STKOKOVNH KÀZPHAVK Strategic Aspects of Outsourcing Jochen Schwade Institut für Wirtschaftsinformatik. Universität Hannover, Wunstorfer Str. 14, D-30453 Hannover, Germarty Abstract The increasing application of information and communication technology during the past two decades led to a lot of new concepts. One of these new concepts In information processing and communication (l&C) seems to be outsourcing. Outsourcing means that certain taste and duties of the information management department are delegated to specialized sen/ice companies which are acting as outsourcing vendors, The paper deals with some strategic aspects of outsourcing like outsourcing reasons, economic impact of outsourcing, extension and intensity of outsourcing, choice of an outsourcing partner, relationships between outsourcing company and outsourcing partner, action models for outsourcing, advantages and disadvantages of outsourcing. Povzetek Povečanje uporabe informacijske in komunikacijske tehnologije v zadnjih desetletjih je imelo za posledico t udi mnoge nove pojme, med katerimi je tudi Izločanje ( outsourcing), izločanje pomeni, da sektor za upravljanje z informacijsko tehnologijo prenese nekatere naloge in obveznosti na specializirana storitvena podjetja. Članek obravnava nekatere strateške vidike izločanja kot so razlogi, ekonomski učinki, širitev in intenzivnost izločanja, izbor poslovnega partnerja, odnosi med organizacijo in pogodbenim parterjem, modeii obnašanja, prednosti in slabe strani izločanja. 1. What is outsourcing? 1.1 Introductory remarks The development of information systems and communication during Hie past two decades is characterized by a sequence of innovations, which sometimes appeared intermittently. These innovations do not only take place in the field of hardware (computers, peripherals, networks etc.) but also in the architecture of information systems and organizational concepts. Typical examples for the latter are ■ intercompany integrated information systems like/iisf-in-time-control, electronic cash systems or systems of electronic tele-diagnostic or tele-maintenance, m delegation of different hut related tasks as a whole to a single employee by using integrated task and decision support systems instead of atomistic division of labour. Another characteristical example is the dislocation of purchasing, processing, storing, transfer and presentation of information to independent service companies. This today is discussed as "outsourcing". 1.2 Definition of outsourcing Even outsourcing is a new term, it is neither a new business activity nor an innovation of applied computer science. In general outsourcing menus the use of externa! agents to perforin one or more organizational activities, e. g. purchasing goods or services (cp. Lacity et al; (1993)). Under the headline make or buy this is discussed under various aspects in business economics (cp. e. g. Mannel (1981)), usually with respect to efficiency of production, even though outsourcing may be applied to nearly every business or administration function. Even outsourcing is a creation of outside and resourcing which does not imply a restriction to I&C, the term outsourcing is only used to discuss the make-or-buy-pmb\em with respect to purchasing, processing, storing, transfer and presentation of information. But even in the l&C domain outsourcing is not a new approach, only a new term, because activities like those discussed as outsourcing, we will find some ten years ago. In the fifties and sixties in many branches companies were using the service centers of hardware suppliers, esp. IBM, for certain tasks of data processing, e. g. statistical evaluation of market analysis, turnover statistics or special tasks of book keeping. In literature we will find different definitions of outsourcing, e.g.: ■ Outsourcing is the delegation of facilities management, i. e. the complete delegation of the data processing center and all tasks related to the data processing center, toan external service enterprise (cp. e. g. Heinrich (1992, pp. 21)). ■ Outsourcing is the medium-mid long-term delegation of secondary functions, esp. the ¡&C function, lo an external partner (cp. e. g. Szyporski et al. {1993, p. 229)). ■ Outsourcing means the use of an external, economically independent I&C service enterprise to perform I&C tasks which have been executed internal so far (Knol-mayer (1993, p. 71)). This definition does not include outsourcing to an affiliated company as well as outsourcing of new l&C tasks. In this sense, facilities management