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CS551 Advanced Software Engineering

Homework #5 Due September 17, 2003

Name: Kartik Vishwanath

ID: 990023570

IT Outsourcing Evolution – Past, Present, and Future – A Paper Critique

[Based on the paper ‘IT Outsourcing Evolution – Past, Present, Future-Jae-Nam Lee, Minh Q. Huyunh, Ron Chi-Wai Kwok, and Shih-Ming Pi’ ACM Communications May 2003/Vol.46 No. 5 Page 84]

A Summary

The paper provides an overview of the current outsourcing trends and traces their evolution from previous trends. It analyses the patterns and relationships inherent in the outsourcing done in the past and attempts to predict future trends in outsourcing. It also proposes a two-stage model for illustrating the conceptual difference between the outsourcing trends of the past and the outsourcing done now.

Past Trends: -

a) Make or Buy - This was the earliest form of outsourcing; in this the organizations considered outsourcing as a product. Thus the decision that the organization had to make was whether it should buy the product or develop it in-house.

b) Motivation – During this phase a lot of pros and cons involved with outsourcing were analyzed and used by companies to make the decision. For instance outsourcing was supported by reasons such as reduction in costs, better use of advanced technologies and so on; It was also criticized by arguments such as loss of control by the client, loss of competitive edge in information management. It was up to the organizations to weigh these two and decide.

c) Scope – With time outsourcing became quite popular so the questions of whether opt for outsourcing or not did not remain. Organizations now began to explore the extent to which outsourcing should be done. For instance they had to decide whether all information services should be outsourced or only a part? Should they involve only a single vendor or multiple vendors? What assets should they entrust to the service providers?

d) Insourcing vs. Outsourcing – The benefits of insourcing were compared to those of Outsourcing. A large number of studies reported that outsourcing was not always successful. Also there were tradeoffs between many factors and these had to be considered before making any decision on outsourcing.

e) Contracts – At this point outsourcing had already planted itself in the organizations and therefore the contract between the service provider and the organization became crucial. There were multiple clauses for unexpected contingencies, increase in costs etc. All possible contingencies could never be mentioned in the contract therefore client-provider relationships had to be based on trust also. This led to the next point discussed.

f) Partners – The need for trust between the Clients and the service providers led to flexible partnerships between them. The effective use of the partnership became a key indicator of the success of the outsourcing.

The Two-Stage model

This model divides the all the developments that took place before the evolution of partner based outsourcing as stage 1 and partnership based outsourcing as stage 2. Nowadays the emergence of partnership-based outsourcing is due to the fact that IT services are more varied now than ever before and a lot of these services are now transferred to the service providers. Therefore the service provider takes a lot more risks and puts in more investments than ever before. Thus a win-win situation is desired now.

In stage one a client normally controlled and dictated the projects, thus it was a self-centered approach. We can say that stage one was client self-centered, had a hierarchical relationship (where the control and ownership was organized in a hierarchy), and was basically a win-lose situation with the service provider in a losing position.

During stage 2 the organizations realized that it was more important to use IT services effectively rather than owning and controlling a project. So the emphasis shifted from proving the superiority of the IT infrastructure of an organization to IT’s impact on efficiency of the business process. This increased the scope (refer point (C) above) of outsourcing to a point where the service providers themselves had to be a part of the business process and management. Often leading to service providers becoming stakeholders in the process. Thus stage two unlike stage one encompasses all 3 issues: -

• Strategic - A company tries to gain an competitive advantage by gaining key resources from a provider.

• Cost – A company tries for cost efficiency in terms of transaction cost, agency cost etc.

• Social – This explains how the relationships should be maintained with partners.

Stage 1 emphasized on one of these issues while in stage 2 there is a paradigm shift towards encompassing all three.

The Future of Outsourcing – ASP

ASPs or application service providers offer services to manage and deploy applications. With the advent of the Internet age the applications can be deployed over the web and this has resulted in the popularity and growth of this industry. Companies that need to communicate over large distances can also use the services of the ASP to do things such as manage their sales, purchases etc. Typical solutions provided are software solutions, systems implementation, data centers etc.

The advantages offered by ASPs include –

1) Since ASPs offer timely services and packaged solutions it is quite easy and fast to market them

2) They have a strong IT expertise.

3) They offer low cost – Since ASPs maintain services for specialized agencies and due to their expertise they can reduce the cost.

ASPs have certain drawbacks also –

1) Since the ASP handles critical applications, a failure can be quite detrimental for the client.

2) Incompatibility in the systems of both the client and ASP can further complicate the integration.

3) Since the client has to share his critical information the issues of mutual trust remain.

If a strong alliance based on the 3 major issues of strategic management, cost, social as discussed above is forged then ASPs can contribute to a major success of the company.

Strengths

1) The paper presents an interesting and effective way of assimilating past experiences in a scientific manner to provide a categorization of a business process.

2) The paper focuses more on the relationship angle and also provides pointers on how to build a good relationship with a service provider; this is a facet of outsourcing, which is often overlooked. The points may prove to be quite useful to organizations planning to use the ASP model for outsourcing.

Weaknesses

1) The paper states that the stage 2 kind of outsourcing is not client-centered, but fails to explain why. This is because the paper states that even in stage 2 the client dictates the policies that should be followed, sets the expectations etc. that in my view are still client-centric. The service provider may have more involvement in the business process but the client is still controlling the entire process.

(2) The paper does not use the patterns and trends to predict new trends, though it specifically states that they can be used to do so. Also I fail to understand how a two-stage model, which has two diagrammatically opposite standpoints, can be used to predict future trends.

Critical Question

1) A point to ponder upon is that for outsourcing to ASPs requires that critical business data be shared with a third party. The inherently implies that both client and service provider have a high degree of trust. Will this be possible in a scenario where there is high competition and ASPs catering to more than one company (possibly a competitor), with similar interests (since they claim expertise in a particular domain)?

2) Since a large chunk of the business process will be managed by the ASPs the clients will demand very good services with almost zero failure. Wont these conditions strain the mutual trust (social aspect as discussed in the paper) between the two organizations? Also with increasing complexity of business applications and load on them, will the ASP be able maintain the service efficiency?

3) Incase of a failure of a service provider’s applications. Will the client have to maintain a backup system? And what will be the role of the service provider in such a case? .

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