Implications of Outsourcing in IT-Management

Contents

List of Figures

List of Tables

List of Abbreviations

1 Introduction
1.1 Actuality and Importance of Outsourcing
1.2 Structure and Approach

2 Fundamentals of Outsourcing
2.1 Definition
2.2 Historical Development of the Idea of Outsourcing and its Concept
2.3 Forms of Integration and Possibilities in Outsourcing
2.4 IT services and their Possibility for Outsourcing
2.5 Phases of Outsourcing

3 Motivation and Risks of IT-Outsourcing
3.1 Chances of Outsourcing
3.1.1 Strategic Chances
3.1.2 Financial Chances
3.1.3 Other Definable Opportunities
3.2 Risks of Outsourcing
3.2.1 Strategic Risks
3.2.2 Financial Risks
3.2.3 Other Definable Risks

4 Conclusion

Bibliography

One illustration has been removed from this paper!

List of Figures

1 Typical outsourcing candidates

2 Public cloud revenue by segment

3 IT outsourcing lifecycle

4 Salesforce database incident

List of Tables

1 Forms of IT Outsourcing

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

This paper takes a closer look at aspects surrounding the importance and application of IT outsourcing and aims to provide a sound understanding of the term as well as the forms of outsourcing strategy in today's IT-based or IT-driven industries. Since outsourcing is a subject that is not necessarily only associated with advantages, a closer look at the disadvantages of outsourcing will also be taken in the course of this paper.

1.1 Actuality and Importance of Outsourcing

Outsourcing has become increasingly popular as a technique to reduce costs and to ac­cess a wider range of technical expertise (in-house competencies versus outsourcing non­core competencies).¹ Especiallyconcerning the second example, outsourcing has become astandard method ofprojectand labormanagementifa firm decides to migrate to a newer technology.² In the IT industry, companies may outsource system development, system operations, help desk, systems, databases, and application administration, as well as a desktop and network support. Furthermore, businesses may use outsourcing to obtain application service provision or business process outsourcing.³

Considering an IT activity a commodity, there is little benefit to doing it internally. Payroll processing, for instance, is often considered a commodity IT activity. In these cases, fo­cused vendors are likely capable of providing the service at a higher level of quality and/or at a lower cost. By taking advantage of economies of scale that other organizations have, a business that specializes in the same field can become more cost-effective.⁴ With re­spect to the given advantages outsourcing of IT resources and services is proving to be an increasing trend on the global market. Companies such as cloud providers specializ­ing in many different manifestations of IT outsourcing (Infrastructure as a Service (IaaS), Platform as a Service (PaaS), Software as a Service (SaaS)) show a growing turnover, which is expected to increase further in the forecast beyond 2021.

Figure 2: Public cloud revenue by segment

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Source: Statista, Public Cloud Revenue by Segment, 2021

1.2 Structure and Approach

This study is divided into two parts. In the first part, the term outsourcing is explained in more detail and a deeper understanding of the characteristics, applications and develop­ment of the methodology is acquired.In the second part, potential risks and opportunities of IT outsourcing are discussed. The summary takes a final look at what has been learned so far about the methodology and the resulting conclusions.

2 Fundamentals of Outsourcing

2.1 Definition

Since the emergence of a productivity-oriented economy, not only has competition be­come established, but economic cooperation opportunities between market participants have also developed to generate competitive advantages. In this context, the considera­tion of outsourcing service parts to professional subcontractors or partners is also playing an increasingly important role. These first "make-or-buy" decisions marked the beginning of classic outsourcing. Hardly any other industry produces as many buzzwords as the in­formation technology industry. For those directly involved, but even more so for customers and potential users, the problem arises of finding one's way through this jungle. Thus, several definitions exist for the term "outsourcing", which is a compound of the nouns "out­side", "resource" and "using". Literally translated, outsourcing means "using resources from outside". Outsourcing generally means the outsourcing of certain partial services or functions of a company and their takeover by third-party service providers. In this context, it is irrelevant whether the services or production processes are involved and whether the services were formerly created internally or newly integrated.⁵

2.2 Historical Development of the Idea of Outsourcing and its Concept

Although outsourcing is often marketed as the newest strategic management tool, it has been around for years. It is not possible to pinpoint the exact time of its emergence. The first documented use dates back to 1954, when General Electric collaborated with Arthur Andersen and Univac in the area of information systems.⁶