is a part of outsourcing. In the following we will use the term outsourcing for delegation of any type of I&C tasks to an external partner, i. e. we prefer a rather wide definition. ifljimifniiHHFOfiMATIKA STKOKOVNK RAZl'KAVB 1.3 Business and economic impacts of outsourcing The delegation of I&C tasks to an external, economically and/ or legally independent I&C service company induces new business relations to a new partner or supplier. This new partner supplies certain I&C services and acts as a mediator between I&C user on one side and l&C suppliers of hardware, software, networks and consulting 011 the other side. This is illustrated in figure I, Producer of Hardware Software Networks —-77 Olsourclng Sorvico Company as a Mediator b ctwoon User, Producer and Supplier Outsourcing ......." '|t Service Company User of Hardware Soft warn Networks Consulting Ty S up pi 1er of Concepts and Consulting Figuf 1, Outsourcing service company as a mediator between l&C user and I&C suppliers (cp.Szyperski et al. (1993, p. 230)) Obviously outsourcing will lead to deep and complex changes in the outsourcing company. In production, the buy of the make or buy decision affects certain steps or activities of production or, in many cases, is related to certain parts of a product. The buy-object can easily be separated and is not affecting other processes and activities. But in the I&C domain the outsourcing object often is an essential part of the companies I&C system (hardware, software etc.) and that means: of the control system. Thus the business impact and importance of outsourcing in the I&C domain mostly is larger than in production, not only with respect to the costs. The outsourcing market is a growing market with a very high growing rate. The rapidly increasing economic importance oi outsourcing will not only be reflected in a large turnover but also in the concentration of market forces on the outsourcing services suppliers because of the dependencies of the outsourcing companies from the outsourcing services suppliers. In 1992 the European outsourcing-market had a volume of 7,6 Billions ECU and will grow up to 16 Billions ECU until 1997. Table 1 shows the 9 largest outsourcing services suppliers in Europe 1992 with their annual turnover (taken fromanoteinWirtschaftsinformatik,Nr, 1 1994, p, 91). Supplier JW2 R US «1 ECU Dffltal .12 J ECU Dchli Gcrmuny J10 ECU FiriVcl. Italy 221 ECU CupGcmtai S.ycn. Frunce Dutcv, Germany :■ EOS 5470 mill. S System One EDS 2.000 IBM 4250 mill. S Enron EUS 750 Amlersnn Consulting I-MO mill. S Full City ens 600 Comp. Science« Cmp (440 mill $ Eastman Kodak IBM 500 DEC ..........$ National Car Xrn:.ii tos 500 KM PCI PCJI Marwick 600 mill Ï Firsi Fide 111 v EOS 450 Table 2. J7ie 6 largest outsourcing ventfors in USA 1989 and large outsourcing contracts in USA ¿991 (from; Lacity el al. (1993, p. 14)) 1.4 Development of outsourcing In the seventies and eighties, the use of I&C was influenced by the development of hardware (smaller, cheaper and more efficient), software (standard software, integrated systems) and new concepts (integration, intercompany data processing). The fast I&C development and the induced changes in organization and information processing led to a lot of problems like l short cycles of innovation and, induced by this, problems of adaption, ■ insufficient qualification of employees, ■ problems of security, ■ high risks of failure, ■ reliability problems. To solve these problems more and more companies are going to outsource I&C tasks with the goat of optimizing benefits. The development of I&C to outsourcing is characterized by the following phases: ■ In the "classical" data processing department or computer center all I&C activities were concentrated. It was operating as a dosed shop or black box and not opened for users. ■ The development of hardware and software led to decentralization of hardware (PCs, work stations, networks) and to personal computing or individual data processing. This was accompanied by an increasing demand of support and service to the users of decentralized I&C. ■ The high degree of decentralization and the fast development of I&C technologies in connection with increasing complexity {and sometimes decreasing reliability) and a lag in qualification of employees induces outsourcing. 