, Inc., Upper Saddle River, New Jersey.

Martin, E.W., Brown, C.V., DeHayes, D.W., Hoffer, J.A. and Perkins, W.C. (2005). Managing Information Technology, 5th edition, Pearson Education, Inc., Upper Saddle River, New Jersey.

Overby, S. (2005). “Simple Successful Outsourcing,” CIO Magazine, http://www.cio.com/archive/100105/outsource.html [accessed: 24 October 2005], October 1.

Overby, S. (2007). “Outsourcing Definition and Solutions,” CIO Magazine, http://www.cio.com/article/2439495/outsourcing/outsourcing-definition-and-solutions.html [accessed: 6 October 2015].

Overby, S. (2012). “10 Outsourcing Trends to Watch in 2015,” CIO.com, http://www.cio.com/article/2864429/outsourcing/10-outsourcing-trends-to-watch-in-2015.html [accessed: 6 October 2015].

Robinson, M. and Kalakota, R. (2004). Offshore Outsourcing: Business Models, ROI, and Best Practices, Mivar Press, Inc.