IT Sourcing Case Study

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timer Asked: Mar 29th, 2019
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Question Description

We want you to practice a business summary style – writing in a clear, structured manner, but not in paragraph form. If you feel you must write in a paragraph, then address the question at hand in bullets or tables (as appropriate) and then summarize your points in an executive summary-type paragraph. In general, you are attempting to efficiently and effectively make your arguments for a particular solution, describe the associated implementation tasks (“to dos”), identify the benefits and costs of the undertaking, and then drive your point home with additional considerations (risk management).

Reading materials and fill out "homework" attachment.

The thing I need to repeat is that do not use whole sentences to answer, use bullet point instead.

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Session 22: Three IT Sourcing Cases - Homework Questions 1. What drove the sourcing decisions on the part of all three business organizations described in the case studies for this session? Business Reasons Behind Sourcing Decision Southwest Bank outsourcing Reliable Utilities - partnering State Retirement System Insourcing 2. What were the risks associated with each of these undertakings? Business Risks with Sourcing Decision Southwest Bank outsourcing Reliable Utilities - partnering State Retirement System Insourcing 3. What actions on the part of each company mitigated these risks? Business Risk Mitigation Steps Southwest Bank outsourcing Reliable Utilities - partnering State Retirement System Insourcing prepared by rmk 080718 Page 1 Session 22: Three IT Sourcing Case Studies Case 1: Outsourcing1 Southwest Bankers, Inc. (not it’s real name) through its subsidiaries, provides financing for industrial and commercial properties, for interim construction related to industrial and commercial properties, and for equipment, inventories, and accounts receivable. The bank also offers acquisition financing, commercial leasing, and treasury management services as well as a host of consumer banking products and services, such as checking accounts, savings programs, automated teller machines, overdraft facilities, installment and real estate loans, home equity loans and lines of credit, drive-in and night deposit services, and safe deposit facilities. Internationally, Southwest has both a commercial and a consumer banking presence in Mexico where it accepts deposits, makes loans, issues letters of credit, handles foreign collections, transmits funds, and deals with matters of foreign exchange. The company also acts as a correspondent for other financial institutions, primarily other, local banks in Texas, providing trust, investment, agency and custodial services for individual and corporate customers, and sales and trading, new issue underwriting, money market trading, and securities safekeeping and clearance services for fixed-income institutional investors. In line with its overall business strategy to provide the most complete portfolio of financial management services, Southwest also offers insurance and securities brokerage services, advisory and private equity services to middle market companies in Texas, and loans to qualified borrowers for the purpose of financing the purchase of property and casualty insurance. In terms of corporate clients, Southwest Bankers focuses on the energy, manufacturing, services, construction, retail, telecommunications, healthcare, military, and transportation industries. The company was founded in 1868 and is headquartered in San Antonio, Texas. For all intents and purposes, Southwest is a healthy and viable financial services institution. Recent business growth has placed the organization in the position of requiring a series of major computer hardware and software upgrades. Although the IT organization is performing well, with high marks from the user community, the company has decided to explore whether to outsource some, or perhaps all, of its IT organization. Their thinking in this matter is driven by the view of executive management that though IT is a key enabler of the bank’s operational (a.k.a. transactional) and management activities, the running of a successful IT services organization is not one of Southwest’s core competencies. Their strategic focus is the expansion of their banking services into the Southwestern United State, Mexico and perhaps other Latin American countries. Southwest therefore developed a request for proposal (RFP) to outsource their internal IT organization and sent this document to several companies with the capabilities and tested experience to provide the necessary range of IT services required of the bank. After evaluating the responses and visiting the facilities of those who responded, the decision was made to outsource the entire IT organization to XYZ Computer Services (not their real name). A contract was signed with the successful bidder. The transition was accomplished smoothly over a period of months. The outsourcing vendor hired most of Southwest’s IT staff onto their own payroll and now operates and updates Southwest’s entire IT platform as required to meet the needs of the client under this fee-based arrangement. 