ERP Outsourcing Evaluation   David L. Olson, Evaluation of ERP outsourcing,  Computers & Operations Research  34:12, 2007,...
Scope of ERP Outsourcing <ul><li>ERP rental estimated at $6.4 billion in 2001 </li></ul><ul><ul><li>Forrester Research Inc...
Relative IT Costs   T. Hoffman, P. Thibodeau, Wage inflation unlikely to soon end India’s offshore dominance.  Computerwor...
Dial soap Schwartz (2003) <ul><li>Installed SAP suite run by EDS </li></ul><ul><ul><li>18 month, $35 million project </li>...
Other outsourcings <ul><li>Sun:  </li></ul><ul><ul><li>Will outsource about 90% of IT jobs </li></ul></ul><ul><li>Californ...
Targeted Outsourcing <ul><li>Informatica Inc. </li></ul><ul><ul><li>Outsourced HR, felt could operate even if it went down...
Government ERP Outsourcing <ul><li>Can lower costs of software ownership </li></ul><ul><li>Avoid problems of developing & ...
Reasons to Outsource Bryson & Sullivan (2003); Clymer (2004) <ul><li>Reduced capital expenditure </li></ul><ul><li>ASP eco...
Reasons Against Outsourcing Bryson & Sullivan (2003); Clymer (2004) <ul><li>Security & privacy </li></ul><ul><li>Dependenc...
Russ Berrie & Co. Nash (2002) <ul><li>Gift-related retailer </li></ul><ul><li>1998 & 1999 spent $19.2 million on SAP </li>...
General Motors eWeek (2003) <ul><li>Outsourced ERP in early 1990s </li></ul><ul><li>One of first to outsource such a large...
Soft Impacts of Outsourcing McCarthy (2001) <ul><li>Software upgrades over time </li></ul><ul><li>Integration, implementat...
Selection Criteria Van Everdingen et al. (2000) 8. International orientation 7. Corporate image 6. Market leadership 6. Su...
ASP Evaluation Factors Ekanayaka et al. (2003) <ul><li>Availability </li></ul><ul><li>Scalability </li></ul>Reliability (R...
Example: Start with Life Cycle Cost $16 m $7 m $2 m $0 m $4 m $3 m ASP $33 m $7 m $5 m $6 m $6 m $9 m Full vendor $36 m $2...
Criteria, Scores by Alternative 1 0 1 0.3 0 0.5 ASP 1 .9 0.5 0.3 1 0.7 Full vendor .7 .9 0.3 0.9 0.5 0.9 Custom .8 .9 0.1 ...
Develop Weights <ul><li>Rank order criteria by importance </li></ul><ul><li>Identify worst measure by criteria </li></ul><...
Weight estimates 0.02 0.019 5 0.019 10 6-Service 0.04 0.038 10 0.048 25 5-Security 0.08 0.075 20 0.095 50 4-Cost 0.18 0.18...
Value = Weights time Scores 0.344 0.706 0.728 0.624 0.706 1 TOTALS x 1.0 =0.020 x 1.0 =0.020 x 0.7 =0.014 x 0.8 =0.016 x 0...
Summary <ul><li>Outsourcing ERP an important new option </li></ul><ul><li>Hard to figure impact on: </li></ul><ul><ul><li>...
