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 uncertainty Lack of organizational learning

Outdated technology skills Loss of innovative capacity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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