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here is homework file and others are related material.

here is homework file and others are related material.

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Session 23 – An Introduction to IT Sourcing Introduction In today’s marketplace, the proper sourcing of business processes and related information technology enablement is a competitive reality. To better leverage internal resources, enterprises of all kinds and descriptions are turning to collaborative arrangements with external, often overseas IT service providers to reduce cost and raise service quality. At the macro level, Internet-enabled globalization has catalyzed these developments. With a highly interconnected world, companies can now perform business operations everywhere. But such a move is not without its challenges and risks to the enterprise’s culture and its business performance. At the micro level, the active drivers of outsourcing, beyond cost reduction, include such value added factors as: enhanced innovation, product and service offering diversification and customization, and speedier time-to-market capabilities. While the number of sourcing alternatives is growing, there is no magical formula guiding participating enterprises through these troublesome waters. Success in sourcing requires: • • • • • • careful IT partner selection internal organizational commitment meticulous and rigorous project management the clear articulation and understanding of service level agreements governing both sides of the sourcing relationship effective methods for continuously monitoring service provider performance a clear process for address issues as they arise The overall effort also calls for patience since very often any return on investment is realized only within the context of a long-term relationship. In the end, enterprise leaders must balance the cost, risk, and quality tradeoffs and process changes inherent in any sourcing solution if they are to obtain real value from the partnership. Selection Criteria: In sourcing business models, management must consider various delivery models: onsite delivery, offsite in the same country, and offshore. This gave rise to several distinct business models, based upon a series of decision factors: • • • • • • • • • • • • cost appropriate expertise internal (organizational) process maturity quality controls; performance history; time-to-market capabilities past industry work experience range of outsourcing services provided quality of the firm’s and host country’s IT infrastructure collaborative capabilities (i.e. between the enterprise’s and the outsourcer’s teams) time zones, handoffs, and other process issues cultural and language compatibility the onsite as well as the offsite presence of the service provider existing trade and currency arrangements between the enterprise’s host country and the offshore service provider’s home country prepared by rmk 051514 Page 1 Session 23 – An Introduction to IT Sourcing Today, countries like India and China are the most dominant regions in offshore delivery. India ranks high on several of the aforementioned parameters, such as: delivery quality, the potential of talent pool, competitive cost structure, and the country’s educational system. Though culturally very different from the United States, India is also English speaking. China is well known for it cheap labor pool and its emerging quality design and production processes but is not as well established overall in terms of IT service delivery. Both nations draw on a huge population and thriving, expansion-driven economies. Furthermore, both the Indian and Chinese governments work closely with both domestic industry leaders and their respective universities systems to create highly competitive partnering opportunities. Nevertheless, India and China are not the only players to consider, especially for those enterprises with business interests and distribution channels elsewhere in the world. For these very reasons, the idea of “nearshoring” in Latin America has emerged as a complementary and alternative option for U.S. firms operating in that region. Certainly in terms of cost, proximity, and an educated technical work force, countries like Mexico should be positioned to compete with India and China. However, it remains to be seen if they can perform competitively in the areas of product and service delivery quality and time-tomarket. Given the rising expectations and operating costs in both India and China for IT service delivery, the U.S.’s Latin American neighbors may indeed provide a promising alternative in the growing global marketplace. SELECTING A SOURCING PARTNER: It is always dangerous to make sweeping generalizations about such a vast, varied, and rapidly changing space as India’s or Mexico’s outsourcing capabilities. Nevertheless, recent corporate experiences in outsourcing do suggest a check list of success factors in identifying the best match between a particular enterprise and its potential offshore/nearshore partners. The model employed below should help the reader sort out his/her organization’s priorities in selecting and establishing an appropriate and effective offshore partnership. Selection Factor cost appropriate expertise, including the ongoing investment in staff certification and training internal (operational) process