Managing IT outsourcing - Essay Example

Managing IT Outsourcing: An Overview of Functional and Strategic Management December 10, 2006 An Overview of Functional and Strategic Management 1 IT Outsourcing 3 Business Processes Outsourcing 3 Chart 1: The Business Process of Outsourcing 3 Tools and Resources 6 Cost and Return on Investment (ROI) 7 Risk Management 9 Data Security 10 Relationship Management 11 Chart 2: Relationship Value and Stakes 12 Conclusion 14 IT Outsourcing IT outsourcing is gaining importance in the business world, especially as businesses begin to work on a multi-national level that transcends geographic boundaries. This means that there is some importance in understanding the components that make IT outsourcing work. The following is an overview of managing the IT outsourcing relationship, which includes the business process of outsourcing, the tools and resources, understanding the cost and return on investment. Furthermore, there will be some examples of risk management and data security, as well as a look at the dimensions of relationship management and its importance. Business Processes Outsourcing Business Process Outsourcing is best explained by Medas Company, an outsourcing management consultant. Their document, A Practical Guide to Business Process Outsourcing (2006) gives straightforward information on the actual process of Managing IT Outsourcing. The following matrix (Medas 2006) shows the services and steps in functional IT management outsourcing: Chart 1: The Business Process of Outsourcing (Image from: Medas p 4 2006) Medas (2006) states that first, it is important for the manager to identify the organisation's needs as the scope of activities, the reasons for outsourcing, and how this will impact or change the business model. This includes understanding the current organisational structure, the IT system infrastructure including the team members functional roles and the systems that support them. Medas notes that the current volume of transactions being internally processes must be examined. Once the current functionality and organisation's objectives for outsourcing have been established, Medas states that the next step is to choose an outsourcing partner: "the Outsourcing partner's people need to fully understand the organisation's needs. They need to understand the systems that support the back office processes as well as having experience in managing complex systems environments, running and supporting hardware and developing systems, including web enabling. At this stage, it is also important to consider whether the Outsourcing partner can ensure network connectivity in a secure environment that permits data integration" (Medas pp 10 2006). The next step in the process of managing IT outsourcing is to agree on a commercial framework. This allows the involved parties to agree on the provisions of service, and should compromise "Details such as fixed costs, unit pricing and the level of investment could all be defined in the commercial framework" (Medas p 11 2006). Lastly, the IT manager wants to develop a transitional plan that establishes the business process and features. This includes: A review of the current systems, processes and organisational structure -identifying which systems are to be transferred (Medas p 11 2006). Definition of services to be provided (Medas p 11 2006). Agree the definition of service levels in terms of Service Level Measures (SLM) and Service Level Agreements (SLA) (Medas p 11 2006). How employees will be affected by the transition e.g. how many staff and what types of jobs will be transferred, where they will be located, how they will be dealt with in terms of motivation and ongoing training and development (Medas p 11 2006). How the process of staff transferral will be managed (TUPE) and what changes, if any, are to be made to the retained organisation - and how this will be communicated to all those involved (Medas p 11 2006). The stages of the transition - and the timeframe involved (Medas p 11 2006). Agree and finalise the contractual terms of the arrangement (Medas p 11 2006). Tools and Resources Tools and resources are greatly important to managing IT outsourcing. To better understand what tools and resources compromise the business process outlined above, this essay turns to the research of Yu-Che Chen, Visiting Assistant Professor at the School of Public and Environmental Affairs in Indiana University, Bloomington, and James L. Perry, Associate Dean and Chancellor's Professor at the School of Public and Environmental Affairs in Indiana University, Indianapolis (2003). At its core, the idea of IT outsourcing is using external companies for technology information. The common tools and resources for this to be effective are "network, desktop, application, and web hosting" (Chen and Perry pp 13 2003). There are multiple IT vendors with capabilities in the technology area, and using these as a resource for outsourcing allows the primary manager to have access to technologies that were not available to the sole company (Chen and Perry pp 13 2003). This includes: network services, data center services, desktop, call centers, web hosting, and application services (Chen and Perry pp 13 2003). The functional manager examines IT outsourcing by examining the "entire spectrum of relevant management tasks" (Chen and Perry pp 13 2003). There are two ends of this spectrum. "At one end of the spectrum, client agencies outsource the development, implementation, and coordination of IT services" and "At the other end of the spectrum, the client agency is heavily involved in the development, implementation, and coordination of IT service" (Chen and Perry pp 14 2003). The concern in IT management outsourcing is that the challenges in technology increase as the breadth of the project increases, and in this manner the value chain of information technology becomes increasingly important. Chen and Perry state that: Information technology services involve the use and management of hardware, software, people, information, maintenance, and support. The more comprehensive and integrated the services provided by a vendor, the less