OUTSOURCING in IT services

Group HAPY: Hong Nhung NGUYEN Huong Trang TRAN Mengyao XING Zicong WANG March 2012

Overview

      Introduction  Definitions  IT outsourcing development  Classifications The risks of IT outsourcing Feeny/Willcocks framework Case study companies  DuPont case  Volkswagen case  Zara case Summary  Advantages and disadvantages of IT outsourcing  Recommendation References

Definitions

  Outsourcing occurs when an organisation contracts with another organisation to provide services or products of a major function or activity (Belcourt, 2006).

IT outsourcing: “… a decision taken by organisation to contract-out or sell the organisation IT assets, people, and/or activities to a third party vendor, who in exchange provides and manages assets and services for monetary returns over an agreed time period” (Kern, 1997, p.37)

IT outsourcing development

   1963: Electronic Data Systems signed the agreement with Blue Cross of Pennsylvania for data processing services -> beginning of IT outsourcing century.

1989: Kodak enter strategic alliance with IBM-IS partner ($1 billion outsourcing deal) ->widespread interest in outsourcing Recently, it evolves from one vendor-one client to multiple vendors-multiple clients.

IT outsourcing development

  The trend towards outsourcing is increasing in all industrial and commercial sectors. The growth in IT outsourcing in the last 10 years has been significant.

Major drivers for upsurge in IT outsourcing:  Global competition  Downsizing  The move to flatter organisation,  The search for greater flexibility,  Rapid change in technology  Emphasis on concentrating on core competencies

IT outsourcing classifications

 Lacity and Hirschheim (1993) divided into 3 types:  Total outsourcing: to a single third party, >80% of the IS budget  Selective sourcing: source externally between 20%-80% of IS budget  Total insourcing: retain >80% of the IS budget internally

The Risks of IT Outsourcing

  Outsourcing has risks => significant to analyse risks of IT outsourcing Earl (1996) discusses eleven risks of IT outsourcing:

Possibility of weak management

Business uncertainty Outdated technology skills Endemic uncertainty

Hidden costs

Technology indivisibility Dangers of an eternal triangle Lack of organizational learning

Loss of innovative capacity

Fuzzy focus

Inexperienced staff

Feeny/Willcocks framework

DuPont case

  Founded in July 1802 as a gunpowder mill.

Before 1997, it expanded as a chemical and energy company. In 1997, transformed to a science company.

 Figures:   2010: Net sales: $31.5 billion, 2011: 67,000 employees, operating in 90 countries

F ocused on core business competencies, a reduction of overhead costs and an increase of capital efficiency DuPont Timeline A pplied Feeny/Willcocks framework E xtended the contract with CSC through 2014 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 S igned a series of ten year contract of IT outsourcing with CSC and Accenture T ransferred 80% of IT spending and 75% of IT staff

How did DuPont apply the framework?

  Defined 5 of 9 capabilities as general competencies:  Relationship building  Leadership  Contract facilitation  Informed buying  Making technology work Pointed to 3 faces as career paths:  Business and IT vision  Delivery of IT services  Design of IT architecture

How did DuPont apply the framework?

 Have informed discussion with vendors  improve architecture planning  A benchmarking process was introduced  improve contract monitoring  Support senior technical capability and informed buying capability

How did DuPont apply the framework?

 By 2003:  Fill 90% of key leadership positions internally  The projected shortfall of in-demand employees was reduced from 30 in 1997 to 2 in 2004  Leverage its relationship with suppliers and renegotiate sourcing arrangements into the future

Profile of Volkswagen

 Industry: Automotive Products: Cars Revenue: €80.251 billion(2010)

Profile of Volkswagen

    1937: Volkswagen Group established Late 1940s:Beetle was introduced and became internationally popular for 20 years before experiencing fluctuation, known as :” Himalayas chart” Early 1990s: dropped to a new low point In 2001: changed in strategy, developed “classic” and “sporty” brands

Volkswagen IT strategy timeline Outsourced with Perot Systems, and dramatically reduced internal IT staff 1990 1992 1994 VWoA IT staffs were transferred to f “gedas AG” to monitor outsource contract 1996 1998 In 1999,Set up 'Ebusiness teams

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2000 2002 The single internal IT department BPTO was created 2004 2006 Early 1990s, sale dropped to new point

Analysis of Feeny/Willcocks Framework on Volkswagen case

 Leadership issue:  failed on creating organizational arrangements  Relationship building issue:  failed on building a single organization in control of the overall process  Contract monitoring issue:  frequently changes on IT staff

Zara case

 Spanish clothing and accessories retailer, belongs to Inditex group.

 In 2010:  Net sale: €8,088m,  Contributed to total sale: 64.6%  Numbers of countries: 77

IT source and Feeny/Willcocks framework

    Zara’s IT strategy:  Utilize technology that is simple, cost-effective and easy to use  Doesn’t require a lot of IT support.

 Nine IS core capabilities from the framework are low Low level of IT infrastructure and organisation.

 No CIO; no formal processes for IT budgets; no investments for strategies and IT projects.

 Low leadership Using outdated software – POS terminals which ran on DOS.

 Architecture planning  Contract facilitation  Vendor development Recommendation: has a room for improvement

Why do Zara not IT outsourcing?

   Preference for speed Unique business Vertical Integration   All functions link together Have their own factory

Summary

Advantages and Disadvantages of IT outsourcing

Advantages

Cost-Effectiveness Qualitative Services Skilled Manpower Focus Expertise in IT Outsourcing

Disadvantages

Loss of Control Communication Challenges & Different Standards Time Zone- a double-edged Sword Cultural Differences Service Provider wants to diversify and take more projects Customer is Novice

Summary

Recommendation

Step 1: Consider the risks of IT outsourcing.

Step 2: Outsource or insource? Step 3: Consider using the Feeny/Willcocks framework to manage their IT function in long term .

References

      Austin, R.D. (2006) “ Volkswagen of America: Managing IT Priorities”, Harvard Business School. Hirschheim, R., & Lacity, M. C. (1993). The information systems outsourcing bandwagon. Sloan Management Review, 35(1), 73-86.

Kern, T. (1997). The Gestalt of an Information Technology Outsourcing Relationship: An Exploratory Analysis. Paper presented at the 18th International Conference on Information Systems, Atlanta, USA Mcafee, A., Dessain, V., Sjoman, A. (2004) “ZARA IT for fast fashion”, Harvard Business School.

Offshoring Times (No date) IT Outsourcing with Advantages and Disadvantages. Available at: http://www.offshoringtimes.com/Pages/2007/offshore_news144 4.html (Accessed: 8 th March 2012) Willcocks, L.P. and Feeny, D (2006) “IT Outsourcing and core is capabilities: Challenges and lessons at DuPont”, Information systems management, p.49-56.

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