Copyright of Fairfield County Business Journal is the property of Westfair Communications, Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Managing and Using Information Systems: A Strategic Approach – Sixth Edition Keri Pearlson, Carol Saunders, and Dennis Galletta © Copyright 2016 John Wiley & Sons, Inc. 1 Chapter 10 Information Systems Sourcing 2 © 2016 John Wiley & Sons, Inc. 2 Kellwood Opening Case Why did Kellwood outsource? Why did Kellwood decide to backsource after 13 years? What was the result? 3 © 2016 John Wiley & Sons, Inc. They wanted to integrate 12 acquisitions with different systems Kellwood was purchased by Sun Capital Partners. COO wanted to consolidate to reduce costs and standardize Result was savings of $3.6 million per year, or 17% of total IS expenses 3 Sourcing Decision Framework 4 © 2016 John Wiley & Sons, Inc. Sourcing OptionsInsourcingOutsourcingDomesticDomestic in-house production Company produces its products domestically without any outside contractsDomestic outsourcing Company uses services supplied by another domestic-based companyOffshoreOffshore in-house sourcing Company uses services supplied by its own foreign-based affiliate (subsidiary)Offshore outsourcing Company uses services supplied by an unaffiliated foreign-based company Figure 10.3. Different Forms of Sourcing. (Source: http://www.dbresearch.com/ servlet/reweb2.ReWEB?rwsite=DBR_INTERNET_EN-PROD) 5 © 2016 John Wiley & Sons, Inc. 5 INSOURCING A firm provides IS services or develops IS in its own in-house IS organization 6 © 2016 John Wiley & Sons, Inc. 6 IT Outsourcing With IT, there is equipment and personnel involved Equipment and facilities are sold to outside vendors Personnel might be hired by outside vendors Services are hired from the vendors Common length of agreement: 10 years 7 © 2016 John Wiley & Sons, Inc. 7 Insourcing DriversInsourcing ChallengesCore competencies related to systems Confidentiality or sensitive system components or services Time available in-house to develop software Expertise for software development in-houseInadequate support from top management to acquire needed resources Temptation from finding a reliable, competent outsourcing provider Insourcing drivers and challenges 8 © 2016 John Wiley & Sons, Inc. 8 Economics of Outsourcing Benefits: Sell equipment, buildings (large cash inflow) Downsized payroll – outsourcer hires employees Costs: Services provided for a fee Fixed costs usually over 10-year term 9 © 2016 John Wiley & Sons, Inc. 9 Drivers Disadvantages Offer cost savings Offer service quality Ease transition to new technologies Offer better strategic focus Provide better mgmt of IS staff Handle peaks Consolidate data centers Infusion of cash Abdication of .

1. Copyright of Fairfield County Business Journal is the property
of Westfair Communications,
Inc. and its content may not be copied or emailed to multiple
sites or posted to a listserv
without the copyright holder's express written permission.
However, users may print,
download, or email articles for individual use.
Managing and Using Information Systems:
A Strategic Approach – Sixth Edition
Keri Pearlson, Carol Saunders,
and Dennis Galletta
© Copyright 2016
John Wiley & Sons, Inc.
1
Chapter 10
Information Systems Sourcing

2. 2
© 2016 John Wiley & Sons, Inc.
2
Kellwood Opening Case
Why did Kellwood outsource?
Why did Kellwood decide to backsource after 13 years?
What was the result?
3
© 2016 John Wiley & Sons, Inc.
They wanted to integrate 12 acquisitions with different systems
Kellwood was purchased by Sun Capital Partners. COO wanted
to consolidate to reduce costs and standardize
Result was savings of $3.6 million per year, or 17% of total IS
expenses
3
Sourcing Decision Framework
4
© 2016 John Wiley & Sons, Inc.

