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OutsourcingDiscuss the reasons for outsourcingDiscuss disadvantages of outsourcingDiscuss conditions when outsourcing
is appropriateDefine backsourcing and describe the
reasons for backsourcingDiscuss structuring and managing
the outsourcing arrangement
Offshore sourcing
❚ Define offshore sourcing, captive center, nearshoring
❚ Discuss reasons for and challenges of offshore sourcing
❚ Describe steps clients take in finding a provider
❚ Describe steps providers take in acquiring clients
Outsourcing
❚ The purchase of a good or service that was previously provided internally
❚ Farm out data center operations (facilities management)
❚ Farm out tasks and services❚ Farm out systems development❚ May transfer IS function to vendor
Our Survey
❚ Companies written up in trade press for having signed outsourcing agreements (1988 - 1993)
❚ Telephone interviews❚ 34 of 129 companies participated❚ 30% financial institutions❚ 25 private vs. 9 public❚ Provided broad range of services
Goals: Determinants of Outsourcing Success
❚ Core vs. commodity❚ Partner vs. vendor❚ Tight vs. loose contract
❚ Success: Economic, Technical, Strategic, Overall Satisfaction with Contract
Findings: Primary Reasons for Outsourcing
❚ Technological considerations (8)❚ Cost Savings (6)❚ Strategic considerations (infrastructure building
- quickly) (5)❚ Human resource considerations (3)❚ Mandated by central office/Acquired by another
company (3)❚ Consolidate Data Centers (2)❚ Efficiency (1)❚ Cash Infusion (1)
Findings: Other
❚ Need tight contracts❚ May be successful for core
functions… especially if linked to tight contract
❚ Can have successful partnerships
Saving $$$: Provider Advantages
❚ Tighter overhead cost control❚ More aggressive use of low-cost labor pools❚ More effective bulk purchases and leasing
arrangements❚ Better management of excess hardware capacity❚ Better control over software licenses❚ Hustle (Staying alive)❚ Creative and more realistic structuring of leases❚ Leaner management structure because of increased
competence and critical mass volumes of work
Outsourcing Disadvantages
❚ Reliance on vendor/partner❚ Loss of control❚ Considerations about
security/confidentiality❚ Evaporization of cost savings❚ Loss of competitive advantage❚ Slight of hand with employees
Outsourcing strategies
DECISIONCRITERIA
“MAKE”PRESSURE
“BUY”PRESSURE
CoreCompetency
Often core* Oftensupport*
Security/Confidentiality
Veryconfidential
Not highlyconfidential
SoftwareAvailability
Uniqueapplication
Softwareavailable forcommonproblem
Outsourcing strategies
DECISION CRITERIA
“MAKE” STRATEGY
“BUY” STRATEGY
Partners No reliable, competent, motivated, or financially stable partners available
Suitable partners available
Time Frame Time available for application development
Available time too limited
IT Professionals
Available in- house
Not available in-house
Backsourcing
❚ Bringing an outsourcing arrangement back in house
❚ Reasons❙ Economic❙ Strategic❙ Relationship❙ Power
Structuring the Alliance
❚ Flexible contract ( a lot can happen over 10 years)❙ Shorten length❙ Termination clause
❚ Detailed performance standards❙ Service levels (terminal response times)❙ Baseline period measurement❙ Growth rates❙ Service volume fluctuations❙ Resolution of performance disputes
Structuring the Alliance
❚ Partial vs. complete outsourcing❚ Multiple vendors❚ Cost savings
❙ Multiple evaluations❙ Outside consultants
Structuring the Alliance
❚ Supplier stability and quality❙ Conflict of interests
❚ Management fit❚ Conversion problems
Managing the Alliance
❚ Strong CIO function❙ Partnership/contract management❙ Architecture planning❙ Emerging technologies❙ Continuous learning
Managing the Alliance
❚ Performance measurements – continuous❙ Low-structured tasks more difficult to
outsource❙ Low-structured task provide higher margins
for provider
❚ Customer-outsourcer interface❙ Specified account manager in provider
company
