Pressures Faced in IT

• IT departments face growing pressure to

improve their business value by accelerating the
delivery of new applications and technologies
and improving service to users

• At the same time, basic maintenance and

support of the existing application portfolio
consumes up to 50% to 80% of IT resources —
posing a serious roadblock to new initiatives and
services that can enhance an organization’s
competitive position
Decision Making Model
 Business Strategy
• It enables the business to better manage the
human and financial resources required to
support current applications while positioning
itself to realize competitive advantage

• Acceptance of outsourcing as a business

strategy extends well beyond IT, with
outsourcing of business functions like customer
service, human resources, and finance and
administration projected to grow at 30% annually
in coming years
Types of Sourcing Arrangements
 Types of Projects Outsourced

• Ongoing Software Maintenance

• Software Conversion Projects (i.e. Y2K)

• Original Application Development

 What is Being Outsourced?
• No area of the development lifecycle is immune
to outsourcing

• In-house teams still do the majority of higher-

abstraction activities, such as project
management, requirements gathering,
architecture, design, modeling, R&D and
deployment

• However, offshore teams aren't simply being

tasked with writing code
Outsourcing Literature Sources
 Outsourcing Objectives

• Outsourcing arrangements are not typical

purchaser/vendor relationships, and
confidence that the vendor can work in a
partnership is vital to a successful
arrangement

• It is essential that the objectives and

success criteria for outsourcing are clearly
understood within the organization
 Outsourcing Agreements
• Any outsourcing arrangement must be tailored to create
a win/win deal that balances potential risk between the
client and the vendor and creates an incentive for the
vendor to work with the customer organization

• It’s becoming increasingly common for outsourcing

arrangements to be structured for ‘gain-sharing’: once
targeted benefits are achieved, benefits beyond the
target are shared

• Arrangements such as these promote a true partnership

 Characteristics of Outsourcing
Contracts
• In outsourcing contracts, the client retains
ownership of the IT strategy while the vendor
assumes responsibility for management
processes and day-to-day supervision of the
resources

• A well-structured outsourcing contract makes the

vendor responsible not only for a defined
package of services, but for the delivery of
business value from those services
 Service Metrics
• Performance related service-level metrics are a
key component of most outsourcing contracts

• Growing emphasis is being placed on measuring

and evaluating the services’ business value

• Accordingly, metrics demonstrating continuous

improvement and business value are becoming
a more common component of outsourcing
agreements
 Service Level Agreements

• In order to offer a competitive service that,

at the same time, is objectively
measurable, the maintenance organization
must commit itself to accomplish its
services according to some indicators

• These Service Level Agreements can also

be used for planning the non-plannable
maintenance
 Risks

• There are many good works analyzing the

problem of risks once the maintenance process
has started, but there is a lack of guidelines to
help managers identify and estimate the risks in
the initial stages of projects

• One situational factor may affect one or more

risk factors, and each risk factor may affect on
one or more business areas
Theoretical Foundations
 6 Characteristics of Describing
Software Development
1) Complexity

2) Degree of Commitment

3) Compatibility

4) Efficiency

5) Benefit

6) Risk and Uncertainty

 Complexity vs Radicalness

Complexity is a measure of the number and

variety of elements and their
interconnections in a system

Radicalness is largely a perceptual measure

which describes the perceived amount of
change in the system at each level of
abstraction
 Developing Applications
• Internal staff already understands legacy applications, time spent
transferring that knowledge would eat any potential savings

• New applications are driven by new opportunities that require rapid

response, and the internal staff is too busy to provide that response.

• New projects can be started quickly because there is no need to

recruit people. This lets the company respond swiftly to unexpected
developments with minimal risk.

• If a new application fails to pan out, then the design cost will have
been significantly less than in-house.

• If the application bears fruit, then offshore developers are in an ideal

position for support, reducing the cost of maintenance.
 Efficiency and Effectiveness in the
Application Management Environment
• A clear picture of the desired, or ‘target’
application management environment is crucial
to understanding the potential business value of
outsourcing application management

• Well run environments have:

– User Satisfaction
– Accountability
– Adequate Staffing
 Maintenance
• Outsourcing of software life cycle activities is a
growing business area

• Lack of planning and high costs of software

maintenance invite many organizations to
outsource

• Even the most unexpected organizations, such

as the US Department of Defense, have decided
to outsource significant portions of their
Information Systems
 Maintenance

• Among the activities that comprise the

software life cycle, maintenance is the
most costly; estimated at 67-90%

• By not planning for change, companies

are faced with higher costs than if they
were to imbed that cost in the original
development plan
 Benefits of Outsourcing Maintenance

• Employees focus on the core business

• Releasing resources for strategic

developments

• Decreasing costs

• Increasing productivity
 Drawbacks of Outsourcing
Maintenance
• Loss of control

• Loss of a learning source

• Loss of knowledge of the software

• Dependencies on the supplier

• Variations in the product quality

• Problems among personnel

 Planning the Non-Plannable

• “Non-plannable” maintenance requires urgent

corrective action

• It is the more problematic type of maintenance,

due to its lack of planning possibility

• The use of predictive models are used to try to

determine the quantity of resources needed for
error corrections.
 Benefits of Outsourcing
• Competitive Advantage

• Speed-To-Market

• Improved Quality

• Overcome cultural barriers to improving methods

and processes

• Access to skills and resources

 According to One CIO…

• "We see little value in offshoring legacy

work," Ross says. "Next-generation
applications is where the payoff's the
greatest."
 The Quality Question

• A large percentage of respondents rated

the quality of work done by the offshore
team as worse than in-house efforts

• 46% of respondents considered the work

of the offshore teams to be of poor quality,
and an additional 14% reported that their
offshore team's work was "unusable or a
setback to progress."
 The Quality Question

• 51% of respondents reported that their

current or most recently outsourced
project was critical to daily operations

• Despite the reports of poor quality, 93%

disclosed that their company plans to keep
using their offshore vendor
 Skill Sets for the New Worker
• Teamwork and communication skills remain important,
but an understanding of other cultures and languages
may also be helpful in this global economy

• More attention must be paid to large applications,

standard tools and platforms that will be used by IT
workers around the world, such as J2EE or .NET.

• In addition, a more global perspective should be taken

 Generalized Application Packages
• There has been a growing trend towards the use of
generalized application packages in IS development,
largely due to the fact that in-house development has
turned out to be costly and risky in terms of development
costs and schedules and the quality of the resulting
systems

• The impression is that there is a common-sense belief

that application package based information systems are
easier to implement than in-house developed systems

• It should be observed, however, that the results are not

very conclusive in this respect
Questions?