work on the side of the client (Chen and Perry pp 14 2003). Cost and Return on Investment (ROI) According to CMP Media, LLC, "General Electric recently divested a 60% stake in General Electric Capital International Services (GECIS), its global business-process-outsourcing operation, to two venture-capital companies, General Atlantic Partners and Oak Hill Capital Partners, for $500 million" (Robinson and Kalokota p 2 2004). There are significant costs in entering into an IT outsourcing project, many which stem from constantly changing technology and market variables. In turn, these create a need for "a rapid adjustment in ROI and value-management techniques" (Robinson and Kalokota p 2 2004). Particularlily, functional management must examine what initiatives the outsourcing will require, and what evolutions will occur that create changes in the ROI estimates and functional costs. Cost in outsourcing comes from multiple places: Salary-sensitive ROI; Location-sensitive ROI; Project-oriented vs. process-oriented ROI (Robinson and Kalokota 2004). In one study by Hewitt, they found that salary-sensitive costs are increasing, particularly for software development and IT-enabled services (Robinson and Kalokota 2004). The cost-return strategy must also take into consideration the low-cost country-location, where wage limits expand offshore-outsourcing projects (Robinson and Kalokota p 3 2004). Many companies have moved towards total outsourcing to hedge against location issues, for example Chicago-based Aon Corp. sold its claims-processing unit to Singapore-based Scandent Group (Robinson and Kalokota 2004). Another concern for managing the IT outsourcing is the process vs. project ROI (Robinson and Kalokota 2004). This is the nature of the outsourcer's functionality in relationship to the organisation. Process-oriented outsourcing is the business process operations (BPO), where a continuous workflow is implicated (Robinson and Kalokota 2004). The process-oriented application is seen in call centers, and have harder to quantify objectives (Robinson and Kalokota 2004). Project-oriented outsourcing has time-specific functions with start and stop goals, for example the "IT application development and maintenance, which are well defined" (Robinson and Kalokota p 4 2004). This requires that functional managers monitor the critical variables that impact the ROI: "Every initiative starts with good intentions and an execution plan to deliver what top management believes the company needs" (Robinson and Kalokota p 5 2004). It is highly important in this aspect that the benefits of operational efficiencies, increased quality, and lower costs, are not diminished when the business process of outsourcing is executed (Robinson and Kalokota 2004). Therefore, the management of IT outsourcing must monitor the critical components that impact the return-on-investment at each stage throughout the business process. This requires that the ROI monitoring responsibility also be defined by assigning a person to the project ROI. To do this, "assign ROI monitoring to someone who has accountability for both interim and final deliverables that support the achievement of overall objectives" (Robinson and Kalokota p 6 2004). Risk Management A risk management strategy is developed from identification, assessment and prioritization of risks. Risk identification is evaluated by the "program elements, processes and requirements to a level where they can perform valid assessment," where the identification information "varies according to the phase of the program" (Kerzner p 726 2006). This is followed by an assessment of those risks and their relationships. "Risk assessment is the process of identifying and analyzing program areas and critical technical process risks to increase the likelihood of meeting cost, performance and schedule objectives" (Kerzner p 719 2006). That is to say, risk assessment is a mathematical probability that an event will occur based on the probability of a failure from maturity and complexity multiplied by the consequence (Kerzner p 719 2006). Finally, in the risk management strategy, Kerzner points out that continued monitoring, called risk monitoring, is "the process that systematically tracks and evaluates the performance of risk handling actions against established metrics throughout the acquisitions process and provides inputs to updating risk handling strategies, as appropriate." To the outsource manager, this is the flexibility in strategy that allows it to be applied over the lifecycle of the business, with the future goal to continually minimise risks before they develop into crises. Data Security Cisco Systems (2002) is a leading technology manufacturer and supplier world-wide. Cisco Systems (2002) identifies components of IT management outsourcing that require data security. They state that because information is a key management strategy in the business technology environment, increasing importance on data security is necessary for capital business. Foremost, Cisco (2002) states that the IT manager should protect any form of information that is vital to the business integrity and well-being, but this is increasingly difficult when outsourcers become involved. Because the physical components of IT outsourcing include networks of data that are inter-related, it is necessary for a business to understand and develop resources that monitor, manage and stay current with security advances to protect network attacks (Cisco 2002). "Networks have become increasingly complex because they support virtually all of a company's business operations" (Cisco p 4 2002). This is also part of the risk management strategy, and the elements of data security include prevention of: Data Tampering; Confidential Data Loss; System Failure; Website Intrusion; Denial of Service; Email Intrusion; and Virus Incident (Cisco p 4 2002). ICT Group, Inc. (2005) is a leading global provider of outsourced customer management solutions. Their newsletter editor recommends several techniques for managing data security while outsourcing. They maintain that protecting client data is a key priority that embraces the following