LINKING ITIL WITH OUTSOURCE SERVICES ROKHSAREH MOBARHAN UNIVERSITI TEKNOLOGI MALAYSIA

Transcription

1 LINKING ITIL WITH OUTSOURCE SERVICES ROKHSAREH MOBARHAN UNIVERSITI TEKNOLOGI MALAYSIA

2 LINKING ITIL WITH OUTSOURCE SERVICES CASE STUDY: CENTER OF INFORMATION COMMUNICATION TECHNOLOGY IN UTM ROKHSAREH MOBARHAN A project report submitted in partial fulfillment of the requirements for the award of the degree of Master of Science (Information Technology Management) Faculty of Computer Science and Information Systems Universiti Teknologi Malaysia NOVEMBER 2009

3 iii To my beloved husband and family for their encouragement, support and pray

4 iv ACKNOWLEDGEMENT In the name of Allah, Most Gracious, Most Merciful. First and foremost I am grateful to ALLAH on His blessing in completing this thesis. I wish to express my sincere appreciation to my supervisor, Assoc. Prof. Dr. Azizah Abdul Rahman for encouragement, precious guidance and critics. Without her continued support and interest, this thesis would not have been the same as presented here, and also to the staffs of CICT, for their valuable feedback. I would also like to thank to all my family members for their prayers and all their supports and encouragements. My gratitude also goes to my beloved and wonderful husband, thank you for the encouragement, for being my inspiration, for the understanding you have given to me and most importantly, for your endless love. I thank you all.

5 v ABSTRACT The arrival of the Internet and the rush to e-commerce has seen many companies look to outside vendors to supply necessary skills and competencies, as these are often not available in-house. Many large organizations are increasingly outsourcing their IT functions. Factors like lower costs, improved productivity, higher quality, higher customer satisfaction, and ability to focus on core areas are some of the benefits of outsourcing. However, there are many challenges and problems associated with IT outsourcing. As a strategic resource, outsourcing must be governed accordingly to mitigating the problems. In this project, I identify the main problems and challenges related to IT outsourcing. In addition, we delve into some important issues on IT outsourcing, particularly the challenges along with benefits. IT Infrastructure Library (ITIL ) delivers framework by providing best practices that provide governance on delivering quality, cost effective, and efficient IT services. So ITIL V3 will be used as a solution in this project. ITIL can be served as a framework for managing the relationship with an outsourcing service provider. This study will help the management to identify the problems and take the necessary remedial steps. In this project, a framework will be suggested that is arisen from the ITIL V3 framework for managing the outsourcing projects and there are some activities and suggestion to implementing each process.

6 vi ABSTRAK Kemunculan internet dan e-dagang telah menyebabkan kebanyakan syarikat mencari pembekal luar untuk membekal kemahiran dan kompetensi yang diperlukan, Hal ini demikian kerana ia tidak didapati di rumah. Banyak organisasi besar semakin mengembangkan fungsi IT mereka kepada subkontraktor IT. Faktor-faktor seperti kos yang lebih rendah, produktiviti yang semakin meningkat, kualiti yang lebih tinggi, kepuasan pelanggan yang semakin tinggi, dan kemampuan untuk fokus pada bidang utama adalah beberapa manfaat kepada subkontraktor IT. Namun, terdapat banyak cabaran dan masalah yang berkaitan dengan subkontraktor IT. Sebagai sumber strategi, subkontraktor harus diatur dengan bijak untuk mengurangkan masalah. Dalam projek ini, saya telah mengenalpasti masalah dan cabaran utama yang berkaitan dengan subkontraktor IT. Selain itu, saya juga telah mengkaji beberapa isu penting khususnya cabaran dan faedah subkontraktor IT. IT Infrastructure Library (ITIL ) menyampaikan rangka kerja dengan menyediakan amalan-amalan terbaik yang memberi kerajaan penyampaian terbaik, kos yang efektif dan perkhidmatan IT yang berkesan. ITIL V3 digunakan sebagai penyelesaian dalam projek ini. ITIL boleh dijadikan sebagai rangka kerja untuk menguruskan hubungan dengan pembekal perkhidmatan subkontraktor. Kajian ini akan membantu bahagian pengurusan untuk mengenalpasti masalah dan mengambil langkah-langkah pembaikan yang diperlukan. Dalam projek ini, sebuah rangka kerja dihasilkan dengan menggunakan ITIL V3 untuk menguruskan projek-projek subkontraktor dan beberapa saranan untuk aktiviti dan cadangan pelaksanaan masing-masing.

