Outsourcing Practices: Lessons Learned

ARTICLES IN OUTSOURCING PRACTICE

ARTICLE 1:

Hidden Cost Can Undermine Savings from Outsourcing

Computerworld, Volume 25, Issue 46, P. 109; Framingham; November 18th, 1991; Duffy, Cathleen A. (ISSN 00104841)

Summary:

Information systems outsourcing often be considered as a cost saving option. Outsourcing saves money by translating capital, space, and human resources costs into flat, predictable operating expenditures. This paper presents the opposite fact. Information systems outsourcing not always decrease cost as expected but might caused cost increase. Such increase caused by hidden cost occurred in transition process in outsourcing. The transition cost often overlooked by client in outsourcing contract development process.

First hidden cost is conversion cost for installation, software transition fees, and training. Employee transition and training cost could be a decreasing in cost saving intended. Termination of equipment leases and maintenance agreements could carry penalties for early termination of the contract. Software license transfer from client to outsourcing vendor could be another source of cost. Software vendor view such transfer as loss of control and will charge very high transfer fees. In some cases, the software license is not transferable and that mean repurchasing of the same software.

Another source of hidden cost is contract management. In order to develop a good contract, management should evaluate all vendors’ proposal and compared to in house information systems capability. Other contract management cost is regarding disaster recovery plan, which is will cost more if client need it. Contract is made based on assumption of business growth. It should be clear what course of action should be taken in case of the assumptions do not happen.

ARTICLE 2

Outsourcing Requires Up-front Work by Users

Computerworld, Volume 31, Issue 51, P. 33-36; Framingham; December 22nd, 1997; Hoffman, Thomas. (ISSN 00104841)

Summary:

This article reports the finding of study conducted by International Data Corp./Technology & Business Integrators Inc. The study conducted by interviewing 50 CEOs and Chief Information Officers at customer companies and account managers for outsourcing vendors using a new report card to measure the success of large outsourcing contracts. The scope of this study is information systems outsourcing contracts value at between US $100 millions and US $ 3 billion from 1991 to 1996.

The study finds several outcomes. First result is the client side believes that they should have done a lot more up-front research before signed any information systems outsourcing contract. However, they would outsource again. Second finding is expected cost savings from outsourcing sometimes unclear. Xerox and Electronic Data Systems Corp. (EDS) outsourcing contract worth US $3 billion result is mixed. The Xerox’s shareholder value are raised by outsourcing itself rather than cost saving.

The third finding is the common measurement should be determined by both client and vendor in order to measure information systems outsourcing contract success. For example is FMC and IBM case. FMC outsourced its’ LAN and desktop to IBM for three years. IBM officials have complained that FMC’s lack of desktop and networking standards make it tough for them to support the company’s environment and FMC doesn’t want to hear about it. FMC has failed to identify the different functional needs of its accounting, human resources, and other and let IBM did the work.

ARTICLE 3

Outsourcers Have Limited Liability

Computerworld, Volume 16, Issue 13, P. 88; Framingham; March 30th, 1992; Leinfuss, Emily. (ISSN 00104841)

Summary:

This paper tries to clarify what role the vendor and client of information systems outsourcing should take. Outsourcing does not mean that all liability of data is fully transferred to the vendor. Vendor has limited liability of client data as identified on the outsourcing contract. They could be held liable in case of blatantly negligent, abuses information, or has negotiated a particular liability in written form.

There are several scenarios that would describe the situation faced by client:

Scenario 1 is when a hacker destroys client’s systems and stops the daily operations. Vendor could replace the data but client will suffer from operational lost.

Scenario 2 is when vendor make a mistake in data processing. Vendor must repair the damage but will not responsible for the financial damage caused.

Scenario 3 is when vendor could not process the data completely on time. Vendor will responsible for the reprocessing but not for the lost.

The best precaution is to get clear understanding between outsourcing vendor and client. Contract is an objectives measure of how well the contract terms are being met. To achieve the best contract, clients are recommended to assemble a group consisting of information systems staff members, management, internal counsel, and outside experts in outsourcing conduct. Client must have reasonable expectations or demands, for example client could not demand that the vendor solve the unforeseeable events or take on problem that the client itself would have to face anyway.