maturity Observations: Like any other IT solution, be sure to base your cost decision on the total cost of ownership (TCO), including the full life-cycle of development, infrastructure, hosting, maintenance and support, and any other costs that might enter into your outsourcing decision. Establish a TCO model from the outset and go into negotiations with a realistic view of what your company actually needs from its offshore partner(s), and what your organization hopes to accomplish through the envisioned partnership. In a global market where some skills are scarce and others are in high demand, detail the business and technical knowledge required to address your needs and then map these requirements against the outsource team’s skills and experience. Be sure to get a formal commitment that locks in the specific people (if appropriate) as well as the skills required to meet your needs. Your outsourcing partner cannot hope to help your organization if their own processes are broken. Look for signs of mature, successful, complementary business process capabilities. prepared by rmk 051514 Page 2 Session 23 – An Introduction to IT Sourcing Selection Factor quality controls; performance history; time-to-market capabilities past industry work experience range of sourcing services provided cultural and language compatibility collaborative capabilities (i.e. between the enterprise’s and the outsourcer’s teams) the onsite as well as the offsite presence of the service provider time zones, handoffs, and other process issues existing trade and currency arrangements Observations: Employ industry standard metrics against the past performance of the outsourcer. Beyond specific certifications, like ISO 9000, look at the size of projects/contracts under management, on budget and on time delivery rates, and customer satisfaction data. And demand reference contacts with existing customers whose business and outsourcing demonstrate needs are close as possible to your own requirements. Since knowledge of the business is paramount in delivering offshore IT services effectively and efficiently, have the prospective outsourcer demonstrate his/her experience in your industry, relevant to your existing needs. Anticipate the full range of your enterprise’s outsourcing needs and ensure that your partner has a successful track record in servicing all of those needs. For example, if you require hosting and ongoing help desk support for an application once developed, be sure that your partner can readily accommodate you. Inevitably when dealing with sourcing, you are faced with a clash of languages and cultures. Ensure that your partner’s team has a sufficient grasp of English to work effectively with you but also make sure that your team understands and appreciates the cultural differences between the U.S. and your partner to enable a clear line of communication. This may entail establishing ground rules for providing an open exchange of ideas and feedback with partners whose culture may be more circumspect than ours. Create a plan up-front for how your local (in-house) team will work with your partner’s team. Establish schedules for the frequency of meetings, the exchange environment (e.g. phone or Web conferencing) and set agendas. Ensure that your prospective partner is committed to these processes, technologies and infrastructure components before signing a contract. Though the point of sourcing may be to shift work to a lower-cost environment, no successful partnering relationship can existed in walled-off isolation. Successful offshore arrangements still require that your partner place personnel on site or at the very least schedule regular visits to the client site for requirements gathering, quality control and customer feedback. From the enterprise’s perspective, it is also important to get to know your service provider, hence the need to periodically visit the outsourcer as well. Here again, ensure that your contract with any outsourcing partner includes language concerning the placement of onsite personnel and regularly scheduled visits. With the Web, a global model for IT product and service delivery works to your advantage. By exploiting time zones, you can turn a ten hour work day into a twenty to twenty-four hour work day. For example, requirements collected onsite can be turned into code over night at your outsourcer’s location and then returned to you for testing the next day. But to leverage this arrangement, your contract will need strong, articulated processes, clear performance measures, and continuous quality improvement. For some enterprises who do business overseas but who cannot extricate their profits in a hard currency, such as US dollars or Euros (e.g. in India or China this can be a problem), purchasing outsourcing services with local currencies is a real win/win. The organization typically purchases the IT services at rates below those in the U.S. while putting its local assets in the partnering country to work. prepared by rmk 051514 Page 3 Session 23 – An Introduction to IT Sourcing By employing these simple principles as part of your enterprise’s selection and negotiating stance with potential outsourcing partners, you will ensure that the final agreement once struck will address expectations on both sides and will limit ambiguities that could lead to troubles later on in the relationship. CRITICAL SUCCESS FACTORS (CSF’s) IN SOURCING1: In this closing introduction, we provide a framework to assist businesses to effectively manage sourcing arrangements. It perhaps goes without saying that the selection of a partner is critical to the success of any sourcing scenario, but even the best partnerships will fail if the arrangement is not properly managed. The following check list identifies those areas that require enterprise management’s immediate and ongoing attention. Consider these simple guidelines as you scope out your working relationship with your external IT service providers. CSF’s 1. Focus on the enterprise’s core value and be open to outsourcing everything else. 2. Align your sourcing decision with executive thinking and sponsorship. 