IT Outsourcing and the Critical Success Factors

Foreword

Globalization and rapid advances in technology are important issues that have shifted the measure of success as well as driving companies to rethink how they obtain and deliver services. Consequently, companies must manage all of the business process. They must think about how to reduce costs to acquire profits as well. One of the strategies to reduce cost is outsourcing. Outsourcing is the contracting of a third party to manage a business process more effectively and efficiently than can be done inhouse (Aalder, 2002).

Nowadays, companies start to concentrate on their core competencies business process. They are taking advantage from the outsourcing vendors’ service from the external company. IT outsourcing is growing after the development of information technology. Companies have increasingly sourced many of their information systems (IS) activities from external service providers rather than delivering them internally as was their practice (Fitoussi and Vijay 2010).

They choose to outsource their information system because of several considerations such as risks and benefits from the outsourcing decision (Agustine, 2007). They also must wrestle with mounting infrastructure cost and complexity to the IT outsourcing vendor to reduce the risks. Hence, before the decision of IT outsourcing is taken, the companies must measure the risks and benefits as well as the critical factors of outsourcing processes.

The Concept of IT Outsourcing

The IT departments are expected to deliver a good support of information technology services. The advanced technology and expert staffs are required to do that. However, the information technology consumes high cost. IT departments have turned to outsourcing IT functions as a way of reducing and controlling their IT costs.

There are many definition of IT outsourcing. However, the main point of IT outsourcing is transferring by either (1) contracting out or (2) selling organization assets (Hardware, software, communications networks, systems, activities, processes, procedures and/or management) to a third party supplier which could be a systems consulting firm, contractor, or hardware vendor (Based on Smith’s definition).

In this paper, the discussion will talk about the outsourcing case. Accenture has been working with the company to succeed the IT outsourcing. The discussion will be talking about the benefit of the IT outsourcing and the critical factors. Below is the case study and the solutions.

The Case Study and Solutions

One of the largest offshore oil exploration and production company In Indonesia, operating in the Southeast Sumatra, completed its SAP ERP implementation project in 1998. The company then needed user support in applying the system to achieve and sustain the benefits of the SAP implementation. The company operates 24 hours a day, 7 days a week in an offshore location that requires high availability and reliability on its ERP and other applications. At the same time, its business environment also requires to have a highly productive information technology services in terms of quality, predictability and responsiveness. This high availability and reliability, predictable and yet cost effective information system support cost were a difficult challenge because the company did not have adequate IT resources.

Accenture provided IT application support services, established the company’s IT business processes and managed the overall delivery of information technology services since 1998. Accenture leveraged its IT Outsourcing Delivery Methods and IT Outsourcing Delivery Assets to ensure that the company achieves its outsourcing objectives of:

1. Increasing productivity (quality, predictability and responsiveness) of IT services
2. Providing access to skilled IT resources
3. Increasing access to current IT technologies and best practices

The Benefit for the Company in Adopting an Outsourcing Concept

The company had several important aspects in regards to IT outsourcing requirement. The company didn’t have adequate IT resources, but in the other side they must provide have a highly productive information technology services in terms of quality, predictability and responsiveness. Of course, the company should consider the cost as well. Therefore, the company adopted IT outsourcing. The benefits will be described below.

Outsourcing information technology (IT) operations has been recognized to have important potential benefits, including cost reduction, improved quality of service, and access to technological expertise (Bahli and Suzanne, 2005). Aalders (2002) also wrote some benefits of IT outsourcing:

• Improved business process
• Better Cost Management Control
• Quality of Service
• Keeps pace with the competition
• Core Competency Focus
• A valid way of achieving cultural change
• Access to management qualities not found in IT departments
• Flexibility in staff numbers
• Quality staff
• Access to specialist skills and knowledge

If compared with the outsourcing objectives of the company, the IT outsourcing can accomplish those objectives and get some advantages from IT outsourcing. The company will get:

• Increasing productivity (quality, predictability and responsiveness) of IT services

IT outsourcing can help the company to improve business process through the IT services. By taking IT outsourcing, the IT tasks are done by the outsourcing vendor so that the company can focus on the core competency. Thus, the company can provide high quality of service and then keep pace with the business process. As the result, the company can survive in the competition.

• Providing access to skilled IT resources

IT outsourcing will answer the problem of skilled IT resources that can’t be provided by IT department. The decision to implement IT outsourcing provides the company to get the advanced skills and knowledge of information technology.

• Increasing access to current IT technologies and best practices

Usually, new technologies are expensive. It also needs an update of skill and knowledge. Frequently, the company is difficult to provide the new technologies because of the lack of skilled IT resources and also cost consideration. By using IT outsourcing, the company will get benefit to access the current technologies and best practices. It can also reduce costs.

