R. Ching, Ph.D. • MIS Area • California State University, Sacramento 1

Week 10Week 10Monday, April 3Monday, April 3

• Strategic OutsourcingStrategic Outsourcing

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 2

Drivers of OutsourcingDrivers of Outsourcing

• General management’s concern about costs and General management’s concern about costs and qualityquality– Tighter overhead cost control of fringe benefits Tighter overhead cost control of fringe benefits

(leaner overhead structures of outsourcer)(leaner overhead structures of outsourcer)– More aggressive use of low-cost labor pools by More aggressive use of low-cost labor pools by

using geography creativelyusing geography creatively– Tough world-class standards applied to the Tough world-class standards applied to the

company’s staff (appointed at time of contract)company’s staff (appointed at time of contract)– More effective bulk purchasing and leasing More effective bulk purchasing and leasing

arrangement for all aspect of the arrangement for all aspect of the hardware/software configuration through hardware/software configuration through discounts and better use of capacitydiscounts and better use of capacity

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 3

Drivers of OutsourcingDrivers of Outsourcing

• General management’s concern about costs and General management’s concern about costs and quality (cont.)quality (cont.)– Better management of excess hardware capacityBetter management of excess hardware capacity– Better control over software licenses through both Better control over software licenses through both

negotiated and realistic examinationnegotiated and realistic examination– More aggressive management of service and More aggressive management of service and

response time to meet corporate standardsresponse time to meet corporate standards– HustleHustle– Ability to run with a leaner management structureAbility to run with a leaner management structure– Ability to access higher levels of IT staff skillsAbility to access higher levels of IT staff skills– Creative and more realistic structuring of leasesCreative and more realistic structuring of leases

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 4

Drivers of OutsourcingDrivers of Outsourcing

• Breakdown in IT performanceBreakdown in IT performance– Need to retool lacking technologyNeed to retool lacking technology

• Intense supplier pressuresIntense supplier pressures– Sales of surplus supplier capacitySales of surplus supplier capacity

• Simplified general management agendaSimplified general management agenda– Outsource non-core competence operationsOutsource non-core competence operations

• Financial factorsFinancial factors– Reduce sporadic capital investments in ITReduce sporadic capital investments in IT– Downsizing IT operating costsDownsizing IT operating costs– Greater organizational awareness of IT’s costsGreater organizational awareness of IT’s costs– More appealing for takeoversMore appealing for takeovers

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 5

• Corporate cultureCorporate culture– Resistance to change within the organizationResistance to change within the organization– Labor unionsLabor unions

• Eliminating an internal irritantEliminating an internal irritant– Conflicts between users and IT staffConflicts between users and IT staff

• Other factorsOther factors– Quick access to current technology and skillsQuick access to current technology and skills– Need to quickly response to changes in the Need to quickly response to changes in the

marketmarket

Drivers of OutsourcingDrivers of Outsourcing

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 6

Outsourcing BenefitsOutsourcing Benefits

BenefitsBenefits

TimeTime

VendorVendor

Customer

Customer

Large initial Large initial investmentsinvestments

Initial problem Initial problem “solved”“solved”

Changes in Changes in business business

environmentenvironment

Low cost to Low cost to maintain the maintain the

initial initial investmentsinvestments

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 7

Sunset PeriodSunset Period

System Performance System Performance (Outsourcer)(Outsourcer)

Organizational Needs Organizational Needs (Outsourcee)(Outsourcee)

Performance Performance RequirementsRequirements

TimeTime

Widening gapWidening gapand benefits and benefits

decreasedecrease

UpgradesUpgrades

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 8

Focus of Outsourcing through TimeFocus of Outsourcing through Time

InternalInternal

ExternalExternal

Automating:Automating: Computerizing physical Computerizing physical and clerical processes, and clerical processes, Data processing era Data processing era (1960-1980)(1960-1980)

Informating:Informating: Leveraging knowledge Leveraging knowledge workers with workers with computers, Networking computers, Networking era (1990-present)era (1990-present)

Embedding:Embedding: Integrating Integrating computers into computers into products and services, products and services, Micro era (1980-95) Micro era (1980-95)

Networking:Networking: Information Information superhighway, superhighway, Network era (1990-Network era (1990-present)present)

Physical aspectsPhysical aspects InformationInformation

Location:Location:

