MBA Core Course in MISMIS 7003

The University of Tulsa

Professor: Akhilesh Bajaj

IT Vendor & Outsourcing Management

Managing IT Acquisition/Outsourcing

© Akhilesh Bajaj, 2008. All Rights Reserved.

Goals for Today

• To learn and discuss a framework that would guide the acquisitionof OTS EWS and help us as we begin our MIS careers!

• To discuss what to outsource & how to outsource it

Acquisition of OTS EWS

• The purchase and implementation of OTS EWS is a high expenditure activity that consumes a large portion of IT budgets.

• The risk is high, because if a wrong OTS EWS is purchased, it will not just affect one area of the organization, but the entire organization. Assuch, it can kill the entire organization.

• A recent study by Harvard Business School determines that 65% of executives believe that OTS EWS have at least a moderate chance of hurting their business because of potential implementation problems.

• Another study by HBS shows that the 2 main reasons for acquiring EWS were: a) simplification of IT in the organization (one system), and b) making information available in a more timely manner in the organization (data centrality). What about best practices?

Acquisition of OTS EWS

• Some critical success factors for OTS EWS implementation include:

• upper management support

• skilled IT / Project team

• in-House project manager (not a consultant)

• well defined chain of command

• adequate training and involvement of users

• a “fit-gap” analysis

• constant communication on part of all parties

Acquisition of OTS EWS

• The acquisition process can be divided into phases:

• planning• information search• selection• evaluation• choice • negotiations

• Acquisition happens before the implementation begins! It is crucial, because the wrong OTS EWS can seriously damage the organization (e.g., Foxmeyer Drug declaring bankruptcy and suing their OTS EWS consulting firm).

Acquisition of OTS EWS

The Planning Phase:

• The maximum time should be spent on this phase. We can break it up into sub-phases.

• Acquisition Team Formation:• Select the project leader. Should have strong political support and be well liked. IT background is not essential.• Identify the skill set required for the acquisition team (technical, systems analysis, etc.) Next identify people who can commit full time to fulfill this skill set. Build the team (should be lots of non-IT people in the team, including at least one person from Purchasing)• Assess what external consultants are needed (usually skills that we don’t have in-house and need)• Consider which acquisition team members will help in implementation also. (The more the better).

Acquisition of OTS EWS

The Planning Phase:

• Acquisition Strategies:• List the strategies that the team will use when conducting the vendor selection. • List the strategies the company will use when deciding on the external consultants.

Some possible methods here:• brain storming• looking at other organizations and how they implemented EWS

Acquisition of OTS EWS

The Planning Phase:

• Requirements Definition:• Define the current technological environment in the organization (what systems are used, software / hardware, legacy systems)• List what users will use the new EWS OTS, • List what functionalities in the new system would increase revenues and customer service• List what interfaces will be needed between the OTS EWS and each legacy system• Get a wish list from users of what they would like the OTS EWS to do.

• This is an ideal point to do the enterprise model of the organization!

Acquisition of OTS EWS

The Planning Phase:

• Establish Evaluation & Selection Criteria:• State how the acquisition team will actually evaluate vendors and external consultants. Examples include vendor strength in the marketplace, availability of people who know the vendor’s software, quality if vendor’s customer service, cost.

For consultants, criteria would include the length of time they have been in business, their base country, the quality of previous implementations in other organizations and the actual personnel whowould be assigned to your project.

Acquisition of OTS EWS

The Planning Phase:

• Acquisition Issues:• List all the issues that could affect the acquisition process.E.g., Y2K shortened timetables. Also, management may want to either quicken or prolong the process.

• Is any BPR required? The best BPR is done before the system is purchased, and with only the enterprise model!

• The idea is to not just automate previously manual processes, but to think about redistributing work loads, pruning redundant business processes and making use of the basic fact that a new system leadsto non-redundancy of data, which may lead to non-redundancy of business processes.

Acquisition of OTS EWS

The Planning Phase:• Marketplace Analysis:

• Determine who the major players are for the solution required (need not be a large ERP vendor, there are hundreds of niche vendors for smaller organizations).

• Determine who the external consulting firms are that have expertise in each system

• Evaluate each vendor and consultant based on the criteria determined earlier in the selection & evaluation criteria phase!

• Create a final short list of vendors & Consultants.

• Later on, the RFP will be sent to vendors in the short list. Based on which vendor is selected, RFPs will be sent to the consultants.

Acquisition of OTS EWS

The Information Search Phase:• This is done concurrently with the latter parts of the planning phase. • Sources of external information include rating services like Dun & Bradstreet, consulting studies like those by the Gartner Group, Meta Group or the Yankee group, other organizations that have implemented an EWS, the marketing departments of the vendors and consultants themselves, trade publications, etc.

• Sources of internal information include the documented processes in our organization, the reports such as internal evaluations, feasibility studies and ROI studies by accounting, strategic objectives, users, seniormanagement.

