Transcript Lecture 19.pptx

Managing
Operations
Lecture 19
Today’s Lecture
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Managing Outsourcing:
Organizational Structure
 Governance
 Day-to-Day Working
 Supplier Development
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Today Lecture…
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EASTMAN KODAK COMPANY
Case Example: Managing Outsourcing
HONDA MOTOR COMPANY
Case Example: Supplier Development
Offshoring
EXULT
Case Example – Offshoring
Outsourcing – The ‘Final Word’
Managing Outsourcing:
1. Organizational Structure
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Managing outsourcing is different from managing internal
staff
 One reason = it is a joint effort between parties that
may not have the same goals
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Typically, parties establish layers of joint teams.
 Top-level team: final word in conflict resolution
 Operational team: oversees day-to-day functioning
Managing Outsourcing:
1. Organizational Structure
 Joint
special purpose teams: created from time to
time to solve pressing issues
 Committees: oversee the use of formal change
management procedures
 Relationship Manager(s): look after the ‘relationship’
 Skills = different to those of e.g. a data center
manager
EASTMAN KODAK COMPANY
Case Example: Managing Outsourcing
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First IS outsourcing by a ‘good shop’
 “Shocked the IS world”
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Four suppliers (ESPs) – manage portions of IS:
1. Operate data centers and networks
2. Manage telecommunications
3. PC support
4. Voice messaging
EASTMAN KODAK COMPANY
Case Example: Managing Outsourcing cont.
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Management structure:
1.
Management Board
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2.
Meets twice a year, includes senior management
from both companies – Focus on strategic issues
The Advisory Council
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Meets monthly, 15 members- handles technical
and operational issues
EASTMAN KODAK COMPANY
Case Example: Managing Outsourcing cont.
3. The Supplier and Alliance Management Group
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4.
Manages long term outsourcing relationships &
contracts with large IT suppliers
The Relationship Manager
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Focal point between itself and service provider –
ensures Kodak gets more than just delivery
EASTMAN KODAK COMPANY
Case Example: Managing Outsourcing cont.
5.
Working Groups

6.
Added to deal with specific technology areas.
Client Surveys

Sent out twice a year to 5,000 internal users
EASTMAN KODAK COMPANY
Case Example: Managing Outsourcing cont.
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Kodak needs all these forms of co-ordination for
effective supplier management
Considered a ‘best practice’ outsourcing and
relationship model
Managing Outsourcing:
2. Governance
The foundations of governing an outsourcing relationship
are laid in the (LARGE) contract(s)
 Service Level Agreement (SLA)
 Responsibilities, performance requirements,
penalties, bonuses
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Another important component of SLAs is metrics. An SLA
needs to be measurable to be of use
 It is only when trust in one another breaks down that they
turn to the contract. (Fig 8-4: Governance rules)
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Service Level Agremeents
Managing Outsourcing:
3. Day-to-Day Working
Recommendations to manage day-to-day interactions:
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Manage expectations, not staff
 Facilitation becomes the mode of working. Rather
than say “do this”, the approach becomes “how
can we solve this together”
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Realize that informal ways of working may disappear
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Loss of informal ways of working may add rigor
Managing Outsourcing:
3. Day-to-Day Working
 Integration
of the two staffs requires explicit actions
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Does not happen naturally
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Explicit policies are likely to be needed
Managing Outsourcing:
3. Day-to-Day Working
 Don’t
unduly restrict outsourcing staff access
 Joint celebrations
 Invite each other to meetings
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The best way to manage day-to-day is communicate
frequently
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Preferably ‘face to face’!
Managing Outsourcing:
4. Supplier Development
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Topic that is receiving increased attention
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Buying parts and services that go into one’s own
products and services
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Assisting one’s suppliers to improve their product and
services by generally improving their processes
HONDA MOTOR COMPANY
Case Example: Supplier Development
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Not an IT related example (manufacturing) but a good
one!
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This automobile manufacturer conducted pioneering
work in improving suppliers’ capabilities by pairing
Honda engineers with a supplier’s engineers to
drastically lower the cost of one part supplied to Honda
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The results are like “walking around picking money up off
the floor.”
Offshoring
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To round out our discussion of outsourcing, we turn to
a topic receiving much attention today: sending work
offshore
 Now = a big political issue
Late 1990s – Offshore outsourcing
 Started when labor markets were especially tight
due to Y2K
 Companies turn to offshore outsourcing because
labor costs are lower and there is ample supply of
educated people
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Ireland, India, Philippines
Off-shoring vs Outsourcing
Offshoring
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The trickle in the late ’90s has turned into a steady
stream of white-collar work going offshore
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Application maintenance and development
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Call centers
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Customer service
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Back office processing
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BPO
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Claims processing
–
Etc.
