Chapter 4
Business
Process and
IT
Outsourcing
IS2184: Information Systems Management
Textbook:
Information Technology for Managers
George W. Reynolds
Strayer University
Learning Objectives
• How do managers determine which business
processes are good candidates for outsourcing?
• How can I ensure the success of an outsourcing
project?
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
2
Why Managers Must Understand
Outsourcing
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
3
Need for Managers to Understand
Outsourcing
• Stakes are high, and the potential for setback is
great
• Failure to apply best practices leads to a business
decline
• Managers must be forewarned about potential
problems
• Effective processes must be followed to minimize
risks and ensure success
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
4
What are Outsourcing and Offshore
Outsourcing?
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
5
Outsourcing
• Arrangement in which one company contracts with
another organization to provide services that could
be provided by company employees
• Offshore outsourcing: Work is performed by
people located in another country
• Control of the outsourced business function or
process
– Shared between the firm contracting for services and
the outsourcing service provider
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
6
Outsourcing (continued 1)
• Includes both large and small projects
• Types
– Information technology outsourcing (ITO)
– Business process outsourcing (BPO)
• Global service providers (GSP)
– Evaluate all aspects of an organization’s business to
offer best practices, business contacts, experience,
intellectual property, and global infrastructure
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
7
Outsourcing (continued 2)
• Core business process: Provides valuable
customer benefits
– Hard for competitors to imitate
– Leveraged widely across many products and
markets
– Directly impact the organization’s customers
– Offered by GSPs
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
8
Table 4.1 - Commonly Outsourced
Tasks
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
9
Reasons for Outsourcing
Cut or stabilize costs
Improve the firm’s focus on core operations
Upgrade the firm’s capabilities and services
Accelerate time to market
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
10
To Cut Costs
• Outsourcing service providers have a lower cost
structure
– Due to greater economies of scale, specialization, or
expertise
• Costs of doing business in a developing country
are lower than those in a developed country
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
11
To Improve Focus
• Outsourcing enables an organization to focus on its
most important priorities
– Ineffective to divert the time and energy of key
company resources to do routine work
– Resources’ unique skills and intimate knowledge of
the firm can be used for strategic issues
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
12
To Upgrade Capabilities and Services
• Outsourcing service provider
– Highly efficient, with world-class capabilities
– Has access to new technology, methods, and
expertise
• Many organizations outsource their logistics
operations to third-party providers
– Helps to manage complex global supply chains
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
13
Accelerate Time to Market
• Delay in the introduction of a new product or
service can negatively impact brand image and
cash flow
• Outsourcing can provide the high level expertise
that an organization might not possess for a start-
up
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
14
Issues Associated with Outsourcing
• Lowering of employee morale due to layoffs
• Quality issues rise as outsourcing is associated
with significant risks
• Ending outsourcing agreements prematurely
generates expensive legal fees
– Termination for convenience gives a party the
right to unilaterally terminate the contract at any time
– Material breach of contract occurs due to non-
performance resulting in the agreement being
irreparably broken
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
15
Issues Associated with Outsourcing
(continued)
• Direct communication between a company and its
customers is reduced
– Prevents a company from building strong
relationship with its customers
• Maintaining data security and integrity to safeguard
against data security lapses
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
16
Special Issues Associated with
Offshore Outsourcing
• Language barrier
– Outsourcing partner may not speak the language
known to the company
• Multiple time zones and inability to meet face-to-
face
– Result in misunderstandings and lost productivity
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
17
Special Issues Associated with
Offshore Outsourcing (continued)
• Jurisdiction
• Data privacy
• Diminishing cost advantages
• Turnover
• Intellectual property rights
• Important technology issues
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
18
IT Outsourcing
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
19
Public Cloud Computing
• Service provider organization owns and manages
the infrastructure
– Cloud user organizations access slices of shared
hardware resources via the Internet
– Faster, cheaper, and more agile approach to
building and managing one’s own IT infrastructure
• Problems
– Complex pricing arrangements and hidden costs
– Performance issues that cause wide variations over
time
– Poor user support
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
20
Figure 4.1 - Cloud Computing
Environment
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
21
Virtualization and Autonomic
Computing
• Virtualization: Separates a physical computing
device into one or more virtual devices
– Reduces capital investments and operating
expenses
• Autonomic computing
– Ability of IT systems to manage themselves and
adapt to changes in the computing environment,
business policies, and operating objectives
– Creates complex systems that run on their own
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
22
Private and Hybrid Cloud Computing
• Private cloud environment: Single tenant cloud
– Types
• On-premise private cloud
• Virtual private cloud
• Hybrid cloud: Includes both private and public
clouds integrated through networking
– Used by organizations to run applications with less
sensitive security requirements
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
23
Planning an Effective Outsourcing
Process
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
24
Establishing a Smart Outsourcing
Strategy
• Smart sourcing: Involves analyzing the work and
determining the best way to do it in the future
– Reduces the time required to market for new
products
– Frees up resources to enable greater innovation
– Requires an organization to work in a true
partnership with the outsourcing provider
