Outsourcing

Benefits Of Incremental Outsourcing

• Managing the shortage of specialized IT
workers- cut down on internal staff
• Reducing time to market- sell over the web
• The shift to 24/7 operations -web always available

• Favourable cash flow profiles-

• Cost reduction in IT service chains

• Making applications globally accessible
 Favourable Cash Flow
• Were expected to pay up front and see benefits
later

• Firms pay monthly fee and cut down on developing

systems

• With limited up front purchases, firms still benefit

• Works like insurance policy by offering immediate

benefits
 Cost Reduction In IT Service Chains

• If IT service provision is centralised will reduce costs

• Will reduce risk and costs of piracy

• Services are distributed in real time to users

• Vendors realise savings from economies of scale

• Reduced prices for customer

POSITION ON STRATEGIC GRID

Factory-uninterrupted Strategic
service-oriented Outsourcing presumption:
Outsourcing MIXED
presumption :YES

Support-Oriented Turnaround
Outsourcing Outsourcing
Presumption : YES Presumption : MIXED
 REASONS FOR OUTSOURCING AT THE
VARIOUS POSITIONS
• SUPPORT – ORIENTED
– because impact on both activities/operations and
strategy is low

• use external parties for up-to-date technologies and

expertise

• reduce the risk of owning IT infrastructure that may not

be of utmost necessity in the organisation
 REASONS FOR OUTSOURCING AT THE
VARIOUS POSITIONS
• TURNAROUND
– High impact on strategy but lower impact on
activities, selectively outsource to

• Boost internal IT unit, without necessarily incurring

high reinvestment costs (hiring, infrastructure, etc)

• Alternatively you might keep IT activities internal,

depending on how serious IT Activities are to the
core strategy.
 Reasons For Outsourcing At The Various
Positions
• FACTORY –Uninterrupted, Service Oriented

– IT has huge impact on core operations but plays a

low role in core strategy, outsource if

• It will allow corporation to concentrate on core activity

• There will be benefits in economies of scale.

 Reasons For Outsourcing At The Various
Positions
• STRATEGIC
– High impact on both activities and strategy

• Could outsource only if there will be greater benefits,

such as access to up-to-date technology, skills,
flexibility, lower costs etc

• However it would seem best to keep IT activities

internally, and build competitive advantage around it,
especially if IT plays a significant part in strategy.
 Selecting service partners
• Providers differ greatly in the services they
offer
• How they charge for services, guarantees they
make and willing to take
• Common process used is request for proposal
(RFP)
 Information Requirement by RFPs
• Descriptive information- how a provider describes it self it tell a lot
about its priorities

• Financial information- provider that has financial problems expect

trouble

• Proposed plan for meeting service requirements- how he

will meet the expectations

• Mitigation of critical risks- risk, security & availability

• Service guarantees- their norm & guarantee
• Pricing-
 Why Companies Enter Into Large Scale
Outsourcing Relationships
• Cost savings- infrastructure shared among clients, H/ware facilities,
reduce overhead costs. Economies of scale if more clients

• Dissatisfaction with existing IT capabilities- cumulative

problems, no trust on IT manager

• Desire to focus strategy in other areas- if IT is not core

• Forcing major changes- changes-rigidity, need changes internally
• Access to skills and talent- non-technological
• Other factors-avoid some future capital investment, transform
fixed costs to variables liquidate intangibles IT assets
 Designing Large Scale Outsourcing
Alliances
• Contract flexibility

• Standards and control

• Expected cost savings

• Rate of technology renewal and

improvement
 Contract Flexibility

Most deals change over time

Contract must allow for evaluation

If there is more mutual interest

contract will work
Takes long to come up with contract
 Standards and Control

– Companies concerned about control

– Outsourcing must address concerns

(standards)
 The Scope Of Outsourcing

• If the outsourced activities can be separated

from rest of the firm

• Does not require specialized expertise

• How central are the things to be outsourced

to the main activities of the organisation

• Consider coordination cost

 Expected Cost Savings

• Assessing benefit can be difficult due to the

intangible nature of some benefits

• Can make cost savings

• Outsourcing vendors are good at

negotiation
 Rate Of Technology Renewal And
Improvement

• Supplier in that area = added advantages

• Be sure to select credible suppliers

• Reference play an important role

 Managing The Alliance
• The CIO function

• Performance measurement

• Relationship interface
 The CIO Function

• Firm must have strong active CIO function

• Must make sure IT resources are at right level

and appropriately distributed, separate from
data centres, systems mgt & line mgt of
networks

• Line activities can be outsourced

• Critical areas retained even if fully outsourced

 The CIO Function
• Manage relationship with vendor
• Monitor performance based on contract
• Help outsourcing alliance adapt to change
• CIO & staff maintain planning for coordinating
long-term approach, networks h/ware, s/ware
stds database architecture
• Have ability to evaluate new technologies and
their use
 Performance Measurement

• Must have performance stds to measure

results & interpret them
• Measures of success are intangible must
watch trends
• Early benefits
– Reduction capital expenditure
– Staff head count reduction
• Firm must find ways of getting additional
value from relationship
 Relationship Interface

• Should not delegate final responsibility

• CIO must manage agreement & relationship
• Complex interfaces btn customer & vendor be
done multiple levels
• There must be links to deal with major issues of
policy relationship restructuring
• At lower levels there must be ways of dealing
with operational & tactical issues
• At times board of directors are involved
Difficulties That Arise From Legacy Systems

• Technology problems

• Residual process complexity

• Local adaptation

• Nonstandard data definitions

 Technology problems
• Incompatibility
• Internetworking not designed to converse
with other vendors
 Residual Process Complexity

• Systems address problems that no longer

exists

• Companies uses batch systems and today

its real time

• Batch systems have not been redesigned or

replaced because of other priorities
 Local Adaptation

• Systems designed for focus business

purposes

• Systems meant to solve particular problems

• There was no future thinking of real time

• Systems designed years back do not cater

for global systems
 Nonstandard Data Definitions

• Firms used different conversions for data

elements

• Dificult to change data elements because

they are tough in other areas e.g. Stannic
SA has 13 digits stannic Swaziland has 11
digits
Key Questions In Managing Legacies
• Legacy systems
• How will new infrastructure exchange data with
legacy systems

• Will new infrastructure obtain needed real-time

interaction with legacy systems

• What work abounds are necessary? Are they

sustainable?

• What is the long-term strategy for renewing legacy

systems?
Legacy organisations and cultures
•How will new infrastructure affect ways of working and
communicating? Are anticipated changes acceptable?

•Should technology drive org. and cultural change?

•Should org. And culture be protected form technology effects?

•What are org. Expectations about common processes in

different parts of the organisation?

•What are criteria for deciding whether systems or process will

change when the two are not compatible?