7 vii TABLE OF CONTENT CHAPTER TITLE PAGE TITLE DECLARATION DEDICATION ACKNOWLEDGEMENT ABSTRACT ABSTRAK TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS LIST OF APPENDICES i ii iii iv v vi vii xi xii xiv xv 1 PROJECT OVERVIEW Introduction Background of the problem Statement of the problem Project Objectives Scope of the project Importance of the project Chapter Summary 7

8 viii 2 LITERATURE REVIEW Introduction Outsourcing Definition of Outsourcing Types of Outsourcing Software Development Software development life cycle (SDLC) Planning Stage Requirements definition Stage Design Stage Development Stage Integration and test Stage Installation and Acceptance Stage Software development Outsourcing (SDO) Steps of Outsourcing Advantages of Outsourcing Disadvantages of Outsourcing Case study Duct layout industry Contact Advocate Outsourcing Governance IT Governance Definition of IT Governance IT Governance Focus Areas IT Governance Frameworks IT Infrastructure Library ITIL Benefits ITIL Evolution ITIL V2 vs. V ITIL V3 books Service Strategy Service Design Service Transition Service Operation 74

9 ix Continual Service Improvement Chapter Summary 82 3 METHODOLOGY Introduction Project Methodology Initial Planning Phase Analysis Literature Review Identifying CICT problems Develop a Proposed Framework Chapter Summary 89 4 INITIAL FINDINGS Introduction Organizational Analysis CICT Mission, Vision and Objectives CICT Organizational Structure Questionnaire and Interview Analysis suitable component of ITIL for outsourcing general proposed framework Chapter summary FRAMEWORK REFINEMENT Introduction Proposed framework design ITIL Implementation Framework Phase Phase Phase 3 109

10 x Phase Framework implementation roadmap Incident Management Process Problem Management Process Financial Management Process Service level management Change management Supplier management Information Security Management Service Evaluation OMF Implementation Project Organizational Structure Implementation team and groups Steering Group ITIL Implementation Project Manager Implementation Teams Framework Applying Steps Framework verification Framework Finalization Risk Management Chapter Summary DISCUSSION AND CONCLUSION Achievements Constraints and Challenges Recommendations Chapter Summary 145 REFERENCES 146 APPENDICES A-E

11 xi LIST OF TABLES TABLE NO. TITLE PAGE 2.1 Definitions of IT governance ITIL V3 processes and sub processes Summary of interview analyzing ITIL V3 processes regarding outsourcing benefits of the framework processes for CICT 130

12 xii LIST OF FIGURES FIGURE NO. TITLE PAGE 2.1 Literature Review Framework Outsourcing SDLC Stages Input and output of planning stage Input and output of requirements definition stage Input and output of Design stage Input and output of Development stage Input and output of Integration and Test stage Input and output of installation and acceptance stage Steps of Outsourcing Outsourcing challenges Key Aspects of Outsourcing Governance Evolution of the IT Function within organizations IT Governance objectives Focus areas of IT Governance The service lifecycle Key links, inputs & outputs of the service lifecycle Service Design Service Transition Service Operation 75

13 xiii 2.21 Continual Service Improvements Project Methodology Framework CICT Organizational Chart general proposed framework Outsourcing Management Framework Framework implementation roadmap suggested Incident/Problem Report Form Framework implementation Steps Finalized OM Framework for CICT OMF for software Development Projects 140

14 xiv LIST OF ABBREVIATIONS CCTA Central Computer and Telecommunications Agency CMM Capability Maturity Model COBIT Control Objectives for Information and Related Technology CSI Continual Service Improvement DSL Definitive Software Library EDA Exploratory Data Analysis IACEP Informational and Analytical Centre of Environmental Protection ITGI Information Technology Governance Institute ITIL IT Infrastructure Library ITSCM Information Technology Service Continuity Management OGC Office of Government Commerce OLA Operating Level Agreement RFC Request for Change ROI Return on Investment SDO Software Development Outsourcing SLA Service Level Agreement SLM Service Level Management SQP Service Quality Plan OMF _ Outsourcing Management Framework

15 xv LIST OF APPENDICES APPENDIX TITLE PAGE A Interview Questions 151 B Questionnaire 152 C UTM Suggested List 155 D Suggested SLA Template 156 E Acceptance Test for OM Framework 162

16 CHAPTER 1 PROJECT OVERVIEW 1.1 Introduction In recent years Information Technology has become an inseparable part of every organizations and the existence of an organization crucially depends on the effective application of IT. With the emergence of e-commerce, the use of technology is becoming just an accepted, indeed expected way of conducting business and also a way of creating new opportunities that provide them with a source of competitive advantage [1]. The arrival of the Internet and the rush to e-commerce has seen many companies look to outside vendors to supply necessary skills and competencies, as these are often not available in-house. Because developing e-commerce applications can place great demands on companies, and managers often conclude that the only