• The Information Search Phase feeds the other phases in the acquisition process.

Acquisition of OTS EWS

The Selection Phase:• During this phase, the acquisition team investigates different vendors in more detail. RFIs (requests for information) and RFPs that were sent out are reviewed. Constant back – and- forth between the team and the vendors (clarifying information in the RFP or RFI, checking on it, etc) is the norm in this phase.

• Evaluate the vendors and consultants based on their responses, and create an even shorter list than in the planning phase!

• The process of narrowing the list of vendors and consultants is an iterative one: meaning, we need to make several passes at it. It should not be done as a one pass only. So, one way is to create a large listthen go through one pass and shorten it somewhat, then get more detailed information from vendors on the new short list, and shorten THAT somewhat, and so on, till we narrow the list down to about 3-7 vendors.

Acquisition of OTS EWS

The Evaluation Phase:• At this point, we have all the requirements down, the time table down, as well as information on vendors and consultants. We also have a short list of between 3-7 vendors.

• In this phase, the vendors are evaluated on much more detailed criteria. More detailed RFPs are created and sent to the vendors. It is importantthat personnel from Purchasing, accounting and user groups be involved in the creation of the detailed RFP.

• The detailed functional evaluation of the different OTS EWS should also be done at this stage, maybe by having key users use sample screensfrom all the different vendors on the final short list.

• MIS should be involved in evaluating the technical requirements of the systems offered by the vendors (e.g., will they require one quad processorserver with RAID and mirroring, or a server farm with load balancing?)

Acquisition of OTS EWS

The Choice Phase:• At this point, we have detailed functional and technical information about the different vendor systems. We should analyze the fit-gap between the systems and our requirements, and create a recommendation memo, addressed to the senior management who sponsored this project. The memo should detail the criteria that were used, and the process that was followed. It should make the choice of vendor be a rational consequence of all the work that was done in the previous phases.

Acquisition of OTS EWS

The Negotiation Phase:• At this point, we have decided on the vendor, and are ready to negotiate the final contract. The negotiations consist of legal negotiations and business negotiations.

Business Issues include: • What constitutes the different milestones in the implementation?• How will payments be made to the vendor after each milestone?• What level of support and for how long will the vendor provide?• How will new releases to the vendor’s EWS be handled, in the future?

Conclusion• OTS EWS Implementations typically take a few years and cost millions or tens of millions of dollars, along with an ongoing maintenance cost as well as periodic upgrading cost, every 5 yearsor so.

• The acquisition process is the make-or-break phase in the implementation. Selecting the wrong vendor greatly increases the chance of failure, while the right vendor greatly increases the chance of success.

• Many consulting firms often come in and offer strategic advice on which vendor to select.

• The framework we have learnt today will serve as a good startingpoint if we ever play a decision role in acquiring a small or large system for our workgroup/organization

IT Outsourcing

• How critical is IT from a strategic perspective?

• Is IT a commodity? Does outsourcing make it so?Should we not outsource critical activities like customer service?

• What are the cons of outsourcing anything, including IT?-loss of in-house knowledge-dependence on a third party-lack of flexibility (wait for vendor to adopt new technology)-vendor responsiveness & incentives (who pays the vendor’s employees?)-How can we use IT as a competitive advantage after it is outsourced?

Nice articles: http://www.strassmann.com/pubs/cw/outsource-losers.shtmlhttp://advice.cio.com/indian-outsourcing-and-deconstructing-it

IT Outsourcing

Outsourcing Alliances are Difficult:-Initial payment made to client from vendor (vendor pays them for IT assets). This results in short term positive impact to client. Costs are less,cash infusion. -Over long term, client needs change, computing changes. This is the time when the vendor wants to make money, and the client feels they are getting less value, since they want the latest & best technology, and feelthey are overpaying (computing has become cheaper but they are paying 10 year old rates).

Drivers of IT Outsourcing:Cost, IT performance issues, Simplification, cash profile,

Success Factors: Metricize processes, get data model, contract flexibility,make sure supplier is stable & can provide basic functionality.

IT Outsourcing

• Globalization & the Internet have enabled outsourcing of support business processes.

• Wage discrepancies are changing: Programmers in India make $20,000a year, versus $80,000 here, as of 2007.

• Outsourcing Challenges: Contract length, commoditization of that which is outsourced, confidentiality of data.

• Outsourcing costs: finding the vendor, transitioning to the vendor, Managing the contract, transitioning after the contract.

Rent the service: a problem is confidentiality of data.

Discussion: What should we outsource in an organization?

IT Outsourcing

Problems to watch out for: -High employee turnover in vendor organization,-Lowering of quality of personnel appointed by vendor,-Security practices at vendor site for data-Effect on your employee morale

Conclusion: Overall outsourcing can be effective if used properlybut can be very detrimental if misused.