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Gerald DeHondt IIDr. Marvin Troutt
Department of Management and Information Systems
Kent State University
Purpose of OutsourcingLowered Development Costs
Primary business of the customer is an area other than systems development.
Utilize Knowledge Capital of the VendorBest PracticesSoftware and Systems ExpertiseEconomies of Scale
ChallengesTransition CostsTime and Effort Managing the VendorLegal and Liability IssuesOrganizational Culture
Purpose of this ResearchInvestigate impact of unanticipated costs.Propose potential methods of mitigating
these cost challenges.
Anticipated Cost SavingsOne in three outsourcing projects targeting
cost reductions fail to meet expectations (Caldwell, 2002).
Most companies believed they understood all major costs (Scheier, 1996).
Unanticipated CostsTransition and Management CostsLegal and Liability IssuesVendor ContractClient Lock-InInstitutional System Knowledge and
Employee Loss of Confidence
Transition and Management CostsCan amount to as much as 5 – 7% of the total
value of the contract (Scheier, 1996).Examples
Costs to maintain the current staff while the vendor learns the system.
Assistance provided to the vendor.Disruption to the business due to mentoring vendor.Slower response of vendor during ramp-up.
The more specific or complex the activity, the more expensive will be transition costs (Barthelemy, 2001).
Legal and Liability IssuesIn the absence of an employment agreement
(as with direct employees), companies need to ensure trade secrets and confidential data are protected.
Non Disclosure Agreements (NDAs)
Vendor ContractThe Customer and Vendor seek to shift risk to the
other partyFixed PriceTime and Materials
Determine consistency of client needs with ability of the vendor.Appropriate Vendor Selection
Relative bargaining power of each party may determine which arrangement is chosen.
Carefully negotiate Service Level, then give Vendor control over how contract is fulfilled (Bendor-Samuel, 2002).
Client Lock-InThe client cannot get out of the relationship
except by incurring a loss (Aubert et al., 1998).Vendor may renege on service levels because the
client cannot easily engage another vendor (Bahli and Rivard, 2003).Service DebasementCost Escalation
Companies utilize a multi-vendor strategy to allow options (Porter, 1985).Switching vendors is easier.Vendors maintain quality because of threat of
losing business (Ngwenyama and Bryson, 1999).
Institutional System Knowledge and Employee Loss of ConfidenceRedisposition of displaced staff or losing
those with significant system knowledge (Domberger, 1998).
Knowledge gained over many years is difficult to transition in a short time.
Loss of confidence by staff may increase turnover.Compounds transition challenges.
Potential BenefitsAccess to Additional Skill SetsOrganizational Flexibility
Access to Additional Skill SetsMaintaining expertise in-house is expensive
(Martin, 1991; Yourdon, 1992)Skill deterioration of workers.Shortage of required skills.
Contracting these services allows access to professionals who have mastered required skill sets.
Vendors can implement best practices or solutions utilized on previous engagements.
Organizational FlexibilityThe degree to which a business unit is
adaptable in administrative relations or the authority vested in situational expertise (Barrett et al., 2005).
Companies skilled in outsourcing systems development have an additional tool set.
Flexibility to adapt to changing markets and environments.
Factors Impacting SuccessInformationIncentivesInstitutional Factors
InformationDue Diligence of Vendor
CapabilitiesStrengthsWeaknesses
Self Reflection of Client Regarding OutsourcingCapabilitiesStrengthsWeaknesses
Full Information on Vendor Team
IncentivesContract Clauses defining Service Level
Agreements (SLAs) and Quality Standards.IncentivesPenalties
May be viewed negatively by Purchasing Department as this places additional liability on the client.
Institutional FactorsCultural FitVendor ExperienceKnowledge of Best Practices
ConclusionOutsourcing Systems Development Activities
may be beneficial if handled appropriately.Lowering Cost of the FunctionOpportunities for Client StaffBringing Additional Knowledge into the
OrganizationCan Introduce Additional Risks to the
Organization.Careful Balancing of Benefits and Risks
Required to Make Optimal Decision.