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Outsourcing reduces costs Reduces one type of risk Introduces other risks

ERP Outsourcing Evaluation David L. Olson, Evaluation of ERP outsourcing, Computers & Operations Research 34:12, 2007, 3715-3724. Outsourcing reduces costs Reduces one type of risk Introduces other risks. Scope of ERP Outsourcing. ERP rental estimated at $6.4 billion in 2001

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Outsourcing reduces costs Reduces one type of risk Introduces other risks

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  1. ERP Outsourcing EvaluationDavid L. Olson, Evaluation of ERP outsourcing, Computers & Operations Research 34:12, 2007, 3715-3724 Outsourcing reduces costs Reduces one type of risk Introduces other risks Olson: ERP4

  2. Scope of ERP Outsourcing • ERP rental estimated at $6.4 billion in 2001 • Forrester Research Inc. • Induced by competitive pressures • Gartner: monthly outsourcing fees $300 to $1,000 per user Olson: ERP4

  3. Relative IT CostsT. Hoffman, P. Thibodeau, Wage inflation unlikely to soon end India’s offshore dominance. Computerworld 38:14, 2004, 11-12. Olson: ERP4

  4. Dial soapSchwartz (2003) • Installed SAP suite run by EDS • 18 month, $35 million project • Overall transfer expense $110 million • Replace mix of Siebel, Oracle, Manugistics, and other applications • 50 IT employees transferred to EDS • Only a small governance team retained by Dial Olson: ERP4

  5. Other outsourcings • Sun: • Will outsource about 90% of IT jobs • California State Automobile Association • Accenture to run PeopleSoft system • ASAT Holdings • IBM to run SAP system Olson: ERP4

  6. Targeted Outsourcing • Informatica Inc. • Outsourced HR, felt could operate even if it went down • Didn’t outsource other modules • Federal-Mogul Corp. • Experienced quick growth through acquisitions • Needed to consolidate 27 different ERPs • Outsourced only technical work such as SAP programming Olson: ERP4

  7. Government ERP Outsourcing • Can lower costs of software ownership • Avoid problems of developing & retaining IT staff • More difficult to get approval for large ERP projects • Need to defend proposals in public hearings • Reduction of State jobs has led to difficulties with information workers’ unions Olson: ERP4

  8. Reasons to OutsourceBryson & Sullivan (2003); Clymer (2004) • Reduced capital expenditure • ASP economies of scale • More flexibility & agility • Increased service levels at lower cost • Gain expertise unaffordable in-house • Allow focus on core business • Continuous access to the latest technology • Reduced risk of infrastructure failure • Manage IT workload variability • Replace obsolete systems Olson: ERP4

  9. Reasons Against OutsourcingBryson & Sullivan (2003); Clymer (2004) • Security & privacy • Dependency on vendor (lock-in) • Availability, performance, reliability • High migration costs • ERP expertise may be critical to organizational success • ERP systems tied to IT infrastructure • Key applications may need to be in-house • May have existing efficient operation • Corporate culture Olson: ERP4

  10. Russ Berrie & Co.Nash (2002) • Gift-related retailer • 1998 & 1999 spent $19.2 million on SAP • Problems tracking orders • Wrote off $10.4 million to revert to old systems • 2001 supply chain inefficiencies • Investigated 4 ERP vendors (not SAP) • Gave hard technical criteria • User ability to access via Web • Software resident on user PCs • Installation in stages • Used weighted scoring system, selected JDEdwards Olson: ERP4

  11. General MotorseWeek (2003) • Outsourced ERP in early 1990s • One of first to outsource such a large system • Acquired EDS • Problems: no management control • Second generation: • Combination of outsourcing companies • 2003 Third generation: • Outsource all IT • Retain control over everything • Wanted competing outsourcing companies • In 2003 spending $1 billion less on IT than in 1996 Olson: ERP4

  12. Soft Impacts of OutsourcingMcCarthy (2001) • Software upgrades over time • Integration, implementation, testing, maintenance • User functionality, technical support, service • Servers • Disaster recovery • Staffing Olson: ERP4

  13. Selection CriteriaVan Everdingen et al. (2000) Olson: ERP4

  14. ASP Evaluation FactorsEkanayaka et al. (2003) Olson: ERP4

  15. Example: Start with Life Cycle Cost Olson: ERP4

  16. Criteria, Scores by Alternative Olson: ERP4

  17. Develop Weights • Rank order criteria by importance • Identify worst measure by criteria • Give worst 10, others assigned proportionally • Identify best measure by criteria • Give best 100, others assigned proportionally • Compromise Olson: ERP4

  18. Weight estimates Olson: ERP4

  19. Value = Weights time Scores Olson: ERP4

  20. Summary • Outsourcing ERP an important new option • Hard to figure impact on: • Cost • Risk • Multicriteria methods can help evaluate Olson: ERP4

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