IT Sourcing Chapter 7 AJ Raven Amrit Tiwana

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IT Sourcing Chapter 7 AJ Raven Amrit Tiwana University of Georgia 21 January 2022

IT Sourcing Chapter 7 AJ Raven Amrit Tiwana University of Georgia 21 January 2022

Agenda Two perpetual challenges Flavors Two antidotes Not letting sourcing undermine strategy 1

Agenda Two perpetual challenges Flavors Two antidotes Not letting sourcing undermine strategy 1

Jargon Decoder • • 2 IT sourcing: Doing IT work in your own firm

Jargon Decoder • • 2 IT sourcing: Doing IT work in your own firm or outside it Offshoring: Outsourcing abroad or using your people abroad Community outsourcing: opensource, crowdsourcing, or ecosystems Tapered sourcing: Doing design inhouse before handoff to a vendor Concurrent sourcing: Simultaneously insourcing and outsourcing Backsourcing: Bringing back outsourced IT activities inhouse Challenges: The outsourced system does not play well with existing systems or you end up with an unwanted system

The Phenomenon • Core competence logic led to wholesale outsourcing – Now trifecta had

The Phenomenon • Core competence logic led to wholesale outsourcing – Now trifecta had made IT inseparable from firms’ offerings – IT increasingly defines them …Medtronic pacemakers …Progressive insurance …Taco Bell tacos …Netflix streaming – Often turned out to be a one-way street • Perpetual challenges in outsourcing IT – Integration problems – Receiving the wrong system • Decisions about whether, how, and where to outsource what IT – Must go beyond the outdated insource-outsource dichotomy • Two innocuous reasons to outsource can create vicious problems 3 1. To access IT skills absent inhouse 2. Vendor cheaper than doing it inhouse

3 x Unstrategic IT Sourcing Decisions Where are your IT assets developed and maintained

3 x Unstrategic IT Sourcing Decisions Where are your IT assets developed and maintained Three routine, non-strategic activities that merely demand competent IT 1. Business process outsourcing enabled by IT – customer support, call centers, remote workers, crowdsourcing – consequences of IT use ~ operations sourcing IT 2. Commodity IT infrastructure and services 3. Commodity software – Negotiating price, service, and contracts is IT unit’s job • Non-IT managers’ involvement needed in IT sourcing of – Software embedded in your firm’s products or services – Custom-built apps into which your business processes are baked – One-off, non-recurring IT tasks 4

Insourcing versus Outsourcing Access skills absent inhouse Cheaper for intermittent IT work Outsourcing Not

Insourcing versus Outsourcing Access skills absent inhouse Cheaper for intermittent IT work Outsourcing Not your employees, ever Disconnect from business needs 5 Identical interests Retains inhouse expertise Thwarts imitation Insourcing Lack of inhouse skills Potentially costlier

IT Sourcing Decision Tree Language barriers Contractual enforcement Currency fluctuations Insourcing IT unit Outsourcing

IT Sourcing Decision Tree Language barriers Contractual enforcement Currency fluctuations Insourcing IT unit Outsourcing Domestic Firm Captive center Offshore Community New Foreign Rural Concurrent sourcing Multisources Cloud sources Tapered outsourcing Open source Crowed source Ecosystems Nike, NPR, US 6 “Follow-the-sun” Benchmarks Everyone's supplier Must share back Razor blade model

Two Challenges in Outsourcing IT Harder to realize business value even if all parties

Two Challenges in Outsourcing IT Harder to realize business value even if all parties are competent 1. Integration problems - the pieces don’t fit – – Must play well with your other IT assets Patchwork of inhouse systems, spanning generations Often uses or sends data to them Actual costs can wipe out obvious savings 2. Receiving the wrong system – – 7 Latent needs create volatile requirements Outsourcing adds extra translator layer between users and vendor Double whammy: Business-IT chasm + cultural barrier Might get what your IT unit asked for but not what you needed