3. Sourcing OptionsInsourcingOutsourcingDomesticDomestic in-
house production
Company produces its
products domestically without any outside contractsDomestic
outsourcing
Company uses services supplied by another domestic-based
companyOffshoreOffshore in-house sourcing
Company uses services supplied by its own foreign-based
affiliate (subsidiary)Offshore outsourcing
Company uses services supplied by an unaffiliated foreign-
based company
Figure 10.3. Different Forms of Sourcing.
(Source: http://www.dbresearch.com/
servlet/reweb2.ReWEB?rwsite=DBR_INTERNET_EN-PROD)
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INSOURCING
A firm provides IS services or develops IS in its own in-house
IS organization
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4. 6
IT Outsourcing
With IT, there is equipment and personnel involved
Equipment and facilities are sold to outside vendors
Personnel might be hired by outside vendors
Services are hired from the vendors
Common length of agreement: 10 years
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Insourcing DriversInsourcing ChallengesCore competencies
related to systems
Confidentiality or sensitive system components or services
Time available in-house to develop software
Expertise for software development in-houseInadequate support
from top management to acquire needed resources
Temptation from finding a reliable, competent outsourcing
provider

5. Insourcing drivers and challenges
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Economics of Outsourcing
Benefits:
Sell equipment, buildings (large cash inflow)
Downsized payroll – outsourcer hires employees
Costs:
Services provided for a fee
Fixed costs usually over 10-year term
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Drivers Disadvantages Offer cost savings
Offer service quality
Ease transition to new technologies
Offer better strategic focus
Provide better mgmt of IS staff
Handle peaks

6. Consolidate data centers
Infusion of cash Abdication of control
High switching costs
Lack of technological innovation
Loss of strategic advantage
Reliance on outsourcer
Problems with security/confidentiality
Evaporation of cost savings
Drivers and disadvantages of outsourcing
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Decisions about How to Outsource
Successfully
Decisions about whether or not to outsource need care and
deliberation.
Requires numerous other decisions about mitigating outsourcing
risks.
Three major decision areas: selection, contracting, and scope.
Selection: find compatible providers
Contracting:
Try for flexible management terms
Try for shorter (3-5 year) contracts
Try for SLAs (service level agreements on performance)
Scope – Determine if full or partial outsourcing
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© 2016 John Wiley & Sons, Inc.

7. Offshoring
Short for outsourcing offshore
Definition:
When the MIS organization uses contractor services in a distant
land. (Insourcing offshore would be your own dept offshore)
Substantial potential cost savings through reduced labor costs.
Some countries offer a very well educated labor force.
Implementation of quality standards:
Six Sigma
ISO 9001
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Selecting an Offshoring Destination
About 100 countries are now exporting software services and
products.
What makes countries attractive for offshoring?
High English language proficiency.
Countries that are peaceful/politically stable.
Countries with lower crime rates.
Countries with friendly relationships.
Security and/or trade restrictions.
Protects intellectual property

8. Level of technical infrastructure available.
Good, efficient labor force
Once a country is selected, the particular city in that country
needs to be assessed as well.
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Selecting an Offshoring Destination
Countries like India make an entire industry of offshoring.
Software Engineering Institute’s Capability Maturity Model
(CMM).
Level 1: the software development processes are immature,
bordering on chaotic.
Level 5: processes are quite mature, sophisticated, systematic,
reliable
Indian firms are well known for their CMM Level 5 software
development processes, making them desirable
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9. Offshore Destination-
Development Tiers
Carmel and Tjia suggest that there are three tiers of software
exporting nations:
Tier 1: Mature.
United Kingdom, United States, Japan, Germany, France,
Canada, the Netherlands, Sweden, Finland, India, Ireland,
Israel, China, and Russia.
Tier 2: Emerging.
Brazil, Costa Rica, South Korea, and many Eastern European
countries.
Tier 3: Infant.
Cuba, Vietnam, Jordan, and 15 to 25 others.
Tiers: based on industrial maturity, the extent of clustering of
some critical mass of software enterprises, and export revenues.
The higher tiered countries have higher levels of skills and
higher costs.
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Farshoring
Definition: sourcing service work to a foreign, lower-wage
country that is relatively far away in distance or time zone.
Client company hopes to benefit from one or more ways:
Big cost savings due to exchange rates, labor costs, government
subsidies, etc.
For the US and UK, India and China are popular