17 2 way to meet short deadlines for new technology projects is to contract for specialist services [1]. However, the challenges for IT managers are to co-ordinate and work in partnership with the business to deliver high quality IT services [43]. Due to enhanced focus on the customer in the planning, development and delivery of information services, IT service management (ITSM) has become increasingly important. ITSM strives to the better alignment of IT efforts to business needs and to manage the efficient providing of IT services with guaranteed quality [54]. There are some mechanisms for implementing Information Technology Governance like COBIT, ITIL, Six Sigma, and CMM, CMMI. In this trend towards embracing principles of organizational IT Service Management, the IT Infrastructure Library (ITIL) has become the worldwide de facto standard in Service Management. It is a set of books describing IT management processes and practices [45]. Globally, most of the IT organizations are currently focused on using ITIL to implement and improving IT Support and Delivery processes.

18 3 1.2 Background of the problem In today s global economy, outsourcing has become a very common phenomenon. Many large organizations have outsourced some or all of their IT functions. Factors like lower costs, improved productivity, higher quality, higher customer satisfaction, time to market, and ability to focus on core areas are some of the benefits of outsourcing [2]. However, there are many challenges and risks associated with outsourcing like Management challenges, Cultural/language communication risks, Security risks, Knowledge transfer challenges, loss of flexibility in reacting to changing business conditions, lack of customer focus, contractual misunderstandings, Hidden costs, and maintaining outsourcing relationships[2]. The Centre for Information and Communication Technology (CICT) in UTM is responsible for ensuring that staffs and students have access to teaching, learning and research resources by providing the University's IT infrastructure, acquiring, developing and supporting new and emerging technologies and systems, and providing access to millions of digital resources across the University's campuses. The vision of CICT is to become the source of quality and innovative ICT services towards achieving the University's aspirations. It had and has many programs for achieving these goals and objectives, such as Human Resource System, Finance System, Document Management, Enterprise Portal, Smart Card System, Business Intelligent and others. CICT uses outsourcing for some of these projects. In spite of many advantages that outsourcing brought for them, they are facing some problems like misunderstanding, quality, cost problems.

19 4 According to the cited problems, it is so important to have a well managed plan for outsourcing actions. Furthermore ITIL is not only an effective tool for managing internal IT processes. It can also serve as a framework for managing the relationship with an outsourcing service provider. 1.3 Statement of the Problem This research attempts to find the answers to some problems related to: i. What is CICT situation and its problem when conducting with the software development outsourcing projects? ii. What are the elements in ITIL v3 framework that are suitable for this case study? iii. How to best manage software development outsourcing projects? iv. How ITIL can be used to manage CICT outsourcing projects? In this research is intended to use a relevant research methodology to analyze the data that will be gathered and arrive with the suggestions for the improvement that can benefit the organization, which would enhance outsourcing management performance.

20 5 1.4 Project Objectives This project will focus on the following five objectives: i. To identify challenges and problems those arise during outsourcing project. ii. To understand the CICT situation and its problem when conducting with the outsourcing, especially software development outsourcing projects. iii. To analyze of how a manager can manage and supervise outsourcing projects and give some suggestions which arise from ITIL methodology. iv. To determine elements in ITIL v3 those are suitable for adapting to CICT to manage the outsourcing projects. v. To propose a framework towards the adoption or adaptation of ITIL for the Software Development Outsourcing Projects. 1.5 Scope of the project This study will concentrate on the Outsourcing projects, especially software development outsourcing, it s conducting problems and challenges, and as a case study CICT will be analyzed. In this project, Information Technology Infrastructure Library (ITIL) will be used for solving the problems associated with outsourcing, so it will cover an overall view of ITIL V3 Framework and it component.

21 6 1.6 Importance of the project When someone decided to use outsourcing services, it is imperative to: Select the right partner Identify issues related to outsourced project management. Improve outsourcing management issues Furthermore, it is important to understand the: Security during outsourcing Relationship with the outsourcer Relevant risks Process used for development a contract To ensure the success of outsourcing, the client and provider are required to confront some critical challenges. The outsourcings should be govern to control and mitigate the risks and to ensure that the outsourcing deliver value to the organization [63]. So, this research project will significantly focus on find the problems of outsourcing and try to give some solutions using ITIL framework. In other words, it will try to implement the ITIL framework for managing the software development outsourcing projects. The main aim of this project is to propose a framework for governing the Software Development Outsourcing.

22 7 1.7 Chapter Summary Introduction of the research project, background of the problem, statement of the problem, problem objectives, and scope of the project was identified in this chapter.