1 Unlike a few of the other of the cases in MISM 2301 that feature fictitious but highly-representative business organizations, the companies mentioned in these three case studies are in fact real but their identities are disguised at the request of the sourcing specialist who consulted with these organizations. prepared by rmk 080718 Page 1 Session 22: Three IT Sourcing Case Studies Case 2: Partnering Reliable Utilities, Inc. (not it’s real name) is a regional, investor-owned electric and gas utility, with revenues of approximately $3.3 billion and assets totaling approximately $7.8 billion. The company transmits and delivers electricity and gas to 1.1 million electric customers in 81 communities and nearly 300,000 gas customers in 51 communities. Reliable employs more than 3,100 employees in its regulated business. Reliable Communications, Inc. is an unregulated subsidiary involved in telecommunications activities over fiber optic networks. Reliable Energy Systems, Inc. is an unregulated subsidiary that provides heating, chilled water services, and electricity to several hospitals, medical research centers and teaching institutions in its major metropolitan service area. Reliable LNG Corp., a third unregulated subsidiary, operates liquefied natural gas facilities in two local communities to supplement pipeline supply during the winter months. The IT Organization within Reliable Utilities, Inc. services the IT needs of the parent organization and all of its subsidiaries. The drive for increased efficiency and cost management led the Reliable Utilities, Inc. IT organization to employ increasingly sophisticated and complex technologies (e.g., wireless remote meter reading; GPS systems in service vehicles; complex mapping systems of embedded pipes, conduits and wiring, etc.). Challenged to find, hire, and retain staff to deploy and maintain these systems, the IT organization launched a search for a partner who could provide a wide range of technical personnel for short- or long-term assignments as needed, and who could flexibly respond to evolving IT staffing needs on short notice. However, in order to maintain close relationships with the user community and to be on top of or to anticipate staffing and expertise requirements as these emerged from planning discussions, this partner needed to work in-house, as though he/she was part of the Reliable Utilities, Inc. IT organization. The CIO of Reliable Utilities, Inc. therefore developed a request for proposal (RFP) and sent this document to several companies with the necessary range of services. After evaluating bidder responses and interviewing their key personnel, she negotiated a contract with the winning bidder. Under this agreement, a senior on-site partner executive operates as a member of the Reliable Utilities, Inc. CIO’s staff, attending staff meetings and participating in strategic planning sessions. This individual then dynamically assigns external IT resources to Reliable IT projects as the need arises. Once a project is completed, the partner’s people will leave, turning over the day-to-day running of the new IT-enabled platforms and services to Reliable’s own IT organization. As part of this hand-off, the departing experts will transfer their knowledge of the new systems to Reliable personnel. This process is referred to as “technology transfer.” prepared by rmk 080718 Page 2 Session 22: Three IT Sourcing Case Studies Case 3: Unwinding an outsourcing relationship The State Retirement System (SRS) (not its real name) is a defined benefit plan qualified under section 401(a) of the Internal Revenue Code. SRS provides benefits to its eligible members and their beneficiaries upon retirement, disability, or death. SRS has approximately 53,000 active members including firefighters, police officers, teachers, and state and local government employees. Approximately 22,000 individuals currently receive a monthly benefit from the System. For many years, consistent with best practice, SRS had retained a consulting actuary to guide its calculations of benefits that would be paid to its members based on the terms in their respective contracts and the level of their past contributions to the retirement funds managed by SRS. In addition to consulting services, the consultant has provided SRS with a unique payroll system under an outsourcing agreement, where SRS members make payroll contributions into the system and they then receive benefit checks from the system upon retirement. Other services, such as investment management, are also provided by other external third-party vendors. Over the years both Federal and State tax law changes have required the consultant to reprogram his software to bring it into compliance. Given the ager of the information system in question, these changes have become increasing difficult to accomplish. The added effort required has been billed to SRS. Faced with increasing administrative costs, and given difficulties in modifying the payroll system to accommodate legislative changes, SRS decided to explore whether to work with their vendor on modifying the existing arrangement and system or to acquire and operate a state-of-the-art retirement management system in house. As it so often happens, in the many years since in inception of SRS’s