Offshore sourcing❚ Offshore sourcing – sourcing to a company
outside the home country❚ Captive center – offshore center owned by
the client company❚ Nearshoring – sourcing to a company in a
country near to home country❚ Most common offshore sourcing IT
activities❙ Maintenance❙ Testing❙ Coding
Estimates on Market SizesCarmel & Tjia, 2006
$21 billion; total savings from offshoring by US corps -$31 billion
$10 billion; total savings from offshoring by US corps -$6.7 billion
Global [offshore] sourcing of software & services
$9.1 billion$1.3 billionIndian R&D sourcing
$680 billion$405 billion at 8%Global Market of IT-enabled Services
N/A$536 billion at 6.2%
Global Market of IT Services
2008 (est)2003
Demand for offshore work
❚ Most aggressive offshore consumers are in US; Within Europe, UK is most active
❚ Most active industries: financial services (banks, investment firms, insurance cos) and technology firms (software, hardware & telecommunications)
❚ Motivation: cost savings, flexibility, accessing talent, follow-the-sun
❚ 100 nations are now exporting software services and products
Wages for Software Professionals Carmel & Tija 2005
$1,400Vietnam$18,000South Africa$3,000China$20,000Brazil$3,600Pakistan$23,000Ireland$4,800Poland$39,500Israel$5,000Ukraine$43,000Singapore$5,000Indonesia$44,000Japan
$5,500- $7,500
Russia$45,000- $99,000
UK$5,000India$57,000Canada
$7,000Mexico$63,000USA
Extra offshore costs (%)Carmel & Tija 2005
15-57%12-52%Total Extra Costs5-8Restructuring/transitioning
1-2Turnover – offshore site2-3Travel3-8Communication/cultural
6-105-7Governance3-270-20Efficiency/lost productivity1-101-10Process changes
0.02 - 21-2Search & ContractCIOMeta Grp
Offshore challenges
❚ Communication breakdown❚ Coordination breakdown❚ Control breakdown❚ Cohesion barriers❚ Culture clash
Offshoring from a client perspective
❚ Laying the foundation❚ Identifying providers❚ Assessing and selecting the provider
Laying the foundation
❚ Assess your offshoring readiness (project management maturity, risk assessment, organizational flexibility, offshore experience)
❚ Set up powerful launch team❚ Hire external expert❚ Create a strategy and a plan❚ Select right project
Identifying the providers
❚ Locate providers❚ Select country (language, general
software skills, government, travel time)❚ Develop criteria for provider selection❚ Write RFI/RFP
Assessing and selecting the provider
❚ Due diligence❙ Check references❙ Set up local meetings to discuss their abilities
and your criteria❙ Pay attention to soft elements (i.e., trust,
feeling comfortable
❚ Offshore visit❚ Make recommendation and contract
negotiations
Marketing offshore services: Provider perspective
❚ Fierce competition: 4000 companies in low cost countries
❚ Quality of service can’t be judged until after the service is consumed
❚ Many IT services companies founded by technical professionals – not marketeers
Characteristics: Successful IT Services Exporters International Trade Center
❚ A truly international outlook (and desire) for exporting
❚ A long-term commitment to exporting❙ May take 2-3 years to generate business
❚ Thorough research into new markets and development of export plans
❚ An international reputation for quality.
First Steps❚ Create realistic business plan
❙ Types of offshore services required by market❙ Assess competitors and their place in market❙ Best ways to enter target market
❚ Seek business intelligence ❚ Define target markets
❙ Market size❙ Linkages (linguistic, historic, geographic, diaspora)
❚ Set up local base (sales office; representative)❚ Conduct SWOT analysis
Local Marketing Activities
❚ Generate client leads❙ “numbers game”
❚ Trade fairs❚ Marketing material❚ Seminars❚ Public relations
Business Discussions with Clients
❚ Know client types❙ Know offshoring champions in firm❙ Start with low-risk projects❙ Cultivate long-term relationships
❚ Know clients’ cultures❚ Build trust❚ Create country branding (with trade
associations and government offices)