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
25
Evaluating and Selecting Appropriate
Activities and Projects for Outsourcing
• Organization must carefully consider which process
and projects it should assign for outsourcing
• Risk
– Dealing with increased management complexity
• Organization should not outsource a critical or core
business process
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
26
Evaluating and Selecting Appropriate Activities
and Projects for Outsourcing (continued)
• Companies start with a short-term, low-risk
outsourcing pilot effort
• Experience of six months or more is required to
make a fair assessment of the provider
• Company may expand the scope of its outsourcing
efforts after the initial experience
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
27
Evaluating and Selecting Appropriate
Service Providers
• Organization must choose a firm with which it can
build a strong strategic partnership
• Due diligence must be used in researching the
potential partner’s capabilities and reputation
• Firms should review certain audit documents of
potential service providers
– Statement on Standards for Attestation
Engagements 16 (SSAE 16): Defines how service
companies must report on compliance controls
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
28
Evaluating and Selecting Appropriate
Service Providers (continued)
• International Standard on Assurance
Engagements (ISAE) No. 3402, Assurance
Reports on Controls at a Service Organization
– Provides an international assurance standard for
public accountants
• Failure to share the results of an SSAE 16 or ISAE
3402 audit is a warning signal in dealing with an
outsourcing vendor
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
29
Table 4.3 - Factors for Evaluating
Outsourcing Partners
Information Technology for Managers
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
30
Evaluating Service Provider Locations
• Outsourcing service providers can be affected by
economic turmoil, natural disasters, and political
disturbances
– Potential for above risks is greater in certain places
than others
• Company should investigate the capability of
outsourcing firm to avoid business interruption
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
31
Evaluating Service Provider Locations
(continued)
• Other factors
– Availability and reliability of high-speed
communications networks and power grids
– Availability of sufficiently trained workers
– Effectiveness of the outsourcing firm’s national legal
system in protecting intellectual property
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
32
Benchmarking Existing Service Levels
• Organization should benchmark its present service
levels before signing outsourcing contract
– Used to establish a reasonable baseline for
negotiating target results and costs
• Agreed-to targets are used to define the service-
level agreement (SLA) of the contract
– Service-level agreement: Defines both the services
and the performance and availability levels of the
service provided
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
33
Benchmarking Existing Service Levels
(continued)
• Choose the right measures to evaluate the
performance of the process
• Time and cost required to perform a benchmark
– Depends on the size, scope, and complexity of the
process being measured and the number of metrics
used
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
34
Defining the Service-Level Agreement
• Good SLA performs the following functions
– Clearly identifies each service included in the
outsourcing agreement
– Specifies conditions under which services will be
available and outlines performance requirements in
the event of a disaster
– Specifies measurable performance levels for each
service
– Defines an escalation process in the event the
service provider does not meet agreed-upon service
levels
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
35
Defining the Service-Level Agreement
(continued)
– Defines both the customer’s and the service
provider’s responsibility
– Defines security standards and methods to be
employed
– Requires the service provider to notify the customer
upon discovery of any unauthorized disclosure of
data
– Defines the customer’s right to audit the provider’s
compliance and to conduct on-site inspections
– Outlines a process for modifying the SLA in
response to changing business conditions
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
36
Developing an Outsourcing Contract
• Job of experienced procurement and legal
professionals
• Ownership of assets and facilities
– Firm can transfer ownership of the assets along with
operational responsibility to the outsourcing service
provider
– Firm can transfer the assets to a third party under
some sort of leaseback arrangement
– Firm can retain ownership of the assets while the
provider takes on the operational responsibility
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
37
Establishing an Outsourcing
Governance Process
• Involves formal and informal processes and rules
– Helps to manage the relationship between the two
organizations
• Defines procedures to ensure the outsourcing
initiative succeeds
• Requires dedicated, trained vendor relationship
professionals
• SLA manager: Serves as a primary contact for any
issues related to the delivery of services
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
38
Measuring and Evaluating Results
• Ongoing monitoring helps an organization in
realizing the benefits of outsourcing and reduce the
degree of operational risk
• If the service provider’s performance and costs do
not meet the SLA standards:
– Financial penalties can be assessed and the
contract can be terminated
• Ongoing tracking and measurement of important
metrics enables the organization to use the data as
feedback
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
39
Summary
• Outsourcing
– Arrangement in which one company contracts with
another organization to provide services
– High-risk activity that raises the potential for quality
problems, legal liabilities, and data and security
breaches
• Offshore outsourcing brings additional issues
– Jurisdiction questions, data privacy, diminishing cost
advantages, and important technology issues
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
40
Summary (continued 1)
• Nine-step process to successful outsourcing
– Establishing a smart outsourcing strategy
– Evaluating and selecting appropriate activities and
projects for outsourcing
– Evaluating and selecting appropriate service
providers
– Evaluating service provider locations
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
41
Summary (continued 2)
– Benchmarking existing service levels
– Defining the service-level agreement
– Developing the outsourcing contract
– Establishing an outsourcing governance process
– Evaluating and measuring results
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
42