Week 4

Question 1

Name some areas for outsourcing

Answer 1

• Programming, software testing, and software maintenance
• IT research and development
• High-end jobs such as software architecture, product design, project management, IT consulting, and business strategy
• Physical product manufacturing-semiconductors, computer components, computers
• Business process outsourcing/IT Enabled Services
• Insurance claim processing, medical billing, accounting, bookkeeping, medical transcription, digitization of engineering drawings, desktop publishing, and high- end IT enabled services such as financial analysis and reading of X-rays
• Call centers and telemarketing.

Question 2

Why ITO?

Answer 2

Why is ITO important?

• The cost, and the hidden costs if IT(?)
• Productivity drain, IT Risk (data security, business continuity), misalignment of technology with business goals)
• Technology uncertainty
• ITO remains controversial due to the unforeseeable success or failure
• The findings from a Dutch field study of a representative sample of 30 outsourcing deals totaling to more than 100 million Euros suggested 18 out of the 30 deals were successful.

Question 3

Transactions Cost Economics/Theory

Answer 3

In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market.

TCE/TCT states that the costs and difficulties associated with market transactions sometimes favor hierarchies (or in-house production) and sometimes markets (external supplier) as the preferred governance structure.

Question 4

Explain transaction costs

Answer 4

Transaction costs, also known as coordination costs, are defined as the costs of all the information processing necessary to coordinate the work of people and machines that perform the primary processes.

• Transaction costs are finding suppliers, negotiating prices, drawing up contracts and enforcing contracts. E.g. the issue of writing a contract. This is not part of the original cost of the product. Still it has to be borne by someone (buyer or seller or both). Also information is not free (contrary to neoclassical view)

Question 5

Explain production costs

Answer 5

• Production costs include the costs incurred from the primary processes necessary to create and distribute the goods or services being produced.

Question 6

Explain three types of uncertainty:

1. volume
2. technological
3. behavioral

Answer 6

• (1) Volume uncertainty is created by unpredictability regarding future demand levels,
• (2) technological uncertainty is created by the unknown future trajectory surrounding an emerging technology, and
• (3) behavioral uncertainty occurs when managers are unable to evaluate the quality of activities because they are either technologically complex or hidden from view

Question 7

Risks of outsourcing

Answer 7

• Bounded rationality/opportunism (supplier lock-in)
• A shift in power is expected to take place overtime, where one player dominates the other (Power-dependence theory).
• Firms can become locked-in as a result of their dependence on another party and thereby shift into a power disadvantage position (e.g. exclusive supply agreements together with high product demand)
• Suppliers may provide firms with attractive prices in the pre-contractual phase, and then afterward renegotiate in light of their latest dominance of the relationship.
• The trap is caused by exit barriers that are derived from relationship specific investments and resource dependence including transaction costs, learning costs, technological costs, legal costs, and cultural, time and geographical constraints.

Question 8

Why is TCE/TCT a useful framework for studying ITO decisions?

Answer 8

• TCE is a useful framework for studying ITO decisions:
• TCE specifically addresses sourcing decisions, that is, the decision to produce a good or service internally or purchase it externally.
• TCE captures the widely-held perception that organizational members make sourcing decisions based upon an economic rationale and that outsourcing should reduce costs.
• Many practitioners use “TCE-speak” to explain why outsourcing is predicted to reduce IT costs: IT is most efficiently provided by external vendors because it is a commodity service (translated into “TCE-speak” as a “nonspecific asset”).
• TCE has enjoyed an abundance of empirical and theoretical academic attention in other organizational contexts.

Question 9

What are the key activities to A standardized approach in place to identify, categorize, register and evaluate all suppliers

Answer 9

1. Establish and maintain criteria relating to type, significance and criticality of suppliers and supplier contracts, enabling a focus on preferred and important suppliers.
2. Establish and maintain supplier and contract evaluation criteria to enable overall review and comparison of supplier performance in a consistent way.
3. Identify, record and categorize existing suppliers and contracts according to defined criteria to maintain a detailed register of preferred suppliers that need to be managed carefully.
4. Periodically evaluate and compare the performance of existing and alternative suppliers to identify opportunities or a compelling need to reconsider current supplier contracts.

