8 IT Sourcing

Question 1

8. 1 Definitions, Reasons and Drivers for Outsourcing
9. 1.1 IT Sourcing

Answer 1

It is a question of make or buy

• Whether to do everything internally or hire the services of specialists?
• Transaction Cost Theory - Oliver E. Williamson

IT Outsourcing – Services that are acquired from external service providers (IBM, EDS, CSC)

• Cost-effective access to specialized computing power or system development skills

Question 2

8.1.2 Outsourcing – a working Definition

Four fundamental parameters determine the types of outsourcing arrangement that a firm may choose:

Answer 2

Outsourcing is a composition of the words „outside“, „resource“ and „using“. In the context of IT it means that single IT-tasks or the whole IT-tasks are given to another company.

– Degree (total, selective, and none);

– Mode (single vendor/client or multiple vendors/clients);

– Degree of Ownership (totally owned by the company, partially owned, externally owned);

– Time Frame (short term or long term)

Question 3

8.1.3.1 Major Offshore Sourcing Models

Answer 3

• Captive
  Customer builds, owns, staff and operates offshore facility
• Joint Venture
  Customer and Offshore supplier share ownership in offshore operations
• Build Operate Transfer
  Offshore Supplier owns, builds, staffs and operates the facility; ownership and staff transfer after completion
• Fee-for-Service
  Customer signs a contract for services in exchange for a fee

Question 4

8.1.3.2.1 Major Domestic Sourcing Models

Answer 4

“contract labor”, “consulting” “staff augmentation”

• A client buys in labor to supplement in- house capabilities, but the client manages the person, usually onsite at client site.

“fee-for-service” or “exchange-based” or “traditional” outsourcing

• A client pays a fee to a supplier in exchange for the management and delivery of specified IT products or services.

“joint ventures” “strategic partnerships”

• “A specific type of contract entered into by two or more parties in which each agrees to furnish a part of the capital and labor for a business enterprise, and by which each shares in some fixed proportion in profits and losses.” – American Heritage Dictionary

Question 5

8.1.3.3 Reasons for Outsourcing

Answer 5

Costs

• cost reduction
• conversion of fixed costs to variable costs
• improved cost transparency

**Personnel **

• avoiding the problem of obtaining qualified IT-employees
• less internal IT routine work
• downsizing staff in the IT-area

Risks

• increase of data security (e.g. by alternative/redundant data center)
• transferring risks and potential dangers to the outsourcer

Concentration

• Concentration of funds to the company ́s core business
• Releasing capacities for more important tasks

Finances

• Possibility of positive influence on a company’s EBIT
• Avoidance of high investments for new information technology or extension of existing capacities

**Technology/Know-how **

• Access to special know-how (e.g. CASE-tools, expertise) that would be difficult and expensive to build up or maintain.
• Usage of latest technologies without own investment.

Question 6

8.1.3.4 Risks of Outsourcing

Answer 6

Cost

• one-time switching costs
• risks of fixed prices

Employees

• personnel related / legal problems
• loss of key personalities and their know-how

Technology

• danger of too much standardisation

Privacy

• maintaining privacy of confidential data

**Know-how **

• increasing outsourcing activities inevitably result in loss of IT-competence and know-how

Question 7

8.2.3 Relevant areas of IT-service management for outsourcing (Bild)

Answer 7