ARTICLE 4

A Two-level Investigation of Information Systems Outsourcing

Association for Computing Machinery. Communications of the ACM, Volume 39, Issue 7, P. 36; New York; July 1996; Nam, Kichan; Rajagopalan, Srinivasan; Rao, H. Raghav; & Chaudury, A. (ISSN 00010782)

Summary:

This paper tries to address two levels of information systems outsourcing decision within an organization. First level is the initial level of outsourcing decision within in the clients’ organization. Second level is regarding the intention to continue the relationships current outsourcing vendors in the future. Three research questions are formed to gain knowledge on both levels:

  1. What are the dimensions of outsourcing decisions?
  2. What are the determinants that affect the dimensions of outsourcing decisions?
  3. What are the determinants at the second level that affect the client firms’ intention to continue the existing outsourcing relationships with the current vendors?

The research proposed four types of IS outsourcing in order to categorize the diverse patterns of outsourcing, which are support, reliance, alignment, and alliance. Support has the lowest extent of substitution and low strategic impact since vendor restricted to non-core IS activities and small contract. Reliance has high extent of substitution and low strategic impact since the vendor restricted to non-major IS activities with cost reduction is the main motivation behind it. Alignment has low extent of substitution and high strategic impact since vendor usually involved mostly in the strategic IS planning, design, and conversion. Alliance has high extent of substitution and high strategic impact since vendor responsible for highly strategic IS activities. Regardless the type of outsourcing, the right decision on outsourcing and its’ continuation will depend on the contract between client and vendor and the main motivation behind it.

ARTICLE 5

Outsourcing: IT. In Practice

Supply Management, Volume 2, Issue 22, P. 32-33; London; October 30th, 1997; Tyler, Geoff. (ISSN 13622021)

Summary:

This article tries to compare IT Outsourcing practices with researches conducted by academic community. Outsourcing defined by Richard Holway as contracts where staff and/or assets have transferred from the user to the IT supplier. IT elements are network cabling, network and computer hardware, network (data traffic) management and maintenance, operational and applications software, training, and users. All IT elements can be outsourced.

The academic perspectives of this article based on research paper by Leslie Wilcox and Mary Lacity and Dr. Robina Chatham and Keith Patching. Wilcox and Lacity found 11 possible causes, such as failing to identify the true cost of in-house operations and clauses which prompt excess fees for any change in function, in the failure of half UK’s outsourcing contracts. Chatham and Patching found that IT managers are not the appropriate person to evaluate outsourcing contract solely because lack of business knowledge, acumen, and in some cases interest. IT managers saw themselves as IT people rather than as business managers within their organization’s industry. The business often does not choose to develop general business skills in its IT people and IT people themselves often does not find it important.

Practice of IT outsourcing have been examined from several businesses, such as Carlton TV, Northern Foods, Coventry City Council, and Hepworth Refractories. Real world practices proof that IT outsourcing contract is crucial to achieve expected result. IT outsourcing contract should be clear enough to ensure responsibility of each part, yet concise to accommodate fast development of IT world.

ANALYSIS

Lacity and Hirschheim (1995) discovered 8 lessons of information systems outsourcing. This paper would like to find other sources that either support or reject those lessons. Summary of the relevant articles can be found in the first part of this paper.

Lesson 3 is regarding the reason to make outsourcing decision. Many reasons can be a motivation of an outsourcing decision but cost saving is the strongest reason (Lacity & Hirschheim, 1995). This is supported by Duffy (1991), in which she warned about cost increase as a result of IS outsourcing decision-making process. This matter only could be resolve by a good and adequate IS outsourcing contract.