23 CHAPTER 2 LITRITURE REVIEW 2.1 Introduction The Literature Review covers all the areas that are of interest to the research study. The purpose of this chapter is to aid the author in having deeper knowledge and understanding on the research areas. Some concepts such as definitions, technologies, best practices and case studies of the current system will be analyzed. For readers, this chapter provides a general view of subject background, problems and some useful solutions. The study areas that shall be discussed are divided into five main themes that are the Outsourcing, IT Governance, ITIL, ITIL V2 overview, ITIL V3 and also CICT problems. Figure 2-1 shows the Literature Review framework of the project.

24 9 Literature Review 2.2 Outsourcing Definition of outsourcing Types of Outsourcing Software Development Outsourcing advantages Outsourcing disadvantages Steps of Outsourcing Case Study Outsourcing Governance 2.3 IT Governance IT Governance Definition IT Governance focus Areas IT Governance Frameworks 2.4 ITIL Benefits ITIL Evolution ITIL v2 vs. V ITIL V3 Books Service strategy Service design Service transition Service operation 2.5 Conclusion Continual Service Improvements Figure 2.1 Literature Review Framework

25 Outsourcing Due to rapidly Advances in technology, increasingly demand for IT applications and the inadequate supply of IT personnel [1], Managers and senior executives are becoming increasingly aware of challenges and opportunities in order to be more efficient and effective in delivering products and services to customers While the changing nature of competition has placed firms under heavy pressure to rapidly develop and commercialize new innovations to ensure their survival, the successful release of new products undoubtedly brings firms plenty of profits and revenue growth. To remain competitive, firms must also pursue product innovation through both internal and external services [6]. Generally, the term outsourcing is used to describe external providing of services. The outsourcing of IT can be traced back to the 1960s when computers were expensive and physically large. During that period, computers required considerable space and controlled environmental conditions so as to operate them successfully. This situation demanded that companies had to make substantial capital investments in order to have their own computing facilities. In order to avoid such expenditure, many organizations contracted out their routine data processing, particularly payroll and accounting, to large data-processing service bureau [1]. In today s global economy, outsourcing has become a very common phenomenon. Many large organizations have outsourced some or all of their IT functions. Factors like lower costs, improved productivity, higher quality, higher customer satisfaction, time to market, and ability to focus on core areas are some of the benefits of outsourcing. However, there are many challenges and risks associated with IT outsourcing [2].

26 Definition of Outsourcing In broad terms Outsourcing refers to a company that contracts with another company to provide services that might otherwise be performed by in-house employees [3]. Outsourcing is usually used when a company takes a part of its business and gives that part to another company [4]. In other word, Outsourcing is an approach to task management that involves utilizing resources that are outside the direct control of the company to handle tasks that are relevant to the operation and success of the business [14]. The outside firms that are providing the outsourcing services are third-party providers, or as they are more commonly called, service providers. But as a complete definition, Outsourcing is as an act of delegating or transferring some or all of the IT related decision making rights, business processes, internal activities, and services to external providers, who develop, manage, and administer these activities in accordance with agreed upon deliverables, performance standards and outputs, as set forth in the contractual agreement. Typically, the function being outsourced is considered non-core to the business [24]. Generally, this involves contracting with a service provider to handle the specific function for a specific period of time and with guidelines that are agreeable to both parties. In some cases, the service may be granted limited power to act in the stead of the client, if that is necessary to perform the contracted tasks [14]. The recipients for outsourced activities are generally in the same country. When a company on another country is involved e.g. India, the correct term to use is offshore outsourcing. Nearshore outsourcing refers to outsourced projects that are outside the country, but on the same continent e.g. a US company outsourcing.

27 12 In recent times, the Outsourcing has been most commonly used for technology related initiatives such as handing over the IT help-desk to a third-party. But it can also refer to non-technical services such as handing over the telephonebased customer service department [4]. Deliver determined product Client Vendor Payment Figure 2.2 Outsourcing Types of Outsourcing Whereas Outsourcing has become an increasingly important issue for many organizations, it categorized in different types. this categorization is based on the nature of work being outsourced. Business Process Outsourcing (BPO): The first type, BPO, is the contracting of a specific business task to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments of its supply chain. In the contemporary context, it is primarily used to refer to the outsourcing of services. It includes call center outsourcing, human

28 13 resources outsourcing (HRO), finance and accounting outsourcing and payroll and claims processing outsourcing [9, 8]. Many of these BPO efforts involve offshoring -- hiring a company based in another country -- to do the work. India is a popular location for BPO activities [8]. Information Technology Outsourcing (ITO): The second is Information Technology Outsourcing. It is a company's outsourcing of computer or Internet related work, such as programming, to other companies. It is used in reference to Business Process Outsourcing or BPO, which is the outsourcing of the work that does not require much of technical skills. ITO includes IT services, technical support, software testing, and website management outsourcing [9]. Software development outsourcing (SDO): The third type is Software R&D or also known as software development outsourcing. It is provision of software development services by an external supplier [7]. I will go details of this part, because my focus is on the SDO projects. Knowledge Process Outsourcing (KPO): The forth one, KPO, is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization. Unlike the outsourcing of manufacturing, this typically involves high-value work carried out by highly skilled staff. KPO firms, in addition to providing expertise in the processes themselves, often make many low level business decisions typically those that are easily undone if they conflict with higher-level business plans [10]. Legal process outsourcing (LPO): Finally, LPO is an activity or practice to get legal support services from legal services' firms or corporations. In the

