Modern Management. IT Outsourcing.

Transcription

1 Modern Management IT Outsourcing

2 Evolution of Outsourcing Vendors Strategic Sourcing STRATEGIC PARTNERSHIP Programmatic Outsourcing BUSINESS PARTNER Project-based Outsourcing VENDOR Project-based Outtasking SUPPLIER 1980s 1990s early 2000s 2010s From Infosys: Building Tomorrow s Enterprise

3 The offshore outsourcing trend and practice is due for a transformation. Client concerns about changing business objectives, the proliferation of as-a-service offerings, and demand for deep industry specialization suggest that only the most collaborative, innovative, and trusted vendors will succeed. Forrester From Infosys: Building Tomorrow s Enterprise

4 Outsourcing Trends - Gartner The number of external IT service providers that buyers use, on average, is already too high. Organizations continue to show a wider interest in outsourcing. Organizations are looking for better ways to manage strategic providers. Clients are less tolerant of finger pointing in a cost-focused market. Alliance offerings from outsourcers are gaining traction. From Infosys: Building Tomorrow s Enterprise

5 Outline What is outsourcing? Why do companies outsource? Who is outsourcing? What jobs are being outsourced and where? Outsourcing processes. Outsourcing consultants. Benefits/difficulties of outsourcing. Outsourcing and the Western World. Outsourcing paradox Is it a good thing?

6 A Working Definition of Outsourcing COMPANY Services Organization Level Agreement Service Level Agreement OUTSOURCER Outsourcing denotes the continuous procurement of services from a third party, making use of highly integrated processes, organization models and information systems.

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11 1. What is IT Outsourcing? Information Technology The development, installation and implementation of computer systems and applications. Outsourcing Contracting with outside professional services to meet specific business needs. IT Outsourcing-it should be noted that outsourcing has existed for a long time, and is a commonly accepted business practice. From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

12 Outsourcing What is Outsourcing? Outsourcing is a strategic decision to give a task or activity to an independent contractor who determines how best to do the task or activity. The firm and the independent contractor become partners and may establish a long-term relationship. Examples of outsourced activities: IT, HR, Legal services, Manufacturing, R & D. Note: Outsourcing transactions are done in the market. MBAO 6030 Human Resource Management

13 2. Why do Organisations (Company) Outsource Organisations typically pursue external sourcing arrangements for two reasons. -From an economic perspective, they use outsourcing to control or lower their ICT costs. -From a strategic perspective, they use it to allow them to focus their energies and attention on core business processes and objectives, gain improved access to better skills or expertise, and provide services not available internally.

14 Why Companies Outsource? 29% - Cost or internal headcount needs to be reduced 22% - Internal capacity is constrained by increasing market demand 20 % - Internal manufacturing or service performance is insufficient 19% - Strategic process 6% - Regulatory, legal or environment 4% - Internal capacity underutilized

15 Why Companies Outsource Companies outsource to: Seek world class skills abroad while cutting costs. IT is relieved of time consuming, routine tasks. Cost predictability, savings and the ability of a company to focus on core competencies. From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

16 From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia Reasons for Outsourcing IT Outsourcing Reduce Cost Free up resources Foreign Capability Revenue Potential Shorter cycle time Process efficencies Company philosophy Lack of IT skills

17 Why do outsourcing? - Survey Results Key drivers for Outsourcing (Survey Results) Access best in class business processes Harness leading technologies Increase efficiencies Enhance capabilities Expand service Enrich customer relations Improve supplier relations Free up management time Decrease operating costs From Accenture s Overview of Outsourcing

18 Value Contribution of Outsourcing From Accenture s Overview of Outsourcing

19 At the same time, many organisations have clear reasons for not outsourcing ICT services. These can include: The market price for outsourcing may be higher than internal costs some organisations find they can fulfill their ICT needs more affordably by using their own resources. The risk associated with relinquishing control is too great for some organisations, ICT is essential for business continuity, or is an integral part of what they do, and they want to keep it close to ensure it is always capable of supporting their needs. The risk of losing organisational knowledge is too high this is of particular concern for organisations that have complex, customised technology.

