Gerald DeHondt II Dr. Marvin Troutt Department of Management and Information Systems Kent State University.

Gerald DeHondt IIDr. Marvin Troutt

Department of Management and Information Systems

Kent State University

Purpose of OutsourcingLowered Development Costs

Primary business of the customer is an area other than systems development.

Utilize Knowledge Capital of the VendorBest PracticesSoftware and Systems ExpertiseEconomies of Scale

ChallengesTransition CostsTime and Effort Managing the VendorLegal and Liability IssuesOrganizational Culture

Purpose of this ResearchInvestigate impact of unanticipated costs.Propose potential methods of mitigating

these cost challenges.

Anticipated Cost SavingsOne in three outsourcing projects targeting

cost reductions fail to meet expectations (Caldwell, 2002).

Most companies believed they understood all major costs (Scheier, 1996).

Unanticipated CostsTransition and Management CostsLegal and Liability IssuesVendor ContractClient Lock-InInstitutional System Knowledge and

Employee Loss of Confidence

Transition and Management CostsCan amount to as much as 5 – 7% of the total

value of the contract (Scheier, 1996).Examples

Costs to maintain the current staff while the vendor learns the system.

Assistance provided to the vendor.Disruption to the business due to mentoring vendor.Slower response of vendor during ramp-up.

The more specific or complex the activity, the more expensive will be transition costs (Barthelemy, 2001).

Legal and Liability IssuesIn the absence of an employment agreement

(as with direct employees), companies need to ensure trade secrets and confidential data are protected.

Non Disclosure Agreements (NDAs)

Vendor ContractThe Customer and Vendor seek to shift risk to the

other partyFixed PriceTime and Materials

Determine consistency of client needs with ability of the vendor.Appropriate Vendor Selection

Relative bargaining power of each party may determine which arrangement is chosen.

Carefully negotiate Service Level, then give Vendor control over how contract is fulfilled (Bendor-Samuel, 2002).

Client Lock-InThe client cannot get out of the relationship

except by incurring a loss (Aubert et al., 1998).Vendor may renege on service levels because the

client cannot easily engage another vendor (Bahli and Rivard, 2003).Service DebasementCost Escalation

Companies utilize a multi-vendor strategy to allow options (Porter, 1985).Switching vendors is easier.Vendors maintain quality because of threat of

losing business (Ngwenyama and Bryson, 1999).

Institutional System Knowledge and Employee Loss of ConfidenceRedisposition of displaced staff or losing

those with significant system knowledge (Domberger, 1998).

Knowledge gained over many years is difficult to transition in a short time.

Loss of confidence by staff may increase turnover.Compounds transition challenges.

Potential BenefitsAccess to Additional Skill SetsOrganizational Flexibility

Access to Additional Skill SetsMaintaining expertise in-house is expensive

(Martin, 1991; Yourdon, 1992)Skill deterioration of workers.Shortage of required skills.

Contracting these services allows access to professionals who have mastered required skill sets.

Vendors can implement best practices or solutions utilized on previous engagements.

Organizational FlexibilityThe degree to which a business unit is

adaptable in administrative relations or the authority vested in situational expertise (Barrett et al., 2005).

Companies skilled in outsourcing systems development have an additional tool set.

Flexibility to adapt to changing markets and environments.

Factors Impacting SuccessInformationIncentivesInstitutional Factors

InformationDue Diligence of Vendor

CapabilitiesStrengthsWeaknesses

Self Reflection of Client Regarding OutsourcingCapabilitiesStrengthsWeaknesses

Full Information on Vendor Team

IncentivesContract Clauses defining Service Level

Agreements (SLAs) and Quality Standards.IncentivesPenalties

May be viewed negatively by Purchasing Department as this places additional liability on the client.

Institutional FactorsCultural FitVendor ExperienceKnowledge of Best Practices

ConclusionOutsourcing Systems Development Activities

may be beneficial if handled appropriately.Lowering Cost of the FunctionOpportunities for Client StaffBringing Additional Knowledge into the

OrganizationCan Introduce Additional Risks to the

Organization.Careful Balancing of Benefits and Risks

Required to Make Optimal Decision.