Chapter 10 Study Notes

Managing and Using Information Systems: A Strategic Approach – Chapter 10: Information Systems Sourcing

Learning Objectives

  • Describe the Sourcing Decision Cycle Framework.
      - Overview of the process and importance in IS sourcing decisions.

  • Explain the differences between:
      - Insourcing and outsourcing
      - Inshoring and offshoring
      - Nearshoring and farshoring

  • Describe how offshoring must be managed.

  • Define the different ways of outsourcing including Application Service Providers (ASPs).

  • Understand the difference between full outsourcing and selective outsourcing.

  • Describe the risks associated with outsourcing and strategies utilized to mitigate these risks.

Real World Example: Kellwood

  • Background of Kellwood Company:
      - American apparel maker that ended IS outsourcing with EDS after 13 years.
      - The original outsourcing contract involved integrating 12 different acquired units into one system.
      - In 2008, purchased by Sun Capital Partners and turned private.

  • Challenges faced by the COO:
      - Large debt and potential bankruptcy.
      - Desire to bring IS operations in-house to:
        - Reduce costs.
        - Enhance IS standardization post-acquisitions.

  • CIO concerns:
      - Fear of disruption in service levels and project deadlines during transition from outsourcing to insourcing.

  • Consultation hired:
      - Third-party consultant recommended backsourcing to save costs and adapt to market changes.

  • Results:
      - Implementation of in-house operations yielded a 17% savings in annual IS expenses in the first year.
      - Importance of maximizing outsourcing benefits without risking service quality or competitive advantage.

Sourcing Decision Cycle Framework

  • Definition:
      - Refers to contracting or delegating IS or IT-related tasks to internal or external entities.

  • Key Steps in the Cycle:
      1. Make or buy decision:
         - If “buy,” proceed to outsourcing.
      2. Determine “how” and “where” to outsource:
         - Options include domestic or offshore outsourcing, cloud services.
      3. Periodic evaluations of outsourcing arrangements to ensure satisfaction.

Figure 10.1: Sourcing Decision Cycle Framework

  • The cycle can originate at any point, emphasizing the ongoing assessment of outsourcing effectiveness.

Make or Buy Questions

  • Key considerations:
      - Core competency involvement:
        - Suggests insourcing for services critical to the company.
      - Confidential/Sensitive IS services:
        - Strongly indicates insourcing.
      - Availability of time and expertise:
        - In-house capabilities vs. outsourcing reliability.

  • Risks Associated with Outsourcing:
      - Loss of control over strategic initiatives, potential leaks of competitive secrets, and excessive costs if poorly managed.

Figure 10.2: Make or Buy? Questions and Risks

  • Comparison of scenarios, highlighting potential risks based on decisions made.

Sourcing Options

  • Insourcing:
      - IS services provided internally.

  • Outsourcing Forms:
      - Domestic and offshore options available for service provision.

Insourcing

  • Definition:
      - Firm manages IS services within its own organization or local cloud. This is sometimes termed the "make" decision.

  • Reasons for Insourcing:
      - Maintaining control over core competencies and minimizing operational complexities.

Insourcing Drivers and Challenges

  • Drivers:
      - Core competencies, confidentiality, and available skilled staff.

  • Challenges:
      - Support from management and temptation of outsourcing alternatives to mitigate resource strain.

Captive Centers

  • Definition:
      - Overseas subsidiaries serving the parent company.

  • Strategic Forms:
      - Hybrid, Shared, Divested, and Terminated captives, each with unique goals and structures.

Backsourcing

  • Definition:
      - Recovery of previously outsourced IS components back in-house.

  • Statistics:
      - 70% of outsourcing clients experienced negative outcomes; 25% opted to backsource.

IT Outsourcing

  • Definition:
      - Purchasing services that could be managed internally, involving both equipment and personnel.

  • Common Agreement Length:
      - Typically 10 years.

Economics of Outsourcing

  • Benefits:
      - Substantial cash inflow from asset sales and downsized workforce.

  • Costs:
      - Service fees and fixed costs over extended terms.

Drivers and Disadvantages of Outsourcing

  • Drivers:
      - Cost savings, quality of service, enhanced strategic focus.

  • Disadvantages:
      - Loss of control, high switching costs, reliance on the outsourcer, and security issues.

Decisions about How to Outsource Successfully

  • Considerations:
      - Decision areas include selection of providers, contracting strategies (flexible terms, shorter contracts, SLAs), and defining the scope (full vs. partial outsourcing).

Deciding Where - Onshore, Offshore, or in the Cloud?

  • Cloud Computing:
      - Definition: Dynamic provisioning of IT services via the internet, enabling clients to utilize shared resources effectively.

  • Benefits:
      - Cost efficiency, 24/7 access, and ease of use.

Cloud Computing Options

  • On-premise, private, community, public, and hybrid clouds providing various levels of service and control.

Public Clouds - Versions

  • IaaS, PaaS, SaaS (ASP):
      - Essential service types each offering different levels of control and risk management across various IT needs.

Crowdsourcing

  • Definition:
      - Outsourcing traditionally employee-conducted tasks to a large, undefined group to improve productivity and reduce costs.

  • Risks:
      - Loss of control over the quality of work performed.

Onshoring

  • Definition:
      - Sourcing work from providers within the same country as the client organization.

Offshoring

  • Definition:
      - Utilizing contractor services from a distant country, with significant potential cost savings.

Selecting an Offshoring Destination

  • Selection Criteria Include:
      - Political stability, English proficiency, security, and labor force quality.

  • Selective countries for offshoring:
      - Countries like India with highly regarded software processes.

Offshore Destination - Development Tiers

  • Tiers of Nations:
      - Tier 1: Mature markets (e.g., USA, UK, India).
      - Tier 2: Emerging markets (e.g., Brazil, Costa Rica).
      - Tier 3: Infant markets (e.g., Cuba, Vietnam).

Nearshoring

  • Definition:
      - Sourcing service work to geographically or temporally proximate lower-wage countries to reduce costs while maintaining some control.

Farshoring

  • Definition:
      - Sourcing service work to distant lower-wage countries, typically for cost savings without geographical proximity.

Partnering Arrangements

  • Definition:
      - Strategic networks established between organizations to offer complementary services.

  • Example:
      - Mitsui Keiretsu as a collaborative network among firms.

Chapter 10 - Key Terms

  • Application service provider (ASP) - provider of software application functionality accessed via web browser.

  • Backsourcing - reclaiming previously outsourced IS functions.

  • Captive center - overseas subsidiary designed to serve the parent company.

  • Cloud computing - offering IT services online.

  • Farshoring - outsourcing to distant countries.

  • Full outsourcing - outsourcing all IS functions.

  • Insourcing - managing IS services internally.

  • IS Sourcing - contracting IS functions to an internal/external entity.

  • Onshoring - domestic outsourcing.

  • Nearshoring - outsourcing to nearby countries.

  • Offshoring - sourcing services to distant countries.

  • Outsourcing - procuring services externally that could be managed internally.

  • Selective outsourcing - retaining certain IT capabilities in-house while outsourcing others.

  • Shore - relates to outsourcing practices globally.