Isys40051 12 is suppliers & outsourcing v2

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  • 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.


  • 1. ISYS40051 – Enterprise Systems ManagementSession 12 –Outsourcing, offshore & IS suppliersGrenville 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 suppliers29 February 2012 2
  • 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 Outsourcing29 February 2012 3
  • 4. IT Outsourcing
  • 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 competencies29 February 2012 5
  • 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 7929 February 2012 6
  • 7. Why outsource IT? Risk Cost mitigation reduction Strategic Process focus expertise29 February 2012 7
  • 8. IT Outsourcing – risk mitigation? Either buyer or supplier Strategic risks makes opportunistic decisions Increased complexity of operations, geographic Operational risks separation, communications Significant issuesrisks 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 29 February 2012 8
  • 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 costsDibbern, 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. 333-36629 February 2012 9
  • 10. IT Outsourcing – cost reduction?29 February 2012 10
  • 11. IT Outsourcing – strategic focus? Less tactical, more strategic29 February 2012 11
  • 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 Governance29 February 2012 12
  • 13. IT Outsourcing – process expertise?29 February 2012 13
  • 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 $80billion29 February 2012 14
  • 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 employer29 February 2012 15
  • 16. 2012 trends in IT outsourcing29 February 2012 16
  • 17. When outsourcing becomes offshore…
  • 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.29 February 2012 18
  • 19. Mix of investment risk, security environment, threat of disruptive events, regulatory risks, datasecurity, quality of infrastructure, and extent of government support (Low number is better) 29 February 2012 19
  • 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 resources29 February 2012 20
  • 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.29 February 2012 21
  • 22. 29 February 2012 22
  • 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 employees29 February 2012 23
  • 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. 167-18929 February 2012 24
  • 25. IS suppliers
  • 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?29 February 2012 26
  • 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 dependencies29 February 2012 27
  • 28. Summary & seminar topic
  • 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.29 February 2012 29
  • 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 supplier29 February 2012 30