15.571 Generating Business Value From Information TechnologyDebate QuestionAll Outsourcing Arrangements Are Not EqualViable Outsourcing Arrangements Find the Sweet SpotDifferent Arrangements Require Different ManagementEnterprise Architecture Matures Over TimeOutsourcing Can Accelerate Architecture MaturityRelative Stock Performance of Dow and DuPontClosing Thoughts on Dow and IT OutsourcingKey Outsourcing DecisionsIT and Business Process Outsourcing: Promises and Risks1.pdfWillcocks, Reynolds, Feeny 9 Core Capabilitieslec17.pptx.pdfDow Financial PerformanceMIT OpenCourseWarehttp://ocw.mit.edu 15.571 Generating Business Value from Information TechnologySpring 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.Center for Information Systems Research (CISR) © 2009 MIT Sloan CISR - RossCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - RossJeanne W. RossDirector & Principal Research ScientistCenter for Information Systems Research (CISR)MIT Sloan School of Management 15.571 Class 17: IT OutsourcingGenerating Business Value Generating Business Value From Information Technology15.571 From Information TechnologyCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - RossCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - Ross0Willcocks, Reynolds, Feeny 9 Core CapabilitiesWillcocks, Reynolds, Feeny 9 Core CapabilitiesCapability DescriptionLeadership Integrates the IS effort with business purpose and activityInformed Buying Manages the IS sourcing strategy to meet the needs of the businessBusiness Systems ThinkingEnsures that IS capabilities are envisioned in every business processRelationship Building Gets the business constructively engaged in operational IS issuesContract Facilitation Ensures the success of existing contracts for external IT servicesArchitecture Planning and DesignCreates the coherent blueprint for a technical platform that responds to present and future needsVendor DevelopmentIdentifies the potential added value from IT service suppliersContract Monitoring Protects the business’s contractual position, present and futureMaking Technology WorkRapidly trouble-shoots problems which are being disowned by othersacross the technical supply chainCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - RossCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - Ross2 Dow's reliance on outsourcers will ultimately limit its success in growing the business.Debate QuestionDebate QuestionCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - RossCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - Ross3Three Mutually Exclusive ModelsTransaction Arrangement Co-sourcing Alliance Strategic PartnershipWhat is OutsourcedNarrowly defined, repeatable processProject management andimplementationBroad responsibility for operational activitiesKey MetricsQuality and/or cost pertransactionProject success Bottom-line impactClient-Vendor RelationshipArms length Joint project management Negotiated accountabilityClient Success 1Vendor Success90%90%63%75%50%50%Increasing Risk1 Client views based on 80 surveys of outsourcing success. Questions asked: “Within the firm we view this outsourcing agreement as a success” and “The vendor is profiting from the outsourcing arrangement.” Percentage is based on number of respondents who ratedthe statement as a 4 or 5 on a scale of 1 to 5.Source: Ross, J. and Beath, C., "Sustainable Value From Outsourcing: Finding the Sweet Spot," MIT Sloan CISR Research Briefing, Vol. V, No. 1A, March 2005.All Outsourcing Arrangements Are Not EqualAll Outsourcing Arrangements Are Not EqualCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - RossCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - Ross4TransactionArrangementCo-Sourcing AllianceStrategicPartnership1 Based on surveys of 80 IT managers.2 Based on eight case studies.•Cost Savings;• Variable Capacity;• Management Focus onCore Competencies1stChoice Provider Moving UpValue Chain• Capability to Deliver Broad Range of Specialized Services;• Integration Expertise;• Disciplined Practices;• Economies of ScaleClientExpectations 1VendorOfferings 2• Best Practice• Variable Capacity • Management Focus on Core Competencies•Standard BestPractice Process Components;• Economies of Scale;• Distinctive AssetsLow MaintenanceRelationship;Reasonable Margins;Innovation to Ensure Process ImprovementsSweetSpot 2Viable Outsourcing Arrangements Find the Sweet SpotViable Outsourcing Arrangements Find the Sweet Spot•Cost Savings;• Access to Expertise on Demand• Labor Arbitrage;• Project Management Expertise;•Expertise onSpecialized TechnologiesVariable Project Staffing;Leverage Offshore;Disciplined Project MgmtCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - RossCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - Ross5Different Arrangements Require Different ManagementDifferent Arrangements Require Different ManagementKey Management PracticesTransaction Arrangement Co-sourcing Alliance Strategic Partnership Transaction is a core competency of the vendor Desirable outcomes clearly specified Simple hand-offs—most often electronic data exchange Low management overhead Client is able to “let go”(doesn’t micromanage) Rigorous processes—disciplined project management Shared management—joint accountability Metrics focused on joint accomplishments: time to market; budget limits (Don’t attempt to measure individual contributions of vendor) Regular renegotiation of the deal—as business and technology change First-choice provider status: client finds additional services to outsource to compensate vendor for lowering costs Vendor committed to client success Client accepts vendor-imposed process discipline Strong relationship leaders on both client and vendorsideCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - RossCenter for Information Systems Research (CISR) © 2009 MIT Sloan CISR - Ross6Business SilosStandardizedTechnologyOptimizedCoreBusinessModularityStrategicBusinessValue25% 46% 27% 2% % of FirmsEnterprise Architecture Matures Over TimeEnterprise Architecture Matures Over TimeSource: Enterprise Architecture as Strategy: Creating a Foundation for