Information Systems Management

IS 483 Information Systems Management James Nowotarski 22 May 2003

Recap risk management and RFP

Understand IT Outsourcing

Today’s Objectives

Topic Duration

Recap risk management/RFP 15 minutes

Assignment 2 reports 20 minutes

Quiz 15 minutes

*** Break 15 minutes

IT Outsourcing 90 minutes

Today’s agenda

Topic Duration

Quiz 15 minutes

Today’s agenda

IT Risk Management

Economic

Technical

Organizational

Legal

Terrorism

Major Categories of Risk

Risks that can potentially affect the business

business environment changes

financial performance

IT Risk Management

Economic

Technical

Organizational

Legal

Terrorism

Risks that can affect the development, implementation, and operation of a system

integrating technology with legacy

applying unproven technology

conversion may uncover “dirty” data

management inexperienced with projects of this size

IT Risk Management

Economic

Technical

Organizational

Legal

Terrorism

Risks that can potentially result from lack of acceptance of a system

low morale

decline in effectiveness/efficiency

IT Risk Management

Economic

Technical

Organizational

Legal

Terrorism

Risks arising from potential lawsuits and liabilities associated with implementation of a project

shareholder lawsuits

data privacy

Foreign Corrupt Practices Act (FCPA)

IT Risk Management

Economic

Technical

Organizational

Legal

Terrorism

Risks arising from intentional destruction or malevolent modification of:

physical equipment

data

software

network

IT Risk Management The process in which potential risks to a business are identified , analyzed and mitigated , along with the process of balancing the cost of protecting the company against a risk vs. the cost of exposure to that risk. Risk Management

Risk Frameworks Fidelity’s Risk Cube

Risk Frameworks Risk Awareness Risk Management Risk Measurement ---------- Fidelity Risk Cube ---------- Identify Analyze Mitigate Measure

Risk Frameworks RISK Cube - Key Questions

R is for R eturn

Are we achieving an appropriate return for the risks we take?

I is for I mmunization

Do we have controls and limits in place to limit downside risk?

S is for S ystems

Do we have systems in place to measure and report risk?

K is for K nowledge

Do we have the right people, skills, culture, and incentives for effective risk management?

Risk Management Approaches Risk Management Approaches

Interdisciplinary Approach

Portfolio Approach

Options Thinking

Chaos Theory

Risk vs. Technology Maturity Impact of Technology Maturity Risk Early Adopter Mid Adopter Late Adopter hands-on implementation experience little exper / high risk more exper / mid risk much exper / low risk vendor survival for project after shake-out high risk mid risk low risk sudden changes in direction of technology high risk mid risk low risk integrating technology with existing portfolio high risk mid risk low risk Benefits Period for Start of Payoff Short term Mid term Long term Size of Returns per period Biggest Bigger Big

Risk Management at Project Level Steps Taken by Prudent Managers

List the risks that could occur and when they could occur

Determine what detection method can alert IS that risk occurred

Establish detection method

Estimate each risk’s probability of occurring

Formulate plans that can mitigate each risk

Establish teams that will monitor and mitigate the risk

Procurement - Process RFP Process Objective : Identify best solution to meet stated business need while minimizing cost and risk 1. Pre-RFP 2. RFP 3. Proposal Submissions 4. Proposal Evaluations 5. Vendor Selection 6. Procurement Method 7. ROI Analysis 8. Negotiate Contract

Topic Duration

Quiz 15 minutes

Today’s agenda

Topic Duration

Quiz 15 minutes

Today’s agenda

Topic Duration

Quiz 15 minutes

Today’s agenda

IT Outsourcing

On average, commercial organizations outsource 40% of their IT budgets

“ Outsourcing is one of the greatest organizational and industry structure shifts of the [20th] century” -- James Brian Quinn, Amos Tuck School, Dartmouth

Information technology (IT) outsourcing is widely accepted by most commercial organizations

IT Outsourcing

Cost reduction -- Perception of IT as a cost burden coupled with availability of cheaper sources of services (e.g., near-shore and offshore)

Cost predictability

Require improved performance levels (e.g., speed of delivery, customer satisfaction, quality, etc.)

Refocus on corporate core competencies

Desire to have in-house IT resources focus on strategic systems and/or technology

Lack of ability and/or willingness to hire/retain IT skills

Information technology (IT) outsourcing is the use of a third party to provide services rather than using those in-house. Drivers

IT Outsourcing “ [g]et rid of context and focus on core” - Billy McCarter, former CIO of Fireman’s Fund, who reduced IT staff from 1,100 to 600 with much of the work outsourced to offshore workers A desire to focus on core competencies is frequently the strongest driver to outsource “ [a]llows me and my staff to focus on fun areas . . . be more productive, more visible to the business, understand what the business needs versus worrying about whether one of the servers needs additional RAM” - Daniel Sheehan, CIO at Advo, Inc. (infoweek, 4/14/03)

IT Outsourcing IT is often viewed as a commodity and, thus, not “core”

IT is like electric power -- a commodity that is required by all but provides distinction to none

IT capability is broadly accessible and affordable

New or proprietary technologies offer opportunity for companies to gain a step, but this advantage is short-lived

Further evidence of IT commoditization:

overcapacity

price drops

vendors positioning selves as “utilities”

bursting of the investment bubble

Carr, N. “IT Doesn’t Matter.” Harvard Business Review. May 2003.