3. Own and manage the project internally. 4. If your underlying business process is broken, fix it before offshoring it. 5. Map your most important outsourcing requirements against the core competencies of your partner. 6. Demand measurable processes and outcomes. 1 Comment As illustrated in this article’s case studies, letting go those activities that are not core to your business allows you to focus on your organization’s competitive competencies while leveraging the expertise of others in those areas where they excel, thus reducing costs/risks while increasing flexibility and time-to-market. Outsourcing relationships are strategic partnerships requiring the attention and ownership of executive management. Though the outsourced services in question may not be core to your business, they will in all likelihood support/enable that core and therefore merit the same focus and attention devoted to other, internallymaintained business capabilities. Outsourced projects and services must be managed internally. Assign accountability to the most senior executive with a stake in the outcome of that project or service and make certain that performance measures are in place for both this internal manager and his/her team and your external partner. Monitor performance. and results! Offshoring a broken process will only make it more unmanageable. Invest in making the process sound and functional and then introduce outsourcing and offshoring into those aspects of the process where it makes sense to do so. In preparing for outsourcing, your enterprise must make explicit its needs and concerns. This requirements effort must comprehend staffing, business process, and technology issues as appropriate and will serve as a measuring stick against the qualifications of competing external IT service providers. You cannot manage what you cannot measure. For that matter, your partner cannot perform up to your expectations if that firm has no concrete way of knowing how its work will be measured against requirements needs. The contract between you and your outsourcer should make all of this explicit, defining processes, roles and responsibilities, and levels of performance in tangible/quantifiable ways. As adapted from David L. Margulius, “10 Ways to Get Offshoring Right,” Infoworld.com 08.29.05, pp: 32-9. prepared by rmk 051514 Page 4 Session 23 – An Introduction to IT Sourcing CSF’s Comment 7. When the individual expertise of your partners is paramount, write their names into the contract. Where the success of your partnership with an outsourcer relies on the particular knowledge and expertise of specific individuals, insist that these individuals appear in the contract or in an accompanying schedule of personnel and also insist that the contract include language to the effect that any changes in project/service staffing only occur with the prior approval the responsible (internal) enterprise manager. When entering into an sourcing partnership work with the prospective vendor to identify any and all costs associated with the arrangement. This would include both your partner’s costs and your own internal costs. For example, even though it may not be a cost that comes to you through the outsourcer, internal process change and relationship management costs must be factored into the model. In so doing, your organization will have a clearer understanding of mutual commitments within the partnership as well as a more complete picture of the cost base when subsequently calculating the ROI on the move to outsourcing. Even the best managed outsourcing projects sometimes fail to account for subtle and not so subtle cultural differences that can muddle any long-distance relationship. Continuously check in and confirm that thee frequency, quality and content of communications meets the processes needs, so as to ensure the synchronization of work efforts. For enterprises without a significant track record in outsourcing and partner management, the authors recommend that you start with a modest, non-critical project and work your way up to more strategic outsourcing arrangements as you grow your own competencies in managing these complex partnerships. 8. Build your sourcing relationship based upon a clear understanding of the total cost of project/service ownership. 9. Recognize up front and systematically deal with cultural differences. 