Learning Objectives

• Need for Alternatives to building Information

Systems:
– Outsourcing
– Purchase of applications / External Acquisition
– IS subsidiary
– ASP
– Renting
– Licensing
– User-developed applications
• Evaluation of Alternatives
• Deciding the best alternative
 What Situations Outsourcing?

• Limited IS staff
• IS Staff has limited skill set
• IS staff is overworked
• Problems with performance of IS staff
• What are the Alternatives to In-House
Development of Information Systems?
 Develop systems in-house or to
outsource?
• What are our core business competencies? Of the
business we conduct, what specialties should we
continue to practice ourselves?
• What do we do outside our specialties that could
be done better for us by organizations that
specialize in that area?
• Which of our activities could be improved if we
created an alliance with IS organizations?
• Which of our activities should we work to
improve internally?
 Why outsourcing?
• Cost and quality concerns
• Problems in IS performance
• Supplier pressures
• Simplifying, downsizing, and
reengineering- focusing on core
competency
• Financial factors- Capital Expenses
• Organizational culture – political or
organizational problems are often difficult
for an IS group to overcome.
• Internal irritants- tension between end users
and the IS staff
 Advantages of Outsourcing
• Improved financial planning
• Reduced license and maintenance fees
• Increased attention to core business
• Shorter implementation cycles
• Reduction of personnel and fixed costs
• Increased access to highly qualified know-how-
experience gained trough work with many clients
in different environments
• Availability of ongoing consulting as part of
standard support
Potential Outsourcing Benefits
Financial

• Avoidance of heavy capital investment, thereby

releasing funds for other users.
• Improved cash flow and cost accountability
• Cost benefits from economies of scale and from
sharing computer housing, hardware, software,
and personnel.
• Less need for expensive office space
Technical

• Greater freedom to choose software due to a

wider range of hardware
• Ability to achieve technological
improvements more easily
• Greater access to technical skills
Management

• Concentration on developing and running core

business activity
• Delegation of IT development (design, production,
and acquisition) and operational responsibility to
supplier
• Elimination of need to recruit and retain
competent IT staff
Human Resources
• Opportunity to draw on specialist skills, available
from a pool of expertise, when needed
• Enriched career development and opportunities for
staff.
Quality
• Clearly defined service levels.
• Improved performance accountability.
• Quality accreditation.
Flexibility
• Quick response to business demands.
• Ability to handle IT speaks and valleys
more effectively.
 Risks of Outsourcing
• Loss of control
• Loss of experienced employees
• Risks of losing a competitive advantage-
• High price
• Shirking – when a vendor deliberately
under performs while claiming full payment
• Poaching – when a vendor develops a
strategic application for a client and then
uses it for other clients (e.g., vendor
redevelops similar systems for other clients
at much lower cost, or vendor enters into
client’s business, competing against it).
• Opportunistic re-pricing (“holdup”) – when a
client enters into a long-term contract with a
vendor and the vendor changes financial terms at
some point or overcharges for unanticipated
enhancements and contract extensions.
• Failure to consider all the costs – hidden costs
such as 1- vendor search and contracting, 2-
transitioning from in-house IT to a vendor, 3- cost
of managing the effort, and 4-transition back to in-
house IT after outsourcing.