4. IT Outsourcing Flashcards
Why is it a bad idea to outsource all IT-related parts of the business?
Because today IT is ingrained in everything and you have to understand what IT can do for you. If you outsource everything you lose the oversight and knowledge. Today, this separation does not makes sense anymore. Business knowledge and IT knowledge is no longer that easy to separate.
Five transactions costs and the goal
- Initiation
- Agreement
- Execution
- Control
- Adaption
The goal is to choose an organizational form with regards to a given set of properties of a transaction that minimizes TCs.
What 4 things can make information distribution unequal and hence lead to a risk in the transaction?
- Specificity - if the good is very specific so that there are few other alternatives to buy from, you might på hold-up and too dependent on that supplier.
- Opportunism - one should assume that the other party will hold-up you if they can.
- Bounded rationality - Maybe people hold-up you even if they don’t intend to because of bounded rationality.
- Uncertainty - the future is uncertain and products and tech change all the time, so maybe you should not write a long-term contract? And this also means that you don’t want to contract too much of your business.
Market vs. hierarchy, how does this look in a graph?
Y-axis: transaction costs
X-axis: degree of specificity
Less specificity means hat the market might be better - just go and buy what you need.
The more specificity the asset/product has, the more beneficial it is to have hierarchy (companies) that you can set up contract with to ensure constant supply.
What are the agency costs that comes with having outsourcing?
- Monitoring and controlling costs
- Agent’s signaling and guarantee costs.
- Remaning loss of welfare (residual costs).
Why these costs occur is because we have asymmetric information and we need to minimize opportunistic behaviour.
3 hidden things that can happen when we have information asymmetry?
- Hidden characteristics - connected to adverse selection.
- Hidden action - connected to moral hazard.
- Hidden intention - connected to hold-up.
The 7 steps of the outsourcing cycle:
- Initiation - you make a decision to outsource.
- Outsourcing strategy - what and how?
- Evaluation & selection - select the partner based on evaluation of multiple.
- Negotiation - set up the contract and make sure to minimize information asymmetry to minimize hidden charact + hidden action.
- Transition - you move the work from you to the partner.
- Service delivery - long phase, stated in the contract.
Typically 3-10 years. - Re-evaluation - are you satisfied or should we change partner? Or in-house?
What is the focus in a tight-governance vs loose-governance design in outsourcing projects? What costs are high vs low?
The focus in tight-governance is cost-focus. You have long and detailed contracts, which lead to high administrative costs and low personnel costs.
In loose-governance designs, it is innovation-focus, so the contracts are shorter and broader. This leads to low admin costs and high people costs.
In between these two, we have the quality-focus.
Sourcing strategies: 6 types ranging from internal/hierarchy to external/market:
- In-house production - left extreme. Most hierarchy.
- JV - complicated but good when it works.
- Equity investment in the service company - as you take a share in the company you are at less risk of being in a hold-up situation.
- Long-term contracts
- Short-term
- External sourcing based on spontaneous market relationships. No contract
6 reasons for outsourcing
- Costs: common reason but often a disappointment due to other coordination costs that arise.
- Employees: you might not have sufficient knowledge in IT so you have to outsource.
- Risk: if you cannot mitigate risks like cyber security it might be better to outsource.
- Consolidation: focus on core competencies. This reason is less legitimate today.
- Finances: 1) accounting is not needed 24/7 so can be better to outsource at the end of month/year instead of hiring personnel. Too much idle time. 2) Just as you sell off assets at the end of the year to make the BS look better, you can do the same with IT assets.
- Technology: if you don’t have the tech or know-how.
6 outsourcing risks:
- Costs - ex quality problems and dependency costs.
- Employees - lose employees that transfer.
- Technology - the service provider might sign new deals with tech providers that you are unhappy with.
- Privacy and data protection - maybe service provider need to giva away data due to regulations.
- Know-how - transfer together with employees.
- Return to self-managed IT in-house
Different ways of sourcing:
6 types. Mention and describe each one.
- Internal (type 1) - service provision by internal staff. Most limited in terms of scale. No standardization across business units.
- Shared services (type 2) - internal business unit operates its own profit and loss, chargeback mechanism. Improved standardization and lower cost than type 1.
- Full service outsourcing - A single contract with single provider. Asset transfer. Improved scale but limited in terms of best-in-class capabilities.
- Prime - single contract with single provider who manages services delivery via multiple providers. The prime vendor should leverage the capabilities of other best-in-class providers.
- Consortium - complex. A collection of service providers selected by the recipient, where all these must come together and work tog. You get best-in-class AND control.
- Selective outsourcing - you orchestrate everything yourself. Most difficult structure. You are responsible for gaps or cross-provider disputes.
What three things are most important to keep in-house?
- IT architecture
- Management
- Understanding of business needs and what IT can do for you
Transition phase stages? And what to think about in the transition phase?
- Initiation
- Implementation
- Ramp-up
- Integration
Important: let it take time. It is not an on-off thing, it needs to be ramped up during months and then when we see satisfied achievements, then we can integrate fully.
5 centrifugal forces that make distributed software difficult:
- Culture clash
- Communication breakdown
- Coordination breakdown.
- Control breakdown
- Cohesion barriers.
