IS 483 Information Systems Management James Nowotarski 29

IS 483 Information Systems Management James Nowotarski 29 May 2003

Today’s Objectives • Recap IT outsourcing • Finish procurement • Understand Financial Analysis

Today’s agenda Topic Duration • Recap IT outsourcing • Quiz 15 minutes • Finish Procurement • *** Break 25 minutes 35 minutes 15 minutes • Financial Analysis 60 minutes • Assignment 2 reports 10 minutes • Assignment 3 free time 30 minutes

IT Outsourcing Information technology (IT) outsourcing is the use of a third party to provide services rather than using those in-house. Drivers • Cost reduction -- Perception of IT as a cost burden coupled with availability of cheaper sources of services (e. g. , near-shore and offshore) • Cost predictability • Require improved performance levels (e. g. , speed of delivery, customer satisfaction, quality, etc. ) • Refocus on corporate core competencies • Desire to have in-house IT resources focus on strategic systems and/or technology • Lack of in-house skills and/or people

IT Outsourcing A desire to focus on core competencies is frequently the strongest driver to outsource “[g]et rid of context and focus on core” - Billy Mc. Carter, former CIO of Fireman’s Fund, who reduced IT staff from 1, 100 to 600 with much of the work outsourced to offshore workers “[a]llows me and my staff to focus on fun areas. . . be more productive, more visible to the business, understand what the business needs versus worrying about whether one of the servers needs additional RAM” - Daniel Sheehan, CIO at Advo, Inc. (Information. Week, 4/14/03)

IT Outsourcing What parts of IT to outsource? • Data center operations • Network operations • Application maintenance • Desktop workstations • Help desk/Support • Application development • Business process execution most common IT activities to outsource

IT Outsourcing Consider business, economic, and technical factors in deciding whether to outsource Business Considerations Insource Critical Strategic Importance Useful Outsource Commodity Differential Potential for Differentiation

IT Outsourcing Consider business, economic, and technical factors in deciding whether to outsource (cont. ) Economic Considerations Insource Leading Managerial Practices Lagging Outsource Subcritical Critical In-House Economies of Scale

IT Outsourcing Consider business, economic, and technical factors in deciding whether to outsource (cont. ) Technical Considerations High Degree of Technology Integration Insource Outsource Low High Degree of Technology Maturity

IT Outsourcing Give examples of applications that would be good candidates for insourcing and outsourcing based on technical considerations Technical Considerations High Degree of Technology Integration Insource Outsource Low High Degree of Technology Maturity

IT Outsourcing To what extent should you outsource? • Transitional Outsourcing • Selective Outsourcing • Total Outsourcing most common approaches

IT Outsourcing Transitional Outsourcing What is it • Outsource legacy systems • Focus in-house staff on development of “new world” • Outsourced activity may return in house at some point Advantages • Legacy systems are well-understood, facilitates specifying outsourcing contract terms • In-house organization moves on to next new thing (Tarzan grabbing the next rope in the IT jungle) • Contract may be shorter term Disadvantages • More vulnerable to vendor manipulation of pricing, maintenance costs • Vulnerable to loss of vendor support if new system is delayed

IT Outsourcing Selective Outsourcing What is it • Select the best-of-breed for an activity Advantages • Creates a competitive environment to overcome organizational impediments & motivates performance • Provides flexibility to adapt to changes • Less risky than total outsourcing Disadvantages • Overhead cost associated with multiple evaluations, multiple contract negotiations, and multiple vendors to manage and coordinate • Depth of relationship with vendors may not be as good as with total outsourcing

IT Outsourcing Selective Outsourcing Example: AT&T Service Provider Deal Scope Computer Sciences Application support • Billing • Credit and collections • Ordering • Provisioning IBM Global Services Data centers (incl. 2000 employees) Accenture Customer service Telemarketing

IT Outsourcing Total Outsourcing What is it • Use one vendor for many activities Advantages • Consistency and stability with same vendor for many activities • Lower transaction costs because there is only one vendor • Creates a competitive environment Disadvantages • More vulnerable to vendor manipulation of pricing, maintenance costs • Vulnerable to loss of vendor support

IT Outsourcing Survey Results Type of sourcing Success Failure Mixed Total outsourcing 38% 35% 27% Selective outsourcing 77% 20% 3% In house 76% 24% 0% Source: Study of 116 companies by college professors Mary Lacity and Leslie Willcocks, Computerworld, 10 May 1999

IT Outsourcing There are several risks to be managed Risks • Losing skills in functions/processes that are outsourced – Don’t give best work to outsiders • Culture clash between outsourcing firm and client – Ideally, can’t tell difference between employees of the two • Loss of control over quality and responsiveness • Overbilling/Underperforming (“shirking”) • Provider may sell or leak buyer’s solutions to competitors (“poaching”) • Overpricing on contract additions/extensions • Remote management by service provider, thus limiting face -to-face communication and jeopardizing coordination