29 14 beginning, LPO covered mostly low-end transcription work (Data management, Word Processing, Litigation support, Book-keeping and reconciliations etc.) but now it includes a huge range of legal processes, such as patent application drafting, legal research, pre-litigation documentation, advising clients, writing software licensing agreements and drafting distribution agreements[11] Software development A software development process is a structure imposed on the development of a software product. Synonyms include software life cycle and software process Software development life cycle (SDLC) SDLC is a process of logical stages taken to develop a software product. The six stages of the SDLC are designed to build on one another, taking the outputs from the previous stage, adding additional effort, and producing results that leverage the previous effort and are directly traceable to the previous stages. This top-down approach is intended to result in a quality product that satisfies the original intentions of the customer [64]. Figure 2.4 illustrates SDLC stages.

30 15 Project Planning Requirements Definition Design Development Integration & Test Installation &Acceptance Figure 2.3 SDLC Stages Planning Stage The planning stage establishes a bird's eye view of the intended software product, and uses this to establish the basic project structure, evaluate feasibility and risks associated with the project, and describe appropriate management and technical approaches.

31 16 Figure 2.4 Input and output of planning stage [64] The outputs of the project planning stage are the configuration management plan, the quality assurance plan, and the project plan and schedule, with a detailed listing of scheduled activities for the upcoming Requirements stage, and high-level estimates of effort for the out stages Requirements definition Stage The requirements gathering process takes as its input the goals identified in the high-level requirements section of the project plan. Each goal will be refined into a set of one or more requirements. These requirements define the major functions of the intended application, define operational data areas and reference data areas, and define the initial data entities. Major functions include critical processes to be managed, as well as mission

32 17 critical inputs, outputs and reports. A user class hierarchy is developed and associated with these major functions, data areas, and data entities. Figure 2.5 Input and output of requirements definition stage [64] The outputs of the requirements definition stage include the requirements document, the RTM, and an updated project plan Design Stage The design stage takes as its initial input the requirements identified in the approved requirements document. For each requirement, a set of one or more design elements will be produced as a result of interviews, workshops, and/or prototype efforts.

33 18 Design elements describe the desired software features in detail, and generally include functional hierarchy diagrams, screen layout diagrams, tables of business rules, business process diagrams, pseudo code, and a complete entityrelationship diagram with a full data dictionary. These design elements are intended to describe the software in sufficient detail that skilled programmers may develop the software with minimal additional input. Figure 2.6 Input and output of Design stage [64] When the design document is finalized and accepted, the RTM is updated to show that each design element is formally associated with a specific requirement. The outputs of the design stage are the design document, an updated RTM, and an updated project plan.

34 Development Stage The development stage takes as its primary input the design elements described in the approved design document. For each design element, a set of one or more software artifacts will be produced. Software artifacts include but are not limited to menus, dialogs, data management forms, data reporting formats, and specialized procedures and functions. Appropriate test cases will be developed for each set of functionally related software artifacts, and an online help system will be developed to guide users in their interactions with the software. Figure 2.7 Input and output of Development stage [64] The outputs of the development stage include a fully functional set of software that satisfies the requirements and design elements previously documented, an online help system that describes the operation of the software, an implementation map that identifies the primary code entry points for all major system functions, a

35 20 test plan that describes the test cases to be used to validate the correctness and completeness of the software, an updated RTM, and an updated project plan Integration and test Stage During the integration and test stage, the software artifacts, online help, and test data are migrated from the development environment to a separate test environment. At this point, all test cases are run to verify the correctness and completeness of the software. Successful execution of the test suite confirms a robust and complete migration capability. During this stage, reference data is finalized for production use and production users are identified and linked to their appropriate roles. The final reference data (or links to reference data source files) and production user list are compiled into the Production Initiation Plan.

36 21 Figure 2.8 Input and output of Integration and Test stage [64] The outputs of the integration and test stage include an integrated set of software, an online help system, an implementation map, a production initiation plan that describes reference data and production users, an acceptance plan which contains the final suite of test cases, and an updated project plan Installation and Acceptance Stage During the installation and acceptance stage, the software artifacts, online help, and initial production data are loaded onto the production server. At this point, all test cases are run to verify the correctness and completeness of the software. Successful execution of the test suite is a prerequisite to acceptance of the software by the customer.