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 9

Framework for OutsourcingFramework for Outsourcing

1.1. Position on the strategic gridPosition on the strategic grid

HighHigh

LowLow

HighHighLowLow

Impact of Impact of Existing IT Existing IT

applicationsapplications

Impact of Future IT Impact of Future IT applicationsapplications

FactoryFactoryOperational ITOperational IT

SupportSupportBasic elementsBasic elements

TurnaroundTurnaroundGradual adoptionGradual adoption

StrategicStrategicStrategic IT plan, Strategic IT plan,

initiativesinitiatives

YesYes

YesYes

DependsDepends

DependsDepends

Product differentiationProduct differentiationProduct differentiationProduct differentiation

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 10

Strategic Grid: OutsourcingStrategic Grid: Outsourcing

HighHigh

LowLowHighHighLowLow

Impact of Impact of Existing IT Existing IT

applicationsapplications

Impact of Future IT Impact of Future IT applicationsapplications

FactoryFactoryOperational ITOperational IT

SupportSupportBasic elementsBasic elements

TurnaroundTurnaroundGradual adoptionGradual adoption

StrategicStrategicStrategic IT plan, initiativesStrategic IT plan, initiatives

• Economies of scaleEconomies of scale• Higher-quality service and Higher-quality service and

backupbackup• Management focus Management focus

facilitatedfacilitated

• Correct internal problemCorrect internal problem• Tap cash sourceTap cash source• Cost flexibilityCost flexibility• DivestitureDivestiture

• Access to IT professionalsAccess to IT professionals• Focus on core Focus on core

competenciescompetencies• Access to current ITAccess to current IT• Reduce risk in IT Reduce risk in IT

investmentsinvestments

• Internal IT shortfallsInternal IT shortfalls• Internal IT development Internal IT development

skill shortfallsskill shortfalls

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 11

Framework for OutsourcingFramework for Outsourcing

1.1. Position on strategic grid (Position on strategic grid (cont.cont.))– Outsource operational activitiesOutsource operational activities

• More operationally dependent More operationally dependent organizationsorganizations

– Need for greater analysis when large IT Need for greater analysis when large IT budgets involvedbudgets involved

2.2. Development portfolioDevelopment portfolio– Maintenance vs. development projectsMaintenance vs. development projects

• High structured vs. low structured High structured vs. low structured development workdevelopment work

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 12

Framework for OutsourcingFramework for Outsourcing

3.3. Operational learningOperational learning– Organizational assimilation of technologyOrganizational assimilation of technology

4.4. Organization’s IT architecture and infrastructureOrganization’s IT architecture and infrastructure– Currency of architectureCurrency of architecture

5.5. Current technology in the organizationCurrent technology in the organization– Segregated operations more easily Segregated operations more easily

outsourcedoutsourced

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 13

Structuring the Alliance between Structuring the Alliance between Outsourcer and “Outsourcee” Outsourcer and “Outsourcee” (Customer)(Customer)

• FactorsFactors– Contract flexibilityContract flexibility– Standards and controlStandards and control– Areas to outsourceAreas to outsource– Cost savingsCost savings– Supplier stability and qualitySupplier stability and quality– Management fitManagement fit– Conversion problemsConversion problems

AllianceAlliance

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 14

Structuring the Alliance between Structuring the Alliance between Outsourcer and “Outsourcee” Outsourcer and “Outsourcee” (Customer)(Customer)

• Contract flexibilityContract flexibility– Accommodating changes in the environmentAccommodating changes in the environment

• Information needsInformation needs• Competitive needsCompetitive needs• Advances in ITAdvances in IT

• Standards and controlStandards and control– Risk (i.e., lost of control, disruptions) in Risk (i.e., lost of control, disruptions) in

operationsoperations– Risk in introducing innovations to the Risk in introducing innovations to the

organizationorganization– Risk in revealing internal Risk in revealing internal secretssecrets

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 15

Structuring the Alliance between Structuring the Alliance between Outsourcer and “Outsourcee” Outsourcer and “Outsourcee” (Customer)(Customer)

• Areas to outsourceAreas to outsource– DetermineDetermine

• Are operations segregated or tightly Are operations segregated or tightly embedded?embedded?

• Can specialized competencies be acquired in Can specialized competencies be acquired in the long run?the long run?