IT Outsourcing There are several risk mitigation strategies Risk mitigation strategies • Assign in-house manager to manage the relationship • Clearly specify terms of relationship and expected service levels in a contract and service level agreement (SLA) • Consider using an RFP to get competitive bids – Note that this can require substantial time

IT Outsourcing: Offshore Cost and quality are the two main reasons for going offshore • Reduce cost – 40 -50% savings, according to Merrill Lynch CTO • Higher quality/capability – Approximately 50 out of 70 CMM Level 5 systems development organizations are in India

IT Outsourcing: Offshore India is the leading location for offshore sourcing Reasons • Highly capable workforce • Focus on process and product quality • Low labor and infrastructure costs • Government commitment and support • English (and other) language skills

IT Outsourcing: Offshore Need to manage risks of offshore outsourcing Potential Risk Areas • • • English or language difficulties Time difference Political Lack of industry-specific knowledge Distrust Communication/Coordination – “Outsourcing is prone to failure because of breakdowns in communications between outsourcing providers and their clients, according to Gartner” (Information. Week, 3/31/03)

Today’s agenda Topic Duration • Recap IT outsourcing • Quiz 15 minutes • Finish Procurement • *** Break 25 minutes 35 minutes 15 minutes • Financial Analysis 60 minutes • Assignment 2 reports 10 minutes • Assignment 3 free time 30 minutes

Procurement - Process RFP Process 1. Pre-RFP 2. RFP 3. Proposal Submissions 4. Proposal Evaluations 5. Vendor Selection 6. Procurement Method 7. ROI Analysis 8. Negotiate Contract Objective: Identify best solution to meet stated business need while minimizing cost and risk

5. Vendor Selection • Vendor site visits • Weighted score method • Final cost, value, and risk analysis – Benefits -- one-time vs. recurring -- fixed vs. variable -- tangible vs. intangible – Costs -- one-time vs. recurring -- fixed vs. variable -- tangible vs. intangible

6. Procurement Methods • Purchase – not that popular because of fear of obsolescence – longest-term commitment of these 3 methods • Rent – usually less than 1 year in duration – only need to give 30 days’ notice to cancel – more expensive than purchase or leasing • Lease – usually 12 -36 months in duration – often done with an option to buy – middle of the pack in terms of cost and ability to get out

7. ROI Analysis • Must be able to calculate the income stream in $ • Not usually able to calculate for: – Strategic investments – Informational investments – Infrastructure investments • Usually able to calculate for: – Transactional investments

8. Contract Negotiation The way you interact at the negotiating table may foreshadow ongoing relationship dynamics • Do’s – Include vendor responses to RFP in the contract – Keep lawyers at bay until Statement of Work is complete – Leverage outside expertise in negotiations – Provide incentives/penalties • Don’ts – Buy vaporware instead of proven solutions – Purchase low bid unless the value is there – Settle on final offer prematurely

8. Contract Negotiation Statement of Work • Agreement between firm and vendor • Was outlined in the RFP, now it gets finalized • Includes – Software characteristics – Implementation plan – Technical architecture – Training strategy – Maintenance and support – Service levels (SLA items) – Cost schedule Approach to quality Definition of quality metrics

Statement of Work Approach to Quality and Measurement 1. Identify quality standards and goals Plan 6. Eliminate causes Act of deficient performance - fix defects - fix root causes Do 2. Measure project performance Check 3. Compare metrics against goals 4. Conduct quality reviews, e. g. , peer reviews 5. Test for defects

Statement of Work Quality Metrics Progress Measures the amount of work accomplished by the development team in each phase Quality Evaluation Effort Measures the percentage of the development effort spent on internal quality evaluation efforts Test Coverage Measures the amount of the software system covered by the testing process Defect Detection Efficiency Measure percentage of the actual defects originating in a stage of the project that were actually detected in that stage Requirements Traceability Measures the percentage of the requirements that have been addressed by the system Defect Removal Rate Measures the number of defects detected and removed over time Defect Density Identifies defect-prone components of the system Customer Satisfaction Measures customer satisfaction using objective surveys.