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ERP Outsourcing

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ERP Outsourcing

  1. 1. 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
  2. 2. Scope of ERP Outsourcing <ul><li>ERP rental estimated at $6.4 billion in 2001 </li></ul><ul><ul><li>Forrester Research Inc. </li></ul></ul><ul><li>Induced by competitive pressures </li></ul><ul><li>Gartner: monthly outsourcing fees $300 to $1,000 per user </li></ul>
  3. 3. Relative IT Costs T. Hoffman, P. Thibodeau, Wage inflation unlikely to soon end India’s offshore dominance. Computerworld 38:14, 2004, 11-12. $65,000 U.S. $30,950 Singapore $29,150 Israel $24,500 Ireland $20,500 Mexico $10,000 Russia $7,550 China $7,500 India $3,475 Vietnam Average Programmer Salary COUNTRY
  4. 4. Dial soap Schwartz (2003) <ul><li>Installed SAP suite run by EDS </li></ul><ul><ul><li>18 month, $35 million project </li></ul></ul><ul><ul><li>Overall transfer expense $110 million </li></ul></ul><ul><li>Replace mix of Siebel, Oracle, Manugistics, and other applications </li></ul><ul><li>50 IT employees transferred to EDS </li></ul><ul><ul><li>Only a small governance team retained by Dial </li></ul></ul>
  5. 5. Other outsourcings <ul><li>Sun: </li></ul><ul><ul><li>Will outsource about 90% of IT jobs </li></ul></ul><ul><li>California State Automobile Association </li></ul><ul><ul><li>Accenture to run PeopleSoft system </li></ul></ul><ul><li>ASAT Holdings </li></ul><ul><ul><li>IBM to run SAP system </li></ul></ul>
  6. 6. Targeted Outsourcing <ul><li>Informatica Inc. </li></ul><ul><ul><li>Outsourced HR, felt could operate even if it went down </li></ul></ul><ul><ul><li>Didn’t outsource other modules </li></ul></ul><ul><li>Federal-Mogul Corp. </li></ul><ul><ul><li>Experienced quick growth through acquisitions </li></ul></ul><ul><ul><li>Needed to consolidate 27 different ERPs </li></ul></ul><ul><ul><li>Outsourced only technical work such as SAP programming </li></ul></ul>
  7. 7. Government ERP Outsourcing <ul><li>Can lower costs of software ownership </li></ul><ul><li>Avoid problems of developing & retaining IT staff </li></ul><ul><li>More difficult to get approval for large ERP projects </li></ul><ul><ul><li>Need to defend proposals in public hearings </li></ul></ul><ul><ul><li>Reduction of State jobs has led to difficulties with information workers’ unions </li></ul></ul>
  8. 8. Reasons to Outsource Bryson & Sullivan (2003); Clymer (2004) <ul><li>Reduced capital expenditure </li></ul><ul><li>ASP economies of scale </li></ul><ul><li>More flexibility & agility </li></ul><ul><li>Increased service levels at lower cost </li></ul><ul><li>Gain expertise unaffordable in-house </li></ul><ul><li>Allow focus on core business </li></ul><ul><li>Continuous access to the latest technology </li></ul><ul><li>Reduced risk of infrastructure failure </li></ul><ul><li>Manage IT workload variability </li></ul><ul><li>Replace obsolete systems </li></ul>
  9. 9. Reasons Against Outsourcing Bryson & Sullivan (2003); Clymer (2004) <ul><li>Security & privacy </li></ul><ul><li>Dependency on vendor (lock-in) </li></ul><ul><li>Availability, performance, reliability </li></ul><ul><li>High migration costs </li></ul><ul><li>ERP expertise may be critical to organizational success </li></ul><ul><li>ERP systems tied to IT infrastructure </li></ul><ul><li>Key applications may need to be in-house </li></ul><ul><li>May have existing efficient operation </li></ul><ul><li>Corporate culture </li></ul>
  10. 10. Russ Berrie & Co. Nash (2002) <ul><li>Gift-related retailer </li></ul><ul><li>1998 & 1999 spent $19.2 million on SAP </li></ul><ul><ul><li>Problems tracking orders </li></ul></ul><ul><ul><li>Wrote off $10.4 million to revert to old systems </li></ul></ul><ul><li>2001 supply chain inefficiencies </li></ul><ul><ul><li>Investigated 4 ERP vendors (not SAP) </li></ul></ul><ul><ul><li>Gave hard technical criteria </li></ul></ul><ul><ul><ul><li>User ability to access via Web </li></ul></ul></ul><ul><ul><ul><li>Software resident on user PCs </li></ul></ul></ul><ul><ul><ul><li>Installation in stages </li></ul></ul></ul><ul><ul><li>Used weighted scoring system , selected JDEdwards </li></ul></ul>