20 3. Who is outsourcing? There is a variety of companies that outsource, but there seems to be trends in IT Outsourcing Banks Medical offices Mortgage Companies Software development From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

21 4. What Jobs are being Outsourced? Some typically outsourced jobs have the following traits: - Technical with measurable standards - Relatively easy for knowledge transfer - Can be done without direct physical contact with customers or colleagues. Specific IT jobs that are outsourced include: Research process, IT operations, Medicare, legal support services Art, animation, editorial and DTP work Software development Environment services From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

22 Categories of Outsourced IT Activities Software Development Application Support & Maintenance Infrastructure Management Services

23 5. Outsourcing Processes Once a company has decided to outsource certain IT functions, it should consider the following: What services to outsource. Which IT outsourcing firm provides these services. Evaluate top candidates. Checklist. From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

24 6. Outsourcing Consultants IBM and Unisys Both IBM and Unisys offers a wide range of IT outsourcing solutions for businesses. Network Outsourcing Services Managed Storage Services Managed Security Services E-Business Hosting Services IBM is a pioneer in IT and Outsourcing IT. Unisys is a major competitor to IBM. From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

25 Examples of IT Outsourcing Unisys City of Minneapolis IBM ING Bank

26 7. Benefits/difficulties of outsourcing. Why is Outsourcing Important Expected 8.1% rise in outsourcing worldwide in 2008 In 2007, IT work was the number 1 outsourced service 75% of U.S. companies outsourced some type of IT activity in

27 7. Benefits/difficulties of outsourcing. Outsourcing Benefit: Better quality people and knowledge may be applied to an activity or task by the outsourcing firm. Reduction in administrative costs may be possible when certain tasks are outsourced. Outsourcing certain activities and employees that do not fit with company culture may be used to preserve a strong culture or employee morale. MBAO 6030 Human Resource Management

28 Benefits of IT Outsourcing Improved Service to the Customer Outsourced companies can receive tech support 24/7, with a smaller budget. Outsourcing companies generally use standardized equipment and methods. Saves time and money for the customer. When IT is outsourced, it allows a company to concentrate on its core competency. IT professionals use list of reliable vendors, which will improve quality of goods and services received. From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

29 Benefits/difficulties of outsourcing. Outsourcing Disadvantages: Outsourcing may lead to loss of control of certain activities which may be a problem on time sensitive projects for example. Outsourcing an activity may result in loss of the opportunity to gain knowledge and information that may have general application to other key processes and activities. MBAO 6030 Human Resource Management

30 Disadvantage of Outsourcing Companies may not fully understand the actual work that is outsourced This could affect cost and satisfaction with end product or service PwC 2007 Global Outsourcing Survey found that less than one third of companies who outsourced were completely satisfied, but 91% said they would continue to outsource

31 Difficulties of IT Outsourcing Threats to security and confidentiality Sensitive information such as payroll, medical records and banking/mortgage records. Hidden costs to outsourcing IT. This includes the contract between companies, as well as legal costs incurred. Loss of possible strategic asset or skill Could it have been used to create a competitive advantage over your competitors? Loss of control, and dependence on an IT supplier. From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

32 Is Outsourcing a Good Thing? PROS: Some Americans don't believe that offshore outsourcing is bad for this country. They seem to be convinced that we can be strengthened as a nation if we are forced to compete in the global economy. Stimulates trade and creates a stronger economy in the U.S. and more jobs in the long run A way to get the job done for less money by: -reducing and controlling company operating costs -freeing up internal company resources for more important purposes -improving the company focus and resultant productivity They consider that what is even more important than the welfare of their employees...is making money. U.S. businesses need to stay competitive From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

