Olayele Adelakun (Ph.D) Assistant Professor CTI DePaul University, Chicago, IL Email : yele@cs.depaul.edu Web: http://f

1. Olayele Adelakun (Ph.D) Assistant Professor CTI DePaul University, Chicago, IL Email : yele@cs.depaul.edu Web: http://facweb.cs.depaul.edu/yele

2. Agenda • IT Outsourcing Trends, Market and Practices • Outsourcing Drivers and Difficulties • When and What to Outsource • Keys to Successful Outsourcing • Conclusion

3. 1960s-----1970s-------1980s--------1990s--------2000s------>$1 trillion Time-sharingInsourcing-------------------------------------> 75% Outsourcing----------------> 24% ASP ---> 1% IT Outsourcing Trends Customers wanted flexible, low cost, high service IT products and services to enable business objectives. Source: Lacity and Willcocks 2001

4. IT Outsourcing Market 1990 - $9 billion Dataquest 1994 - $28 billion Dataquest $50 billion The Yankee Group (global revenues) 1995 - $76 billion International Data Corporation (global revenues) 2000 - $121 billion International Data Corporation (global revenues) 2004 $154 billion Kern and Willcocks (2002) IT Outsourcing is not a fad, but a fundamental change in the way IT is delivered Source: Willcocks 2002

5. Percent Outsourced by Function 1998 1999 2000* 2001* * Projected Source: Michael F. Corbett & Associates, Ltd.1999 & 2000 Strategic Outsourcing Studies The Outsourcing Research Council

6. Outsourcing’s Economic Impact 1998 1999 2000 2001 U.S. Corporate Revenue $11.08T 11.65T 12.23T 12.85T Outsourcing Spending $510B 610B 730B 874B as a %of Corporate Revenue 4.6% 5.2% 6.0% 6.8% 1999 Revenue: GM, GE, Ford, Exxon, IBM $682B 2000 Global E-commerce Spending $272B 2000 Global Electronics Sales $772B 2001 Federal Budget (discretionary) $642B (Source: Michael F. Corbett & Associates, Ltd. 2001)

7. Customer Rating of Supplier Performance Overall, suppliers are earning a “good” report card, but there are many opportunities for improvement. Source: Lacity and Willcocks 2001

8. Too early Mixed Results Yes, most expectations met No, most expectations not met IT Outsourcing Practices Sourcing Outcomes: 116 Cases Source: Lacity and Willcocks 2001

9. IT Outsourcing Practices Outsourcing Success Rates Improve over Time Contract Signed Percent “Successful” 1984-1990 39% 1991-1998 72% Source: Lacity and Willcocks 2001

11. IT Outsourcing Practices Outsourcing Scope:116 sourcing decisions from case studies (<20% IT budget outsourced) (>80% of IT budget outsourced) (20-80% IT budget outsourced) Source: Lacity and Willcocks 2001

12. IT Outsourcing Practices Selective Outsourcing (n=102 sourcing decisions from case studies with discernible outcomes) Sourcing Decision Percent “Successful” • Selective Sourcing 77% • Total Outsourcing 38% • Total Insourcing 76% Source: Lacity and Willcocks 2001

13. IT Outsourcing Practices Contract Duration: 82 Cases Greater than 7 years Between 4 to 7 years Less than 4 years Source: Lacity and Willcocks 2001

14. IT Outsourcing Practices Shorter contracts had a higher success frequency than longer contracts. (n=85 outsourcing decisions with discernible outcomes) Contract Duration: Percent Successful: • Less than 4 years 88% • Between 4 and 7 years 59% • Greater than 7 years 38% Source: Lacity and Willcocks 2001

15. Packaged Applications Packaged Services Custom Applications Few Companies Many Companies Ubiquitous Trends: E-sourcing and the ASP Model “ASPs are doing for software what the Internet has already done for data -- making software applications available, affordable and ubiquitous.” Traver Gruen-Kennedy, chairman, The ASP Industry Consortium (Source: 2001 Michael F. Corbett & Associates, Ltd.)

16. Functional Areas IT Department ASPs IT Department Trends: E-sourcing is Used To... Deliver Internal IT Capabilities (Source: 2001 Michael F. Corbett & Associates, Ltd.)

17. Trends: Offshore and Nearshore

18. Trends: Offshore and Nearshore Sourcing of IT Work Offshore (SITO) Stage Model Proactive Strategic Focus Strategy focused on multiple sources of competitive advantage: innovation, world-class talent, and skills. Sourcing centers perform core corporate activities, including new systems and product 4 3 2 1 Proactive Cost Focus Strategy focused on cost efficiencies where sourcing centers perform non-core activities (support, enhancement) Offshore Experimenter Experimentation begins. Sourcing is ad hoc. Offshore Bystander Domestic sourcing only. Source: Erran Carmel and Ritu Agarwal (2000)

19. Agenda • IT Outsourcing Trends, Market and Practices • Outsourcing Drivers and Difficulties • When and What to Outsource • Keys to Successful Outsourcing • Conclusion

20. Changing Business Environment Cost Pressure New Technology Global Competition The Need to Maximize Business Value, Reduce Risk, Make Profit, Stay in Business E-Business & E-Commerce Changing Business Conditions and Objectives Total Quality Deregulation Sourcing Relationships, Alliances, Partnerships, Mergers, Acquisitions Source: Everest Software Company

21. Outsourcing Drivers • Two main factors have affected the growth of IT outsourcing • Recognition of strategic alliances • Changes in the technological environment

