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Lecture07-IToutsourcing.pptx

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ISDS 351 - Information Technology for Managers

Information Technology for Managers IT outsourcing

Learning Objectives

How do managers determine which business processes are good candidates for outsourcing?

How can I ensure the success of an outsourcing project?

Why Managers Must Understand Outsourcing

Need for Managers to Understand Outsourcing

Stakes are high, and the potential for setback is great

Failure to apply best practices leads to a business decline

Managers must be forewarned about potential problems

Effective processes must be followed to minimize risks and ensure success

What are Outsourcing and Offshore Outsourcing?

Outsourcing

Arrangement in which one company contracts with another organization to provide services that could be provided by company employees

Offshore outsourcing: Work is performed by people located in another country

Control of the outsourced business function or process

Shared between the firm contracting for services and the outsourcing service provider

Outsourcing (continued 1)

Includes both large and small projects

Types

Information technology outsourcing (ITO)

Business process outsourcing (BPO)

Global service providers (GSP)

Evaluate all aspects of an organization’s business to offer best practices, business contacts, experience, intellectual property, and global infrastructure

Outsourcing (continued 2)

Core business process: Provides valuable customer benefits

Hard for competitors to imitate

Leveraged widely across many products and markets

Directly impact the organization’s customers

Offered by GSPs

Table 4.1 - Commonly Outsourced Tasks

Reasons for Outsourcing

Cut or stabilize costs

Improve the firm’s focus on core operations

Upgrade the firm’s capabilities and services

Accelerate time to market

To Cut Costs

Outsourcing service providers have a lower cost structure

Due to greater economies of scale, specialization, or expertise

Costs of doing business in a developing country are lower than those in a developed country

To Improve Focus

Outsourcing enables an organization to focus on its most important priorities

Ineffective to divert the time and energy of key company resources to do routine work

Resources’ unique skills and intimate knowledge of the firm can be used for strategic issues

To Upgrade Capabilities and Services

Outsourcing service provider

Highly efficient, with world-class capabilities

Has access to new technology, methods, and expertise

Many organizations outsource their logistics operations to third-party providers

Helps to manage complex global supply chains

Accelerate Time to Market

Delay in the introduction of a new product or service can negatively impact brand image and cash flow

Outsourcing can provide the high level expertise that an organization might not possess for a start-up

Issues Associated with Outsourcing

Lowering of employee morale due to layoffs

Quality issues rise as outsourcing is associated with significant risks

Ending outsourcing agreements prematurely generates expensive legal fees

Termination for convenience gives a party the right to unilaterally terminate the contract at any time

Material breach of contract occurs due to non-performance resulting in the agreement being irreparably broken

Issues Associated with Outsourcing (continued)

Direct communication between a company and its customers is reduced

Prevents a company from building strong relationship with its customers

Maintaining data security and integrity to safeguard against data security lapses

Special Issues Associated with Offshore Outsourcing

Language barrier

Outsourcing partner may not speak the language known to the company

Multiple time zones and inability to meet face-to-face

Result in misunderstandings and lost productivity

Special Issues Associated with Offshore Outsourcing (continued)

Jurisdiction

Data privacy

Diminishing cost advantages

Turnover

Intellectual property rights

Important technology issues

IT Outsourcing

Public Cloud Computing

Service provider organization owns and manages the infrastructure

Cloud user organizations access slices of shared hardware resources via the Internet

Faster, cheaper, and more agile approach to building and managing one’s own IT infrastructure

Problems

Complex pricing arrangements and hidden costs

Performance issues that cause wide variations over time

Poor user support

Figure 4.1 - Cloud Computing Environment

Virtualization and Autonomic Computing

Virtualization: Separates a physical computing device into one or more virtual devices

Reduces capital investments and operating expenses

Autonomic computing

Ability of IT systems to manage themselves and adapt to changes in the computing environment, business policies, and operating objectives

Creates complex systems that run on their own

Private and Hybrid Cloud Computing

Private cloud environment: Single tenant cloud

Types

On-premise private cloud

Virtual private cloud

Hybrid cloud: Includes both private and public clouds integrated through networking

Used by organizations to run applications with less sensitive security requirements

Cloud Computing

What is the Cloud?

Elastic leasing of pooled computer resources over the Internet

Elastic?

Dynamically increasing/decreasing leased resources programmatically in short time span, and only pay for resources used

Apple Data Center in Maiden, NC

Why Is the Cloud Preferred to In-House Hosting?

Why Is the Cloud Preferred to In-House Hosting? (cont’d)

Why Now?

Technology now supports construction and use of enormous data centers

The existence of the Internet

Processors, data communication, data storage nearly free

Web farms providing virtual machine for about 1.5¢ per hour

When Does the Cloud Not Make Sense?

Law or industry standard practices require physical control over the data

Private cloud

In-house hosting, delivered via Web service standards

How Can Organizations Use the Cloud?