37 22 After customer personnel have verified that the initial production data load is correct and the test suite has been executed with satisfactory results, the customer formally accepts the delivery of the software. Figure 2.9 Input and output of installation and acceptance stage [64] The primary outputs of the installation and acceptance stage include a production application, a completed acceptance test suite, and a memorandum of customer acceptance of the software. Finally, the PDR enters the last of the actual labor data into the project schedule and locks the project as a permanent project record. At this point the PDR "locks" the project by archiving all software items, the implementation map, the source code, and the documentation for future reference.

38 Software development Outsourcing (SDO) Outsourced product development has become the most feasible solution in the IT world for the development of software products. This is because not only is it cost effective but it s the sure shot means for producing top-quality products. There are very many outsourced product development firms that are ready to undertake this task at a reasonable cost without compromising on quality. Not only that, they also bring in new and innovative ideas in product development. The term software outsourcing has been described as a situation where in a customer contacts a software development company for the part or complete development of a software product or delivering an IT enabled service. The software outsourcing with an external organization can be for development of complete or partial software products, the purchase of packaged or customized software products or involving the vendor in the full software development cycle & also contract with him for maintenance after delivery [65]. Most companies take up the option of outsourcing the development phase of software due to several factors such as to minimize costs, bring in additional resources or channelize their time and resources for core activities. Whatever be the reason, outsourced product development is now making quite a stir in the IT world. The different types of software outsourcing can be broadly described as below: I. In-house software development (no outsourcing): Many organizations have their own IT departments catering to their software needs. These

39 24 organizations develop the required software and information systems within their own capacity and productivity limits. II. Product Component outsourcing: In product component outsourcing, the developer is contracted to develop one or several parts of a software system. In case of complex systems when the organization does not have the capacity or required skill to develop a particular component such component is outsourced. III. Process Component Outsourcing: In outsourcing parts of software development cycle, the customer organization contracts for an external group to perform all or certain functions of one or more of their process steps or components. IV. Software Acquisition (Total outsourcing): In this type, the organization outsource each and every activity associated with the software which includes design, development, programming, testing and maintenance.the main reason for such type of outsourcing is to focus on the organizations core values Steps of Outsourcing With the development of the complex and strategic of outsourcing, IT outsourcing decision becomes more complex [14]. The decision to outsource IT is

40 25 not an easy one to make. Experience highlights that it demands considerable managerial attention and should not be made without rigorous analysis and discussion [1]. Figuring out whether or not the company should pack up some part of production and ship it to outsourcers can be a difficult choice to make [12]. Each business will have different priorities and concerns, which will drive the outsourcing decision. The selection process needs to be rigorous [15]. Outsourcing needs to be undertaken systematically and handled like any other major business project. Outsourcing is still too often driven by gut feel, promises of short-term gains and response to the smart sales staff of the outsourcing service providers [15]. It can offer definite advantages, but only if it s done right. To do the job properly a number of steps need to be considered by the business in its considerations of outsourcing strategies and plans.

41 26 1 Understand Company s objective, business strategy, mission and vision 2 Plan the RFI 3 Prepare the RFP 4 Vender Selection 5 Contracts and negotiation 6 Ongoing supplier management Figure 2.10 Steps of Outsourcing Step1: Understand Company s objective, business strategy, mission and vision. The client company needs to understand its mission, vision and business strategy to decide if outsourcing and partnering are viable strategic options. The mission and objectives of the business must be understood together with the critical success factors, in particular in terms of customer and shareholder demands. Outsourcing of complete processes should be the aim, but before that decision is made, the core competencies must be identified and understood [15].

42 27 Also company needs to describe the process, service or product that they want outsourced clearly. They should indicate what their goals are through outsourcing [18]. Step2: Find out all you need to know about the vendor (Plan the RFI) This stage of the process begins testing of the market for vendor resources which have the skills, interest, capability and equally as important, the corporate culture and flexibility to become the company s outsourcing partner. This stage anticipates the preparation and issuance of a Request for Information (RFI) to the specific market sector [19]. The RFI provides material for the first rounds of vendor evaluations. It also spells out the business requirements defined by the core team, so the vendor understands what the company is trying to accomplish [18]. Frequently, candidate vendors are already known by the company through past or existing supplier/vendor relationships. Care should be taken during this Step to test the management philosophy of the vendor with regard to customer care and protection, degree of service level commitment, and overall business philosophy. Other areas for investigation include historical performance as measured by client reference, vendor outsourcing market share & experience, and overall approach to be a partner in the outsourcing program. The RFI provides the outsourcing vendor the opportunity to describe his skills, to show his wares and to reveal his philosophical viewpoints on the conduct of business [19].