10. Oddly, India and China also offshore to other locations
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Nearshoring
Definition: sourcing service work to a foreign, lower-wage
country that is relatively close in distance or time zone.
Client company hopes to benefit from one or more ways of
being close:
geographically, temporally, culturally, linguistically,
economically, politically or from historical linkages.
Distance and language matter.
There are three major global nearshore clusters:
20 nations around the U.S., and Canada
27 countries around Western Europe
smaller cluster of three countries in East Asia
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Captive Centers

11. An overseas subsidiary that is set up to serve the parent
company.
Alternative to offshoring or nearshoring.
Four major stategies that are being employed:
Hybrid Captive – performs core business processes for parent
company but outsources noncore work to offshore provider
Shared Captive - performs work for both parent company and
external customers.
Divested captive - have a large enough scale and scope that it
could be sold for a profit by the parent company.
Terminated Captive - has been shut down, usually because its
inferior service was hurting the parent company’s reputation.
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Backsourcing
When a company takes back in-house, previously outsourced, IS
assets, activities, and skills.
Partial or complete reversal
Many companies have backsourced such as Continental
Airlines, Cable and Wireless, and Halifax Bank of Scotland.
70% of outsourcing clients have had negative experiences and
25% have backsourced.
4% of 70 North American companies would not consider
backsourcing.
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12. 19
Backsourcing Reasons
Mirror reason for outsourcing (to reduce costs, increase quality
of service, etc.)
Costs were higher than expected
Poor service
Change in management
Change in the way IS is perceived within the company
New situations (mergers, acquisitions, etc.)
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Crowdsourcing
Definition:
Taking a task traditionally performed by an employee or
contractor, and
Outsourcing it to an undefined, generally large group of people,
In the form of an open call.
Used by companies to increase productivity, lower production
costs, and fill skill gaps.
Can be used for a variety of tasks.

13. Companies do not have control over the people doing the work.
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Partnering Arrangements
Strategic networks: arrangements made with other organizations
to offer synergistic or complementary services
Example: The Mitsui Keiretsu contains over 30 firms spanning
many industries. The members use each others’ services and
don’t compete: Toshiba, Fujifilm, Sony are members
Business ecosystems (see chapter 9): Informal, emerging
relationships
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© 2016 John Wiley & Sons, Inc.
Deciding Where -
Onshore, Offshore, or in the Cloud?
New option: cloud computing
See chapter 6 for basic definitions; advantages; disadvantages.
Works when outsourcing or insourcing
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© 2016 John Wiley & Sons, Inc.

14. Cloud Computing Options
On-premise
Private clouds
Data—managed by the company or offsite by a third party.
Community clouds.
Cloud infrastructure is shared by several organizations
Supports the shared concerns of a specific community.
Public clouds.
Data is stored outside of the corporate data centers
In the cloud provider’s environment
Hybrid clouds
Combination of two or more other clouds.
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Public Clouds - Versions
Infrastructure as a Service (IaaS).
Infrastructure through grids or clusters of virtualized servers,
networks, storage, and systems software.
Designed to augment or replace the functions of an entire data
center.
The customer may have full control of the actual server
configuration.
More risk management control over the data and environment.
Platform as a Service (PaaS).
Virtualized servers

15. Clients can run existing applications or develop new ones
Provider manages the hardware, operating system, and capacity
Limits the enterprise risk management capabilities.
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© 2016 John Wiley & Sons, Inc.
Public Clouds - Versions
Software as a Service (SaaS) or Application Service Provider
(ASP).
Software application functionality through a web browser.
The platform and infrastructure are fully managed by the cloud
provider.
If the operating system or underlying service isn’t configured
correctly, the data at the higher application layer may be at risk.
The most widely known and used form of cloud computing.
Some managers shy away from cloud computing because they
are concerned about:
security—specifically about external threats from remote
hackers and security breaches as the data travels to and from the
cloud.
data privacy.
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© 2016 John Wiley & Sons, Inc.

16. To manage risk, an SLA needs to spell out these requirements.
26
Managing and Using Information Systems:
A Strategic Approach – Sixth Edition
Keri Pearlson, Carol Saunders,
and Dennis Galletta
© Copyright 2016
John Wiley & Sons, Inc.