Speaking of feedback and measurement http: //www. cs. depaul. edu/My. CTI

8. Contract Negotiation The way you interact at the negotiating table may foreshadow ongoing relationship dynamics • Do’s – Include vendor responses to RFP in the contract – Keep lawyers at bay until Statement of Work is complete – Leverage outside expertise in negotiations – Provide incentives/penalties • Don’ts – Buy vaporware instead of proven solutions – Purchase low bid unless the value is there – Settle on final offer prematurely

8. Contract Negotiation Co-sourcing arrangements share risks and rewards • What is co-sourcing? – Outsourcer shares risks and rewards with client – Example: AT&T wanted to reduce cost of customer service and telemarketing from $5 B to $2. 6 B (2003 -7) • If costs are > $2. 6 B, outsourcer pays penalty • If costs < $2. 6 B, outsourcer pockets the additional savings • Prescribed customer service levels must also be met • Why is this a good thing – It gives both firms a compelling interest in the initiative’s success

Procurement - Process RFP Process 1. Pre-RFP 2. RFP 3. Proposal Submissions 4. Proposal Evaluations 5. Vendor Selection 6. Procurement Method 7. ROI Analysis 8. Negotiate Contract

Procurement Process Consultants can help with procurement, particularly vendor selection and contract negotiation • Why use a consultant? – Process/Methodology – Experience – Capacity • Several firms specialize in procuring outsourcing services – Technology Partners Inc. (TPI) – Technology & Business Integrators – Milbank, Tweed, Hadley and Mc. Cloy (law firm) • Need to have experienced people on procurement team, regardless of whether consultants are used

RFP Software Products 1) APES with INFORequestor. TM Series – Completely integrated database system enabling pre-loaded or user-defined automated use requirements surveys. Business needs priority scoring, pre-loaded or user-defined RFQ, RFI, RFP preparation. Automatic generation of detail shortlist based on actual RFI responses. It is re-usable tool that will help over and over in the future. Cost is $698. 00. 2)Hyper. RFPTM Series – Distribute RFPs by email or by Web, receive formatted vendor responses back to your designated E-Mail address & eliminate tedious copying, packaging, and mailing. Cost is $229. 00. 3) On-Line Consultant - Software tool to make the process more efficient and objective. Linkage vendors’ responses with RFP questions. Quickly and easily compare and score vendors. Cost is varying

RFP Software Products “Wilmington Trust Co. uses collaboration technology to manage the request-for-proposal process with its vendors. Most recently it used software from e. Room technology to evaluate 20 competitors vying to be the company’s sole temporary-staffing vendor, posting a set of questions in a single format. ” - Information. Week, 7 October 2002

RFP Software Products Network Computing web site’s RFP Builder * http: //www. networkcomputing. com/1202 sp 3. html

RFP Software Products For those preparing proposals (www. pragmatech. com): The RFP Machine® enables Knowledge Managers to build, edit, and maintain a central repository of company, product, and service information required for automated RFP and RFI creation. The software brings consistency and accuracy to the RFP response process by providing you with the tools to produce persuasive, professional documents in dramatically reduced time. The RFP Tracking System™ allows users to track proposal activity, including information pertaining to the issuer of the RFP or RFI, the person responsible for the response, document turnaround time, the win/loss status, and any other important information

Today’s agenda Topic Duration • Recap IT outsourcing • Quiz 15 minutes • Finish Procurement • *** Break 25 minutes 35 minutes 15 minutes • Financial Analysis 60 minutes • Assignment 2 reports 10 minutes • Assignment 3 free time 30 minutes

Financial Analysis Definition: Quantitative justification of an IT investment, typically looking at costs and benefits

Financial Analysis in the SDLC The systems development life cycle (SDLC) is a description of the phases of an information system Planning Analysis Design Implementation

SDLC: Planning Phase Approval Analyze Technical Feasibility Identify Business Value Analyze Economic Feasibility Analyze Organizational Feasibility Project Initiation Project Management

SDLC: Planning Phase Approval Analyze Technical Feasibility Identify Business Value Analyze Economic Feasibility Analyze Organizational Feasibility Deliverables System Request Project Management Economic Feasibility Analysis

Financial Analysis Costs and Benefits Review • Costs – One-time vs. recurring – Fixed vs. variable – Tangible vs. intangible o o Tangible - Accurately projected Intangible - Difficult to estimate or hidden

Financial Analysis One-Time vs. Recurring Costs Item • Hardware/Software purchase • Hardware/Software lease • Hardware/Software rental • Hardware support from vendor • New application development • Training • Research • Help desk support • Application maintenance • IT HR management • Communication charges One-Time Recurring

Financial Analysis Fixed vs. Variable Costs Item • Hardware/Software purchase • Hardware/Software lease • Hardware/Software rental • Hardware support from vendor • New application development • Training • Research • Help desk support • Application maintenance • IT HR management • Communication charges Fixed Variable

Financial Analysis Tangible vs. Intangible Costs Item • Hardware/Software purchase • Hardware/Software lease • Hardware/Software rental • Hardware support from vendor • New application development • Training • Research • Help desk support • Application maintenance • IT HR management • Communication charges Tangible Intangible

