Legacy Application Support
With the move to large integrated software suites, some companies have chosen to outsource support of their legacy applications. Like data center operations, the rationale includes the fact that support of these “sunset systems” is not a core competency.
A company might choose to outsource legacy systems if any of the following are true: 1. It wants its internal IT staff to focus on other work, such as the implementation of a new packaged system or the development of Web-enabled applications. Most IT managers will attest to the fact that it is difficult for staff to meet project deadlines when they are also responsible for maintaining production systems, because production problems are a higher priority than new work. Although it is possible to minimize permanent staff involvement by using staff augmentation, concerns about co-employment and the desire to eliminate the day-to-day management of these employees makes outsourcing a more appropriate choice.
2. The company wants to ensure that the old systems are shut down when the new ones are installed. Many companies have a poor history of retiring old systems, even after the new ones have been in operation for several months.
To achieve the cost savings projected for the new system, it is often vital that duplicate systems be eliminated. When a company pays an outside company to support the systems, costs are more visible and easier to eliminate.
3. It fears the flight of key employees who are supporting the legacy systems. In a tight job market, employees who fear that their jobs may be eliminated when a system is retired, or who prefer system development to maintenance, will leave. By transferring responsibility to a service provider with expertise in system support and a large staff, the company has reduced its risk.
The primary concerns associated with outsourcing of legacy systems are: 1. The vendor may not have staff with the needed technical expertise. This is particularly true for very old systems, which may have been written in arcane languages on now obsolete equipment.
2. The learning curve for the vendor’
s staff may be steep, because many legacy
systems were either developed in-house or are highly customized versions of packaged software. In these cases, the vendor would have to train staff, rather than having people with the needed expertise ready to deploy on the engagement.
3. Costs may be higher than the current internal costs. This is often true in short engagements, or when the company has been operating with a lean staff.
Outsourcers typically achieve rapid cost savings on commodity functions, which legacy systems are not. Otherwise, they depend on engagements of three to five years for cost efficiencies.
Packaged System Implementation
Some companies have chosen to outsource the implementation of packaged software, frequently to the vendor who developed the software, or to a niche service provider that specializes in the system. Unfortunately, however, the approach can be a dangerous one, and should be undertaken only after a careful consideration of the risks.
The reasons a company would outsource packaged software installation include:
§ The vendor is the expert.
§ Because the vendor is the expert, it can implement its software cheaper than IT can.
§ The vendor’
s implementation will be faster than IT’
s.
§ While these circumstances can be true, they do not address the primary concerns:
§ If no internal staff is involved, there is no knowledge transfer, and the company will be dependent on the vendor for ongoing support. Even if the vendor’
s support is cost-effective, the absence of internal expertise makes a future “divorce” more difficult.
§ Without internal involvement, the vendor may install a “vanilla” version of the software that fails to meet the customers’
unique needs. Business knowledge
is key to successful system implementation; and, while the vendor may have industry expertise, internal staff know the idiosyncrasies of their company and its customers best.
To minimize long-term risks, IT should consider using staff augmentation for system implementation. The company can hire the vendor’
s experts on a time and materials
basis, requiring them to work with internal staff to transfer knowledge. Alternatively, it can contract for specific portions of the work to be done by the vendor at a fixed
price. Such a fixed-price contract can be considered a form of outsourcing. In this case, it is important that at least one member of the internal staff be involved in the project. If that is not possible, perhaps because work is being done off-shore, a formal transition should take place once the work is completed.
New System Development
System development is similar to packaged system implementation in that a company increases its risks by outsourcing the entire project, even if it plans to have the vendor provide ongoing support of the system. To ensure that the company retains internal knowledge of the system, it may want to use a combination of staff augmentation and selective outsourcing as outlined above for packaged system implementation. In this scenario, IT would typically retain responsibility for all strategic decisions. Working with its customers, it would define the requirements of the new system. It might outsource portions of the development, including the writing of detailed specifications, coding, and unit testing, while retaining overall project schedule responsibility.
CONCLUSION
Staff augmentation and outsourcing are valuable tools for the IT manager. Although the services provided may seem similar, there are fundamental differences between them, and they are most effective when used on specific functions. While outsourcing can reduce costs and free internal staff to work on higher-priority projects, it should be used only when work is clearly defined and when the company is willing to relinquish day-to-day control. For other projects, staff augmentation is a less risky although often more costly approach.
Chapter 25: The Essentials for Successful IT
Outsourcing
Ralph L. Kliem
Irwin S. Ludin
OVERVIEW
Information technology (IT) outsourcing is the use of a third party to provide services rather than using those in-house. It has become a growth industry and will continue to grow. Today, it has become commonplace for firms to outsource at least some aspect of their IT services. Some of the more popular services are:
§
Application development
§
Data center
§
Desktop/personal computers
§
Network (e.g., LANs, WANs)
§
Support services/help desk
§
Training
The above list is by no means exhaustive and can, in fact, include many services that are not IT in nature. However, this chapter will guide organizations through the pitfalls that often plague IT outsourcing activities, like:
§ Cumbersome transition into and out of an outsourcing relationship
§ Incomplete or vague contracts
§ Lack of an infrastructure for supporting an outsourcing relationship
§ Negotiating a contract with an unsuitable vendor
§ Poor communications with vendors
SUCCESS TIP #1: DETERMINE THE BUSINESS CASE FOR
OR AGAINST OUTSOURCING
Many firms do not thoroughly analyze the need for IT outsourcing. Instead, they seek outsourcing because it provides immediate gain, only to later realize that it delivered long-term loss. As a result, some firms lock themselves into massive, long-term contracts only to find that such an arrangement is a liability rather than an asset (e.g., delivery of no longer necessary services at above market prices). A good business case, looking at different pricing alternatives (e.g., fixed or cost plus), and varying payback periods (e.g., three, five, or ten years) can help determine whether outsourcing will achieve savings (e.g., five to 20 percent), desirable levels of quality,
and other objectives. Outsourcing should not occur, however, if the service is mission critical, can be done more effectively in-house, cannot provide a savings of five percent or more, or fear exists over losing controls (see Exhibit 1). When forming the evaluation team, the organization should be sure to: Exhibit 1. IT Outsourcing Process
§ Determine the required knowledge and skills (e.g., accounting, technical, or business management)
§ Designate a project manager
§ Determine the objectives of the team
§ Define each member’
s roles and responsibilities
When conducting the initial review, the organization should be sure to:
§ Define the objectives and scope of the review
§ Conduct an inventory of all assets (e.g., software, hardware, or data)
§ Determine which services are mission critical; which are important but not critical; and which are nonessential
§ Determine existing capabilities for providing current services
§ Determine core competencies
§ Determine the internal service requirements
§ Define the requirements of internal customers
When conducting the preliminary external review, the organization should be sure to:
§ Define the objectives and scope of the review
§ Develop criteria for selecting which vendors to look at
§ Determine the research approach (e.g., interview or literature review)
§ Determine the core competencies of the firms
When performing the cost/benefit analysis, the organization should be sure to:
§ Account for the time value of money
§ Determine a payback period
§ Determine the type of outsourcing agreement (e.g., co-sourcing, outtasking)
§ Calculate different pricing options (cost plus, fixed price, time and materials)
§ List assumptions and constraints