10. Build your partnership(s) incrementally as you learn how to manage outsourcing arrangements; start small. Ultimately, you may ask: “What sourcing strategy is the right approach for my company?” The answer to this question must be derived from a clear sense of your organization’s IT deployment and management needs and what if any services might best be managed outside of the immediate enterprise. In this global economy, it makes increasing sense to partner rather than to go one’s own way. But like any successful business undertaking sourcing requires the participation of stakeholders from within your organization as well as internal leadership and management if it is to prosper as an enabler/sustainer of your IT systems and business processes. prepared by rmk 051514 Page 5 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 special services? How responsive is the vendor to questions? What project management methods are employed by the vendor? How closely are project time and cost estimates met? What has been the experience with service levels over the past 12 months? What support staff is provided on site; how would you rate their performance? What kind of training and customer service support is available? 25 Due Diligence Questions Checklist (Cont’d)          What is the assessment of vendor philosophy, expertise, reputation and stability? What relationship has been established with top vendor management? What level of vendor management is available to you? What unexpected costs did you encounter? Did the vendor make any financial arrangements for your existing equipment? What were the cost savings or other benefits you expected from the vendor relationship? To what extent were your expectations met? What, if anything, would you do differently? What advice would you have for us? 26 Solicitation Methods to Find a Partner  RFI – Request for Information      Informal Most vendors will submit brochure-ware Specific questions can elicit specific answers “Blood in the water” RFQ – Request for Quotation     Generally reserved for stock items (e.g., printer paper) Specify quantity, quality, delivery, acceptance, standard terms Vendor responds with price and delivery quote; accepts standard terms Buyer places purchase order 27 Solicitation Methods (Cont’d)  RFP – Request for Proposal   Custom products or services Essential elements      Statement of Work (SOW) (sometimes called Scope of Work) Services and deliverables to be provided by vendor Resources to be provided by Client Format of proposal (to facilitate comparisons) Procurement schedule and events   E.g., vendor conference, site visit Terms and conditions to be included in contract 28 The RFP Process  Request for Proposals (RFP)     The vendor's conference   About two weeks after the RFP A chance for vendors to ask questions, and you to answer    Questions in advance? A chance for you to provide additional information   Expensive for vendors and for buyers Requires complete, and usually elaborate, description of requirements, conditions, schedules, evaluation criteria, etc. Unfortunately, often necessary Client SMEs should attend Answers should go to all who received a copy of the RFP Communications from / to vendors  Contact should be named in the RFP 29 The RFP Process  Client specifies requirements           Scope Functionality Schedule Terms and Conditions Vendors review and ask questions; client responds Vendors deliver proposals Client evaluates proposals; selects one or two vendors with whom to negotiate Client negotiates scope, functionality, schedule, terms and conditions with vendor(s) Client signs agreement; vendor begins work At some point, vendor negotiates change to agreement based on improved understanding gained after beginning work 30 Pros and Cons – the RFP Approach       Pro Most effective with large number of potential vendors Keeps vendors at arms length during the procurement process Insures all vendors work from the same requirements documentation Brings discipline to the procurement process RFP and vendor proposal can form important parts of the eventual contract Facilitates comparison of vendor proposals      Con Significant staff effort required Difficult to include complete requirements Vendors usually have questions or request additional information Vendors will sometimes question objectivity of the procurement process Procurement process can become rigid and mechanistic 31 Session 23: 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 051514 Page 1 Session 23: 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 051514 Page 2 Session 23: 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 051514 Page 3 Session 23: 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 051514 Page 1 Session 23: 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 051514 Page 2 Session 23: 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 051514 Page 3 Session 23: 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 051514 Page 1
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Session 23: Three IT Sourcing Cases - Homework Questions

Session 23: Three IT Sourcing Cases - Homework Questions
Student’s name
Institution
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prepared by rmk 051514

Page 1

Session 23: 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 They can save a lot of money outsourcing the services
outsourcing
compared to running the services themselves.
Running IT services is not part of Southwest Bank core
competencies
The bank’s intended expansion requires it to upgrade its IT
software and ha...


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