Outsourcing information technology

During the past five weeks of this Critical Thinking: Strategies in Decision-Making” class, we as a team has focused on the problems that outsourcing of Information Technology (IT) services to an offshore consulting company can create. We use critical thinking skills to analyze decision-making techniques that will result in an implementation and evaluation plan. Due mostly in part to blockbuster drugs like Viagra coming off patent, revenues have dropped off and management is looking for a solution to stop the bleeding.

Just so we have a clear picture, a blockbuster drug is a prescription drug that generates over 1 billion dollars in sales per year. So from this you can see the lack of new blockbuster drugs in its pipeline.  The combination of a depleted drug pipeline in addition to blockbuster drugs coming off patent means revenue problems for this company for the next few years.  The business goal of the pharmaceutical company is to reduce expenses to counter the loss of projected revenue. In an effort to support this objective, management has decided to investigate the possibilities of outsource its entire IT infrastructure to an offshore outsourcing company, keep the IT infrastructure and staff in-house, or outsource individual components of the IT infrastructure?

It’s no secret that the IT departments of many organizations are considered a cost centers, or a “budget-breakers”. Cost centers tend to deplete the revenues without directly putting the revenue back into the company. IT departments can be considered a necessary evil in many business organizations; they maintain critical business data while enabling the company to compete in today’s global Internet economy.

The most obvious benefit of outsourcing is the low cost. For example: compared to a U.S. call center, outsourcing can save companies up to 50% in operational expenses. But there is more to why people are shipping call centers to countries such as India besides cost. Benefits such as an educated, English-speaking labor pool, low employee turnover, and complimentary time zones all make outsourcing attractive. Therefore, outsourcing IT departments has become more prevalent in today’s global business environment.

One concern that companies face today when deciding to outsource their entire IT departments is the amount of security needed to protect their product, their financial records, and their customers. Ken Wheatley, vice president of corporate security, Sony Electronics states, “People are so focused on saving money and shifting operations that they don’t think about the safeguards that need to be put in place” (May 2005). Not all companies’ need the same type of security levels, which is a decision made based on the nature of the business. Wheatley also goes on to say, “U.S. based companies routinely underestimate the extra elements of risk introduced into the off shoring equation by issues such as poor infrastructure, political instability and legal systems that don’t line up with Western practices.” Wheatley continues to say that American companies are so set on saving money that they do not realize other countries do not have the same mindset and safe guards as we do”.

While reviewing the aspects of outsourcing portions of the information technology (IT) department, task force managers measured the cost risk benefits of keeping its better run IT operations in-house. The IT department was divided into five sections, application development and maintenance, operations, database and systems administration, voice and data networking infrastructure, and technical training. A study was performed against each of these organizations regarding how they measured against industry leading outsource consulting companies. A baseline of criteria was established for measurement purposes that included the number of full time salaried employees and annual salaries, number of years experience, employee educational achievements and certifications, and efficiency of departmental work flow process.

In addition the business management teams consulted with several IT consulting companies to gather as much information as possible for the considered outsource IT organizations. According to preliminary results from an outsourcing study conducted by Cutter Consortium, 73% of companies surveyed outsource some part of their IT services (Cutter Consortium, 2000). When asked which aspects of IT are outsourced, the top five areas were:

  • Application development: 52%
  • Hardware maintenance: 47%
  • Training: 45%
  • Web design: 40%
  • Application maintenance: 35%

When asked to compare the amount of IT activities outsourced one year ago to the current amount, 50% said their companies are currently outsourcing more than they did a year ago. The top two reasons for increased outsourcing were: satisfaction with a previous outsourcing experience (21%) and scarcity of qualified personnel (20%). (Cutter Consortium, 2000)

The task force analysis showed that the in-house Database and System Administration, and Operations organization were meeting and exceeding the offerings of the offshore outsourcing company. Management and non union employees were working off-hours to perform system maintenance activities that cannot be performed during the normal workday. These activities would be considered off-hours by the consulting company according to the service level agreement negotiated and additional charges would have to be made.

Armed with this data analysis along with data recorded internally the pharmaceutical project team narrowed its focus on the Application Development and Maintenance, Voice and Data Networking Infrastructure, and Technical Training organizations for possible outsourcing. The team also submitted this data into an online decision tree algorithm to determine the cost risk of keeping these IT operational groups in-house.