Three Fundamental Cloud Type

Planning an Effective Outsourcing Process

Establishing a Smart Outsourcing Strategy

Smart sourcing: Involves analyzing the work and determining the best way to do it in the future

Reduces the time required to market for new products

Frees up resources to enable greater innovation

Requires an organization to work in a true partnership with the outsourcing provider

Evaluating and Selecting Appropriate Activities and Projects for Outsourcing

Organization must carefully consider which process and projects it should assign for outsourcing

Risk

Dealing with increased management complexity

Organization should not outsource a critical or core business process

Evaluating and Selecting Appropriate Activities and Projects for Outsourcing (continued)

Companies start with a short-term, low-risk outsourcing pilot effort

Experience of six months or more is required to make a fair assessment of the provider

Company may expand the scope of its outsourcing efforts after the initial experience

Evaluating and Selecting Appropriate Service Providers

Organization must choose a firm with which it can build a strong strategic partnership

Due diligence must be used in researching the potential partner’s capabilities and reputation

Firms should review certain audit documents of potential service providers

Statement on Standards for Attestation Engagements 16 (SSAE 16): Defines how service companies must report on compliance controls

Evaluating and Selecting Appropriate Service Providers (continued)

International Standard on Assurance Engagements (ISAE) No. 3402, Assurance Reports on Controls at a Service Organization

Provides an international assurance standard for public accountants

Failure to share the results of an SSAE 16 or ISAE 3402 audit is a warning signal in dealing with an outsourcing vendor

Table 4.3 - Factors for Evaluating Outsourcing Partners

Information Technology for Managers

Evaluating Service Provider Locations

Outsourcing service providers can be affected by economic turmoil, natural disasters, and political disturbances

Potential for above risks is greater in certain places than others

Company should investigate the capability of outsourcing firm to avoid business interruption

Evaluating Service Provider Locations (continued)

Other factors

Availability and reliability of high-speed communications networks and power grids

Availability of sufficiently trained workers

Effectiveness of the outsourcing firm’s national legal system in protecting intellectual property

Benchmarking Existing Service Levels

Organization should benchmark its present service levels before signing outsourcing contract

Used to establish a reasonable baseline for negotiating target results and costs

Agreed-to targets are used to define the service-level agreement (SLA) of the contract

Service-level agreement: Defines both the services and the performance and availability levels of the service provided

Benchmarking Existing Service Levels (continued)

Choose the right measures to evaluate the performance of the process

Time and cost required to perform a benchmark

Depends on the size, scope, and complexity of the process being measured and the number of metrics used

Defining the Service-Level Agreement

Good SLA performs the following functions

Clearly identifies each service included in the outsourcing agreement

Specifies conditions under which services will be available and outlines performance requirements in the event of a disaster

Specifies measurable performance levels for each service

Defines an escalation process in the event the service provider does not meet agreed-upon service levels

Defining the Service-Level Agreement (continued)

Defines both the customer’s and the service provider’s responsibility

Defines security standards and methods to be employed

Requires the service provider to notify the customer upon discovery of any unauthorized disclosure of data

Defines the customer’s right to audit the provider’s compliance and to conduct on-site inspections

Outlines a process for modifying the SLA in response to changing business conditions

Developing an Outsourcing Contract

Job of experienced procurement and legal professionals

Ownership of assets and facilities

Firm can transfer ownership of the assets along with operational responsibility to the outsourcing service provider

Firm can transfer the assets to a third party under some sort of leaseback arrangement

Firm can retain ownership of the assets while the provider takes on the operational responsibility

Establishing an Outsourcing Governance Process

Involves formal and informal processes and rules

Helps to manage the relationship between the two organizations

Defines procedures to ensure the outsourcing initiative succeeds

Requires dedicated, trained vendor relationship professionals

SLA manager: Serves as a primary contact for any issues related to the delivery of services

Measuring and Evaluating Results

Ongoing monitoring helps an organization in realizing the benefits of outsourcing and reduce the degree of operational risk

If the service provider’s performance and costs do not meet the SLA standards:

Financial penalties can be assessed and the contract can be terminated

Ongoing tracking and measurement of important metrics enables the organization to use the data as feedback

Summary

Outsourcing

Arrangement in which one company contracts with another organization to provide services

High-risk activity that raises the potential for quality problems, legal liabilities, and data and security breaches

Offshore outsourcing brings additional issues

Jurisdiction questions, data privacy, diminishing cost advantages, and important technology issues

Summary (continued 1)

Nine-step process to successful outsourcing

Establishing a smart outsourcing strategy

Evaluating and selecting appropriate activities and projects for outsourcing

Evaluating and selecting appropriate service providers

Evaluating service provider locations

Summary (continued 2)

Benchmarking existing service levels

Defining the service-level agreement

Developing the outsourcing contract

Establishing an outsourcing governance process

Evaluating and measuring results