Rising to this, outsourcing developed into a significant economic factor by the early 1980s. This resulted from the fact that many industries, faced with increasing cost pressure, out­sourced their cost-intensive production processes to so-called "low-wage countries" in Southeast Asia. The cost pressure was so strong that it was worthwhile to manufacture in another country with lower production costs and ship the finished product halfway around the world. Outsourcing production facilities increased administrative costs enormously. Accordingly, production was no longer carried out at just one location but, if necessary, at several locations on several continents. In order to cope with the resulting enormous administrative workload, the company made use of the constantly developing information and communication technology. Information and communication technology enabled the mass processing oflarge amounts ofdata, giving IT-supported companies a significantad­vantage. Due to the aforementioned cost pressure and competition on the market, almost all companies, especially small and medium-sized ones, were encouraged to invest more in their own IT. The fact that the core competencies of these companies are usually not IT-related encouraged the willingness to outsource in these areas. The American company Eastman Kodak was the first to outsource its entire IT system in 1989. As a result of this outsourcing, the company was able to reduce its IT costs by almost 20%.⁷

In the 1990s, there was a renewed interest in outsourcing and the strategic use of out­sourcing. There were two different purposes. First, the interest in outsourcing was to reduce staff in order to save costs, generate a competitive advantage and keep the com­pany lean. Next, due to the technical advancement of programming languages, was to upgrade legacy systems from 3rd generation to 4th generation. This was not possible for many companies due to lack ofknow-howand human resources. These lacking resources were to be purchased or the upgrade outsourced, to ensure a smooth transition. In 1999, on-site facility management and selective outsourcing increased in outsourcing, especially in areas related to the Y2Kproblem (i.e. the millennium bug). This is reflected in the use of temporary workers and the first application of offshore outsourcing, particularly in India.⁸ Since the 2000s, the term outsourcing has not changed much. In recent years, the focus has been increasingly on the areas of business process outsourcing and offshore out­sourcing. Business processes that are outsourced serve to redefine the internal structure of a company. Here, the focus of a company is on outsourcing administration, transactions and similar tasks in order to save costs and gain access to new technologies. Further­more, outsourcing is intended to focus on strategic issues of a company. Nowadays, we are essentially talking about services that the outsourcing provider takes over. One ser­vice, for example, consists of outsourcing complete defined business processes to external service providers who manage them. This is to ensure complete integration between the outsourced business processes and the internal processes.⁹

2.3 Forms of Integration and Possibilities in Outsourcing

Outsourcing onlymeansin exceptional cases thatcompanies free themselves from the en­tire tasks of, for example, IT. Rather, the aim is to obtain those services from outside which external providers can provide or handle more efficiently. In other words, it is a question of the appropriateness of inter-and intra-company division of labor or optimization of service depth. In this context, it should be noted that in the case of service depth optimization, a decision must be made not only between the two alternatives "pure in-house production" and "pure external procurement", but also that a number of institutional forms of integration are possible for internal management.¹⁰ Outsourcing can be divided into two meanings. On the one hand, outsourcing can be understood as the outsourcing of IT services to ex­ternal companies or external service providers. On the other hand, outsourcing can be understood as the transfer of the IT department to an independent or non-independent organization. If only a partial area or a partial task of company activities is outsourced, this is referred to as partial or selective outsourcing. If the outsourcing customer wants to outsource its entire IT operations or large parts (tasks) of its IT operations, but does not want to place these in the hands of an outsourcing provider in the sense of total out­sourcing, but instead outsources them to different service providers, this is referred to as multisourcing or multi-vendor outsourcing. With a multisourcing strategy, the outsourcing customer uses not just one service provider but many different outsourcing providers who, as individual entrepreneurs, have specialized in a particular IT area. Amajor disadvantage of multisourcing is the interfaces between the individual outsourcing providers.¹¹

In total or complete outsourcing, the majority of a group's or company's IT activities are performed by an external service provider (outsourcing provider). This economic process is referred to in different ways, but as result it is the same process.¹²

Business process outsourcing refers to a business relationship in which a provider takes over a complete business process or corporate function, including all the information tech­nology that supports it. In contrast to conventional outsourcing, the provider is free in the technical implementation. The customer obtains the process result without being involved in the area of responsibility or the data processing infrastructure.¹³

2.4 IT services and their Possibility for Outsourcing

IT outsourcing describes the external procurement of IT services such as functions and processes. Information processing generally affects all of a company's processes and thus assumes a central cross-sectional function. Ifthis cross-sectional function fails over a longer period of time, the core business may come to a standstill and the company can no longer fulfillits originalpurpose. Information processing is thus closelyintertwinedwith the core business and assumes a central and essential role. Outsourcing, in the information processing industry, is therefore much more complex than in comparison with a classic supplier company.¹⁴

Table 1: Forms of IT Outsourcing

Abbildung in dieser Leseprobe nicht enthalten

source based on Lux , W., Schön , P, Outsourcing der Datenverarbeitung, 2012, p. 4-6

