Managing IT Strategic Partnerships
In our second class meeting we had an introduction to outsourcing. Outsourcing can start with dissatisfaction with the internal IS organization (see Meyer), but it relies in non-strategic tasks (which do not provide competitive advantages) to proliferate it was a 100 billion business in 1999 (see Ohlson). We will rely heavily in the textbook materials in this class (this is one of the best chapters in the book). Outsourcing alliances are difficult for they are long-term contracts (generally ten years), in an industry with a very high technology change rate, and because there are very few qualified players (EDS, CSC, IBM, ADP to engage in the large outsourcing partnerships of the 90s and 00s.
The main attractions of outsourcing are the sale of IT assets to the outsourcer and the transformation of IT fixed costs to lower outsourcing variable costs. Read textbook pages 370-378 for a more detailed discussion of benefits. The next question is when to outsource IT. In general you may outsource IT when the computer services can be clearly defined and are not part of the core business, providing strategic advantage, of an organization. Organizations in the support quadrant are generally clear cases for outsourcing. Organizations in the factory quadrant are also good candidates, but size and efficiency may favor in-house IT. Organizations in the turnaround and strategic quadrants should not consider outsourcing unless significant cash needs exist or the in-house IT unit is performing poorly. Read textbook pages 378-382 for more details.
Outsourcing IT does not mean that the organization will no longer manage the IT resources, rather it creates a very complex process of managing the IT outsourcing partnership. The CIO function is even more demanding than before, for he/she will have the responsibility to plan, control and supervise the delivery of the IT services while no longer having direct authority over the IT resources. Measuring performance involves not only measuring success, but also who (client or outsourcer) is responsible for failure (finger-pointing is common). Read textbook pages 382-390 for more in managing the outsourcing partnership.
Case instructions
Two cases will be discussed this week. We will use a simple framework to analyze each case: (a) what is the problem, (b) what are the alternatives, and (c) what are the recommendations, like we have done before. We will discuss the Xerox: Outsourcing Global IT resources case (4-1) on the Web and the General Dynamics and CSC case (4-2) in class. You will only need to write the report for case 4-2.
Additional information: in November 1991 GD and CSC signed an agreement in which CSC would pay $190 million for all DSD assets plus a $10 million transition fee that GD would then pay back to CSC over five months. DSD personnel was to be transferred to CSC (2,600) to provide regular computer services, or to GD business units (800) to continue developing product-embedded software. GD would pay $360 million a year to CSC for computer services, under a ten-year contract.
1. What is the problem?
Why is it a problem? Is there a decision involved? If it is a problem, what are the pros and cons that makes it a problem?
2. What are the alternatives?
What can be done? There is always the do nothing alternative. If everything went well (rosy scenario) what we would like to do? If everything went wrong (doomsday scenario) what should we do? What can we do in between the rosy and the doomsday scenarios? What are pros and cons of each alternative? Be sure to list not only alternatives, but pros and cons.
3. What is you recommendation?
What criteria should we use to select the most suitable alternative in the case? Why you are recommending one alternative versus the others? How this alternative satisfies your criteria? How to implement the alternative you selected?