ICT3261 Chapter 9 Strategic sourcing of resources, capabilities and competencies Paula Goulding.

ICT326ICT326 11

Chapter 9Chapter 9Strategic sourcing of Strategic sourcing of

resources, capabilities and resources, capabilities and competenciescompetencies

Paula GouldingPaula Goulding

ICT326ICT326 22

IntroductionIntroduction

‘‘We set out to shape a global enterprise that We set out to shape a global enterprise that preserved the classic big company advantages preserved the classic big company advantages while eliminating the big company drawbacks. while eliminating the big company drawbacks. What we wanted to build was a hybrid enterprise What we wanted to build was a hybrid enterprise with the body of a big company and the soul of a with the body of a big company and the soul of a small company.’small company.’

(Jack Welch, CEO, GE, 1995)(Jack Welch, CEO, GE, 1995)

ICT326ICT326 33

Developing e-business Developing e-business capabilitiescapabilities

large,established

firms

act small enjoy

advantagesof being big

small start-ups

get big fast

retain benefitsof being small

Do all organisations need to be ‘big’ and ‘small’ simultaneously?

ICT326ICT326 44

need to combine:need to combine:– Efficiency, power, resources, reach of ‘big’ Efficiency, power, resources, reach of ‘big’

andand– Speed, agility, responsiveness of ‘small’Speed, agility, responsiveness of ‘small’

new capabilities, resources, and competencies new capabilities, resources, and competencies needed to exploit digital business needed to exploit digital business infrastructureinfrastructure

Developing e-business Developing e-business capabilitiescapabilities

ICT326ICT326 55

Organisational capabilitiesOrganisational capabilities Need capabilities and resources: Need capabilities and resources:

– To identify opportunities and to create and To identify opportunities and to create and communicate visions, goals, objectives communicate visions, goals, objectives strategiesstrategies

– To innovate and improve, to create excellent To innovate and improve, to create excellent core business processescore business processes

– To establish relationships and systems linking To establish relationships and systems linking them to suppliers, trading partners and them to suppliers, trading partners and customers, and manage knowledge and customers, and manage knowledge and intellectual resourcesintellectual resources

– To maintain controls without stifling flexibility, To maintain controls without stifling flexibility, creativity, agility, responsiveness, while creativity, agility, responsiveness, while remaining competitive, manage uncertaintyremaining competitive, manage uncertainty

ICT326ICT326 66

Understanding capabilitiesUnderstanding capabilities Organisations become competitive through Organisations become competitive through

their ability to access (internally or their ability to access (internally or externally) and exploit required resources, externally) and exploit required resources, competencies and capabilitiescompetencies and capabilities– Decision must be made on:Decision must be made on:

Capabilities to develop and acquire Capabilities to develop and acquire internallyinternally

Capabilities which would be better sourced Capabilities which would be better sourced through external providersthrough external providers

– Crucial to delivering value to customersCrucial to delivering value to customers

ICT326ICT326 77

Understanding capabilitiesUnderstanding capabilities

Organisational capability is derived through Organisational capability is derived through accessing competencies (the ability to do things or accessing competencies (the ability to do things or ‘know-how’) and resources needed to deliver on ‘know-how’) and resources needed to deliver on customer value proposition and thus achieve customer value proposition and thus achieve business objectivesbusiness objectives

ICT326ICT326 88

Building IT capabilitiesBuilding IT capabilities

What we know…What we know…

IT is becoming commoditised…few impediments to IT is becoming commoditised…few impediments to purchasing ITpurchasing IT– Require capabilities and competencies to leverage Require capabilities and competencies to leverage

value from IT investmentsvalue from IT investments

‘Technical wizardry does not generatesustainable competitive advantage’

(Peppard 2000)

ICT326ICT326 99

Sourcing required IT capabilitiesSourcing required IT capabilities

Historically, IT capabilities were developed in-Historically, IT capabilities were developed in-househouse

With increasing complexity and greater With increasing complexity and greater emphasis on cost controls, decisions often taken emphasis on cost controls, decisions often taken to access some/all capability from external to access some/all capability from external providersproviders– IT outsourcingIT outsourcing

ICT326ICT326 1010

Outsourcing definedOutsourcing defined‘‘commissioning a third party (or a number of third commissioning a third party (or a number of third parties) to manage a client organisation’s IT assets, parties) to manage a client organisation’s IT assets, people, and/or activities to required results. This can and people, and/or activities to required results. This can and often does involve a degree of transfer of assets and staff often does involve a degree of transfer of assets and staff to the third party organisation.’to the third party organisation.’

(Fitzgerald & Willcocks 1994)(Fitzgerald & Willcocks 1994)

‘‘the use of a third party vendor to provide information the use of a third party vendor to provide information products and services that were previously provided products and services that were previously provided internally’internally’

(Lacity & Hirschheim (Lacity & Hirschheim 1994)1994)

‘‘Outsourcing encompasses the movement of any part of Outsourcing encompasses the movement of any part of MIS functionality to an outside agent’MIS functionality to an outside agent’

(Chapman & Andrade 1998)(Chapman & Andrade 1998)

ICT326ICT326 1111

Degrees of outsourcingDegrees of outsourcing Total outsourcingTotal outsourcing

– >80% IT requirements are outsourced>80% IT requirements are outsourced

Selective sourcingSelective sourcing– IT viewed as a portfolio of activatesIT viewed as a portfolio of activates– 20-80% sourced internally20-80% sourced internally– Decisions made on a case by case basisDecisions made on a case by case basis