ProfessionalService describes the external implementation ofITprojects outside the com­pany. As shown in the Table 1, classic IT services are offered e.g. IT consulting and Sys­tem development. Here, the outsourcing provider is only liable for solution responsibility and is detached from financial responsibility. Usually, short- to medium-term individual contracts are signed.¹⁵

System Integration expands Professional Services. New complex solutions were created, such as user support, network operation, large-scale system applications, or even the transfer of employees to outsourcing companies. These new solutions use and rely on hardware, software, network, and professional services and thus represent new outsourc­ing opportunities.¹⁶

Outsourcing in facility management represents the classic form of outsourcing. Here, the outsourcing provider takes over partial areas or the entire information processing. In this case, the provider takes over all employees, operational and financial responsibility for the general contractor. In principle, contractual arrangements are concluded over a long pe­riod of time. System management is a further development of facility management and includes the strategic responsibility for information processing. This gives rise to risks for the outsourcer, as it has to delimit the IT services that still have to be provided itself.¹⁷

2.5 Phases of Outsourcing

Outsourcing IT services is not a one-off action, but a process consisting of several phases. General recommendations for action are hardly possible here. In contrast, analysis schemes and assessment frameworks which focus attention on the factors relevant to the decision and provide tools for decision support prove to be very helpful.

Figure 3: IT outsourcing lifecycle

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cf. Future Processing Start Nearshoring, IT outsourcing lifecycle, 2021

Figure 3 shows the complex outsourcing process. The outsourcing process can be di­vided into six steps. These steps are each subdivided into subphases or subprocesses. In this way, a systematic, methodical approach can be achieved.The first step is to identify potential opportunities for outsourcing. In this step a strategy is designed. This often in­volves a comprehensive target-performance analysis of the existing IT structure, followed by a Total Cost of Ownership (TCO) analysis of the corresponding costs for business and IT processes.¹⁸ The next step is the selection of IT suppliers. Here the Request for In­formation (RFI) and the Request for Proposal (RFP) play an important role. An RFI is designed to collect information from a supplier or vendor with no commitment to engage in any particular project. The RFP focuses on specifying a scope of work that needs to be performed (the RFP) and solicits in response a Proposal from the vendor describing how they would go about executing the project - including pricing information. The next step is to negotiate the contract. Continuing, the implementation begins, where the planning and executing service transition and the project launch is done.¹⁹ The next step is monitoring and controlling, where the relationships and contracts are maintained. The end of the IT outsourcing lifecycle describes the end of the project or the beginning of a new project.²⁰

[...]

¹ Vgl. Vorontsova, A., Rusu, L., Determinants of IT Outsourcing Relationships, 2014, S. 589.

² Vgl. Vorontsova, A., Rusu, L., Determinants of IT Outsourcing Relationships, 2014, S. 589.

³ Vgl. Vorontsova, A., Rusu, L., Determinants of IT Outsourcing Relationships, 2014, S. 589.

⁴ Vgl. Laplante, P. et al., The who, what, why, where, and when of IT outsourcing, 2004,S.21.

⁵ cf. Hagen, R., Stefan, D., KaiT., B., IT-Outsourcing, 2013, p. 2f.

⁶ cf. Walters, B., Tang, Z., IT-Enabled Strategic Management, 2006, p. 247.

⁷ cf. Hagen, R., Stefan, D., Kai T., B., IT-Outsourcing, 2013, p. 2f.

⁸ cf. Walters, B., Tang, Z., IT-Enabled Strategic Management, 2006, p. 248.

⁹ cf. Walters, B., Tang, Z., IT-EnabledStrategic Management, 2006, p. 248.

¹⁰ cf. Picot, A., Maier, M., Anaylse- und Gestaltungskonzepte für das Outsourcing, 1993, p. 20.

¹¹ cf. Söbbing, T., Handbuch IT-Outsourcing, 2002, p. 47.

¹² cf. Söbbing, T., Handbuch IT-Outsourcing, 2002, p. 33.

¹³ cf. Söbbing, T., Handbuch IT-Outsourcing, 2002, p. 49.

¹⁴ cf. Lux, W., Schön, P., Outsourcing der Datenverarbeitung, 2012, p. 4-6.

¹⁵ cf. Lux, W., Schön, P., Outsourcing der Datenverarbeitung, 2012, p. 4.

¹⁶ cf. Lux, W., Schön, P., Outsourcing der Datenverarbeitung, 2012, p. 5.

¹⁷ cf. Lux, W., Schön, P., Outsourcing der Datenverarbeitung, 2012, p. 6.

¹⁸ cf. Söbbing, T., Handbuch IT-Outsourcing, 2002, p. 65.

¹⁹ cf. Söbbing, T., Handbuch IT-Outsourcing, 2002, p. 98.

²⁰ cf. Söbbing, T., Handbuch IT-Outsourcing, 2002, p. 177.