Transcript IS 483 Information Systems Management James Nowotarski 22 May 2003

IS 483
Information Systems Management
James Nowotarski
22 May 2003
Today’s Objectives
• Recap risk management and RFP
• Understand IT Outsourcing
Today’s agenda
Topic
Duration
• Recap risk management/RFP
15 minutes
• Assignment 2 reports
20 minutes
• Quiz
15 minutes
• *** Break
15 minutes
• IT Outsourcing
90 minutes
• Assignment 2 reports
20 minutes
Today’s agenda
Topic
Duration
• Recap risk management/RFP
15 minutes
• Assignment 2 reports
20 minutes
• Quiz
15 minutes
• *** Break
15 minutes
• IT Outsourcing
90 minutes
• Assignment 2 reports
20 minutes
IT Risk Management
Major Categories of Risk
•
Economic
•
Technical
•
Organizational
•
Legal
•
Terrorism
Risks that can potentially affect the
business
• business environment changes
• financial performance
IT Risk Management
Major Categories of Risk
•
Economic
•
Technical
•
Organizational
•
Legal
•
Terrorism
Risks that can affect the development,
implementation, and operation of a
system
• integrating technology with legacy
• applying unproven technology
• conversion may uncover “dirty” data
• management inexperienced with
projects of this size
IT Risk Management
Major Categories of Risk
•
Economic
•
Technical
•
Organizational
•
Legal
•
Terrorism
Risks that can potentially result from
lack of acceptance of a system
• low morale
• decline in effectiveness/efficiency
IT Risk Management
Major Categories of Risk
•
Economic
•
Technical
•
Organizational
•
Legal
•
Terrorism
Risks arising from potential lawsuits and
liabilities associated with implementation
of a project
• shareholder lawsuits
• data privacy
• Foreign Corrupt Practices Act (FCPA)
IT Risk Management
Major Categories of Risk
•
Economic
•
Technical
•
Organizational
•
Legal
•
Terrorism
Risks arising from intentional destruction
or malevolent modification of:
• physical equipment
• data
• software
• network
IT Risk Management
Risk Management
The process in which potential risks to a business are
identified, analyzed and mitigated,
along with
the process of balancing the cost of protecting the
company against a risk vs. the cost of exposure to that
risk.
Risk Frameworks
Fidelity’s Risk Cube
Risk Frameworks
----------
Risk Awareness
Identify
Analyze
Fidelity Risk Cube
Risk Management
Mitigate
---------Risk
Measurement
Measure
Risk Frameworks
RISK Cube - Key Questions
• R is for Return
– Are we achieving an appropriate return for the risks we
take?
• I is for Immunization
– Do we have controls and limits in place to limit
downside risk?
• S is for Systems
– Do we have systems in place to measure and report
risk?
• K is for Knowledge
– Do we have the right people, skills, culture, and
incentives for effective risk management?
Risk Management Approaches
Risk Management Approaches
• Interdisciplinary Approach
• Portfolio Approach
• Options Thinking
• Chaos Theory
Risk vs. Technology Maturity
Impact of Technology Maturity
Risk
Early Adopter
Mid Adopter
Late Adopter
hands-on implementation experience
little exper / high risk
more exper / mid risk
much exper / low risk
vendor survival for project after shake-out
high risk
mid risk
low risk
sudden changes in direction of technology
high risk
mid risk
low risk
integrating technology with existing portfolio
high risk
mid risk
low risk
Period for Start of Payoff
Short term
Mid term
Long term
Size of Returns per period
Biggest
Bigger
Big
Benefits
Risk Management at Project Level
Steps Taken by Prudent Managers
• List the risks that could occur and when they could occur
• Determine what detection method can alert IS that risk occurred
• Establish detection method