components: physical security; control of data centers where hardware and software is located; electronic security measures throughout the network; disaster recovery plans; and client protection initiatives that protect information, data encryption, and non-disclosure agreements (ICT 2005). The other concern for data security in the legal and political landscape is that off-shored outsourcers exist in nations with different legal determinants than the United States. This means that the large volumes of personal and business information transferred between two countries may not be subjected to the same information security laws and acts of the primary country. There are multiple resources that exist to support the IT manager in outsourcing data security. One example is The Center for Information Policy Leadership: The Center for Information Policy Leadership provides strategic consulting, legal, and policy development services for information industry and information-dependent companies. The Center brings together business leaders, government officials, consumer advocates, and academic experts to provide thought leadership on a variety of information policy topics, including global privacy law development, privacy notices, public-private data sharing, and use of personal information for authentication (Eisenhauer p 4 2005). Relationship Management Functional management strategy above has outlined the important concepts and utilisation of managing IT outsourcing. However, these components will not be sustainable if there is not a strong strategic focus on relationship management between the primary company and the outsource company. This means that while the tools, resources, and functionality in the previous sections is highly valuable, there is still a need for adequate communication and a strong, open initiative towards success. Recalling the business process of outsourcing (Chart 1), relationship management has a significant impact on all the functional components of IT outsourcing management. The following chart shows the values of the outsourcing relationship: Chart 2: Relationship Value and Stakes (Image from: Chamberland p 3 2004) To better understand the importance of IT outsourcing management in a relationship context, IBM shows that there are multiple strategies to improve the relationship management. The leadership capabilities are different in IT outsourcing. There is a need to "Develop an ongoing governance and relationship management structure to address conflicts and build an effective working relationship between the client and the vendor" (Lesser p 1 2005). It is important for the management team to decide not only how these decisions in outsourcing will be made, but also the mannerisms in which decisions will be communicated throughout the value chain (Lesser 2005). This is usually completed through a "measurement and reporting framework that communicates how well the outsourcing arrangement is operating" (Lesser p 1 2005). Furthermore, the value of the outsourcing partnership is highly dependent on the "leadership, transition management, governance and measurement activities that occur early in the outsourcing relationship" (Lesser p 1 2005). Steve Norton, managing director of Financial Services at Fujitsu Services (p 8 2005) comments that "It's also important not to let the relationship stagnate [] Establish continuous improvement expectations and work with your supplier to implement ideas that they generate." Norton (2005) also explains that outsourcing is a shared responsibility between customer and supplier, rather than an abdication of the responsibility. In the relationship, risks and reward, as well as stakes and values, should be communicated between both parties in the outsourcing relationships. He (Norton 2005) explains that communication and relationship management must be a focus because "The bottom line is that mutually beneficial contracts are essential; if an outsourcer fails, your business could also potentially have failed." Conclusion In conclusion, the business process of outsourcing includes multiple steps and strategies, where the manager develops communication, service, and transitional plans that explain the processes and features of the outsourcing relationship. The tools and resources are very important to managing this relationship, and it should be an initiative of the management strategy to substantially examine the cost and return on investments, especially in regards to the changes that are represented as the cost of technology changes. Finally, all these components, including the data security and risk management, are only viable if there is a sustained relationship between management and outsourcers. References Chamberland Denis (2004) "Managing the Outsourcing Relationship: Walking the Tightrope (Part II)." Gowling Lafleur Henderson. Vantage Partners. December 10, 2006 Chen, Yu-Che and Perry, James (2003) "IT Outsourcing: A Primer for Public Managers." Eds. Mark A. Abramson and Paul R. Lawrence, IBM Endowment for The Business of Government. December 8, 2006 Cisco Systems (2002) "Securing Your Business Information-Strategies for Outsourcing Security Measures." Cisco Systems Inc. December 8, 2006 Eisenhower, Margaret (2005) "Privacy and Security Law Issues in Off-shore Outsourcing Transactions." Hunton & Williams, Atlanta Georgia. December 8, 2006 ICT Group (2005) "From the Editor-Offshore Data Security." December 8, 2006 Lesser, Eric (2005) "Outsourcing The Learning Function. IBM Institute for Business Value." December 10, 2006 Medas (2006) "A Practical Guide to Business Process Outsourcing." Medas Corporation. Villiers House, The Broadway, Haven Green, Ealing, London W5 2BR. December 8, 2006 http://72.14.253.104/searchq=cache:lqbzcXUReyAJ:www.math.unipd.it/sperduti/GESTIONE/Medas-Practical_Guide.pdf+Outsourcing+Processes+filetype:pdf&hl=en&gl=us&ct=clnk&cd=5&lr=lang_en Norton, Steve (2005) "Managing The Outsourcing Relationship." Financial Services, Fujitsu Services. December 10, 2006 Robinson Marcia and Kalakota, Ravi (2004) "Managing the Changing ROI of Offshore Outsourcing." CMP Media LLC December 2004 December 8, 2006. Read More