home-grown system, a number of commercial product equivalents have entered the market place. To make this decision, SRS first developed the overall requirements for the new system. This exercise revealed a number of issues with the existing system. Then they developed a RFP describing their needs and sent this document to qualified IT system providers. The companies were required to define the costs to obtain and configure the hardware that would be needed to operate their prosed product offering (i.e. the proposed information system), the installation costs for the new system, the costs to convert and move the SRS data from the existing vendor-based system to the envisioned in-house system, and the cost to train SRS staff on system operations. Per the RFP, the vendor would perform system maintenance under a separate agreement. After evaluating the responses and interviewing the bidders, SRS found that they were much better off with bringing this core service of the firm back in house. They therefore reached an agreement with the chosen vendor and implementation began. First the hardware was ordered and a data center was located and built within the SRS building. The vendor then assisted with configuring the hardware, and installing the software. The firm’s records on the old system were converted to run on the new software. User training and system acceptance testing took place over a period of several months. Once the parallel run results were certified by the auditors, SRS began operations with the new system and sunset the old outsourced solution and its own – their former actuary. prepared by rmk 080718 Page 3 IT Sourcing within The Enterprise Note: These slides have been compiled through the collaborative efforts of Professor Richard Kesner of Northeastern University and Ralph Loftin of The Capable Company, Inc . 1 What needs to be sourced: Key Infrastructure Components ◼ ◼ ◼ ◼ ◼ ◼ ◼ Systems hardware Operating systems Network infrastructure Security systems Applications Peripherals Support and Training Services 2 IT Functional Relationships ◼ How are the responsibilities for IT systems divided among the constituencies? ◼ ◼ ◼ ◼ ◼ Executive management Enterprise staff IT staff Business partners IT vendors 3 Critical Factors for Successful Change ◼ ◼ ◼ ◼ ◼ IT/business alignment Flexible organizations Appropriate technology Flexible processes Continuous process review 4 IT Delivery Models ◼ ◼ ◼ ◼ ◼ Centralized Decentralized/Distributed Outsourced Partnering Hybrid Most organizations today employ a hybrid model of IT delivery – some centralized, some decentralized, some in-house and some outsourced….. 5 Therefore most IT shops must Manage Vendor Relationships ◼ ◼ ◼ Monitor vendor landscape Facilitate partner vs vendor decision making Document strong SLA ◼ ◼ ◼ ◼ SMART goals Regulatory compliance Fair for all parties Monitor and safeguard against typical mistakes in sourcing management Adapted by Martin Dias from original by Luth Computer Specialists, Inc. 6 Sourcing Objectives ◼ ◼ Close Capability Gaps Quickly Cost Savings ◼ ◼ ◼ ◼ Improve Quality Displace Responsibility (reduce hassle factor) ◼ ◼ ◼ ◼ ◼ Economies of scale and scope Moving assets ‘off the books’ Access to business continuity facility ‘Outsource’ integration headaches Regulatory issues & compliance IT staff retention Enable Agility ◼ ◼ ◼ Access to skilled resources Access to ‘state of the art’ technology Access to technology updates 7 External Sourcing Options Approach/Model ◼ ◼ ◼ ◼ ◼ Outsource Consortium Alliance Joint venture Partnership Onshore Nearshore Offshore 8 External Sourcing: Outsourcing / Outtasking Service Client Agreement Vendor Outtasking – contracting for a specific, narrowly defined service (e.g., Unix server administration) Outsourcing – contracting for a complete function (e.g., call center) ◼ Characteristics: ◼ ◼ ◼ ◼ Arm’s length buyer-seller relationship Minimal buyer involvement in vendor’s internal operations Vendor performance gauged by well-defined, easily quantifiable measures Examples ◼ ◼ Office Depot: HR administration with Convergys; call centers with WillowCSN ; accounts payable invoice processing, mailroom, scanning, indexing, and document management to ACS Sainsbury's signed a seven-year deal with Accenture in 2000 to outsource all of its IT operations and transfer about 800 employees to Accenture. It retained a small in-house staff to oversee the new IT strategy. 9 External Sourcing: Outsourcing / Outtasking Pro ◼ Straightforward contract ◼ Low buyer overhead ◼ Well-defined services ◼ Performance easy to measure ◼ Short lead time (few months) Con ◼ Tendency to neglect relationship 10 External Sourcing: Consortium Consortium Agreement •Governance •Services •Etc. Client Co. 2 Vendor Co. 3 A cooperative, mutually beneficial arrangement among companies (co-opetition) ◼ Characteristics: ◼ ◼ ◼ All companies operate under a common, written agreement Minimum tailoring of services to individual companies Examples: ▪Credit Unions (CUNA) ▪Industry associations ▪Ariba ▪Exchanges (steel, cotton) ▪Standards groups (e.g., ANSI) ▪Shared service centers (internal consortium) 11 External Sourcing: Consortium Pro ◼ ◼ ◼ ◼ Straightforward contract Well defined services Low customer overhead Short lead time (weeks to months) Con ◼ Limited range of services available ◼ Limited customization available 12 External Sourcing: Alliance Service Agreement • SLA Client Alliance Agreement • Governance V. 1 V. 2 V. n A close association of companies or groups, formed to advance common interests or causes ◼ Characteristics ◼ ◼ ◼ Highly customized services and agreements Closed membership Examples ◼ Banc One (AT&T and IBM) 13 External Sourcing: Alliance Pro ◼ Services can be tailored ◼ Wide range of services can be provided Con ◼ Success is critically dependent on the relationship between alliance partners (limited control by buyer) ◼ Complex contractual issues ◼ Difficult to change vendors ◼ Long lead time 14 External Sourcing: Joint Venture Services Client Separate Legal Entity Vendor A legal entity formed to share risk or expertise ◼ Characteristics: ◼ ◼ ◼ ◼ ◼ Customer can have name on door Vendor operates Joint management Negotiated sharing of investment, risk and rewards Examples: ◼ ◼ ◼ Call center Facility management Business process (BPO) 15 External Sourcing: Joint Venture Pro ◼ Services can be tailored ◼ Wide range of services can be provided ◼ Customer can exert significant control ◼ Can provide asset management benefits ◼ Can shield both parties from certain liabilities ◼ Can resolve local approval issues Con ◼ Complex contract; requires establishing separate legal entity ◼ Significant customer overhead (support, relationship management) ◼ Long lead time ◼ Difficult and costly to extricate ◼ Customer must commit resources 16 External Sourcing: Partnership Client Service Agreement Partnership Agreement Vendor A legal contract entered into by two or more organizations in which each agrees to furnish a part of the resources for a business enterprise, and by which each shares a fixed proportion of the benefits. ◼ Characteristics: ◼ ◼ ◼ Mutual cooperation and responsibility Reciprocity – both parties benefit Examples: ◼ ◼ ◼ Client and UPS Stop & Shop and Citizen’s Bank Desktop support for remote locations 17 External Sourcing: Partnership Pro ◼ Services can be tailored ◼ Wide range of services can be provided Con ◼ Complex contract ◼ Significant customer overhead (relationship management) ◼ Long lead time ◼ Difficult and costly to extricate 18 External Sourcing: ‘Onshoring’ ◼ ◼ ◼ ◼ PRO Quicker start to project Fewer contracting / legal issues Fewer cultural and language issues Avoids political issues, e.g. “exporting jobs” ◼ CON Typically most expensive 19 External Sourcing: ‘Nearshoring’ ◼ The performance of certain tasks by a third party whose base of operations and resources are located in a country in close proximity to the US (Canada, Mexico, Bermuda,…). Some vendor resources may be located on-site as well. 20 External Sourcing: ‘Nearshoring’ ◼ ◼ ◼ ◼ PRO Relatively quick start to project Easier to visit vendor sites Same as US time zones Fewer cultural and language barriers ◼ ◼ ◼ ◼ CON More expensive than offshore Luxury of proximity reduced More complex contractual / legal issues May introduce political issues 21 External Sourcing: ‘Offshoring’ ◼ The performance of certain tasks by a third party whose base of operations and resources are located in a country distant from the US; typically a developing nation offering very low labor rates 22 External Sourcing: ‘Offshoring’ ◼ ◼ PRO Least expensive model Leverage in negotiating price reductions ◼ ◼ ◼ ◼ ◼ ◼ ◼ CON Difficult to visit vendor site, esp. on short notice Time zones often 10+ hours out of phase Cultural and communication issues Most complex contractual / legal issues Introduces political issues Possible unstable geo-political climate Difficult to repatriate 23 Suitable Vendor Checklist ◼ ◼ ◼ ◼ ◼ Availability: Based on a cursory analysis, are there vendors who appear able to satisfy the requirement? Number of sources: How many potential vendors appear suitable? Ideally there should be at least three. Location: Are the potential vendors located favorably. Industry knowledge required: Do the vendors have experience in the specific industry? Specific company knowledge required: Do the vendors have a prior or existing relationship with the company? 24 Due Diligence Questions Checklist ◼ ◼ ◼ ◼ ◼ ◼ ◼ ◼ ◼ ◼ What would you change about the contractual relationship? How do actual costs compare with estimates? How does the vendor respond to programming needs? How does the vendor respond to requests for spe ...
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School: Carnegie Mellon University

Attached.

Session 22: Three IT Sourcing Cases - Homework Questions
1. What drove the sourcing decisions on the part of all three business organizations
described in the case studies for this session?
Business
Reasons Behind Sourcing Decision
Southwest Bank Upgrading of the hardware and software due to recent
outsourcing
growth of the business.
Not a key competency running IT services
Not able to provide a variety of IT services
Preparation of extending banking services to Latin America
Reliable Utilities Complex and sophisticated technology is required
partnering
No talent to maintain the system
Dynamic staff are required on a short term notice
Cannot handle short term and long-term IT services
State Retirement System Need to reprogram the software to comply with Federal and
Insourcing
State tax laws
D...

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