2 Reasons for outsourcing In literature we can find a wide spectrum of reasons to outsource I&C tasks. The following survey gives an overview but could not lay claim to completeness (cp. to the reasons of outsourcing e. g. Heinrich (1992), Knolmayer (1993), I-acity et al. (1993), Lang (1992), Szyperski et al. (1993)}. Internal motivation to outsourcing comes from ■ strategic reasons: increasing orientation to processes and projects and turning away from orientation to functions, general trend to outsource service functions, 22 Ufjombi ml NFOR M ATI KA STKOKOVNB KAjÏPUAVE concentration to the core business of a company and in connection with this the delegation of secondary functions to service companies: "do what you can best - outsource the rest"; ■ personnel reasons: insufficient qualifications of users, low qualifications of I&C employees or for lack of I&C specialists; ■ economic and organizational reasons: demand on rationalization efforts, high I&C costs, problems of authority and competence between functional departments and the I&C department; ■ reasons from unsufficient I&C in the past: deficient l&C in the past, increasing complexity in I&C, short cycles of innovation in hard- and software, increasing problems of hardware and network management, problems of security. In a study of Lacity et al. (1993, pp. 198) the following six reasons were pointed out as the main motivation for outsourcing: • Reaction to the efficiency imperative. - The need to require resources. - Reaction to the bandwagon. - Reduce uncertainity, - Eliminate a troblesome function. - Enhance credibility. Eximia/motivation to outsourcing comes from the market or from the services offered by the outsourcing vendors: ■ optimal utilization of specialized I&C employees, ■ high qualified staff, ■ input of modern hard- and software, ■ short cycles of innovation in hardware, software and I&C concepts, a reserve capacity, ■ optimal capacity control, ■ high potential in automatization of system operating and network operating, ■ short reopening time in any case of damage. 3 Object of outsourcing 3.1 Basic ideas about the l&C tasks which can be outsourced In practice there is a wide range of different ou sou rein g contracts and solutions. They are reaching from temporal limited delegation of a single I&C task like data collection or scanningquestionaries and the statistical evaluation of the data gathered by the questionaries up to a nearly complete outsourcing of the I&C department. A total outsourcing of I&C is impossible because information arising in the company as well as the results of information processing were needed in the company. At least the interfaces must be left in the company. This is a characteristic of outsourcing and implies a more or less integration of the outsourcing vendor into the l&C processes of the outsourcing company. Figure 3 illustrates how outsourcing resp. the outsourcing vendor is integrated in the overall I&C process of the company. Company which outsources l&C tasks origin of Information flow ^vendor"9 "YnrorniMkm need of Infor-matlon Information Interlace '' ISC services 1 , , v ^enlama! l&C depaftmoiil J ""»''««J Slralvgic pFaitnlny und cuurdínalion of l&C processes Figure 3. Integration of an outsourcing vendor into the companies information process Thus from the companies view and the companies overall I&C process there are natural limits of outsourcing. Limits we will also find looking to the I&C tasks in the company. The development and updating of an information strategy and the design and planning of basic or strategic conccpts of Í&C processes should be left inside the company because of their vital importance, 3.2 Width of outsourcing The strategic planning of outsourcing has to determine, which functions or tasks should be delegated to an outsourcing vendor. From the viewpoint of the companies divisions or departments outsourcing domains may be e. g, from: purchasing selling materials management finance production accounting research & development project management and others computer center upper support and service maintenance From the viewpoint of the I&C department we can distinguish between: system development computer center programming system operating upper support data collection network management Looking to the duties of an information management (cp. e. g. Schwarze (1990) and (1993)) the strategic outsourcing decisions should reflect the following: S/m/cyic duties are not or only partly suitable for outsourcing: ■ Planning and design of information infrastructure has long term impacts and plays an important role in the general strategic planing. Thus outsourcing will mainly be restricted to consulting. The fundamental decisions and planning duties must be done by the (top) management. ■ Mrjíííitfcmciif of technological innovation requires a high level of specialized knowledge, thus outsourcing will bring benefits. ■ Design of l&C systems nitd organizational concepts touches the whole organization and so only parts of these tasks are suitable for outsourcing. ■ The development of an information strategy is a duty of the top management and should not be delegated to an outsourcing vendor. i/fid NFOR M ATI KA 23 STKOKOVNB tuzi'iLwi: The tasks ofsysfóm ífesi^ii and realization could be outsourced in a high degree, concerning analysis of the present state management of l&C projects requirements analysis and specification purchasing software software development design of data bases hardware configuration design of security concepts Outsourcing is also rather easiliy possible for nearly aü tasks of operating i&C systems-. service for decentralized hardware data management hardware maintenance security management network management disaster management computer center l&C revision user support accounting The decision about outsourcing width depends on the following criteria: ■ strategic role for the company, l security requirements, ■ requirements to the level and quality of realizing l&C tasks, ■ degree of automation and integration. 3.3 Depth of outsourcing Outsourcing depth is refering to the question, if a special I&C task should be delegated to an outsourcing vendor in whole or in part. Most tasks of operating l&C systems, like transaction processing, production service and utility processing, could be undertaken by an ousourcing vendor. Conception and design of l&C systems, duties of security and controlling must be left partially inside the company. But today sometimes outsourcing concerns even the area (if l&C management. 3.4 Special outsourcing domains Outsourcing is practicized sometimes to special domains, e. g. to support individual information processing by ■ provision of hard- and software, ■ installation and management of networks, ■ maintenance of hard- and software, ■ training and support when using new software, ■ development of new applications and ■ user service. A particular case is every system of intercompany I&C processing like "just-in-time" or "electronic banking". These systems inevitably lead to outsourcing. 3.5 Support systems for the outsourcing decision Planning and preparing outsourcing of l&C tasks and I&C facilities is a very complex and partly fuzzy problem. So obviously managers are looking for decision support, for which there are different techniques and methods, Knol-mayer (1993) discusses seven different decision support approaches and their application to the outsourcing problem: portfolio analysis benefit value analysis checklist cluster analysis argument balance complete enumerabon different models of mathematical optimization Most of these approaches are difficult to apply because it is complicated or nearly impossible to get the information necessary for applying the models. 4 Choice of an outsourcing partner The choice of an outsourcing partner ist difficult, because the outsourcing vendor doesn't act as an usual supplier because his service is - depending on the outsourcing concept - more or less integrated in the operational procedure of the company. This is caused by the role of information and I&C systems in the internal processes and organization. So outsourcing does not lead to the usual relationship between customer and supplier. Outsorcing is more, it is a special type of partnership. The following criteria may be helpful to support the choice of an outsourcing partner: a level of know-how, ■ experiences in the interesting I&C domains, ■ neutrality with respect to hard - and software suppliers, ■ service and support in the phase of conversion and operation, 1 personnel and technical resources, ■ mid term and long term capabilities to extend the partnership, l strategic objects of the outsourcing partner, compatibility of his objectives and his strategy with the corporate objectives and corporate strategy, ■ competitive ability, innovation capability and economic power of the outsourcing partner, ■ degree and level of specialization in those fields of I&C which should be outsourced, ■ scrvicc level, ■ price. The relationship between the outsourcing company and the outsourcing partner may be of different types, e. g. the outsourcing partner could be ■ an affiliated company, which is (1) only active for the parent company or (2) also for other companies, m a company, independent in law and economically. Other solutions