43 28 Contents of RFI The type of information usually sought by RFI s includes things such as: The availability of equipment or needed services. The approximate one time and recurring costs. The differentiating factors between the goods or services proposed and similar offerings from other vendors. The latter is very useful in providing information to help determine mandatory and desirable characteristics to be included in an RFP. After vendors return the questionnaire, the issuing company matches the vendors responses to the company s requirements and weights the criteria based on importance. Providers that don t meet stated needs or haven t responded to the specific questions are eliminated. Eventually, the RFI process helps companies make the "go or no go" decision that is, the choice to proceed with or walk away from a project. The data solicited identifies the availability and viability of outsourcing, cost estimate ranges, and risks. It also provides detail useful for developing project requirements [18]. Step 3: Prepare the RFP The third step is to develop the RFP; send it to short-listed suppliers; evaluate them; and, finally, select the best ones.

44 29 The RFI and RFP are complementary. Information collected during the RFI process can prepare the solution requirements section of the related RFP. Leveraging the information-gathering focus of the RFI will lead to a concise RFP that articulates the business needs [18]. But Unlike a Request for Information (RFI), an RFP is designed to get suppliers to provide a creative solution to a business problem or issue. RFPs should be used carefully since they can take a lot of time for both the organization and its suppliers. However, for more complex projects, an RFP may be the most effective way to source the goods or services required [20, 21]. The RFP outlines the engagement s requirements relevant skill sets, language skills, intellectual property protection, infrastructure, and quality certifications and gives prospective vendors the information necessary to prepare a bid. The responsibility of developing the RFP rests with the project s sourcing leader, but various aspects of the document will require input from other domain experts [18]. A good RFP includes one section that states what the company seeks (business requirements) and four sections that ask about the vendor and what it will be able to provide [18]: Business requirements. In brief, this section details the company s project goal, deliverables, performance and fulfillment requirements, and liquidity damages. Vendor profile. External service providers differ greatly in performance, style, and experience. This part of the RFP details the vendor s stability, services, and reputation. Vendor employee information. This section addresses the resources assigned at the project management, middle management, team leader, and task levels, along with the quality of people, their skills, training,

45 30 compensation, and retention. If the company ranks technical skills highest should look at technical expertise before examining costs. Vendor methodology. The methodology segment details project management, quality, regulatory compliance and security. Infrastructure. This part outlines the vendor s infrastructure stability and disaster-recovery abilities. Step4: Vender Selection After vendors have sent their RFP responses, the evaluation is begun. When vendors respond to an RFP, if the proposal meets the stated requirements, each vendor must then undergo a due diligence review [18]. In depth due diligence takes place s to ensure that the vendors are financially sound and likely to be able to deliver as promised. Activity levels, the impact of changes in activity levels, the performance KPIs and the measurement processes are just some of the factors agreed together with service level agreements (SLAs), all specified in clear, unambiguous, measurable form [15]. The length and formality of the due diligence process varies according to companies experience with outsourcing, the timeline for implementing outsourcing, the risk, and familiarity with the vendor [18].

46 31 Step5: Contracts and negotiation Negotiations and contracts with an outsource provider are a complex area requiring procurement and negotiation skills as well as legal skills and in-depth knowledge of the subject matter under consideration, i.e. experts who understand the current processes and their scope, strengths and weaknesses [15, 21]. Contracts are about identifying costs and deliverables, sharing of risk, service levels agreements and control processes. Negotiations are a prime opportunity for the outsourcing partner to add income without increasing effort and for the client company to add value without adding cost. This is not a trivial activity and requires much skill and tenacity [15]. Step6: Ongoing supplier management Once the Outsourced programme is implemented, there is an ongoing need for supplier relationship management to ensure that the outsourced process is fully integrated with the business and the process performance is monitored to meet contractual as well as business needs is safeguarded. If critical business processes are outsourced it is paramount that the supplier is integrated into the client's management processes and communications [15].

47 Advantages of Outsourcing Organizations who are interested in outsourcing are often curious to know more about advantages and disadvantages of outsourcing. By gaining insight about both the good and bad of outsourcing, organizations can decide if outsourcing is right for them. Most organization jump headlong into outsourcing, without actually finding out if outsourcing is good for their business. The advantages and disadvantages of outsourcing can help the organization decide if outsourcing is right for their business [15]. There are several good reasons to consider outsourcing, including: I. Cost Reduction: One of the most common benefits is cost reduction. What this means is that an organization delegates a job to a vendor who can perform the same job at a much lower cost. The comparative cost advantage that a vendor offers forms the basis for outsourcing [1, 2, 13, 15, 22, and 23]. Depending on the function, there is a good chance that choosing to outsource the task will be cheaper than buying necessary equipment, hiring and training personnel, and actually doing the work necessary to successfully complete the task [13]. II. Focus on core business: Another advantage of outsourcing is that it allows company to focus on core business processes and activities [2, 13, 15, 21, and 22] and to improve its competitive advantage to enable organization s strategic goals, quality and reliability, professional services, and higher customer satisfaction [2]. In other words, the operating principle is to retain the activities that deliver customer value and shareholder value and outsource the rest. On the other hand, Outsourcing system allows companies to contract for services that are not within the scope of their expertise, so that they can focus their time,