Lowering Integration Costs: 2 x Strategies 1. Concurrent sourcing: Simultaneously insourcing and outsourcing the

Lowering Integration Costs: 2 x Strategies 1. Concurrent sourcing: Simultaneously insourcing and outsourcing the same sort of IT work – – Just a little (~10%) suffices Prevents outsourcing from being irreversible Helps write better contracts and better specifications Fosters healthy competition between inhouse IT and vendors 2. Verify-then-trust approach – Japanese-style screening using dummy projects 8

Avoiding the Wrong System: 2 x Strategies Control through design 1 Gather requirements #1:

Avoiding the Wrong System: 2 x Strategies Control through design 1 Gather requirements #1: Tapered Outsourcing Overcomes language/ cultural barriers ~ architect’s blueprints Design it Immune to misinterpretation Delays 2 Code it Test it American approach Japanese approach Roll it out Demands business-savvy inhouse IT design skills #2: Match Requirements Ambiguity with Contract Choice • Fixed-price contracts: Predicable but inflexible • Time-and-materials contracts: flexible but greater cost variability • Lean towards T&M when project requirements ambiguous 9

What Should Never be Outsourced I Criterion #1: Mission criticality and differentiation potential Jeopardizes

What Should Never be Outsourced I Criterion #1: Mission criticality and differentiation potential Jeopardizes a primary activity Need enforceable SLAs Embedded software Strengthens inhouse skills 1 4 Yes Insource Concurrently source Insource Outsource Mission critical? No 2 3 Competitive differentiator • Thwarts imitation • Surfaces latent needs 10 Operational necessity

What Should Never be Outsourced II Criterion #2: Interaction intensity and labor intensity Ideal

What Should Never be Outsourced II Criterion #2: Interaction intensity and labor intensity Ideal outsourcable project 1 4 High Outsource No Outsource for expertise Tapered outsourcing Labor intensity If no inhouse skills Insource 2 3 Low High Business-IT interaction requirements Can write specs 11

Chain of Responsibility in IT Outsourcing Ensuring it requires rudimentary appreciation of two things…

Chain of Responsibility in IT Outsourcing Ensuring it requires rudimentary appreciation of two things… 1. Formal controls used by IT unit on vendors – Output metrics reward/ penalize vendor for meeting predefined, targets … Need: Vendor outputs to be measurable and specifiable project requirements – Process controls dictate methods a vendor should follow … Works only when your technical expertise in the project domain is superior 2. CMM ratings (1 -5; CMU) ~ e. Bay ratings; trustworthy but imperfect From line functions Line function(s) 12 Meeting business objectives Vendor’s client Your IT unit From IT Unit Meeting technical specifications Vendor firm

~ 100 National Outsourcing Destinations 13

~ 100 National Outsourcing Destinations 13

5 Considerations of Where to Outsource 1. Time zone: Overlapping or follow-the-sun spacing? 2.

5 Considerations of Where to Outsource 1. Time zone: Overlapping or follow-the-sun spacing? 2. Skill sets in region, for that project? – Israel & Russia for embedded – Canada, India, and Ireland for custom apps 3. Country profile: Politically stable? Who’s already there? # vendors? 4. Cultural and language differences? 5. Legal sophistication: IP protection & legal track record? 14

Summary • IT sourcing… – – is a strategic choice takes many, many forms

Summary • IT sourcing… – – is a strategic choice takes many, many forms fails because of integration challenges or getting the wrong system entails tradeoffs, which concurrent and tapered sourcing can mitigate • Some IT projects should never be outsourced – Mission-critical + competitively-differentiating – or needing intense business-IT interaction • Outsourcing lengthens the chain of responsibility – IT unit accountable still to non-IT managers for business results • Don’t let outsourcing be irreversible ~ concurrent sourcing option 15

Figure 7 -7 China India Moscow Russia US EST Canada Mexico Hungary Ireland 17

Figure 7 -7 China India Moscow Russia US EST Canada Mexico Hungary Ireland 17 Brasilia, Brazil