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:
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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:
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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
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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.
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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.
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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.
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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.
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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.
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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 .
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What needs to be sourced:
Key Infrastructure Components
Systems hardware
Operating systems
Network infrastructure
Security systems
Applications
Peripherals
Support and Training Services
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IT Functional Relationships
How are the responsibilities for IT
systems divided among the
constituencies?
Executive management
Enterprise staff
IT staff
Business partners
IT vendors
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Critical Factors for Successful
Change
IT/business alignment
Flexible organizations
Appropriate technology
Flexible processes
Continuous process review
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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…..
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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.
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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
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External Sourcing Options
Approach/Model
Outsource
Consortium
Alliance
Joint venture
Partnership
Onshore
Nearshore
Offshore
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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.
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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
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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)
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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
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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)
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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
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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)
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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
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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
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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
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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
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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.
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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
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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
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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
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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?
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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?
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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?
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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
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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
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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
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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
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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
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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.
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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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