• Estimate each risk’s probability of occurring
• Formulate plans that can mitigate each risk
• Establish teams that will monitor and mitigate the risk
Procurement - Process
RFP Process
1. Pre-RFP
2. RFP
3. Proposal
Submissions
4. Proposal
Evaluations
5. Vendor
Selection
6. Procurement
Method
7. ROI Analysis
8. Negotiate
Contract
Objective: Identify best
solution to meet stated
business need while
minimizing cost and risk
Today’s agenda
Topic
Duration
• Recap risk management/RFP
15 minutes
• Assignment 2 reports
20 minutes
• Quiz
15 minutes
• *** Break
15 minutes
• IT Outsourcing
90 minutes
• Assignment 2 reports
20 minutes
Today’s agenda
Topic
Duration
• Recap risk management/RFP
15 minutes
• Assignment 2 reports
20 minutes
• Quiz
15 minutes
• *** Break
15 minutes
• IT Outsourcing
90 minutes
• Assignment 2 reports
20 minutes
Today’s agenda
Topic
Duration
• Recap risk management/RFP
15 minutes
• Assignment 2 reports
20 minutes
• Quiz
15 minutes
• *** Break
15 minutes
• IT Outsourcing
90 minutes
• Assignment 2 reports
20 minutes
IT Outsourcing
Information technology (IT) outsourcing is widely
accepted by most commercial organizations
•
On average, commercial organizations outsource 40% of
their IT budgets
•
“Outsourcing is one of the greatest organizational and
industry structure shifts of the [20th] century” -- James
Brian Quinn, Amos Tuck School, Dartmouth
IT Outsourcing
Information technology (IT) outsourcing is the use
of a third party to provide services rather than using
those in-house.
Drivers
•
Cost reduction -- Perception of IT as a cost burden coupled with
availability of cheaper sources of services (e.g., near-shore and
offshore)
•
Cost predictability
•
Require improved performance levels (e.g., speed of delivery,
customer satisfaction, quality, etc.)
•
Refocus on corporate core competencies
•
Desire to have in-house IT resources focus on strategic systems
and/or technology
•
Lack of ability and/or willingness to hire/retain IT skills
IT Outsourcing
A desire to focus on core competencies is
frequently the strongest driver to outsource
“[g]et rid of context and focus on core” - Billy McCarter,
former CIO of Fireman’s Fund, who reduced IT staff from
1,100 to 600 with much of the work outsourced to offshore
workers
“[a]llows me and my staff to focus on fun areas . . . be more
productive, more visible to the business, understand what
the business needs versus worrying about whether one of
the servers needs additional RAM” - Daniel Sheehan, CIO
at Advo, Inc. (infoweek, 4/14/03)
IT Outsourcing
IT is often viewed as a commodity and, thus, not “core”
•
IT is like electric power -- a commodity that is required by
all but provides distinction to none
•
IT capability is broadly accessible and affordable
•
New or proprietary technologies offer opportunity for
companies to gain a step, but this advantage is short-lived
•
Further evidence of IT commoditization:
– overcapacity
– price drops
– vendors positioning selves as “utilities”
– bursting of the investment bubble
Carr, N. “IT Doesn’t Matter.” Harvard
Business Review. May 2003.
IT Outsourcing
Processes once considered core are now
candidates for outsourcing.
Examples
•
Chipmakers no longer make chips
•
Pharmaceuticals outsource new drug research
•
Government outsources prisons
•
Apparel firms outsource apparel manufacturing
IT Outsourcing
What parts of IT to outsource?
•
Data center operations
•
Network operations
•
Application maintenance
•
Desktop workstations
•
Help desk/Support
•
Application development
•
Business process
execution
most common IT activities to
outsource
IT Outsourcing
To what extent should you outsource?
