IT Sourcing

Chapter 10

10-1© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

© 2012 Pearson Education, Inc.  Publishing as Prentice Hall

Outsourcing

Outsourcing has become an integral part of IT strategy.

Operations, Help Desks, Maintenance and Development are all IT activities that have been outsourced.

Outsourcing may provide a wider range of skills and lower costs. 10-2

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Outsourcing Strategies

1. Outsourcing for operation efficiency

2. Outsourcing for tactical support

3. Outsourcing for strategic impact

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Outsourcing for Operation Efficiency

The most common outsourcing strategy

Utility functions are transferred to an outsourcer.

The objective is to save money and/or provide better service.

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Outsourcing for Tactical Support

IT managers seek to rapidly add to their capacity.

Outsourcing is used to free up development staff to eliminate peaks and valleys in the IT staffing cycle.

Outsourcers used to introduce new technologies.

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Outsourcing for Strategic Impact

As companies have become more focused on core competencies, entire non-core business processes can be outsourced.

Supported by greater connectivity

Right-sourcing can change with time; non-core processes can become core processes. 10-6

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Three Complementary IT Sourcing Approaches

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Table 10.1

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Outsourcing Critical Success Factors

Use selective sourcing.

Have joint Business-IT sponsorship.

Ensure a thorough comparison with internal operations.

Develop a detailed contract.

Limit the length of the contract.10-8

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Offshore Outsourcing Benefits

Labor rates are cheaper.Some countries offer significant tax breaks.Availability of skilled laborIndian companies have better software and risk management processes than many other companies.

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Offshore Locations

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Offshore Outsourcing Risks

Language – including understanding customer needs.

Hidden Costs – including costs of finding a vendor, drafting a contract, managing the relationship, transitioning the work, travel, and visas.

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Offshore Outsourcing Risks Continued

Reduced Control – greater liability exposure to issues such as confidentiality, security, and time schedules.

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Offshore Outsourcing Risks Continued

Legal and Political Uncertainties – governments in third world countries are less stable, legal disputes are more difficult to cope with, work in other countries means you have to deal with rules and regulations that may be unfamiliar.

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Offshore Outsourcing Risks Continued

Cultural Differences – misunderstandings can occur as a result of differences in pace of daily life, employee’s relationship to authority, security attitudes, and adherence to social principles. (Overby,

2003b)

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Offshore Outsourcing Risks Continued

Social Justice – government organizations are sensitive to moving jobs out of the country.

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Successful Sourcing Criteria

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What are our industry dynamics, and where are we in the food chain?What are we good at?What do we want to be good at?What should we be good at?Do we want to invest in this function/activity?How many vendors do we want to deal with?

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Sourcing Strategy

Develop an in-depth understanding of business drivers and strategy before sourcing.IT managers should develop a detailed understanding of their functions, processes, and overall IT portfolio.Apply particular sourcing criteria to IT activities.Test and reevaluate the sourcing strategy.

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Risk Management Mitigation

Detailed planning is essential.Incorporate monitoring and an audit trail into the contract.Rate risks on likelihood of occurrence and impact. Take steps to reduce/manage these risks.Develop an exit strategy.Exercise caution.

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Governance

Governance problems are heightened when they are off-shored.“You can’t outsource good project management”; this is one reason why off-shore vendors set up local offices.Ideally an offshore venture should be set up so that risks are shared.

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Cost Structures

Companies must understand the complete cost of outsourcing.

They need to understand the total cost of ownership for each IT activity prior to making financial decisions.

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New IT Roles and Responsibilities

Solution delivery

Task decomposition

Task costing analysis

Right-sourcing decision making

Designing for collaboration and connectivity

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New IT Roles and Responsibilities Continued

Supplier relationship management

Contract management and monitoring

Sourcing marketplace analysis

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Conclusion

Sourcing has become an integral part of many IT organizations.Sourcing has evolved into a means to produce optimal IT value.Increasingly, it is IT’s job to guide the organization in sourcing decisions.As a result, sourcing is changing the way IT work is done.

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