are m the outsourcing partner acquires the computer center of the outsourcing company, ■ the outsourcing leads to a reduction of I&C resources and I&C employees, ■ outsourcing is only realized to special I&C domains, ■ the outsourcing partner is a specialized I&C service company for a certain economic or business sector or branch. Hfxmibi nil NfOR M ATI KA Outsourcing induces long term business ties and thus a systematic action model for the choice of an outsourcing partner is necessary. Two proposals are shown in figures 4 and 5. Figure 4 shows the phases of planning and preparing an outsourcing decision. market analysis of potential outsourcing partner» _extension and quality of periormarvie: solidity, pricing, service lavel__ external feasibility study (concerning the outsourcing partner) (]nr lor marten i.i'ir:; bf,»naM-GO&|, analysis, risk analysis, contractual relationship internal feasibility study __organization, information presentation. slaM_ development of strategy of realization _planning ol an outsorting organization: contract {rights and [¡abilities)__ [ result testing Figure 4. Action model for planning outsourcing (Cp. Lang (1992, p, 74)) Figure 5 is directly oriented to the choice of an outsourcing partner. Both models shown in figure 4 and 5 may be modified with respect to the individual situation. Figure 5. Action mode/ for the choice of an outsourcing partner (cp, Lacity et al. (1993, p. 231)) 5 Organization of outsourcing The result of outsourcing is a cooperation between two partners, the outsourcing company and the outsourcing vendor. To ensure high efficiency of this cooperation, the operation of outsourcing requires an adequate organization. The management of both partners is controling the outsourcing. This outsourcing management or parts of it may be delegated to □ control and coordination committee which is responsible for the whole outsourcing cooperation. The outsourcing process itself resp. the outsourcing activities then could be regarded as something like an intersection between the two partners. As I&C processes play an essential role in the work flow resp. business processes, it is necessary, to install a quality control to supervise the outsourcing activities. Based on the outlined ideas Figure 6 shows how outsourcing may be organized. The arrows are illustrating flows of information, instructions and work. StkOKOVNB ItAZI'ltAVB Mananagement of me outsourcing company] \ Manan ajenien I of ine outsourcing vendoT"| 1 i i - Purchasing **1 ca mm i Ilea 1** Computer center - - Production - - System operating — — SeiHnfl r > Competence centers * . .. Slafl organization Outsourcing Support - Finance •• Innovation — — Accounting — 1 - Project management — L. R&D [ Quality control j Training -J Figure 6. Organization of outsourcing 6 Advantages and disadvantages of outsourcing Outsourcing Is entailed with different advantages and disadvantages. The following catalogue gives an overview {cp. e. g. Heinrich (1993), Heinrich (1993a, p. 43), Knolmayer (1994), Lang (1992, pp. 74-80), Sommerlad (1993, p. 48)): advantages m reduction of the complexity of I&C processes, ■ acces to innovations, ■ acces to high competencc and know how, ■ access to high standards in hard- and software, ■ access to high processing and storage capacity, ■ reduction of the danger of a bottleneck in l&C processes, ■ reduction of technical and personnel risks, ■ concentration to the primary functions or core business, ■ flexibility, ■ better service, ■ risk transfer, ■ cost reduction by economics of scale, less training, fewer measures in security and data protection, no capacity reserves for processing peaks; disadvantages ■ dependence from the outsourcing partner, ■ problems of coordination and control, ■ loss of competence and know how, ■ risk of bad performance of the outsourcing partner, ■ frictional loss between internal and external employees, ■ problems of acceptance in the functional departments, ■ costs of transaction, data transmission, reorganization, accounting, coordination and control, administration. 