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OUTSOURCING in IT services
Group HAPY:Hong Nhung NGUYEN
Huong Trang TRANMengyao XINGZicong WANG
March 2012
Introduction Definitions IT outsourcing development Classifications
The risks of IT outsourcing Feeny/Willcocks framework Case study companies
DuPont case Volkswagen case Zara case
Summary Advantages and disadvantages of IT outsourcing Recommendation
References
Overview
Outsourcing occurs when an organisation contracts with another organisation to provide services or products of a major function or activity (Belcourt, 2006).
IT outsourcing:“… a decision taken by organisation to contract-out or sell the organisation IT assets, people, and/or activities to a third party vendor, who in exchange provides and manages assets and services for monetary returns over an agreed time period” (Kern, 1997, p.37)
Definitions
1963: Electronic Data Systems signed the agreement with Blue Cross of Pennsylvania for data processing services -> beginning of IT outsourcing century.
1989: Kodak enter strategic alliance with IBM-IS partner ($1 billion outsourcing deal)
->widespread interest in outsourcing Recently, it evolves from one vendor-one
client to multiple vendors-multiple clients.
IT outsourcing development
The trend towards outsourcing is increasing in all industrial and commercial sectors. The growth in IT outsourcing in the last 10 years has been significant.
Major drivers for upsurge in IT outsourcing: Global competition Downsizing The move to flatter organisation, The search for greater flexibility, Rapid change in technology Emphasis on concentrating on core competencies
IT outsourcing development
Lacity and Hirschheim (1993) divided into 3 types: Total outsourcing: to a single third party,
>80% of the IS budget Selective sourcing: source externally
between 20%-80% of IS budget Total insourcing: retain >80% of the IS
budget internally
IT outsourcing classifications
Outsourcing has risks => significant to analyse risks of IT outsourcing
Earl (1996) discusses eleven risks of IT outsourcing:
The Risks of IT Outsourcing
Possibility of weak management
Dangers of an eternal triangle
Business uncertaintyLack of organizational
learning
Outdated technology skillsLoss of innovative
capacity
Endemic uncertainty Fuzzy focus
Hidden costs Inexperienced staff
Technology indivisibility
Feeny/Willcocks framework
Founded in July 1802 as a gunpowder mill. Before 1997, it expanded as a chemical
and energy company. In 1997, transformed to a science company.
Figures: 2010: Net sales: $31.5 billion, 2011: 67,000 employees, operating in 90
countries
DuPont case
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Focused on core business competencies, a reduction of
overhead costs and an increase of capital efficiency
Signed a series of ten year contract of IT outsourcing with
CSC and Accenture
Applied Feeny/Willcocks framework
Extended the contract with CSC through 2014
Transferred 80% of IT spending and 75% of IT staff
DuPont Timeline
Defined 5 of 9 capabilities as general competencies: Relationship building Leadership Contract facilitation Informed buying Making technology work
Pointed to 3 faces as career paths: Business and IT vision Delivery of IT services Design of IT architecture
How did DuPont apply the framework?
Have informed discussion with vendors improve architecture planning
A benchmarking process was introduced improve contract monitoring
Support senior technical capability and informed buying capability
How did DuPont apply the framework?
By 2003: Fill 90% of key leadership positions
internally The projected shortfall of in-demand
employees was reduced from 30 in 1997 to 2 in 2004
Leverage its relationship with suppliers and renegotiate sourcing arrangements into the future
How did DuPont apply the framework?
Industry: Automotive Products: Cars Revenue: €80.251 billion(2010)
Profile of Volkswagen
1937: Volkswagen Group established Late 1940s:Beetle was introduced and became
internationally popular for 20 years before experiencing fluctuation, known as :” Himalayas chart”
Early 1990s: dropped to a new low point In 2001: changed in strategy, developed “classic” and
“sporty” brands
Profile of Volkswagen
1990 1992 1994 1996 1998 2000 2002 2004 2006
Early 1990s, sale dropped to new point
Outsourced with Perot Systems, and dramatically reduced internal
IT staff
VWoA IT staffs were transferred to f “gedas AG” to monitor outsource
contract
In 1999,Set up'Ebusiness teams'
The single internal IT department BPTO was created
Volkswagen IT strategy timeline
Leadership issue: failed on creating organizational arrangements
Relationship building issue: failed on building a single organization in control of
the overall process
Contract monitoring issue: frequently changes on IT staff
Analysis of Feeny/Willcocks Framework
on Volkswagen case
Spanish clothing and accessories retailer, belongs to Inditex group.
In 2010: Net sale: €8,088m, Contributed to total sale: 64.6% Numbers of countries: 77
Zara case
Zara’s IT strategy: Utilize technology that is simple, cost-effective and
easy to use Doesn’t require a lot of IT support. Nine IS core capabilities from the framework are low
Low level of IT infrastructure and organisation. No CIO; no formal processes for IT budgets; no
investments for strategies and IT projects. Low leadership
Using outdated software – POS terminals which ran on DOS. Architecture planning Contract facilitation Vendor development
Recommendation: has a room for improvement
IT source and Feeny/Willcocks framework
Preference for speed Unique business Vertical Integration
All functions link together Have their own factory
Why do Zara not IT outsourcing?
Advantages Disadvantages
Cost-Effectiveness Loss of Control
Qualitative Services Communication Challenges & Different Standards
Skilled Manpower Time Zone- a double-edged Sword
Focus Cultural Differences
Expertise in IT Outsourcing Service Provider wants to diversify and take more projects
Customer is Novice
Summary Advantages and Disadvantages of IT outsourcing
Recommendation
Step 1: Consider the risks of IT outsourcing.Step 2: Outsource or insource? Step 3: Consider using the Feeny/Willcocks framework to manage their IT function in long term .
Summary
Austin, R.D. (2006) “ Volkswagen of America: Managing IT Priorities”, Harvard Business School.
Hirschheim, R., & Lacity, M. C. (1993). The information systems outsourcing bandwagon. Sloan Management Review, 35(1), 73-86.
Kern, T. (1997). The Gestalt of an Information Technology Outsourcing Relationship: An Exploratory Analysis. Paper presented at the 18th International Conference on Information Systems, Atlanta, USA
Mcafee, A., Dessain, V., Sjoman, A. (2004) “ZARA IT for fast fashion”, Harvard Business School.
Offshoring Times (No date) IT Outsourcing with Advantages and Disadvantages. Available at: http://www.offshoringtimes.com/Pages/2007/offshore_news1444.html (Accessed: 8th March 2012)
Willcocks, L.P. and Feeny, D (2006) “IT Outsourcing and core is capabilities: Challenges and lessons at DuPont”, Information systems management, p.49-56.
References
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