Question 10

What are the key activities to A fair and formal practice to select suppliers to ensure a viable best fit based on specified requirements

Answer 10

1. Review all Supplier requests for information (RFIs) and requests for proposals (RFPs) to ensure that they:

• Clearly define requirements
• Include a procedure to clarify requirements
• Allow vendors sufficient time to prepare their proposals
• Clearly define award criteria and the decision process

2. Evaluate RFIs and RFPs in accordance with the approved evaluation process/criteria, and maintain documentary evidence of the evaluations. Verify the references of candidate vendors.
3. Select the supplier that best fits the RFP. Document and communicate the decision, and sign the contract.
4. In the specific case of software acquisition, include and enforce the rights and obligations of all parties in the contractual terms. These rights and obligations may include ownership and licensing of intellectual property, maintenance, warranties, arbitration procedures, upgrade terms, and fit for purpose, including security, escrow and access rights.
5. In the specific case of acquisition of development resources, include and enforce the rights and obligations of all parties in the contractual terms. These rights and obligations may include ownership and licensing of intellectual property; fit for purpose, including development methodologies; testing; quality management processes, including required performance criteria; performance reviews; basis for payment; warranties; arbitration procedures; human resource management; and compliance with the enterprise’s policies.
6. Obtain legal advice on resource development acquisition agreements regarding ownership and licensing of intellectual property.
7. In the specific case of acquisition of infrastructure, facilities and related services, include and enforce the rights and obligations of all parties in the contractual terms. These rights and obligations may include service levels, maintenance procedures, access controls, security, performance review, basis for payment and arbitration procedures.

Question 11

What are the key activities to A formalized management process in place to achieve effectiveness and efficiency

Answer 11

1. Assign relationship owners for all suppliers and make them accountable for the quality of service(s) provided.
2. Specify a formal communication and review process, including supplier interactions and schedules.
3. Agree on, manage, maintain and renew formal contracts with the supplier. Ensure that contracts conform to enterprise standards and legal and regulatory requirements.
4. Within contracts with key service suppliers include provisions for the review of supplier site and internal practices and controls by management or independent third parties.
5. Evaluate the effectiveness of the relationship and identify necessary improvements.
6. Define, communicate and agree on ways to implement required improvements to the relationship.
7. Use established procedures to deal with contract disputes, first using, wherever possible, effective relationships and communications to overcome service problems.
8. Define and formalize roles and responsibilities for each service supplier. Where several suppliers combine to provide a service, consider allocating a lead contractor role to one of the suppliers to take responsibility for an overall contract.

Question 12

What are the key activities to A formal approach in place to identify potential risk

Answer 12

1. Identify, monitor and, where appropriate, manage risk relating to the supplier’s ability to deliver service efficiently, effectively, securely, reliably and continually.
2. When defining the contract, provide for potential service risk by clearly defining service requirements, including software escrow agreements, alternative suppliers or standby agreements to mitigate possible supplier failure; security and protection of intellectual property (IP); and any legal or regulatory requirements.

Question 13

What are the key activities to A monitoring process in place to ensure that the supplier’s performance comply with agreed standard(s)

Answer 13

1. Define and document criteria to monitor supplier performance aligned with service level agreements and ensure that the supplier regularly and transparently reports on agreed-on criteria.
2. Monitor and review service delivery to ensure that the supplier is providing an acceptable quality of service, meeting requirements and adhering to contract conditions.
3. Review supplier performance and value for money to ensure that they are reliable and competitive, compared with alternative suppliers and market conditions.
4. Request independent reviews of supplier internal practices and controls, if necessary.
5. Record and assess review results periodically and discuss them with the supplier to identify needs and opportunities for improvement.
6. Monitor and evaluate externally available information about the supplier.