Outsourcing

Pressures Faced in IT
IT departments face growing pressure to

improve their business value by accelerating the
delivery of new applications and technologies
and improving service to users

At the same time, basic maintenance and
support of the existing application portfolio
consumes up to 50% to 80% of IT resources
posing a serious roadblock to new initiatives and
services that can enhance an organizations
competitive position
Decision Making Model
Business Strategy
It enables the business to better manage the
human and financial resources required to
support current applications while positioning
itself to realize competitive advantage

Acceptance of outsourcing as a business
strategy extends well beyond IT, with
outsourcing of business functions like customer
service, human resources, and finance and
administration projected to grow at 30% annually
in coming years
Types of Sourcing Arrangements
Types of Sourcing Arrangements
Types of Projects Outsourced
Ongoing Software Maintenance

Software Conversion Projects (i.e. Y2K)

Original Application Development
What is Being Outsourced?
No area of the development lifecycle is immune
to outsourcing

In-house teams still do the majority of higher-
abstraction activities, such as project
management, requirements gathering,
architecture, design, modeling, R&D and
deployment

However, offshore teams aren't simply being
tasked with writing code
Outsourcing Literature Sources
Outsourcing Objectives
Outsourcing arrangements are not typical
purchaser/vendor relationships, and
confidence that the vendor can work in a
partnership is vital to a successful
arrangement

It is essential that the objectives and
success criteria for outsourcing are clearly
understood within the organization
Outsourcing Agreements
Any outsourcing arrangement must be tailored to create
a win/win deal that balances potential risk between the
client and the vendor and creates an incentive for the
vendor to work with the customer organization

Its becoming increasingly common for outsourcing
arrangements to be structured for gain-sharing: once
targeted benefits are achieved, benefits beyond the
target are shared

Arrangements such as these promote a true partnership
Characteristics of Outsourcing
Contracts
In outsourcing contracts, the client retains
ownership of the IT strategy while the vendor
assumes responsibility for management
processes and day-to-day supervision of the
resources

A well-structured outsourcing contract makes the
vendor responsible not only for a defined
package of services, but for the delivery of
business value from those services
Service Metrics
Performance related service-level metrics are a
key component of most outsourcing contracts

Growing emphasis is being placed on measuring
and evaluating the services business value

Accordingly, metrics demonstrating continuous
improvement and business value are becoming
a more common component of outsourcing
agreements
Service Level Agreements
In order to offer a competitive service that,
at the same time, is objectively
measurable, the maintenance organization
must commit itself to accomplish its
services according to some indicators

These Service Level Agreements can also
be used for planning the non-plannable
maintenance
Risks
There are many good works analyzing the
problem of risks once the maintenance process
has started, but there is a lack of guidelines to
help managers identify and estimate the risks in
the initial stages of projects

One situational factor may affect one or more
risk factors, and each risk factor may affect on
one or more business areas
Theoretical Foundations
6 Characteristics of Describing
Software Development
1) Complexity

2) Degree of Commitment

3) Compatibility

4) Efficiency

5) Benefit

6) Risk and Uncertainty
Complexity vs Radicalness
Complexity is a measure of the number and
variety of elements and their
interconnections in a system

Radicalness is largely a perceptual measure
which describes the perceived amount of
change in the system at each level of
abstraction

Developing Applications
Internal staff already understands legacy applications, time spent
transferring that knowledge would eat any potential savings

New applications are driven by new opportunities that require rapid
response, and the internal staff is too busy to provide that response.

New projects can be started quickly because there is no need to
recruit people. This lets the company respond swiftly to unexpected
developments with minimal risk.

If a new application fails to pan out, then the design cost will have
been significantly less than in-house.

If the application bears fruit, then offshore developers are in an ideal
position for support, reducing the cost of maintenance.
Efficiency and Effectiveness in the
Application Management Environment
A clear picture of the desired, or target
application management environment is crucial
to understanding the potential business value of
outsourcing application management

Well run environments have:
User Satisfaction
Accountability
Adequate Staffing
Maintenance
Outsourcing of software life cycle activities is a
growing business area

Lack of planning and high costs of software
maintenance invite many organizations to
outsource

Even the most unexpected organizations, such
as the US Department of Defense, have decided
to outsource significant portions of their
Information Systems
Maintenance
Among the activities that comprise the
software life cycle, maintenance is the
most costly; estimated at 67-90%

By not planning for change, companies
are faced with higher costs than if they
were to imbed that cost in the original
development plan
Benefits of Outsourcing Maintenance
Employees focus on the core business

Releasing resources for strategic
developments

Decreasing costs

Increasing productivity

Drawbacks of Outsourcing
Maintenance
Loss of control

Loss of a learning source

Loss of knowledge of the software

Dependencies on the supplier

Variations in the product quality

Problems among personnel
Planning the Non-Plannable
Non-plannable maintenance requires urgent
corrective action

It is the more problematic type of maintenance,
due to its lack of planning possibility

The use of predictive models are used to try to
determine the quantity of resources needed for
error corrections.
Benefits of Outsourcing
Competitive Advantage

Speed-To-Market

Improved Quality

Overcome cultural barriers to improving
methods and processes

Access to skills and resources
According to One CIO
"We see little value in offshoring legacy
work," Ross says. "Next-generation
applications is where the payoff's the
greatest."

The Quality Question
A large percentage of respondents rated
the quality of work done by the offshore
team as worse than in-house efforts

46% of respondents considered the work
of the offshore teams to be of poor quality,
and an additional 14% reported that their
offshore team's work was "unusable or a
setback to progress."
The Quality Question
51% of respondents reported that their
current or most recently outsourced
project was critical to daily operations

Despite the reports of poor quality, 93%
disclosed that their company plans to keep
using their offshore vendor
Skill Sets for the New Worker
Teamwork and communication skills remain important,
but an understanding of other cultures and languages
may also be helpful in this global economy

More attention must be paid to large applications,
standard tools and platforms that will be used by IT
workers around the world, such as J2EE or .NET.

In addition, a more global perspective should be taken
Generalized Application Packages
There has been a growing trend towards the use of
generalized application packages in IS development,
largely due to the fact that in-house development has
turned out to be costly and risky in terms of development
costs and schedules and the quality of the resulting
systems

The impression is that there is a common-sense belief
that application package based information systems are
easier to implement than in-house developed systems

It should be observed, however, that the results are not
very conclusive in this respect
Questions?

Outsourcing

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Pressures Faced in IT

IT departments face growing pressure to

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