Internet Business Intelligence
Interduction
Companies outsource all or significant parts of their management of information technology (IT) for the following reasons:
1. Cost and quality
2. Lagging IT performance
3. Supplier pressure
4. Access to special technical & application skills
5. Financial factors
From a relatively unusual entrepreneurial activity in the past, IT outsourcing has in the last five years exploded across the global corporate landscape. Xerox, United Technologies, Commonwealth Bank, Nortel, and Nedcor are a few mega alliances.
Reasons for Outsurcing Alliances beings so Difficult
Over long periods many major outsourcing contracts are structured to expand. Contracts are 8-10 years in length and the IT environment changes rapidly. The situation is exacerbated by the timing of benefits to customer and the vendor. Advantages in the first year are clear to the customer, who regularly receives a one-time payment and the quality of service is closer to what they expected. The contract payment stream becomes less & less tied to the initial set of planned outputs in the subsequent years, & brings misunderstanding between the customer and the vendor. Only a small number of outsourcing corporations have the resources (critical mass & access to capital markets) to take the large contracts such as Electronic Data Systems (EDS), IBM, and Computer Sciences Corporation (CSC). Delegating a firm• s service differentiator is another complication.
Outsourcing in Retrospect
In the mid 1960s, small to medium-sized firms used service bureaus for accounting applications (ADP). Service bureau customers were mostly small and medium-size firms, although large firms used them for specialized needs or highly confidential items such as executive payroll.
Accenture developed customized applications in the private sector; CSC and EDP did the same in the public sector.
Before 1990, the general trend was to develop systems in-house. Outsourcing before 1990 occurred because:
• Cost-effective access to specialized or occasionally needed computing power or systems development skills.
• Avoidance of building in-house IT skills, primarily an issue for small and very low technology organizations.
• Access to special functional capabilities. Outsourcing through this phase was vital but in retrospect largely peripheral to the main IT activities that took place in midsize and large organizations.
Ootsourcing in the 21st Century:
A harbinger of traditional IT department transformation is IT outsourcing. It offers a glimpse at the budding organizational structures of the networked economy. By 1995, more than 70% of all mid-size to large firms globally had outsourced significant IT activities. Not just in the US, but Novartis (Switzerland), British Aerospace (the United Kingdom), & the AMP Insurance Company (Australia) have all outsourced substantial parts of their IT activities.
Two factors affect the growth of IT outsourcing:
Acceptance of Strategic Alliances
The significance of strategic alliances is broadly recognized, and interconnected forces stimulate their creation. Alliances allow a company to simplify its management agenda safely and gain access to higher-quality resources. They allow a firm to leverage a key part of its value chain by bringing in a strong partner that complements its skills. For an alliance to be successful and endure for the long-term, both firms must believe they are winners because they benefit from the synergistic potential of the relationship and the opportunity to specialize.
IT's Changing Technology Environment
Todays firms are integrating internal systems with their customers and suppliers and in the process changing their organizational structure to compete efficiently in the global marketplace. On firms trying to keep the old services running while developing the interconnections and services demanded by the new environment this integration places extraordinary pressures. Companies look to vendors for low-cost maintenance of the old systems to ensure that they operate reliably as well as for access to the new skills that permit their transformation to the new model. This shift toward outsourcing as a major source of new capabilities is as significant today as the move from tabulating equipment was 40 years ago.
What Drives Outsourcing:
General Managers Concerns About Costs and Quality
When managers consider outsourcing, the following questions come into their minds:
• Can we get our existing services for a reduced price at acceptable quality standards
• Can we get systems developed faster
Breakdown in IT Performance
Failure to meet service standards forces general management to find other ways to achieve reliability. In order to remain competitive companies need to rapidly retool backward IT structures.
Intense Vendor Pressure
The visibility of contractual arrangements, combined with the vendors aggressive sales forces, enabled vendors to approach general managers with compelling reasons to outsource.
Simplified General Management Agenda
A firm under intense cost or competitive pressures, which does not see IT as its core competence, may find outsourcing a way to delegate time-consuming, messy problems. If managers perceive the outsourcing vendor as competent and are able to transfer a non-core function to reliable hands, they will not hesitate to choose outsourcing.
Financial Factors
N Firms liquidate the IT assets and strengthen the balance sheet.
N Outsourcing turns fixed cost expenses into a variable cost expense.
Corporate Culture
A highly decentralized firm may find it difficult to consolidate data centers.
Eliminating an Internal Irritant
The dissimilar language IT professionals use, lack of career paths for IT staff, perceived high costs, apparent unresponsiveness to urgent requests, and apparent technical obsolescence produces tension among the end users of the resources and the IT staff.
When to Outsource:
Five factors can help in deciding the time to outsource:
1. Position on the Strategic Grid
2. Development Portfolio
• The higher the percentage of IT resources working on maintenance or higher-structured projects, the more likely outsourcing.
3. Organizational Learning Ability
4. A Firms Position in the Market
5. Current IT Organization
Stucturing the Allance:
Following factors are vital to a successful alliance:
• Contract Flexibility
• Standards and Control
• Areas to Outsource
• Cost Savings
• Supplier Stability and Quality
• Management Fit
• Conversion Problems
Managing the Allance
Four critical areas need to be focused on for managing alliance:
• Strong CIO is essential
• Partnership/contract management
• Architecture planning
• Emerging technologies
• Continuous learning
• Performance Measurement
• Mix and Coordination of Tasks
• Customer-Vendor Interface
Conclusion:
While outsourcing or forming an alliance, one should consider the key issues involved therein. The unique challenges posed by strategic alliance-based programs also require special attention.
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