ICT326ICT326 1212

Degrees of outsourcingDegrees of outsourcing

InsourcingInsourcing– >80% IT requirements provided internally>80% IT requirements provided internally– Deliberate decision to retain IT in-house Deliberate decision to retain IT in-house

after evaluating marketplaceafter evaluating marketplace

BacksourcingBacksourcing– Building IT capabilities internally Building IT capabilities internally

following an outsourcing arrangementfollowing an outsourcing arrangement

ICT326ICT326 1313

Outsourcing decisionsOutsourcing decisions None of these approaches are inherently good None of these approaches are inherently good

or bador bad– ‘‘horses for courses’horses for courses’

IT becomes more diffused and more complex, IT becomes more diffused and more complex, yet more pivotal to the achievement of business yet more pivotal to the achievement of business goals and objectives, to the creation of efficient goals and objectives, to the creation of efficient and effective business processesand effective business processes– Different perspectives emerge on how best to deal Different perspectives emerge on how best to deal

with increasing demands for IT serviceswith increasing demands for IT services– Sourcing decisions are about how to achieve desired Sourcing decisions are about how to achieve desired

levels of competence, expertise and capability in IT, levels of competence, expertise and capability in IT, and how to manage increasing complexityand how to manage increasing complexity

ICT326ICT326 1414

What can be outsourced?What can be outsourced? All / most IT/EC operationsAll / most IT/EC operations All / most applications development and/or All / most applications development and/or

maintenance functionsmaintenance functions All/most networks and communications All/most networks and communications

facilitiesfacilities TrainingTraining E-business strategy formulationE-business strategy formulation Re-engineering processes and IT supportRe-engineering processes and IT support

General heuristic is to outsource those activities & services which are regarded as non-core. However, many organisations are now outsourcing core activities.

ICT326ICT326 1515

Why outsource?

• Accrue cost savings / better control of costs• Uncertainty about value of IT• Improve levels of service• Internal IT to concentrate on ‘value add’ • More predictability • Refocusing staff

ICT326ICT326 1616

Why outsource?Why outsource?

Changing business strategyChanging business strategy– focus on core competenciesfocus on core competencies– shed all non-core functionsshed all non-core functions– determination to improve business performancedetermination to improve business performance– accommodate business change, restructuringaccommodate business change, restructuring

ICT326ICT326 1717

Acquire new skills, ‘state of the art’ Acquire new skills, ‘state of the art’ technologytechnology– resources not available internallyresources not available internally

Cash infusionCash infusion Popular trendPopular trend

Why outsource?Why outsource?

ICT326ICT326 1818

Risks of outsourcing?

• Contractual complexity / incompleteness– IT services to be outsourced– required service levels– IT personnel to be provided by vendor– fees payable– clauses covering disputes, changing

requirements

ICT326ICT326 1919

Risks of outsourcing?Risks of outsourcing?

Increased dependence on outside Increased dependence on outside parties for serviceparties for service– poor relationship with vendorpoor relationship with vendor– loss of skillsloss of skills

Recognition that IT played strategic roleRecognition that IT played strategic role– strategic disadvantagestrategic disadvantage

ICT326ICT326 2020

Unrealistic contract negotiationsUnrealistic contract negotiations– vendor pushed to provide low quotationvendor pushed to provide low quotation– set about attempting to be profitable after set about attempting to be profitable after

winning the contractwinning the contract

What are the risks?What are the risks?

ICT326ICT326 2121

What are the risks?What are the risks?

Hidden costsHidden costs– Costs of locating & contracting with a vendorCosts of locating & contracting with a vendor– Transitioning to the vendorTransitioning to the vendor

DisruptionDisruption ‘‘help’given bringing vendor up to speedhelp’given bringing vendor up to speed

– Contract managementContract management Fulfilling contractual obligationsFulfilling contractual obligations Bargaining with vendorsBargaining with vendors Negotiating contract changes & variationsNegotiating contract changes & variations

– Transitioning back in-house(?)Transitioning back in-house(?)

ICT326ICT326 2222

Best practice in outsourcingBest practice in outsourcing

Contracts are essentialContracts are essential– Fee-for-serviceFee-for-service– Strategic alliances/partnershipsStrategic alliances/partnerships– Buy-in contractsBuy-in contracts

Allow vendor to be profitableAllow vendor to be profitable Contract managementContract management Change managementChange management Retain IT management skills in-houseRetain IT management skills in-house

ICT326ICT326 2323

Trends in outsourcingTrends in outsourcing

Contract renegotiationContract renegotiation– Changes demanded to improve performance measurement, Changes demanded to improve performance measurement,

better monitoring of contract performancebetter monitoring of contract performance BacksourcingBacksourcing

– Decision to rebuild some IT capability internallyDecision to rebuild some IT capability internally Netsourcing (e-sourcing)Netsourcing (e-sourcing)

– Obtaining entire infrastructure requirements from single Obtaining entire infrastructure requirements from single vendor who delivers all required services via Internet vendor who delivers all required services via Internet

ICT326ICT326 2424

Application service providers (ASPs)Application service providers (ASPs)– Similar to netsourcing, but parts of services can be Similar to netsourcing, but parts of services can be

accommodatedaccommodated

– Not confined only to infrastructureNot confined only to infrastructure

Business processing outsourcingBusiness processing outsourcing– Outsourcing entire business process or functionOutsourcing entire business process or function

OffshoringOffshoring– Trend to access IT services from developing Trend to access IT services from developing

countries with lower cost structurescountries with lower cost structures

Trends in outsourcingTrends in outsourcing