Manufacturers have faced international competition,
whereas service firms have (had?) not
Offshoring cont.
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Offshore outsourcing differs in some unique ways from
domestic outsourcing
 Some areas to be considered:
1.
2.
Offshoring options are broadening
Both parties need cultural training to bridge
cultural differences
• Clients = cultural integration programs
• Providers = accent neutralization
Offshoring cont.
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Offshore outsourcing differs from domestic

Some areas to be considered cont.
3.
Communication issues need to be addressed
from the outset
• “Yes”
– Asia = “I hear what you are saying”
– West = “I can do what you ask” or “I agree
with you”
Offshoring cont.
•
Tips
– Avoid colloquialisms such as sporting
analogies
– Use short, concise sentences with
common words
– Have the provider write a ‘statement of
work’ to gauge understanding
Offshoring cont.
– Get all commitments in writing
– Include on your team someone who know
their culture
Communication issues continue throughout
offshore relationships
Country laws need to be followed
•
4.
EXULT
Case Example - Offshoring
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Provides full-service HR outsourcing to Global 500
companies
 Mature
in outsourcing relationships because
outsourcing is its primary business
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2 Indian companies maintain its core HR computer
systems (SAP & Peoplesoft)
 Chose
2 Vs. 1 to ensure resources could be scaled
up as needed
Exult services
EXULT
Case Example - Offshoring
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In choosing the providers used consultants to do the
detailed review and content (neoIT) and to structure the
contract (TPI)
 Aim
= for best deal. Needed to understand the Indian
market and its practices. Consultants helped achieve
that
EXULT
Case Example - Offshoring
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Current split of maintenance work
 70%
Indian
 15%
provider employees ‘onshore’
 15%
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Exult ‘onshore’
Requires us buyers to work within the highly disciplined
Indian maintenance processes rather than to try to
change them
 Applies to all outsourcing!
Good economic outcomes
Offshoring cont.
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Use Offshoring to Advantage
 A major criticism is that it decreases skills and
know-how of its client’s IS organization
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This need not be so
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Redefine Services Using Offshoring
 Understand customers
 Understand demographics
Offshoring cont.
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Stay in touch with customers
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Offer end-to-end service
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Dominate the screen
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As information moves online, companies are
vying to control “the screen” = where the
information ends up
Offshoring IS Activities
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Outsourcing was caused by the emphasis on
organizations sticking to their core competencies,
offshoring was caused by scarce resources.
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Offshore outsourcing occurs when products and services
are procured from locations in other countries. Offshore
out-sourcing of information systems services is,
arguably, the most significant phenomenon to occur in
recent decades
Offshoring IS Activities…
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American Express has been offshoring their back-office
processing services in India since 1994.
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GE Capital opened its GE Capital International
Services (GECIS) in India in 1997.
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Given the abundance of skilled professionals at offshore
sites as well as pressure on executives to drive down
costs, it is very likely that this trend will continue and
even increase for some time, despite negative public
reaction.
Offshoring IS Activities…
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Many of these outsourcing vendors are “offshore” in
large part because of the lower costs that can be
attained outside of countries in the industrialized West.
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This exploitation of international cost differentials has
been termed “global arbitrage,” as it is an extension of
the classic economic arbitrage strategy.
Offshoring Factors
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Bandwidth growth and telecommunication
Scarce human expertise
Increased demand
Available global talents
Routine tasks
Changing goals and objectives
Innovation
Imitation
Offshoring Factors..
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Offshore outsourcing of information systems activities is
broadly accomplished
in one of two ways:
 First, the client or offshoring organization sets up
units in other countries and hires local talent to
develop, maintain, and provide services.
 In this case,the company maintains responsibility for
training, supervision, quality control, and the like.
 These responsibilities can be managed locally or
remotely
Offshoring Factors…
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Second, the client or offshoring organization contracts
out services to providers in locations in other
countries.
 In
this case, responsibility for hiring, training,
supervision, quality control,and the like rests with the
provider.
Offshoring Factors…
Describes six varieties of work related to information
systems:
1. Programming, software testing, and software
maintenance;
2.
Information systems research and development;
3.
high-end jobs such as software architecture, product
design, project management, information systems
consulting, and business strategy; that are often
offshored:
Offshoring Factors…
4.
5.
6.
Physical product manufacturing—semiconductors,
computer components, computers;
Business process outsourcing/IT enabled services
insurance claim processing, medical billing,
accounting, bookkeeping, medical transcription,
digitization of engineering drawings, desktop
publishing, and high-end IT enabled services such as
financial analysis and the reading of X-rays;
Call centers and telemarketing.
Controlling information systems
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Controlling information systems development and
maintenance costs is necessary for an organization in
general and the information systems function in
particular.