Lesson 6 is regarding contract, which is the only mechanism to ensure that expectations are realized (Lacity & Hirschheim, 1995). Duffy (1991) describes possible cost increases as a result of client IS outsourcing decision. Unfortunately, those cost increases often invisible and overlook by client in the IS outsourcing contract development. As a result the expected cost saving could not be achieved or even worst client would suffer from cost increase instead of cost decrease.  Hoffman (1997) proposed a way to prevent IS outsourcing failure. He suggests that the users or client conduct a thorough research regarding its’ outsourcing options. The client would gain better knowledge of its’ own strengths, weaknesses, and the need of IS services. The knowledge obtained would be a better foundation to determine what kind of IS services and/or IS function that would be outsourced, which functional area within organization would need such services, and what expectation vendor should meet. Nam et.al. (1996) proposed a model to help identifying such need. Their research concludes that IS outsourcing contract falls into 4 types: support, reliance, alignment, and alliance. Those types of IS outsourcing will determine contract content between client and vendor. This model would determine two level of IS outsourcing decision. First level is initial level, in which the decision is about to be made. Second level is when the IS outsourcing contract is expire and client decides whether or not to continue the relationship with current vendor. Decision in first level would be determined by how well is an organization know about itself and information regarding vendors’ offer and its’ past performance. Those information and the expected performance achieved by vendor will be written in the IS outsourcing contract. Decision in second level would be determined by contract achievement by vendor. If the client satisfied by vendors’ performance, it would be a great possibility that client will renew the contract instead of searching for new vendor.

However, client should be aware of its’ own expectation in IS outsourcing. Leinfuss (1992) present the limitation of liability of both client and vendor in IS outsourcing. Not, all failures during IS outsourcing contract is vendors’ fault. There are several things that could not be seen in the time contract was made, such as natural disaster, hacker attacks, power failure, equipment failure due to product manufacturing defect, etc. Even in the case of any failure is well covered in the contract, there is a limitation in the vendor’s liability. Vendor responsible to provide IS function and/or services to client. In any case of operational delay due to any failure caused by vendor, it will be only responsible to restore it immediately and not responsible to any lost caused by the delay.

Another suggestion in order to build a good and adequate IS outsourcing contract came from Tyler (1997). Tyler find that to evaluate an IS outsourcing contract is not only IT or IS management responsibility. IT or IS management often lack of business and organization skills to make a decision that would affect whole organization. This limitation caused by IT or IS manager perception that those skills are not necessary in his or her daily work. It is not solely their fault because often the organization itself does not want to develop such skills in there IS or IT functional area. Tyler propose that organization should form a group of inter functional employee in order to evaluate all aspect of IS outsourcing before sign any written contract with vendor.

CONCLUSION

IS outsourcing must be evaluate thoroughly and carefully before any decision is made, otherwise cost saving goal (Lacity & Hirschheim, 1995) will not be achieved. Last but not least contract is important to IS outsourcing, because it is the one and only objectives measurement tool to evaluate IS outsourcing (Lacity & Hirschheim, 1995). Concerning all aspects of clients’ organization and vendor preference would make a good, realistic, and adequate contract.

REFERENCES

Duffy, Cathleen A. 1991, Hidden Cost Can Undermine Savings from Outsourcing, Computerworld, 25(46), Framingham, pp. 109.

Hoffman, Thomas. 1997, Outsourcing Requires Up-front Work by Users, Computerworld, 31(51), Framingham, pp. 33-36.

Lacity, M. & Hirschheim, R. 1995, Beyond The Information Systems Outsourcing Bandwagon: The Insourcing Response, John Wiley, New York, pp. 19-33.

Leinfuss, Emily. 1992, Outsourcers Have Limited Liability, Computerworld, 26(13), Framingham, pp. 88.

Nam, Kichan; Rajagopalan, Srinivasan; Rao, H. Raghav; & Chaudury, A. 1996, A Two-level Investigation of Information Systems Outsourcing, Communication of ACM, 39(7), New York, pp. 36.

Tyler, Geoff. 1997, Outsourcing: IT in Practice, Supply Management, 2 (22), London, pp. 32-33.

4 thoughts on “Outsourcing Practices: Lessons Learned”

  1. thx for the information, its very useful for my paper. what about here in Indonesia? can you give me name of company who outsourced their information systems developments? I read from many articles, but examples are always companies overseas. eg hawlet Packard, HSBC, Boneto milk. thx

    1. most of the banks in Indonesia outsource some of their IT functions. For example their IT, Data Communications, etc. Pertamina and Garuda Indonesia also outsource their ERP.

  2. THanks for the sharing
    About hidden cost, it should have been considered and calculated by the outsourcer, so it is not a surprise, in the cost and benefits analysis prior to appointing the outsource vendor

    Cheers
    DL

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