• Are operations core to the organization?Are operations core to the organization?• Cost savingsCost savings

– ObjectiveObjective evaluation of costs and savings evaluation of costs and savings

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 16

Structuring the Alliance between Structuring the Alliance between Outsourcer and “Outsourcee” Outsourcer and “Outsourcee” (Customer)(Customer)

• Supplier Stability and QualitySupplier Stability and Quality– Financial stabilityFinancial stability

• Difficult to insourceDifficult to insource• Difficult to change outsourcersDifficult to change outsourcers

– Incompatibility between the organization and Incompatibility between the organization and outsourceroutsourcer• TechnologyTechnology• Organization cultureOrganization culture• Between technology and organization’s Between technology and organization’s

strategystrategy

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 17

Structuring the Alliance between Structuring the Alliance between Outsourcer and “Outsourcee” Outsourcer and “Outsourcee” (Customer)(Customer)

• Management fitManagement fit– Compatibility between management styles and Compatibility between management styles and

culturescultures• Conversion problemsConversion problems

– Mergers and acquisitionsMergers and acquisitions• IncompatibilitiesIncompatibilities

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 18

Managing the AllianceManaging the Alliance

• Critical areas:Critical areas:– CIO FunctionCIO Function

• Management (balance between organization Management (balance between organization and outsourcer)and outsourcer)

• Planning (vision)Planning (vision)• Awareness of emerging technologiesAwareness of emerging technologies• Continuous adaptation (evolution)Continuous adaptation (evolution)

– Performance measurementsPerformance measurements• Essential standards, measurements and Essential standards, measurements and

interpretationsinterpretations

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 19

Managing the AllianceManaging the Alliance

– Mix and coordination of TasksMix and coordination of Tasks• Development versus maintenance Development versus maintenance

(portfolios)(portfolios)– Associated risks inherent to eachAssociated risks inherent to each

– Customer-outsourcer interfaceCustomer-outsourcer interface• Delegation of authority, not responsibilityDelegation of authority, not responsibility

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 20

Information SecurityInformation SecurityProtecting the Information ResourceProtecting the Information Resource

• Five security pillarsFive security pillars– Authentication – verifying the authenticity of the Authentication – verifying the authenticity of the

useruser• Something you know, have or are (i.e., physical Something you know, have or are (i.e., physical

attribute)attribute)– Identification – identifying users to grant them Identification – identifying users to grant them

appropriate accessappropriate access– Privacy – protecting information from Privacy – protecting information from

being seenbeing seen– Integrity – keeping information in its Integrity – keeping information in its

original formoriginal form– Nonrepudiation – preventing parties from denying Nonrepudiation – preventing parties from denying

actions they have takenactions they have taken

EncryptionEncryption

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 21

Management and Technical Management and Technical CountermeasuresCountermeasures

Management countermeasuresManagement countermeasures• Evaluate return on their security expendituresEvaluate return on their security expenditures• Conduct security auditsConduct security audits• Do not outsource cybersecurityDo not outsource cybersecurity• Security awareness trainingSecurity awareness training

Technical countermeasuresTechnical countermeasures• FirewallsFirewalls• EncryptionEncryption• Virtual private networks (VPN)Virtual private networks (VPN)

ExpenseExpenseLikelihoodLikelihood

Balancing between expense Balancing between expense and likelihood of a threatand likelihood of a threat

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 22

Planning for Business ContinuityPlanning for Business Continuity

• Recognize threatsRecognize threats• Contingency plans if a threat is realizedContingency plans if a threat is realized

– Alternate workspaces for people to resume Alternate workspaces for people to resume workwork

– Backup IT sitesBackup IT sites– Up-to-date evacuation plansUp-to-date evacuation plans– Backed up computers and serversBacked up computers and servers– Helping people cope with disasterHelping people cope with disaster

R. Ching, Ph.D. • MIS Area • California State University, Sacramento 23

Internal and External ResourcesInternal and External Resources

InternalInternal• Multiple data centersMultiple data centers• Distributed processingDistributed processing• Backup communications facilitiesBackup communications facilities• LANsLANs

ExternalExternal• Integrated disaster recovery servicesIntegrated disaster recovery services• Specialized disaster recovery servicesSpecialized disaster recovery services• Online and off-line data storageOnline and off-line data storage