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Managing and Using Information Systems:

A Strategic Approach – Sixth Edition

Keri Pearlson, Carol Saunders, and Dennis Galletta

Chapter 10 Information Systems Sourcing

Kellwood Opening Case

• Why did Kellwood outsource?

• Why did Kellwood decide to backsource after 13 years?

• What was the result?

Sourcing Decision Framework

Sourcing Options

Insourcing Outsourcing

Domestic Domestic in-house production Company produces its products domestically without any outside contracts

Domestic outsourcing Company uses services supplied by another domestic-based company

Offshore Offshore 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)

INSOURCING

A firm provides IS services or develops IS in its own in- house IS organization

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

Insourcing Drivers Insourcing Challenges

Core competencies related to systems

Confidentiality or sensitive system components or services

Time available in-house to develop software

Expertise for software development in-house

Inadequate support from top management to acquire needed resources

Temptation from finding a reliable, competent outsourcing provider

Insourcing drivers and challenges

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

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 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

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.

1. Selection: find compatible providers 2. Contracting:

1. Try for flexible management terms

2. Try for shorter (3-5 year) contracts

3. Try for SLAs (service level agreements on performance)

3. Scope – Determine if full or partial outsourcing

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

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 • 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.

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

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.

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

• Oddly, India and China also offshore to other locations

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

Captive Centers

• 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.

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.

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.)

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.

• Companies do not have control over the people doing the work.

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

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

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.

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 • Clients can run existing applications or develop new ones • Provider manages the hardware, operating system, and

capacity • Limits the enterprise risk management capabilities.

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.

Managing and Using Information Systems:

A Strategic Approach – Sixth Edition

Keri Pearlson, Carol Saunders, and Dennis Galletta