The Critical Success Factors for Making Outsourcing Work

Nevertheless, there are several critical factors to succeed the IT outsourcing implementation. Companies must consider some aspects for making outsourcing work. Additionally, the company must do the management of IT outsourcing risk (Aubert et al, 1998). Below is several critical success factors from several writers.

There are several critical factors based on Masur’s paper for making outsourcing work:

• Retain leverage and manage change
• Manage in-scope and new services
• Monitor and manage service quality
• Deliver promised cost savings
• Provide competitive price protection
• Manage potential liability and risk without impacting price

Furthermore, Reid (1996) also explained some critical success factors to

• properly organized your team;
• achieved necessary management commitment;
• properly defined your own corporate needs, objectives, and priorities;
• identified appropriate alternatives;
• identified and evaluated your risks and benefits;
• selected the best alternative for each specified service area;
• developed and negotiated an appropriate and effective outsourcing agreement; and
• Provided the mechanisms to administer, maintain, and monitor the contract and to resolve the inevitable problems.

Another view about the critical success factors of IT outsourcing was written by PPM Manajemen (2008). There are 6 aspects of critical success factors:

• Commitment
• Detail of the rule
• Letter of agreement and Performance experience and evaluation
• Duration of the agreement
• Communication
• Knowledge, skill dan attitude (K.S.A) of the outsourcing vendor

Agustine also (2007) defined the critical success factors to the IT outsourcing implementation. There are 5 aspects of critical success factors:

• Legal and Contract
  • Service level agreements
  • Penalties for non-performance
  • Baseline measure
  • Contract length
  • Flexibility
  • Post-outsourcing
  • Vendor standart contract
• Privacy and security
• Maintaining the relationship
• Policy and procedure
• Change management

In addition, the company must consider how to choose the IT outsourcing vendor. That is also important element of IT outsourcing. The company should think carefully to decide the IT outsourcing vendor. Of course, the decision to choose IT outsourcing vendor must be based on the objectives and goal of the IT outsourcing. After that, the company must ensure all of the critical success factors above for making outsourcing work; such as legal and contract stuffs, change management, performance experience and evaluation of service quality, identified and evaluated risks and benefits also privacy and security matter.

Conclusion

IT outsourcing is contracting with outside consultants, software houses or service bureaus to perform IT operations (Minevich and Frank, 2005). IT outsourcing provides significant value when the companies consider about several critical success factors of IT outsourcing. They must prepare vigilantly the IT outsourcing strategy and choose carefully the vendor of outsourcing. Moreover, the companies must think warily the critical success factors of IT outsourcing.

References

• Aalders Rob. 2002. IT Outsourcing: Making It Work. http://www.fujitsu.com/downloads/WWW2/whitepaper_IT-outsourcing.pdf
• Agustine, Emilia. 2007. Pertimbangan-Pertimbangan Melakukan IT Outsourcing dan Proses Pemilihan Vendor. Thesis Economic Faculty Satya Wacana Christian University: Salatiga
• Aubert, Benoit A., Sylvie Dussault, Michel Patry, Suzanne Rivard. 1998. Managing the Risk of IT Outsourcing. CIRANO: Montreal
• Bahli, Bouchaib, Suzanne Rivard. 2005. Validating measures of information technology outsourcing risk factors. http://www.hkbu.edu.hk/~vwschow/lectures/ism3620/3620g3.pdf
• Fitoussi, David, Vijay Gurbaxani. 2010. IT Outsourcing Contracts and Performance Measurement. http://www.crito.uci.edu/papers/2010/Perf-metrics.pdf
• IT Outsourcing Services: How Small Businesses Can Benefit From Outsourcing IT Services http://www.dossusa.com/dbs/networking/IT_Outsourcing.pdf
• Masur, Daniel A. IT Outsourcing Practises: Contract Structure and Critical Term. https://www.acquisition.gov/comp/aap/documents/IT%20Outsourcing%20Practices%20%20Masur%2009%2027%2005.pdf
• Minevich, Mark, Frank-Jürgen Richter. 2005. Global Outsourcing Report 2005. Horasis and Going Global Ventures Inc: Geneva
• PPM Manajemen. 2008. Outsourcing. http://www.ppm-manajemen.ac.id/uploads/dirfile_research/PAPER%20OUTSOURCING%20final.doc
• Reid, Warren S. 1996. Outsourcing: The 20 Steps to Success. http://www.wsrcg.com/Articles/OutSourcing.pdf
• Smith, Rodney R. Yates.  Selective Global Information Technology Outsourcing: A Practitioner/Scholar Perspective http://www.drrodneysmith.com/images/downloads/conference/2004_Academy_of_Intl%20Business.pdf