•
Transitional Outsourcing
•
Selective Outsourcing
•
Total Outsourcing
most common approaches
IT Outsourcing
Transitional Outsourcing
What is it
• Outsource legacy systems
• Focus in-house staff on development of “new world”
• Outsourced activity may return in house at some point
Advantages
• Legacy systems are well-understood, facilitates specifying
outsourcing contract terms
• In-house organization moves on to next new thing (Tarzan
grabbing the next rope in the IT jungle)
• Contract may be shorter term
Disadvantages
• Vulnerable to loss of vendor support if new system is
delayed
• More vulnerable to vendor manipulation of pricing,
maintenance costs
IT Outsourcing
Selective Outsourcing
What is it
• Select the best-of-breed for an activity
Advantages
• Creates a competitive environment
• Enables staff to be retained and redeployed
• Provides flexibility to adapt to changes
• Less risky than total outsourcing
Disadvantages
• Overhead associated with multiple evaluations,
multiple contract negotiations, and multiple vendors to
manage and coordinate
• Dividing up pieces of infrastructure (e.g., help desk and
network management) can lead to trouble since the pieces
are integrated
IT Outsourcing
Selective Outsourcing
“Global access to Enterprise Service Providers (ESPs) with low cost
structures is accelerating outsourcing adoption rates, leading to the
proliferation of mixed-sourcing delivery models in which the ‘best’
provider of a particular service wins.” (Gartner 2003)
IT Outsourcing
Selective Outsourcing
“Today, businesses look to "selective sourcing & services" for
their IT infrastructure, operations and management needs. With
selective sourcing the focus is on securing services for very
specific needs. Using managed contracts, selective sourcing has
proved very successful in limiting risk, motivating vendor
performance and achieving goals. With selective
sourcing/services organizations have the best of both worlds
with the flexibility to select a best practice supplier while
maintaining overall control of their IT practices.” -- Strategic
Sourcing Advisory Council, http://www.ssacouncil.org/
IT Outsourcing
Selective Outsourcing
“I don’t believe you should have a dozen partners, because then
it’s not a real relationship” -- Mukesh Mehta, VP of IT at
Metropolitan Life, InformationWeek, 23 December 2002
IT Outsourcing
Total Outsourcing
What is it
• Use one vendor for many activities
• Extreme outsourcing: At least 50% of IT functions
outsourced
Advantages
• Consistency and stability with same vendor for many
activities
• Lower overhead because there is only one vendor
Disadvantages
• More vulnerable to vendor manipulation and loss of vendor
support
• Lack of competition between suppliers
• One vendor cannot be best across the whole spectrum
• Needs can change dramatically after 1-2 years
IT Outsourcing
Survey Results
Type of sourcing
Success
Failure
Mixed
Total outsourcing
38%
35%
27%
Selective outsourcing
77%
20%
3%
In house
76%
24%
0%
Source: Study of 116 companies by college
professors Mary Lacity and Leslie Willcocks,
Computerworld, 10 May 1999
IT Outsourcing
Consider business, economic, and technical factors in
deciding whether to outsource
Business Considerations
Insource
Critical
Strategic
Importance
Useful
Outsource
Commodity
Differential
Potential for Differentiation
IT Outsourcing
Consider business, economic, and technical factors in
deciding whether to outsource (cont.)
Economic Considerations
Insource
Leading
Managerial
Practices
Lagging
Outsource
Subcritical
Critical
In-House Economies of Scale
IT Outsourcing
Consider business, economic, and technical factors in
deciding whether to outsource (cont.)
Technical Considerations
High
Insource
Degree of
Technology
Integration
Outsource
Low
Low
High
Degree of Technology Maturity
IT Outsourcing
Give examples of applications that would be good
candidates for insourcing and outsourcing based on
technical considerations
Technical Considerations
High
Insource
Degree of
Technology
Integration
Outsource
Low
Low
High
Degree of Technology Maturity
IT Outsourcing: Offshore
IT organizations and solutions providers
are increasing their offshore capabilities
for both maintenance and development
IT organizations
• JP Morgan
• Merrill Lynch
• Lehman Brothers
• Ford
• NY Stock Exchange
• Motorola
• Boeing
• Household
• Many unpublicized
Solutions providers
• Accenture
• IBM
• HP
• Offshore firms,
typically with local
presence
Types of projects
• Legacy
maintenance
• New development
• Projects requiring
specialized
expertise, e.g.,
– Embedded
software
– ERP
IT Outsourcing: Offshore
Cost and quality are the two main reasons
for going offshore
• Reduce cost
– 40-50% savings, according to Merrill Lynch CTO
• Higher quality/capability
– Approximately 50 out of 70 CMM Level 5 systems
development organizations are in India
IT Outsourcing: Offshore
India is the leading location for offshore
sourcing
Reasons
• Highly capable workforce
• Focus on process and product quality
• Low labor and infrastructure costs
• Government commitment and support
• English language skills
IT Outsourcing: Offshore
Wall Street’s top firms are investing heavily
in offshore outsourcing of IT and operations
• North American brokerage firms spent $417 million on offshore contracts in 2002 and will
spend $1.31 billion by 2005 (a compound annual growth rate of 46.4 percent)
• In cumulative terms, 8,150 U.S. Wall Street IT jobs (or 15 percent of the four-year moving
average IT headcount) will head offshore between 2002 and 2005.