33 Is Outsourcing a Good Thing? (Cntd.) CONS: The Loss of jobs in the U.S. The problems associated with offshore outsourcing are profound and complex Outsourcing jobs to places like India and China really aren't as substantial as some would like us to believe. From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

34 8. The Decision to Outsource Work System Design Insource the Work Outsource the Work Contingent employees: temps, consultants Independent Contractor MBAO 6030 Human Resource Management

35 When and how to outsource activities (Baron & Kreps, 1999) High Strategic Importance Low Low??? Outsource Insource Contingent employees Interdependence High MBAO 6030 Human Resource Management

36 Outsourcing: Considerations (Baron & Kreps, 1999) Does learning from this activity spill over to an important core activity? Can the outsourcing relationship be reversed and the work brought back inside when conditions change? MBAO 6030 Human Resource Management

37 Outsourcing: Considerations (Baron & Kreps, 1999) Can the outsource supplier adjust more quickly to changing labor or market demands than we can? Do we have a strong clan-like culture that would be weakened with employees who have different values or interests (such as IT employees)? MBAO 6030 Human Resource Management

38 Outsourcing: Considerations (Baron & Kreps, 1999) Outsourcing may not be appropriate when: 1. The task is a core activity critical to strategy or technology. 2. Task is highly interdependent with core activity due to technology or work design. 3. Task requires great deal of firm specific human capital or access to proprietary information. 4. Tasks where the employees work in close proximity to regular, core employees and are similar socially to them. MBAO 6030 Human Resource Management

39 Confidentiality and IT Outsourcing Outsourcing of sensitive information such as bank records between countries. How do you assure your clients that their information is safe and legal? Seek out and build a relationship with this outsourcing supplier before passing them sensitive information Only agree to work with a supplier that is ISO/IEC 7064:2003 certified. Have periodic audits, and develop COBIT. This is a big deal, especially as you see more and more companies sending all their information systems overseas and offshore From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

40 Outsourcing Critical Thinking Questions 1. The university hires many contingent faculty ( adjuncts ) to teach courses on a part-time basis. What challenges does this present to university administration? Why are these adjuncts hired in the first place? 2. A current trend in the practice of HR management is to outsource a good deal of the HR function. Which aspects of the HR activities should be outsourced, and which ones should be kept inside a firm? MBAO 6030 Human Resource Management

41 Outsourcing Critical Thinking Questions 3. Some large pharmaceutical companies outsource Research & Development activities. What justification would they have to outsource this important activity? MBAO 6030 Human Resource Management

42 9. Where are they outsourcing to? IT Outsourcing can be farmed out to a variety of places, but you will find more often than not, to developing countries on the rise. Bangalore, India (Call centers) The Philippines Saudi Arabia China Eastern Europe Canada From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

43 Trend is clearly towards Off-Shore From Accenture s Overview of Outsourcing

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45 The US and European countries are the largest customer for Indian outsourcing industry (specially IT & BPO) and accounts for 60% and 30% of IT and BPO exports.

46 Where is IT outsourcing headed? More prevalent Total system outsourcing Trend toward closer outsourcing Nicaragua Mexico US

47 Where is IT outsourcing headed? Competitive Better service More flexibility Lower cost

48 Examples of IT Outsourcing Apple Foxconn Samsung

49 10. What does Outsourcing Mean for the Western World? Capability Maturity Model As IT Outsourcing continues, you will find that our abilities will diminish. We will slide further down on the Capability Maturity Model, due to the outsourcing of our IT know how and abilities. Many economists have recently conjectured that the higherthan-expected IT unemployment numbers were not the result of offshore outsourcing. Outsourcing has actually had a positive impact on the American economy. Many western companies have realized that outsourcing can improve the quality of much of their work by taking advantage of excellent workforces abroad. From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

50 What does Outsourcing Mean for the Western World? From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

51 Outsourcing Paradox Outsourcing of IT jobs occurs at a rate of between 2 and 3% While the number of jobs being outsourced has increased, it is important to note that an almost equal number of IT jobs have been created. Difficult to measure the loss of IT jobs to outsourcing From IT Outsourcing by Andrew Butler, Michael Cheng, Carlos Garcia

