OUTSOURCING CORE IT APPLICATION

Outsourcing Core IT Application

Outsourcing Core IT Application

Abstract

Information systems outsourcing is now almost standard practice for many companies. Outsourcing the information processing activities is a complex issue that entails considerable implications for the strategy of the firm. An important mechanism for managing the performance of outsourcing vendors is incentive contracts. But to develop an outsourcing contract the IS manager must quantify risks and benefits. However methods and tools for analyzing and quantifying outsourcing risks that IS managers have at their disposal are rudimentary. In this paper we offer a method and some mathematical models for analyzing risks and constructing incentive contracts for IS outsourcing. We are aware that most managers do not like to use mathematical models, consequently we have minimized the technical discussion and have illustrated how this model could be implemented using spreadsheet software for ease of use.

Table of Contents

CHAPTER 14

INTRODUCTION4

CHAPTER26

LITERATURE REVIEW6

Understanding Core and Critical Business Functions11

Impact of Application Management Outsourcing on Competitiveness12

Impact of Application Management Outsourcing on Business Functions12

Core competencies13

Resource-based theory14

Resource-dependent theory15

Transaction cost theory (TCT)15

Origins of the Cost Reduction16

Application Management Outsourcing versus Insourcing17

What might deter me from outsourcing?18

Agency cost theory (ACT)19

Partnerships20

Game theory20

Outsourcing information systems in the public sector21

Developing a framework for purchasing and licensing of electronic information22

THE CASE OF CLAIMS MANAGEMENT SERVICES29

Risk management's role in contracting and outsourcing30

Risks arising from contracting and outsourcing33

CHAPTER 443

METHODOLOGY43

CHAPTER 545

Conclusion45

REFERENCES47

Outsourcing Core IT Application

Chapter 1

Introduction

Information systems (IS) outsourcing has become a major issue for IS managers. The primary motivation for outsourcing portions of the IS portfolio is the potential for cost savings by the outsourcer. It is claimed that IS outsourcing vendors can achieve economies of scale and specialization because their only . business is information processing. IS outsourcing vendors can purchase equipment more cheaply, and allocate fixed cost more favorably. The potential for cost savings has lead many senior managers to enter into various types of contracts with IS outsourcing vendors. However, while some firms have achieved their cost reduction goals by outsourcing, others have had various degrees of failure (Due, 1992; Rochester and Douglas, 1990, 1993; Lacity and Hirschheim, 1993a). Many firms have had to prematurely terminate contracts and re-established their data centers (Lacity and Hirschheim, 1993b; Reponen, 1993). Others have had to seek out new vendors and write new contracts. And although the price of entry into IS outsourcing can be low relative to in-house cost, it can rise steeply after the outsourcer is ''locked-in''. A survey by Lacity and Willcocks (1995) found that in 53 out of 61 outsourcing cases, managers reported an unsatisfactory outcome. One explanation for some of the failures is the complexity of IS outsourcing transactions (Lacity and Hirschheim, 1993a; Loh and Venkatraman, 1992). Another explanation that has been given for IS outsourcing failures, is incomplete analysis of outsourcing decision problems, and the limited selection of decision models to support managers in analyzing the risks and benefits .Another survey found that nearly 75% of IS managers believed that their analysis and planning methods failed to adequately quantify relevant benefits from specific ...