IS/IT Outsourcing

1. IS/IT Outsourcing GP Dhillon Virginia Commonwealth University

2. A Typical MIS Department Budget • 33% Systems and Programming • 70% Maintenance • 30% New Development • 10% Administration and Training • 57% Operations • Includes PCs, printers, off the shelf software, network hardware/software • Involve more $ than any other part of the MIS department

3. Reasons to Outsource • Organizationally-driven • Improvement-driven • Financially-driven • Revenue-driven • Cost-driven • Employee-driven

4. What is Outsourcing?Defined Outsourcingis defined as the act of moving a firm’s internal activities and decision responsibility to outside providers.

5. Three solutions to operations problems • Problems: downtime, obsolescence, unresponsive systems • Solutions: • Buy more equipment • Continuously fight fires and rearrange priorities, getting people to solve the problems at hand • Continually document and measure what you are doing, to find out the real problems, not just the apparent ones. Then set standards - the preferred solution

6. Supplier Supplier Supplier Supplier Supplier Supplier What does a business process look like? The Company

7. Supplier Supplier Supplier Supplier Supplier Supplier What does a business process look like? I N T E R or I N T R A N E T I N T E R or I N T R A N E T ERP or equiv ERP or equiv The Company ERP or equiv ERP or equiv ERP or equiv ERP or equiv ERP or equiv

8. Outsourcing Information Systems Functions: Customer-Vendor • Changes as IT has moved from the more traditional professional services category to outsourcing: • IS Management loses an increasing amount of control • Vendors take more risk • Vendors’ margins improve • Choosing the right vendor becomes more important

9. Outsourcing Information Systems Functions: Two Driving Forces • Focus on core businesses: Global competition in 1970s-2002 have forced efficiencies • Shareholder value: Companies “priced” based on shareholder value, and focus on short term profits. • Management must stress value, they must consider outsourcing in all their nonstrategic functions.

10. Supplier Supplier St St St St St St HP HP HP HP HP HP I N T E R or I N T R A N E T I N T E R or I N T R A N E T KO KO KO KO KO KO Sup Sup Sup Sup Sup Sup ERP or equiv ERP or equiv The Company Supplier Supplier ERP or equiv ERP or equiv ERP or equiv Supplier Supplier St HP KO Sup ERP or equiv ERP or equiv What does a business process look like?

11. Strategic High Potential Key Operational Support

12. Nature of contracts

13. Strategic High Potential Key Operational Support

14. Outsourcing Alternatives • IT outsourcing • Single outsourcer • Big bang (common pre-1990) • Sell IT assets to outsourcer • Move personnel to outsourcer • Get fixed costs off books and change to variable costs • Outsourcers took loss for 2 years and then got economy of scale to keep costs down • Many problems with transition and culture shock of ex-employees being treated like “temps”

15. Outsourcing Alternatives • Best-of-breed outsourcing (common throughout 1990s) • Multiple outsourcers • Choose each outsourcer based on their expertise • Alternatively, could be “collaborative outsourcing” • General contractor and subcontractor system

16. Outsourcing Alternatives • Shared services • Insourcing within organization • Across large organization, create centralized service unit that deals with services of all sorts (like a spin off company that has its own management and autonomy and in some cases is legal corporate entity) • Specialties within types of service (like IT or mailroom or legal) have autonomous subunits within service unit • Insource group can subsequently outsource

17. Outsourcing Alternatives • Business process outsourcing (late 1990s) • Margins for routine IT services shrank as they became commodities • BPR became lucrative niche and is more art than science • BPO is buying strategic process and administration of new processes for use of IT instead of just cutting costs of existing IT processes • Is risky and sometimes risks and rewards are shared in joint ventureship