A recent report, which reviewed three hundred company technology-decision makers, pointed out that just twenty eight percent of associations suppose that IT outsourcing can offer major cost savings.  In addition, the study discovered numerous fundamental concerns in the minds of possible outsourcers.  Over half the respondents pointed out that a defeat of internal knowledge was a major drawback of outsourcing, while another forty-one percent designated that lower service quality was a main concern.  Potentially the most worrying statistic for outsourcing companies is the fact that such concerns were considerably lower merely two years ago when only 23% pointed out service quality as a major drawback.  While this survey appears to some extent of an outlier statistically, it does agree with the recent inclination seen in many large companies who are getting IT work back in-house.  Such news elevates more questions concerning the sustainability of outsourcing and its long-standing effects on business.

During the course of gathering data points with relation to evaluating and analyzing the good and bad aspects of outsourcing the data seemed to contradict each decision. With the use of a decision tree algorithm the pharmaceutical company’s task force members have come to the conclusion to outsource portions of the IT organization.

In the past the pharmaceutical company has conventionally favored to uphold a large part of its IT activities in-house but is now more and more looking to outsourcing as a way of better balancing its internal core groups in addition to providing for better organization of the peak demands for resources. An additional driver for outsourcing is the augmented focus on core competencies, it looks from the angle of “do what the business is good at and get others to do what they are good at”. (Angell, 2004)

The chosen alternative is to form a hybrid of sorts.  Keep some IT functions in house while allowing other IT functions to be outsourced.  We know that trying to maintain a completely self contained infrastructure may be costly and cumbersome.  Therefore in the future the pharmaceutical company will continue to review outsourcing other IT departments such as help desk functions or corporate web site design, this will enable streamlining workflow and the possibility of cutting back staff.  Daily issues like password lock outs, new account setups, and email issues could be handled remotely.  Other things like intranet, business to business web services, firewall security and sensitive company data could be handled in house.  The pharmaceutical executives have made their decision based on industry best practices while saving the corporation millions of dollars in IT expenses.

Different opportunities for project management, such as keeping in-house IT infrastructure or outsourcing it, cause different human resource decisions. But anyway we need a Project Manager for this project. As for other employee, the number of them varies for different decisions. The information about employees’ skills is gathered at Monster.com and placed into the Table 1.

Table 1. Employees’ skills.

Title Skill set In-House Cost (per month) Outsource Cost (per month)
Project Manager Understands needs, identifies root causes of problems, and develops and implements creative and pragmatic solutions.

Ability to create detailed functional and technical design specifications for software development efforts.

Experience developing software tests for functional; stress, and regression testing that include manual, ad-hoc, and automated testing elements.

8,000 1,000
System Architect Software architecture leadership experience, including designing complex, multi-component software systems.

Experience establishing an enterprise framework for all phases of software development: requirements, design, development, testing, and delivery.

8,000 1,000
Software Developer Familiarity with all aspects of the development life cycle

Minimum of 3 years software development experience

Working experience with SQL, XML, COM, Java, Wi-Fi, USB, Windows XP

Strong communication and interpersonal skills

High-level problem solving skills

Strong mathematical and mechanical background preferred

Ability to handle multiple tasks

5,000 800
Software Consultant Must be able to work independently and with a team.

Experience in performing mass updates to mapping systems and maintaining high Quality Control standards.

Able to anticipate users’ needs and develop into documented solutions.

Must have good interpersonal skills to work with customer.

5,000 800
Hardware Consultant Cost estimations of hardware systems

Analysis of cost research data

Formulation of Cost Research

Modeling and simulation

4,000 700
Test Engineer Possesses general knowledge of QA systems and methodologies, use of debugging tools, knowledge of manual tests tools.

Ability to write and implement test plans.

Creates thorough technical/functional test plans/scripts and performs QA testing of end-user application development.

4,500 500
Helpdesk Officer Strong communication skill

Strong computer hardware and software skills

Ability to find bottlenecks where problems can occur

Ability to fix common problems and to find a way how to fix complex problems

Strong customer service skills

4,000 400

So, economy on the human resources in case of outsourcing IT infrastructure is sufficient.