• India's share of outsourced work from U.S. securities firms will rise in 2003 to 94 percent,
but will settle at 84 percent by 2004 as other offshore locations (including China) gain
ground
• Reasons cited for India’s success:
– Low labor costs
– Sophisticated processes to manage offshore projects
– Highly certified staff
(Source: Intelligent Outsourcing Strategies, March 24, 2003)
IT Outsourcing: Offshore
Wall Street’s top firms are investing heavily
in offshore outsourcing of IT and
operations (cont.)
• U.S. financial-services companies plan to transfer 500,000 jobs, or 8% of total
industry employment, to foreign countries in the next 5 years
• Involves a wide range of work, including financial analysis, regulatory reporting,
accounting, and graphic design
• Example of cost savings: A Wall Street researcher with a college business
degree and a few years experience can earn as much as $250K, compared
with $20K in India.
• Corporate chiefs list India as the most attractive country, followed by China,
Philippines, Canada, Czech Republic, Mexico
• Among the most aggressive U.S. companies: GE Capital, Citicorp, American
Express.
Wall Street Journal, 1 May 2003
IT Outsourcing
Wall Street’s top firms are investing heavily
in offshore outsourcing of IT and
operations (cont.)
•
•
•
•
High costs associated with white collar labor
Heavy data processing that financial firms face
Not only IT services
– Outsourcing business processes such as check
processing ($7-8/hour vs. $12-16 for U.S. worker)
U.S. and Indian services firms are pairing up to provide
onshore/offshore model to financial services companies
- InformationWeek, 12 May 2003
IT Outsourcing: Offshore
India’s advantage is beginning to erode
Reasons
• Salary costs in India are going up
• Undervalued currency (rupee) could gain 2030% against the dollar
• Vietnam, China, and Philippines are training
armies of programmers to compete with India
IT Outsourcing: Offshore
Need to manage risks of offshore
outsourcing
Potential Risk Areas
•
•
•
•
English or language difficulties
Lack of industry-specific knowledge
Distrust
Communication/Coordination
– “Outsourcing is prone to failure because of breakdowns in
communications between outsourcing providers and their clients,
according to Gartner” (InformationWeek, 3/31/03)
Discuss
Outsourcing offloads
a burdensome
technical
responsibility and
allows management
to focus on its core
business.
Outsourcing strips a
company of an
important core
competence -- IT
know-how.
• Which statement do you agree with and why?
Discuss
• Some industry watchers believe that certain functions
ought always to be retained in-house. For instance,
“application maintenance is the most dangerous thing to
take out. This is very subtle, but it’s the glue that sticks
everything together. If you outsource it, you lose the
ability to understand and change your environment.”
– Peter Bendor-Samuel, president of Everest Software Corp.,
Dallas-based outsourcing consulting company, Software
Magazine, July 1998
Discuss
• “Outsourcers are good with day-to-day repetitive tasks,
but not with implementing bleeding-edge technology.
Those who are successful ‘focused on infrastructure,
which is 80% of an IT operating budget. Infrastructure is
a lot easier to outsource than application development.’ ”
– Mary C. Lacity, associate professor of management information
systems at the University of Missouri in St. Louis,
Computerworld, 10 May 1999.
IT Outsourcing
There are several risks to be managed
Risks
•
•
•
•
•
Losing skills in functions/processes that are outsourced
Internal backlash from staff who fear outsourcing
Loss of control over quality and timing of outputs
Provider may sell or leak buyer’s solutions to competitors
Lack of face-to-face communication can hinder applications
development
Discuss
What are the implications of all this on IT managers?