22. Outsourcing Drivers • What drives Outsourcing • Concern for cost and quality • Breakdown in IT performance • Intense Supplier pressure • Simplified GM Agenda • Concentrating on core competence? • Improved company focus • Financial factors (make capital available) • Cash infusion • Turn fixed cost into variable cost • To reduce cycle time / process improvement (BPR/TQM) • Eliminating Internal Irritant • Engage an outside agent in the change process. • Strategic Alliance

23. Outsourcing Difficulties Top ten problems perceived by customers as “serious/difficult” 44% Getting different contract suppliers to work together 42% Poor supplier staffing of contract 38% Defining service levels 33% Supplier’s lack of understanding your business 32% IT skills shortage affecting supplier service 30% Cost for additional services beyond contract 28% In-house staff resistance to outsourcing 28% Managerial skills shortage 26% Cost escalation due to contract loopholes 25% Failure to align corporate strategy with IT strategy Source: “Inside Information Technology Outsourcing: A State of the Art Report”, published by Oxford Institute of Information Technology.

24. Agenda • IT Outsourcing Trends, Market and Practices • Outsourcing Drivers and Difficulties • When and What to Outsource • Keys to Successful Outsourcing • Conclusion

25. When to Outsourcing • Business Factor • Position in the strategic grid • Technical Factor Matrix

26. ‘Qualifiers’ ‘Order Winners’ (Best-source: In-House/Partner) (In-House/Buy-In) ‘Necessary Evils’ ‘Distractions’ (Outsource) (Migrate or Eliminate) When to Outsourcing The Business Factors Matrix Critical Contribution to Business Operations Useful Differentiator Commodity Contribution to Competitive Positioning Source: Lacity and Willcocks 2001

27. When to Outsourcing Factory-uninterrupted service-oriented information resources management Outsourcing Presumption: Yes High Strategic information resources management Outsourcing Presumption: No Current Dependence on Information Support -oriented information resources management Outsourcing Presumption: Yes. Turnaround information resources management Outsourcing Presumption: No Low Importance of Sustained, Innovative Information Resources Development High Low

28. When to Outsourcing The Business Factors Matrix High Preferred Supplier Strategic Alliance Degree of Integration Buy-in Contract Fee-For-Service Low High Low Technology Maturity Source: Lacity and Willcocks 2001

29. When to Outsourcing • Development portfolio • Organizational learning • A firm’s position in the market • Current IT organization

30. Agenda • IT Outsourcing Trends, Market and Practices • Outsourcing Drivers and Difficulties • When and What to Outsource • Keys to Successful Outsourcing • Conclusion

31. Keys to Successful IT Outsourcing • Literature Review on Outsourcing Success Factors • Outsourcers’ technical skill and competence • Cultural awareness • PM skills • Cost • Telecommunications • SW development process • Trust and good relationship • Problem resolution • Intellectual property protection • Detailed contract (SLA)

32. Keys to Successful IT Outsourcing Most Critical Success Factors Item Attribute U.S. Outsourcers Non-U.S. Outsourcers Clients PI1 General Knowledge Skills of outsource workers √ √ √ TI1 Telecommunications infrastructure √ TI3 Technical skills of outsource workers √ √ CI1 Client knowledgeable √ √ CI2 Trust exists in the relationship √ √ √ RI1 Intellectual Property Rights √ Note: √ indicates that the item had a mean value significantly greater than 4.0 on a five point scale: 1=Not Important, 2=Useful, 3=Important, 4=Very Important, 5=Critical. n=201 Source: Jennex and Adelakun (2003), see Journal of IT Cases and Application Special issue on outsourcing 2003.

33. Keys to Successful IT Outsourcing Relationship Management:Better Viewed as Stakeholders Customer Senior Business Managers Managers Staff Users Trade Union Subcontractors Senior Managers Account Managers Staff Supplier Source: Lacity and Willcocks 2001

34. Keys to Successful IT Outsourcing Stakeholder Relationships Vary by Goal Alignment for Task at Hand Collaborative Relationships: Tentative Relationships: Unknown Goals Shared Goals Cooperative Relationships: Adversarial Relationships: Complementary Goals Conflicting Goals Source: Lacity and Willcocks 2001

35. Keys to Successful IT Outsourcing Outsourcing Success Factor Model Regulatory Environment - Outsourcer Outsourcer Internal Technical Infrastructure Business Interface People Factor Client Interface Intervening Technical Infrastructure Intervening Technical Infrastructure Client Interface Internal Technical Infrastructure Business Interface People Factor Regulatory Environment - Client Client Source: Jennex and Adelakun (2003), see Journal of IT Cases and Application Special issue on outsourcing 2003.

36. Agenda • IT Outsourcing Trends, Market and Practices • Outsourcing Drivers and Difficulties • When and What to Outsource • Keys to Successful Outsourcing • Conclusion

37. Conclusion • IT Outsourcing is not a fad • Fee-for Service Contracts • Strategic Alliances/Partnership • Offshore • ASP models • Selective / multi-Sourcing • In-sourcing • Total outsourcing • Selective outsourcing decisions and total in-sourcing decisions achieved success more often than total outsourcing decisions.

38. Conclusion • Senior executives and IT managers who made decisions together achieved success more often than when either stakeholder group acted alone. • Organizations that invited both internal and external bids achieved success more than organizations that merely compared a few external bids with current IT performance • Short-term contracts achieved success more often than long-term contracts • Detailed fee-for-service contracts achieved success more often than other types of contracts • Older contracts experienced failure more than newer contracts. • The type of IT services most commonly outsourced are infrastructure and support IT activities

39. Conclusion • Two main Critical Success Factor • Excellent skill • Good relationship

40. CGEY Revisited