48 33 money and energy on their core competencies instead of wasting valuable resources trying to gain Understanding of areas that are somebody else's expertise [22]. III. Reduce capitalization and their fixed cost base: Some organizations outsource to reduce capitalization and their fixed cost base. In order to flex business volumes and product mix in a business dealing with heavily fluctuating demand, the asset base needs to be kept low. Business assets include all assets of the business such as fixed assets, inventories and human assets (i.e. permanently employed staff). Outsourcing some or all of the asset intensive activities such as manufacturing may be a good way of achieving that [1, 15]. IV. Access to specialist resources: It is sometimes possible to gain access to specialist resources by outsourcing. By outsourcing company can get expert and skilled services Service levels can be increased by appreciating that a company is unlikely to be good at everything and that specialist suppliers can add significant value by applying their specialist skills - and possibly economies of scale - on behalf of their customers [15, 1]. V. Increase productivity: Productivity means getting more accomplished starts outsourcing; it must break down duties into smaller tasks. These tasks become part of an organized process, where each person involved becomes an efficient specialist, as opposed to a generalist who tries to do everything. When workers are able to focus on a limited number of tasks, they will become more efficient in performing their duties. They know what is expected from them and they are not distracted by having new demands put on them. When

49 34 someone is trying to juggle too many conflicting tasks at once, the person won t be able to do all of them well [25]. VI. Access better technology at a lower cost: Technology is changing rapidly and it is expensive for companies to keep up with the latest advances. Instead of investing the considerable financial resources necessary to continuously upgrade equipment and train staff, it may make more sense to borrow the technology from a company that has already made this investment. When a company enters into an agreement with another company to provide some services involving new technology, both parties benefit. One of them reaps the benefit of the other company s investment and the company that already bought the equipment gains needed capital [25]. VII. Make faster deliveries to customers: Another benefit of outsourcing is that company can make quicker deliveries to customers. Third-party contractors will be able to provide faster deliverables because the existence of a contract puts pressure on the supplier, compared with internal development, to deliver a quality product on time and within budget, and the company in turn will be able to make quick deliveries to its customer. Faster deliveries can also help them save on time [1]. VIII. Improved customer satisfaction: With timely deliveries and high-quality services you can impress your customers. Outsourcing can help you benefit from increased customer satisfaction and your customers will remain loyal to your organization [26].

50 35 IX. Share Risk: Investing in new technology can be a risky proposition for businesses today. Rather than putting up its own funds, it may make more sense for a business to use outsourcing to ensure that the technology available to them is always up to date and relevant to their needs [26]. Apart from the above factors there are other reasons as to why a company would want to outsource. These include: Improving technical expertise. Gaining access to technical talent and technical expertise not available inhouse. Gaining access to new technologies. Improve efficiency Save on manpower and training costs Increase flexibility Disadvantages of outsourcing While the benefits of outsourcing can be obvious and immediate, there are still a few potential disadvantages to keep in mind. Often, these are minor, and may not even be issues at all in some situations. However, every organization can and should consider them before choosing to outsource any company function. Disadvantages of outsourcing are:

51 36 I. Loss of real-time control: When any given business function is conducted inhouse, it is a simple task to step in and order some type of a change if necessary. For example, when billing is done in-house, it is very easy to apply a credit to a customer invoice when the product or service did not live up to the promises made to the client. If the billing process is outsourced, there may be several steps to go through in order to submit a credit. Even then, if the invoice is already generated, there may be no way to apply the credit in real time, or there may be an extra charge for the service [13]. II. Threat to Security and Confidentiality: It is possible that since data is moved around, leakages or even misuse of information can happen especially in sensitive industries such as those in the technology sectors. Also the knowledge obtained by the supplier from the company may be transferred to competitors [54]. III. Hidden Costs: Anything not covered in the contract will be the basis for the company to pay additional charges. Additionally, it will experience legal fees to retain a lawyer to review the contacts will be signed. This is the outsourcing company's business. They have done this before and they are the ones that write the contract. Therefore, you will be at a disadvantage when negotiations start [55]. IV. Communication is very crucial: Working miles away, may lead to loss of data or inappropriate data if not handled wisely which may lead to misunderstanding [56].