Are we outsourcing effectively?

1. Are we outsourcing effectively? Chapter 7 MISY 300

2. Business-IT Providers Discussion • Why should we outsource or why are we outsourcing? • What are our competitors outsourcing today? • What should we be outsourcing? • Is our governance of outsourcing appropriate? • Are we engaging with our outsourcing vendors appropriately? • Are your SLAs driving the behavior we need?

3. The Famous Kodak Story • Kodak shook the IT world in the late 1980s • Intense Competitive Pressure • lost Polaroid lawsuit • cost pressure from Fuji • Downsized twice—in a firm never before laying anyone off

4. What Did They Do? (1/2) • Kathy Hudson, VP of IT, had $50 million approved for a new data center • Rather than spend the money, she sold the existing MIS department for $250 million! • Immediate inflow of cash

5. What Did They Do? (2/2) • Former employees were now hired by vendors • They used 3 vendors: • IBM for their data center • DEC for networking • BusinessLand for PC services • Made the venture into a strategic alliance

6. What was different? (1/2)

7. What was different? (2/2)

8. Why should we outsource or why are we outsourcing? • WHY? • Offer cost savings • Ease transition to new technologies • Offer better strategic focus • Provide better mgmt of IS staff • Handle peaks • Consolidate data centers • Infuse cash • Rapidly drive standardization • Reduce risk associated with inability to retain critical/quality resources • Maintain cost competitiveness • Leverage resources to increase productivity • Inability to find resources locally or cost effectively • Reduce risk in ‘bankruptcy’ • Contain/replace legacy technologies • Outsource non-critical back-office functions • Customer requests for new product features

9. Why should we outsource or why are we outsourcing? • Need to revisit IT outsourcing decisions to ensure assumptions are still valid IT Outsourcing Decisions  Business Goals • Expertise availability in-house and outsourced • Total cost of expertise in-house and outsourced • Manageability in-house and outsourced • Corporate philosophy in-house • Transition barrier to outsourcing

10. What are our competitors outsourcing today? • Why is this an important question? • On average, firms spend 21-30% of their IT budget on outsourcing • Firms/IT Providers: do we spend more or less? Why? • More than 70% of firms that outsource plan to increase their outsourcing spending next year or keep it at the same level – no decrease it • Firms/IT Providers: What are our plans? Why? • Firms spend 50+% of their IT outsourcing budgets offshore • Firms/IT Providers: Do we? Why or why not? • There is a non-trivial amount (11-20%) of IT outsourced activity being brought back in-house. (next slide) • Firms/IT Providers: why is this happening? Is it significant? Is this risk management activity that we should be engaged in?

11. Backsourcing • When a company takes back in-house, previously outsourced, IS assets, activities, and skills. • Partial or complete reversal • Many companies have backsourced such as Continental Airlines, Cable and Wireless, and Halifax Bank of Scotland. • 70% of outsourcing clients have negative experiences and 25% have backsourced. • 4% of 70 North American companies would not consider backsourcing.

12. What are our competitors outsourcing today? Pitfalls to be avoided when outsourcing • Management lacks skill at overseeing outsourcing vendors • Outsourcing vendors do not share the same culture/language • Management lacks skill at writing and negotiating outsourcing contracts • Outsourcing vendor lacks experience with providing outsourcing services • Management lacks prior experience with outsourcing And some others, too: • Abdication of control • High switching costs • Lack of technological innovation • Loss of strategic advantage • Reliance on outsourcer • Problems with security/confidentiality

13. Avoiding Outsourcing Pitfalls • Do not negotiate solely on price. • Craft full life-cycle service contracts that occur in stages. • Establish short-term supplier contracts. • Use multiple, best-of-breed suppliers. • Develop skills in contract management. • Carefully evaluate your company’s own capabilities. • Thoroughly evaluate outsourcing providers’ capabilities. • Choose an outsourcing provider whose capabilities complement yours. • Base a choice on cultural fit as well as technical expertise. • Plan transition to offshoring.

14. What should we be outsourcing? What can be outsourced? • Sell entire IS Department (like Kodak) • Sell portions only • outsource non-strategic portions only • outsource non-critical portions only • outsource independent portions only • Use outsourcing as a threat for dramatic improvements in internal cost efficiency

15. What should we be outsourcing? What should “never” be outsourced? • Problems • IT leadership/management • Architecture Development • Business enhancement • Technology advancement • Vendor management • Anything that directly touches a customer (at least at first) • “Core” competency (at least at first) • Strategic functions • Measurement functions • How “never” is “never”?

16. Is our governance of outsourcing appropriate? Governance   Accountability • Direct management of IT Providers • Management through a “Global Sourcing Department” • Management through Procurement • Management through M&A • Captive Investments • Build-operate-transfer • Management through CIO and IT Department • Management through 3rd parties – “outsource the outsourcing”

17. Are we engaging with our outsourcing vendors appropriately? • Vendor selection is paramount to success • Establish the project’s technical needs • Identify and quantify your business strategies • Assess the RFP responses based on the pre-established criteria • Business drivers (usually major sections in RFP template) • Cost • Culture • Skills and resources • Turnover • References • Supplier stability

18. Are we engaging with our outsourcing vendors appropriately? CSFs for outsourcing partnerships • Understand each other’s business • Understand each other’s processes • Set short- and long-term goals • Define realistic expectations early • Share benefits and risks • Develop measurable performance metrics across the whole relationship • Expect changes • Prepare for the unexpected • Nurture the relationship

19. Are your SLAs driving the behavior we need? A good SLA: • Defines the scope of services that are to be covered by the contract • Describes either acceptance criteria or thresholds for different levels of quality that the included services must meet • Defines means to measure and monitor these services • Describes actions to be taken of service levels fall below acceptable levels

20. Are your SLAs driving the behavior we need? The Dos of Picking an Outsourcing Vendor Ask for and check references and exercise due diligence Assess the culture of your outsourcing partner Evaluate multiple options – both suppliers and approaches Metrics matter – use them Pick an outsourcing partner with a strong partner network Get it in writing! The Don'ts of Picking an Outsourcing Vendor Buy on price alone Overlook the reference-checking process Forget to provide for contingencies Communicate via committee Ever hand over the project management Single-source Let your head be turned by goodies

21. Are we engaging with our outsourcing vendors appropriately? Some Possible Metrics • On-time delivery • Cost effectiveness or productivity • Total cost of ownership • Service availability • User satisfaction • Processing time • Defect rates • Technical quality • Rework rates • Acceptance rates

22. “An outsourcing deal that is too one-sided, too favorable to one party at the expense of the other, usually ends up as a bad deal for both sides”