Success Tip 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

■ Develop alternatives

■ Make a recommendation

Outsourcing Cheat Sheet

Outsourcing Cheat Sheet

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