1. ISYS40051 – Enterprise Systems Management
Session 12 –Outsourcing, offshore & IS suppliers
Grenville Lannon
2. IS Outsourcing & managing suppliers
• So far;
– IS in a business context
– Data analytics & Business Intelligence
– Key business application groups – ERP, SCM and CRM
– Overview of IS architecture
– Development of the Internet, the Web and Web services
– Cloud Computing, mobile devices and „consumerisation‟
– Security & Open Source software
– IS investments & IS adoption
– Implementation
• This week
– Outsourcing Farhoomand, pp. 76-82
– IS suppliers
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3. ESM – Module structure
IS in context
Cloud ERP CRM
Web
services
SCM
IS solutions
Architecture
Security
Open
Mobile
Source
Invest?
Function? IS evaluation
Adoption?
Scope?
Suppliers
Projects
IS
implementation
Outsourcing
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5. What is outsourcing?
• A company contracts another company to provide a service instead
of employing staff to do it
– Cleaning
– Catering
– Transportation
– Recruitment
• Often seen as a tactic to allow the company to focus on its core
competencies
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6. Why outsource IT?
• Reduce and control operating • Share risks
costs
• Make capital funds available
• Improve company focus
• Get help to manage out of
• Gain access to world-class control functions
capabilities
• Get cash infusion
• Free internal resources for
• Get access to resources not
other purposes
available internally
• Accelerate re-engineering
benefits
Farhoomand, page 79
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7. Why outsource IT?
Risk Cost
mitigation reduction
Strategic Process
focus expertise
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8. IT Outsourcing – risk mitigation?
Either buyer or supplier
Strategic risks makes opportunistic
decisions
Increased complexity of
operations, geographic
Operational risks separation, communications
Significant issues
risks still exist
Over time, in-house
Atrophy risks expertise will be lost
Geopolitical risks, exchange
Location risks rate risks, sovereign risks
Aron, R. et al. (2005), “Just Right Outsourcing: Understanding and Managing Risk”, Journal
of Management Information Systems, Vol. 22, No. 2, pp. 37-55
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9. IT Outsourcing – cost reduction?
Phase 0 Phase 1 Phase 2
Pre-contractual Onshore transition Delivery
Search costs Specification / design costs
Contract /
negotiation Knowledge transfer costs
costs
Control costs
Coordination costs
Dibbern, J. et al. (2008) “Explaining variations in client Contract adaptation
extra costs between software projects offshored to costs
India”, MIS Quarterly, Vol. 32, No. 2, pp. 333-366
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11. IT Outsourcing – strategic focus?
Less tactical, more strategic
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12. IT Outsourcing – strategic focus?
• “IT can be considered core at the corporate level, but some of its
aspects at lower levels, might be commodities”
• Understanding what role IT has as a core competency is key.
Testing
Coding
Software Development
?
Out Bug fix
Help Desk
Business Analysis
In Project Management
IT Strategy
Governance
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14. Evolution of IT outsourcing
• In the 1980s executives were increasingly made aware of the
strategic importance of information systems
BUT
• Also increasingly made aware to focus their company on its core
competencies
• 1989 – Landmark Eastman Kodak $250million outsourcing deal with
IBM, DEC and Businessland Inc. for data centre and server
management
• 1990 – Total outsourcing market was $1.5billion
• 2008 – Total outsourcing market was $80billion
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15. IT Outsourcing – a moral dilemma?
• To whom are the managers of an organisation responsible?
– Shareholders?
– Employees?
– Customers?
– Governments?
– Suppliers?
In the UK regulations called TUPE (Transfer of Undertakings Protection of
Employment) exist to protect the rights of employees when business
operations are transferred from one company to another.
• Terms and conditions of employment are maintained
• Continuity of employment is guaranteed
• Job is transferred to the new employer
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18. Offshore
• An organisation can choose to move some of its operations
„offshore‟.
• This means having staff physically located in another
country, because having the staff in that country provides cost
advantages.
• Offshore operations can be in place either;
– As part of the organisation of the company itself
– As part of outsourcing operations to another company who
provides those services from offshore
• India was initially the dominant choice for offshore operations, but
the picture is now much more complex.