7 Final remarks Outsourcing induces a lot of changes in the whole domain of information management and related areas. Thus an outsourcing strategy is needed which includes an action model for the choice of an outsourcing partner as well as criteria and concepts for outsourcing width arid depth. In the process of current operations a new position or department is necessary to coordinate and control the outsourcing process. This includes all aspects of cooperation with the outsourcing partner. Ufxmihiud NFOR M ÄTIKA Stuokovnk iiazphave Looking lo the advantages and disadvantages one can suppose that in many cases it would be difficult {tir nearly impossible) to decide about outsourcing by a cost-benefit-analysis. Most benefits are qualitative and could not be used for calculation of profitability. But one can assume that outsourcing gives a lot of benefits especially because of the access to competence, know how, actual and modern hard-and software and reserve capacity. Thus outsourcing would be a way to solve problems in the I&C domain of a company. References Iicinriuh, \V (1992): Out no timing, Modewnrt odor ucties strate-iiisuhes Konzupt? In: llelnrieh, \V. (lid.); Outsourcing, Model le - Strategic - Praxis. Ueigheim ¡992, pp. 11-54. llelnrieh, W (1 993}: \\-inn cm slch lohnt, DV-Aufgiihen nuszu-lagcru. In: liusincss (loniputing vol. 6, pp. 42-45. ilchirleh, \V (199.1a): SAP-Outsourcing; Festpreisc [riigen In: Online vol. II, pp. 59-60. Knolniaycr, (1. (199.1): Modelle zur Untenttutzung vnn Outwmru-ing-Kutsohcidungcn. In: Kurhel, K. (Ed.): Wirtsehnftslnfor-niatik'9.1. Heidelberg 199.1, pp. 70-83, Kuohnayer, 11. (1994): Der Fremdhezug von Information-Gen ter* Leistungen. In: Information Management vol. 1, pp. 54-60, Laelty, M.O.; Hirsch he im. R, (199.1): Information Systems Outsoureing. Chiuhcuter et al. Lang, M. (1993): Bin Mituni für Partnerschaft liehe Kooperation. In: lldnrich, W. (Bd.): Outsoureing, Modelle - Strategie -Praxis. Ilerghelra 1992, pp. 55-85. Mflnnol, \V (I9K1): Hie Wahl zwischen Ivige ufert ig ung und fremdhezug. Stuttgart, 2, Aufl. Sehwarze,.), (1990): Betriebswirtschaftliche Aufgaben und Bedeutung des In forma tionKmanagemuits. In: Wirtschaft sin/o? matlkvol. .12, pp. 104-115. Schwarze, .1. (199.1): Qualifiziorungskonzcpte für das Information* Management. In: Schecr, A.-W (Ed.): Hnndhuch Infop matiousmaiiagumunt. Wiesbaden 199,1, pp. f>.l.l-(i5.1. Komorbid; K. (199.1): Der Outsourelng-Vcrtrag ia der EDV! In: Dusiness (Computing vol. S, pp. 4H-50. Szyperski, N.; Schmitz. 1!; Kronen, .1. (199.1): Outsoureing: Profil und Markt einer Diestleistung für Unternehmen auf dem Weg zur strategischen Zentrierung. In: Wirt-schaftslnforniatik vnl, ,15, pp, 22N-240. Jochen Schwarze Brief Curriculum Vitae 1957 Abitur / 1957-1959 Apprenticeship Industrial Abridgement / 1959-1963 Univ. Frankfurt and Univ. Güttingen- Business Administration, Diplom-Kaufmann/1963-1966 Univ. Göttingen: Mathematics/1963-1967 Univ. Güttingen: wissensch Assistent/1967Untv Göttingen: Drrer.poi. /1967-1972 Univ. Münster, 1972 Habilitation /1972-1990 Techn. Univ. Braunschweig: full Professor Statistics and Operations Research / since 1990 Univ. Hannover: Full Professor Business Administration esp. Business Computer Science, Head of ttie Institute for Business Computer Science Offices held 1970-1991 President of the Academy of Business and Public Administration in Leer/1991-1993 President of the "Leibniz-Akademie", Academy of Business and Public Administration, in Hannover / 1974-1976 Member of the founding Committee of the fernuniversitat (Tele-University) Hägen / 1981-1982 Vice-President of die Gernian Operations Research Society / Honorary-Professor of the Beijing Agricultural Engineering University, Beijing, P.P.China Memberships Member of Oer nan Informatik-Society / German Operations Research Society / German Statistical Society / Austrian Operations Research Society / Schmalenbach Society for Business Administration / International Institute of Forecasters / Society of Academic Teachers of Business Administration Main Fields of Research and Interest Project Management / Information Mamgement, esp. Outsourcing, Organizational Aspects, Feasibility Studies, Business Processes / Development of Information Systems Publications 21 books (e. g. Netzplantechnik; 7. Ed 1994,- Mathematik für Wirtschaftswissenschaftler 4 Vol, 9 Ed. 1992; Statistik, Band I, 7. Ed., Band II, 5. Ed 1993; Personal-Computer 1985; Einführung in cfe VCtrtschaftsinformatA, 3. Ed. 1994), and more titan 130 articles. 26 Pričujoči članek, ki ga objavljamo v originalu, je bil predstavljen kot referat na Četrti mednarodni konferenci o razvoju informacijskh sistemov ISD'94 na Bledu, v septembru 1994. Objavljen je bi! tudi v zborniku konference. Uredniški odbor se je odločil za ponatis v reviji v prepričanju, da je prispevek zaradi aktualne tematike zanimiv za Širši krog bralcev. Na tem mestu se zahvaljujemo organizacijskemu odboru konference in avtorju za dovoljenje za objavo. n/*)m£>i tal NFO Rli ATI KA