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In the early days of computers, investment in hardware,
software, and IS products and personnel faced little
scrutiny.
Risks in Offshore Outsourcing IS Activities
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Any business decision involves risks, and that risk is
greater in situations when there is increased change or
uncertainty.
The best option, however, is not to avoid decisions or to
wait and see what might happen elsewhere.
The pressure on CEOs and CIOs to reduce costs is
real, and there is no sign that it will be lifted any time
soon.
Good management practice suggests careful
assessment of potential risks for any decision.
Risks in Offshore Outsourcing IS Activities
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Although offshore outsourcing of information systems
services has been going on for some time now, our
understanding of its impact is still evolving.
The trend in offshoring has been rapid, and there is little
doubt that it will continue in the foreseeable future.
It is critical that offshored projects are carefully studied
and costbenefit analyses are carried out to make
sure benefits overweigh costs beyond a margin.
Only significant cost benefits will warrant offshore
outsourcing of information systems services.
With only a marginal cost benefit of say 10–15%,
most organizations are better off retaining their
information systems activities in-house or in-shore.
Risks in Offshore Outsourcing IS Activities..
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The offshore outsourcing of information systems
activities is primarily based on transaction cost
economics.
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That rationale is narrowed down to the cost of labor to a
large extent.
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There is an extant discourse among academics,
professionals, and business leaders as to the exact
nature of this cost advantage.
Risks in Offshore Outsourcing IS Activities..
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Risk in:
(a) overestimating the cost saving,
(b) underestimating the overhead costs that are
necessary to get to the cost saving stage
(c) discounting non-cost factors that influence
offshore outsourcing outcome.
 The tangible transaction-cost economics of
offshore outsourcing is more readily measured by
economics and cost accounting models.
 The intangible costs or benefits of offshore
outsourcing include issues of organization,
behavior, morale, social, strategy, and the like, and
these require acute management skills and insight.
Risks of Offshore Outsourcing
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Decline in employee morale
Loss of innovation and know-how
Public reaction to corporate citizenship
Regional instability of host country
Quality control and standards
Communications and culture
The Management of Offshore
Information Systems Projects
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Offshore outsourcing of information systems services
has added new dimensions to duties and responsibilities
of project managers.
Systems that are developed at remote sites in different
countries are more difficult to manage due to differences
in culture,language, time zone, labor law, work habits,
and the like.
These issues are relevant even to cases when a firm
operates its own offshore practice.
The Management of Offshore
Information Systems Projects..
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Project managers are often involved with negotiation and
management of contract with international vendors for
the delivery of information systems services.
Many firms have their legal division draw and finalize
these offshore contracts.
Project managers often interact directly with offshore
vendors to negotiate and clarify responsibilities.
Communication skills and clear understanding of the
culture and language of offshore vendors are essential to
successful negotiation.
The Management of Offshore
Information Systems Projects..
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Project managers are responsible for the development
and management of relationships between their team
members and offshore service providers.
Routine and effective collaboration and interaction
between client and vendor teams is heavily
influenced by relationship management
Risk assessment and risk management of offshore
projects is especially difficult. For example,risks
associated with local politics, natural disaster, and
communication and network infrastructure in offshore
locations are more difficult to assess and manage.
The Management of Offshore
Information Systems Projects..
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Systems planning and integration also takes a new
dimension in offshore outsourcing practice.
This may turn out to be a critical problem if the
outsourcing firm reduces internal expertise to the point
that planning and integration of information systems
services becomes dependent on outside vendors
Security and privacy continues to be an important issue
for the individual and organization.
Issues of security and privacy have assumed greater
importance in recent years on priority lists of information
systems executives and project managers.
Skills Required for the Successful Management of
Offshore Projects
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Contract negotiation and management
Relationship management
Risk assessment and management
Planning and integration
Business process redesign
Enterprise needs analysis and testing
Security and privacy planning
Outsourcing – The ‘Final Word’
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Outsourcing has become a strategic alternative for
companies
 With
the pace of change so rapid in IT and ebusiness, the only hope of many companies is to tap
the expertise of companies that are (paid to be)
keeping pace with the changes
 = Their ‘day job’
Outsourcing – The ‘Final Word’
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Outsourcing does not however mean relinquishing
responsibility
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This is serious stuff
 Marriage?
 Trouble in ‘paradise’?
Summary
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Managing Outsourcing:
Organizational Structure
 Governance
 Day-to-Day Working
 Supplier Development
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Summary…
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EASTMAN KODAK COMPANY
Case Example: Managing Outsourcing
HONDA MOTOR COMPANY
Case Example: Supplier Development
Offshoring
EXULT
Case Example – Offshoring
Outsourcing – The ‘Final Word’