IT Outsourcing Trends
Trends
•
More outsourcing of things that were traditionally
mission-critical, such as billing services (optimize, 12/02)
•
It takes 3-6 months for offshore IT project managers to
gain authorization to visit the [client] company’s US
offices . . . last year the typical waiting period was 1 month
(InformationWeek, 3/31/03)
IT Outsourcing Trends
A Growing Market
•
Technology Business Research analyst Humberto
Andrade says he expects revenue generated by IT
outsourcing deals to increase 12% to 15% this year
compared with last year (Source: InformationWeek, 11
April 2003)
•
Almost one in five companies plan to increase their
spending on IT outsourcing in 2003 (Source: Internet
World, 23 December 2002)
IT Outsourcing Trends
Recent News
•
HP will manage IT infrastructure, data center, desktop, and
user support, network management, and application
development at Procter & Gamble Co. operations
worldwide. It sealed the $3billion, 10-year deal last week
(InformationWeek, 14 April 2003)
•
Motorola farming out much of its IT infrastructure to
Computer Sciences Corp. in a deal valued at $1.6B . . .
CSC will run desktop and midrange technology, including
global help-desk and network operations. IT will also
acquire some of Motorola’s physical IT infrastructure and
network assets (InformationWeek, 14 April 2003)
End of slides
5. Vendor Selection
• Vendor site visits
• Weighted score method
• Final cost, value, and risk analysis
– Costs
-- one-time vs. recurring
-- fixed vs. variable
– Benefits
-- tangible vs. intangible
6. Procurement Methods
• Purchase
– not that popular because of fear of obsolescence
– longest-term commitment of these 3 methods
• Rent
– usually less than 1 year in duration
– only need to give 30 days’ notice to cancel
– more expensive than purchase or leasing
• Lease
– usually 12-36 months in duration
– often done with an option to buy
– middle of the pack in terms of cost and ability to get out
7. ROI Analysis
Earnings on investment
ROI 
Total investment
• Must be able to calculate the income stream in $
• Not usually able to calculate for:
– Strategic investments
– Informational investments
– Infrastructure investments
• Usually able to calculate for:
– Transactional investments
8. Contract Negotiation
• Do’s
– Include vendor responses to RFP in the contract
– Keep lawyers at bay until Statement of Work is
complete
– Leverage outside expertise in negotiations
– Provide incentives/penalties
• Don’ts
– Buy vaporware instead of proven solutions
– Purchase low bid unless the value is there
– Settle on final offer prematurely
8. Contract Negotiation
Statement of Work
• Agreement between firm and vendor
• Was outlined in the RFP, now it gets finalized
• Includes
– Software characteristics
– Implementation plan
– Technical architecture
– Training strategy
– Maintenance and support
– Service levels (SLA items)
– Cost schedule
Approach to quality
Definition of quality metrics
You Get What You Measure
• “Incentives can bring vendor behavior in
line with a client's expectations, thereby
improving performance, but they can also
distort it, causing performance to drop”
Statement of Work
Approach to Quality and Measurement
1. Identify quality standards and goals
Plan
6. Eliminate
Act
causes of
deficient
performance
- fix defects
- fix root causes
Do
2. Measure project
performance
Check
3. Compare metrics against goals
4. Conduct quality reviews, e.g., peer reviews
5. Test for defects
Statement of Work
Quality Metrics
Progress
Measures the amount of work accomplished by the development
team in each phase
Quality Evaluation Effort
Measures the percentage of the development effort spent on
internal quality evaluation efforts
Test Coverage
Measures the amount of the software system covered by the
testing process
Defect Detection
Efficiency
Measure percentage of the actual defects originating in a stage of
the project that were actually detected in that stage
Requirements Traceability
Measures the percentage of the requirements that have been
addressed by the system
Defect Removal Rate
Measures the number of defects detected and removed over time
Defect Density
Identifies defect-prone components of the system
Customer Satisfaction
Measures customer satisfaction using objective surveys.
Procurement - Process
RFP Process
1. Pre-RFP
2. RFP
3. Proposal
Submissions
4. Proposal
Evaluations
5. Vendor
Selection
6. Procurement
Method
7. ROI Analysis
8. Negotiate
Contract