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19. Mix of investment risk, security environment, threat of disruptive events, regulatory risks, data
security, quality of infrastructure, and extent of government support (Low number is better)
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20. Case study – Shell (Customer)
Foundation – Cisco, SAP,
Oracle, Microsoft India
China
Malaysia
Infrastructure – AT&T, HP, Mexico
70% of total T-systems Poland
Total IT spend
IT spend is Romania
outsourced Kenya
Application services –
Brazil
Accenture, IBM, Logica,
Wipro
80% of that outsource goes
to 11 suppliers – who use
offshore resources
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21. Case study – Capgemini (Supplier)
• Capgemini proposed a concept called Rightshore – a mix of;
– Offshore
– Nearshore
– Onshore
• Staff based in
– USA, Canada, Mexico
– Chile, Argentina, Brazil, Guatemala
– UK, France, Spain, Netherlands, Germany, Finland, Italy, Poland
– Morocco
– Australia, China, India
• Staff provided to customer contracts based on an „optimum mix‟ of
cost, capability, language, time zone etc.
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23. Case Study – Capgemini (Supplier)
• India is still the dominant offshore resource
UK IT consultant with 5-7 years experience = £1,400 per day
Indian consultant with 5-7 years experience = £100 per day
• Bringing Indian staff into Europe for several months is still more
cost effective than local employees
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24. Offshore – a further moral dilemma?
• To whom are the managers of an organisation responsible?
– Shareholders?
– Employees?
– Customers?
– Governments?
– Suppliers?
There is evidence that organisations should recognise that establishing
offshore base (either directly or through a supplier) is more than simply a
lower transaction cost replacement for existing business processes. They
need to consider issues such as job loss, security, quality – all stakeholder
groups are sensitive to the broader issues.
Robertson, C.J. et al. (2010) “Stakeholder Perceptions of Offshoring and Outsourcing: The
Role of Embedded Issues”, Journal of Business Ethics, Vol. 95, pp. 167-189
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26. IS suppliers
• IS suppliers aim for three things
Revenue Margin Credentials
Top line sales Gross profit Can they use
(sales – your experience
direct costs) as a reference?
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27. IS suppliers
• IS suppliers will most actively manage risk
– Risk to their revenue
– Risk to their margin
– Risk to their credentials
• Good suppliers will proactively seek a regime for managing risk at
the beginning of a contract
• Common risks for IS suppliers are related to;
– Estimating
– Governance
– Scope creep
– Penalties for late delivery
– Client dependencies
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29. Summary
• IT services have been one of the dominant areas which businesses
have sought to outsource to suppliers for a number of reasons.
• Outsourcing can provide many benefits, but it is not easy and can
often be controversial.
• Offshoring can be done either within an organisation, or as part of
outsourcing to a third-party. Similarly, it is not easy and is often
controversial.
• IT suppliers – especially those providing services – will actively
manage risks associated with their revenue and margin.
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30. Seminar topic
• Read NICHOLSON, B. & SAHAY, S. (2001) “Some political and
cultural issues in the globalisation of software development: case
experience from Britain and India”, Information and
Organisation, Vol. 11, pp. 25-43
• What do you think organisations which engage in offshore software
development or IT services provision can do to reduce the impact of
political or cultural issues related to the offshore work?
– As a customer
– As a supplier
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Notes de l'éditeur
Economic roller coaster3,4 — The global economy remains unstable. Many IT budgets will remain flat or will shrink. The demand for IT organizations to deliver sustainable business value is key to organizations' success.5Recommendations: Establish flexibility in your services and your relationships with providers, and an innovative approach to IT services sourcing. Be realistic about budgets, but don't abandon value for cost.Consumerization6 — The lines between consumers/communities, professionals and enterprises are blurring. All have a greater choice of solutions and sources and can bypass IT.Recommendations: Satisfy the demand for greater agility by implementing new channels for information and work.Globalization7 — Emerging markets represent the new frontier for supply and demand; Gartner estimates that Standard & Poor's (S&P) 500 companies will derive more than 50% of new revenue from them. Low-cost labor benefits are shrinking, creating a need for new models and approaches. Organizations can buy value, not just volume.Recommendations: Evaluate the costs and benefits associated with the development of intellectual property (IP) or increased speed to market.IT services industrialization8 — Sourcing organizations have more alternatives than ever, and industrialization represents a shift from a labor-driven customized model to an automated and standardized one. Industrialized IT service offerings will mature and increase in number, putting pressure on prices. The effect on demand and supply9 requires change, and differentiation needs to be reconsidered.Recommendations: Manage standards and hybrid models. Assess risks such as IP exposure, data security and uptime guarantees.