  11. 11. General Motors eWeek (2003) <ul><li>Outsourced ERP in early 1990s </li></ul><ul><li>One of first to outsource such a large system </li></ul><ul><ul><li>Acquired EDS </li></ul></ul><ul><ul><li>Problems: no management control </li></ul></ul><ul><li>Second generation : </li></ul><ul><ul><li>Combination of outsourcing companies </li></ul></ul><ul><li>2003 Third generation : </li></ul><ul><ul><li>Outsource all IT </li></ul></ul><ul><ul><li>Retain control over everything </li></ul></ul><ul><ul><li>Wanted competing outsourcing companies </li></ul></ul><ul><ul><li>In 2003 spending $1 billion less on IT than in 1996 </li></ul></ul>
  12. 12. Soft Impacts of Outsourcing McCarthy (2001) <ul><li>Software upgrades over time </li></ul><ul><li>Integration, implementation, testing, maintenance </li></ul><ul><li>User functionality, technical support, service </li></ul><ul><li>Servers </li></ul><ul><li>Disaster recovery </li></ul><ul><li>Staffing </li></ul>
  13. 13. Selection Criteria Van Everdingen et al. (2000) 8. International orientation 7. Corporate image 6. Market leadership 6. Support 5. Price 5. Scalability 4. Interface with other systems 4. User friendliness 3. Implementation speed 3. Cost 2. Product quality 2. Flexibility 1. Product functionality 1. Fit with business procedures ERP Supplier (n=2623) IS (n=2401)
  14. 14. ASP Evaluation Factors Ekanayaka et al. (2003) <ul><li>Availability </li></ul><ul><li>Scalability </li></ul>Reliability (RAS) <ul><li>Performance metrics clearly defined </li></ul><ul><li>Procedures to open & close accounts </li></ul><ul><li>Flexibility in service offerings, pricing, duration </li></ul>Service level <ul><li>Help desk & training </li></ul><ul><li>Support for administration of accounts </li></ul>Customer service <ul><li>Total cost impact </li></ul><ul><li>Hidden costs & charges </li></ul><ul><li>ROI </li></ul>Pricing <ul><li>Sharing data across applications </li></ul>Integration <ul><li>Physical security </li></ul><ul><li>Data & application security </li></ul><ul><li>Back-up & restoration </li></ul><ul><li>Disaster recovery plan </li></ul>Security
  15. 15. Example: Start with Life Cycle Cost $16 m $7 m $2 m $0 m $4 m $3 m ASP $33 m $7 m $5 m $6 m $6 m $9 m Full vendor $36 m $2 m $8 m $6 m $7 m $13 m Custom $39 m $6 m $6 m $6 m $9 m $12 m B-of-B $38 m $4 m $5 m $6 m $8 m $15 m In-house Total Train Implement HW Consult Software Option
  16. 16. Criteria, Scores by Alternative 1 0 1 0.3 0 0.5 ASP 1 .9 0.5 0.3 1 0.7 Full vendor .7 .9 0.3 0.9 0.5 0.9 Custom .8 .9 0.1 0.7 0.7 0.6 B-of-B 0 1 0.2 1 0.3 1 In-house Svc L Security Cost Integrate RAS Customer service Option
  17. 17. Develop Weights <ul><li>Rank order criteria by importance </li></ul><ul><li>Identify worst measure by criteria </li></ul><ul><ul><li>Give worst 10, others assigned proportionally </li></ul></ul><ul><li>Identify best measure by criteria </li></ul><ul><ul><li>Give best 100, others assigned proportionally </li></ul></ul><ul><li>Compromise </li></ul>
  18. 18. Weight estimates 0.02 0.019 5 0.019 10 6-Service 0.04 0.038 10 0.048 25 5-Security 0.08 0.075 20 0.095 50 4-Cost 0.18 0.189 50 0.171 90 3-Integrate 0.30 0.302 80 0.286 150 2-RelAvScal 0.38 0.377 100 0.381 200 1-Cust svc Comp BEST WORST Criteria
  19. 19. Value = Weights time Scores 0.344 0.706 0.728 0.624 0.706 1 TOTALS x 1.0 =0.020 x 1.0 =0.020 x 0.7 =0.014 x 0.8 =0.016 x 0.0 =0.000 0.02 Svc Lev x 0.0 =0.000 x 0.9 =0.036 x 0.9 =0.036 x 0.9 =0.036 x 1.0 =0.040 0.04 Security x 1.0 =0.080 x 0.5 =0.040 x 0.3 =0.024 x 0.1 =0.008 x 0.2 =0.016 0.08 Cost x 0.3 =0.054 x 0.3 =0.054 x 0.9 =0.162 x 0.7 =0.126 x 1.0 =0.180 0.18 Integrate x 0.0 =0.000 x 1.0 =0.300 x 0.5 =0.150 x 0.7 =0.210 x 0.3 =0.090 0.30 RelAvSc x 0.5 =0.190 x 0.7 =0.226 x 0.9 =0.342 x 0.6 =0.228 x 1.0 =0.380 0.38 Cust Svc ASP Full V Custom B-o-B In-house Wgt Criteria
  20. 20. Summary <ul><li>Outsourcing ERP an important new option </li></ul><ul><li>Hard to figure impact on: </li></ul><ul><ul><li>Cost </li></ul></ul><ul><ul><li>Risk </li></ul></ul><ul><li>Multicriteria methods can help evaluate </li></ul>

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