52 11. Audit of Outsourcing The objective of an audit of outsourcing is to determine whether: Risks associated with outsourcing are mitigated Objectives of outsourcing are being met IT strategy has been modified to make best use of outsourcing Audit of Outsourcing Anantha Sayana

53 Risks of Outsourcing: Business Risks Outsourcing undesirable functions versus the ones that will provide the greatest competitive advantage Costs of outsourcing Not having defined goals and objectives carried over to the service provider Outsourcing Audit Program & Internal Control Questionnaire

54 Risks of Outsourcing: Business Risks Contract improperly prepared or structured Flexibility limitations in the future Going concern Outsourcing Audit Program & Internal Control Questionnaire

55 Risks of Outsourcing If third-party services directly impact financial reporting or internal control environment activities, a company s management is now responsible for evaluating the design and effectiveness of the control structure

56 Risks of Outsourcing: Offshoring Political, socio-economic, or other factors may amplify outsourcing risks Weak controls may affect customer privacy Privacy regulations may not be as strict in some areas Different laws and regulations Language barriers 10 Things to Consider when Offshoring Operations Tejus Trivedi, CISA, CA

57 Risks of Outsourcing: Security Risks Network security issues Customer data theft or misuse Cyber crime Inability to closely monitor security claims

58 Auditing and Outsourcing It is important for the auditor to be a part of the process if a client decides to outsource Determining what should be outsourced and reasons for outsourcing Various alternatives with respect to outsourcing Key components of the contract Performance expectations Outsourcing Audit Program & Internal Control Questionnaire

59 ISACA Audit Guidelines for Outsourcing Document G4 ISACA : Information Systems Audit and Control Association

60 Audit Charter Any outsourced services must be included in the scope of the audit charter The audit charter should explicitly include the auditor s right to: Review the agreement between the service user and the service provider Carry out necessary audit work regarding the outsourced function Report findings, conclusions and recommendations to service user management G4 Outsourcing of IS Activities to Other Organizations ISACA IS Auditing Guideline

61 Planning Obtain an understanding of the nature, timing and extent of the outsourced services Identify and assess risks associated with the outsourced services Obtain an understanding of which controls are the responsibility of the service provider and which controls will remain the responsibility of the service user. G4 Outsourcing of IS Activities to Other Organizations ISACA IS Auditing Guideline

62 Performance of Audit Work Audit work should be performed as if the service was being provided in the service user s own IS environment. Auditor must consider contractual agreements and legal requirements Auditor should review management of outsourced services Auditor should consider restrictions on scope and report them to management G4 Outsourcing of IS Activities to Other Organizations ISACA IS Auditing Guideline

63 Reporting After completing the audit work, the auditor should provide an audit report to the service user The service provider may receive a report from the service user if deemed necessary The IS auditor should also consider including a statement excluding liability to third parties G4 Outsourcing of IS Activities to Other Organizations ISACA IS Auditing Guideline

64 Follow-Up Activities Request appropriate information from the service user and the service provider on previous relevant findings, conclusions and recommendations Determine whether appropriate corrective actions have been implemented by the service provider in a timely manner. G4 Outsourcing of IS Activities to Other Organizations ISACA IS Auditing Guideline

65 Outsourcing Today More and more functions outsourced Acceptance of strategic alliances Opportunity to complement strengths and weaknesses Collaborative innovation Changes in Technology Most code development is outsourced Most IT departments integrate (select vendors, code etc.) rather than develop

66 Next Steps in Outsourcing Outsourcing will continue to grow, mainly for BPO Services will become more standardized, creating new norms New service providers will appear in Eastern Europe and China Asian players will move on-shore and compete head-on with traditional local players Local regulations will continue to be opened up to support cross-border services Politics will start to address increasing social issues and concerns From Accenture s Overview of Outsourcing

67 Q & A