IT Outsourcing

Chipmakers no longer make chips

Pharmaceuticals outsource new drug research

Government outsources prisons

Apparel firms outsource apparel manufacturing

Processes once considered core are now candidates for outsourcing. Examples

IT Outsourcing

Data center operations

Network operations

Application maintenance

Desktop workstations

Help desk/Support

Application development

Business process execution

What parts of IT to outsource? most common IT activities to outsource

IT Outsourcing

Transitional Outsourcing

Selective Outsourcing

Total Outsourcing

To what extent should you outsource? most common approaches

IT Outsourcing

What is it

Outsource legacy systems

Focus in-house staff on development of “new world”

Outsourced activity may return in house at some point

Transitional Outsourcing

Advantages

Legacy systems are well-understood, facilitates specifying outsourcing contract terms

In-house organization moves on to next new thing (Tarzan grabbing the next rope in the IT jungle)

Contract may be shorter term

Disadvantages

Vulnerable to loss of vendor support if new system is delayed

More vulnerable to vendor manipulation of pricing, maintenance costs

IT Outsourcing

What is it

Select the best-of-breed for an activity

Selective Outsourcing

Advantages

Creates a competitive environment

Enables staff to be retained and redeployed

Provides flexibility to adapt to changes

Less risky than total outsourcing

Disadvantages

Overhead associated with multiple evaluations, multiple contract negotiations, and multiple vendors to manage and coordinate

Dividing up pieces of infrastructure (e.g., help desk and network management) can lead to trouble since the pieces are integrated

IT Outsourcing Selective Outsourcing “ Global access to Enterprise Service Providers (ESPs) with low cost structures is accelerating outsourcing adoption rates, leading to the proliferation of mixed-sourcing delivery models in which the ‘best’ provider of a particular service wins.” (Gartner 2003)

IT Outsourcing Selective Outsourcing “ Today, businesses look to "selective sourcing & services" for their IT infrastructure, operations and management needs. With selective sourcing the focus is on securing services for very specific needs. Using managed contracts, selective sourcing has proved very successful in limiting risk, motivating vendor performance and achieving goals. With selective sourcing/services organizations have the best of both worlds with the flexibility to select a best practice supplier while maintaining overall control of their IT practices.” -- Strategic Sourcing Advisory Council, http://www.ssacouncil.org/

IT Outsourcing Selective Outsourcing “ I don’t believe you should have a dozen partners, because then it’s not a real relationship” -- Mukesh Mehta, VP of IT at Metropolitan Life, InformationWeek, 23 December 2002

IT Outsourcing

What is it

Use one vendor for many activities

Extreme outsourcing: At least 50% of IT functions outsourced

Total Outsourcing

Advantages

Consistency and stability with same vendor for many activities

Lower overhead because there is only one vendor

Disadvantages

More vulnerable to vendor manipulation and loss of vendor support

Lack of competition between suppliers

One vendor cannot be best across the whole spectrum

Needs can change dramatically after 1-2 years

IT Outsourcing Survey Results Type of sourcing Success Failure Mixed Total outsourcing 38% 35% 27% Selective outsourcing 77% 20% 3% In house 76% 24% 0% Source: Study of 116 companies by college professors Mary Lacity and Leslie Willcocks, Computerworld, 10 May 1999

IT Outsourcing Consider business, economic, and technical factors in deciding whether to outsource Business Considerations Outsource Insource Commodity Differential Critical Useful Strategic Importance Potential for Differentiation

IT Outsourcing Consider business, economic, and technical factors in deciding whether to outsource (cont.) Economic Considerations Outsource Insource Subcritical Critical Leading Lagging Managerial Practices In-House Economies of Scale

IT Outsourcing Consider business, economic, and technical factors in deciding whether to outsource (cont.) Technical Considerations Low High High Low Degree of Technology Integration Degree of Technology Maturity Outsource Insource

IT Outsourcing Give examples of applications that would be good candidates for insourcing and outsourcing based on technical considerations Technical Considerations Low High High Low Degree of Technology Integration Degree of Technology Maturity Outsource Insource

IT Outsourcing: Offshore

IT organizations and solutions providers are increasing their offshore capabilities for both maintenance and development

JP Morgan

Merrill Lynch

Lehman Brothers

Ford

NY Stock Exchange

Motorola

Boeing

Household

Many unpublicized

IT organizations

Accenture

IBM

HP

Offshore firms, typically with local presence

Solutions providers

Legacy maintenance

New development

Projects requiring specialized expertise, e.g.,

Embedded software

ERP

Types of projects

Reduce cost

40-50% savings, according to Merrill Lynch CTO

Higher quality/capability

Approximately 50 out of 70 CMM Level 5 systems development organizations are in India

IT Outsourcing: Offshore Cost and quality are the two main reasons for going offshore

Highly capable workforce

Focus on process and product quality

Low labor and infrastructure costs

Government commitment and support

English language skills

India is the leading location for offshore sourcing Reasons IT Outsourcing: Offshore

North American brokerage firms spent $417 million on offshore contracts in 2002 and will spend $1.31 billion by 2005 (a compound annual growth rate of 46.4 percent)

In cumulative terms, 8,150 U.S. Wall Street IT jobs (or 15 percent of the four-year moving average IT headcount) will head offshore between 2002 and 2005.