Evaluation of keeping IT infrastructure in-house includes analysis of cost and quality of service risk issues. Keeping IT infrastructure in-house risks (with likelihoods of each risk) are:

  • Establishment of software development process can take extra time, so the project can exceed the limits of 18 weeks (high likelihood of the risk occurring)
  • Lack of experience in managing common software development problems (high likelihood of the risk occurring)
  • Risk of inappropriate staff hiring (medium likelihood of the risk occurring)
  • Risk of wrong choice and purchase of software and database for computer system development (medium likelihood of the risk occurring)
  • The project can exceed the limits of budget due to unforeseen technical problems (medium likelihood of the risk occurring)

Benefits of keeping IT infrastructure in-house are:

  • Full control over application development and maintenance
  • Fast feedback from staff
  • More flexible and accurate budgeting
  • Difference in mindset is absent

Outsourcing the IT infrastructure risks are:

  • Choice of unreliable IT vendor (medium likelihood of the risk occurring)
  • Difference in mindset can cause problems with customers (high likelihood of the risk occurring)
  • Overstating vendor’s price (low likelihood of the risk occurring)
  • Impossibility of precise project control (medium likelihood of the risk occurring)
  • Badly documented project can complicate system’s support (medium likelihood of the risk occurring)

Benefits of outsourcing the IT infrastructure are:

  • Cost savings on full-time employees’ salaries
  • Skilled computer engineering staff
  • Core competency – outsourcing companies are competent in business they do
  • Outsourcing companies provide 24/7 support

The less risky solution for the project management is always optimal. Therefore a risk minimization strategy is developed (Table 2).

Table 2. Risks minimizing strategy for outsourcing the IT infrastructure.

Risk Strategy
Choice of unreliable IT vendor It’s necessary to select a vendor who has experience in development and maintenance of software for pharmaceutical companies

It would be useful to talk with vendor’s customers, if they are satisfied with level of service

Overstating vendor’s price Finance department should check vendor’s estimate

A consultant can be engaged to control the project’s budget

Impossibility of precise project control Before signing the documents, we should discuss computer system vision with vendor’s key specialists

Regular meetings between Project Manager and vendor’s key specialists should be held

Vendor’s key specialists must weekly report about their work

Badly documented project can complicate system’s support Project Manager should monitor project documentation

Outsourcing portions of the IT infrastructure is carried out in two steps:

  • Step 1. Outsourcing of daily issues like password lock outs, new account setups, and email correspondence.
  • Step 2. Outsourcing of help desk functions and corporate web site design.

An evaluation period must be held between the steps to make sure that the first step was successful. The timeline for the outsourcing project is given in Table 3.

Table 3. The timeline for the outsourcing project.

Activity Time (in working days)
Analysis and choice of IT vendor 5 days
Negotiations with IT outsource company 3 days
Preparation and signing a contract for Step 1 2 days
Outsourcing of password lock outs 1 day
Outsourcing of new account setups 2 days
Outsourcing of email correspondence 1 day
Evaluation of Step 1 results 5 days
Signing a contract for Step 2 1 day
Outsourcing of help desk functions 3 days
Outsourcing of corporate web site design 3 days
Evaluation of Step 2 results 5 days
Total 31 days

So, all outsourcing process takes 31 working days.

An evaluation of the success of the solution must be made based on the actual costs, benefits, and return on investment. Throckmorton (2005) recommends using following questions for evaluation:

  • Is outsourcing giving you the results that you had anticipated?
  • Is the vendor meeting the goals and expectations you had for them?
  • Are you getting the feedback you anticipated from employees on the service being provided?
  • Do the goals, expectations, and/or fees need adjusted in any way?

Throckmorton advises to do this re-evaluation as often as necessary to ensure the relationship and need stays on track, which will only add to the success of the decision. (2005)

Reference

Koch, Christopher. (2005). Don’t Maroon Security. CIO Magazine – May 15, 2005. Retrieved on September 30, 2005 from http://www.cio.com/archive/051505/security.html

Michael Muh, (2000). Cutter Consortium: The Cutter Edge E-mail Advisor

http://www.cutter.com/research/2000

Marcia Angell, (2004) The truth about the drug companies. Random House, New York.

Monster.com (2005). Retrieved October 23, 2005, from http://www.monster.com

”Outsourcing Strategies – Guidelines for Evaluating Internal and External Resources for Major Information Technology Projects” (1998). Department of Information Resources, Austin, Texas. Retrieved on October 23, 2005 from http://www.dir.state.tx.us/oversight/outsourcing/outsource1.htm

Throckmorton, Robin (May 2005). “Part2: Is This a Solution to Help You Become More Strategic?” Strategic HR inc. Retrieved on October 23, 2005 from http://www.strategichrinc.com/articles/May2005.htm

“Starting a Project”. (2005). Project Management Information. Retrieved October 23, 2005 from http://www.projectperfect.com.au/info_start_project.php

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