India's share of outsourced work from U.S. securities firms will rise in 2003 to 94 percent, but will settle at 84 percent by 2004 as other offshore locations (including China) gain ground

Reasons cited for India’s success:

Low labor costs

Sophisticated processes to manage offshore projects

Highly certified staff

(Source: Intelligent Outsourcing Strategies, March 24, 2003)

Wall Street’s top firms are investing heavily in offshore outsourcing of IT and operations IT Outsourcing: Offshore

U.S. financial-services companies plan to transfer 500,000 jobs, or 8% of total industry employment, to foreign countries in the next 5 years

Involves a wide range of work, including financial analysis, regulatory reporting, accounting, and graphic design

Example of cost savings: A Wall Street researcher with a college business degree and a few years experience can earn as much as $250K, compared with $20K in India.

Corporate chiefs list India as the most attractive country, followed by China, Philippines, Canada, Czech Republic, Mexico

Among the most aggressive U.S. companies: GE Capital, Citicorp, American Express.

Wall Street Journal, 1 May 2003

Wall Street’s top firms are investing heavily in offshore outsourcing of IT and operations (cont.) IT Outsourcing: Offshore

IT Outsourcing

High costs associated with white collar labor

Heavy data processing that financial firms face

Not only IT services

Outsourcing business processes such as check processing ($7-8/hour vs. $12-16 for U.S. worker)

U.S. and Indian services firms are pairing up to provide onshore/offshore model to financial services companies

- InformationWeek, 12 May 2003 Wall Street’s top firms are investing heavily in offshore outsourcing of IT and operations (cont.)

Salary costs in India are going up

Undervalued currency (rupee) could gain 20-30% against the dollar

Vietnam, China, and Philippines are training armies of programmers to compete with India

India’s advantage is beginning to erode Reasons IT Outsourcing: Offshore

English or language difficulties

Lack of industry-specific knowledge

Distrust

Communication/Coordination

“ Outsourcing is prone to failure because of breakdowns in communications between outsourcing providers and their clients, according to Gartner” (InformationWeek, 3/31/03)

Need to manage risks of offshore outsourcing Potential Risk Areas IT Outsourcing: Offshore

Which statement do you agree with and why?

Discuss Outsourcing strips a company of an important core competence -- IT know-how. Outsourcing offloads a burdensome technical responsibility and allows management to focus on its core business.

Some industry watchers believe that certain functions ought always to be retained in-house. For instance, “application maintenance is the most dangerous thing to take out. This is very subtle, but it’s the glue that sticks everything together. If you outsource it, you lose the ability to understand and change your environment.”

Peter Bendor-Samuel, president of Everest Software Corp., Dallas-based outsourcing consulting company, Software Magazine, July 1998

Discuss

“ Outsourcers are good with day-to-day repetitive tasks, but not with implementing bleeding-edge technology. Those who are successful ‘focused on infrastructure, which is 80% of an IT operating budget. Infrastructure is a lot easier to outsource than application development.’ ”

Mary C. Lacity, associate professor of management information systems at the University of Missouri in St. Louis, Computerworld, 10 May 1999.

Discuss

Losing skills in functions/processes that are outsourced

Internal backlash from staff who fear outsourcing

Loss of control over quality and timing of outputs

Provider may sell or leak buyer’s solutions to competitors

Lack of face-to-face communication can hinder applications development

IT Outsourcing There are several risks to be managed Risks

What are the implications of all this on IT managers?

Discuss

IT Outsourcing Trends

More outsourcing of things that were traditionally mission-critical, such as billing services (optimize, 12/02)

It takes 3-6 months for offshore IT project managers to gain authorization to visit the [client] company’s US offices . . . last year the typical waiting period was 1 month (InformationWeek, 3/31/03)

Trends

Technology Business Research analyst Humberto Andrade says he expects revenue generated by IT outsourcing deals to increase 12% to 15% this year compared with last year (Source: InformationWeek, 11 April 2003)

Almost one in five companies plan to increase their spending on IT outsourcing in 2003 (Source: Internet World, 23 December 2002)

A Growing Market

HP will manage IT infrastructure, data center, desktop, and user support, network management, and application development at Procter & Gamble Co. operations worldwide. It sealed the $3billion, 10-year deal last week (InformationWeek, 14 April 2003)

Motorola farming out much of its IT infrastructure to Computer Sciences Corp. in a deal valued at $1.6B . . . CSC will run desktop and midrange technology, including global help-desk and network operations. IT will also acquire some of Motorola’s physical IT infrastructure and network assets (InformationWeek, 14 April 2003)