Financial Analysis Costs and Benefits Review (cont. ) • Benefits – One-time vs. recurring – Fixed vs. variable – Tangible vs. intangible o o Tangible - Measurable Intangible - Important but difficult to measure or translate into $$$

Financial Analysis One-Time vs. Recurring Benefits Item • Increased sales • Improved customer service • Reduced inventory costs • Improved productivity • Improved time to market • Staff reductions • Offer services that competitors offer • Better information for decision-making • • • One-Time Recurring

Financial Analysis Fixed vs. Variable Benefits Item • Increased sales • Improved customer service • Reduced inventory costs • Improved productivity • Improved time to market • Staff reductions • Offer services that competitors offer • Better information for decision-making • • • Fixed Variable

Financial Analysis Tangible vs. Intangible Benefits Item • Increased sales • Improved customer service • Reduced inventory costs • Improved productivity • Improved time to market • Staff reductions • Offer services that competitors offer • Better information for decision-making • • • Tangible Intangible

Financial Analysis There are four common methods of costbenefit analysis: 1. Break-even analysis 2. Payback analysis 3. Cash-flow analysis 4. Net present value analysis

Financial Analysis 1. Break-even analysis Definition Breakeven point is when total cost of current system and proposed system intersect Example Current payroll systems costs $1. 25 per employee New system costs $20, 000 to implement and $0. 35 per employee Let x = number of employees. 35 x + 20000 = 1. 25 x x = 22, 222 employees If 1, 000 employees processed per week, breakeven point is reached in the 23 rd week of the system’s life

Financial Analysis 1. Break-even analysis When to use Project justified in terms of cost savings, not benefits Advantages Useful when business is growing, volume is key variable in cost Disadvantages Benefits are ignored

Financial Analysis 2. Payback analysis Definition Payback period is the amount of time it takes to recover an initial investment Example New B 2 B system costs $300, 000 to develop. System handles 1, 000 sales per month. Cash inflow is $50 per sale after paying variable costs. Payback period = initial investment / annual cash inflow = 300, 000 / (1, 000 * 50) = 300, 000 / 50, 000 = 6 months

Financial Analysis 2. Payback analysis When to use Project justified in terms of tangible benefits Advantages Simple to use Disadvantages Ignores the time value of money Does not consider total return beyond the payback period

Financial Analysis 3. Cash Flow Analysis Definition Example Examines the direction, size, and pattern of cash flow associated with the proposed system

Financial Analysis 3. Cash Flow analysis When to use Project is expensive relative to firm size Advantages Simple to use Disadvantages Ignores time value of money

Financial Analysis 4. Net present value analysis Definition Present value - $1 received today is more valuable than $1 a year from today, which is more valuable than $1 two years from today, etc. NPV considers the time value of both the investments and cash flows Let p = current amount, r = interest rate Future amount in n periods (Fn) = p(1+r)n p = Fn / (1+r)n Example

Financial Analysis 4. Net present value analysis When to use Payback period is long or cost of borrowing money is high Advantages Can adjust interest rate to reflect greater risk in far future versus near future Relatively simple to explain Disadvantages Longer the time frame, more uncertain on what NPV is Slightly more complex than other methods

Financial Analysis Describe a situation where a project may not meet minimum cost-benefit requirements and still be approved.

Capital Budgeting Objective • Determine if a depreciable asset will provide a return that will meet or exceed the original investment in the asset's acquisition Screening vs. Preference Decisions • Screening - Look at one proposed project • Preference - Select from among several alternatives

Capital Budgeting Total Cost Approach • • Frequently used in making preference decisions All inflows and outflows for the alternatives are considered Cash inflows Cash outflows Incremental revenues Cost reductions Salvage value Initial investment Repairs & maintenance Incremental operating costs

Capital Budgeting Question: • When do you consider intangible benefits in capital budgeting decisions? Answer: • When tangible costs exceed tangible benefits, look at intangible benefits and decide if they are worth the deficit amount

Financial Analysis When is cost-benefit analysis done during the procurement process? Why is the most desirable 1. Pre-RFP time to do it? 2. RFP 3. Proposal Submissions 4. Proposal Evaluations 5. Vendor Selection 6. Procurement Method 7. ROI Analysis 8. Negotiate Contract

Financial Analysis When is cost-benefit analysis done during the procurement process? Why is the most desirable 1. Pre-RFP time to do it? range of potential costs/benefits 2. RFP 3. Proposal Submissions 4. Proposal Evaluations preliminary cost/benefit analysis 5. Vendor Selection in-depth cost/benefit analysis 6. Procurement Method update cost/benefit analysis 7. ROI Analysis update cost/benefit analysis 8. Negotiate Contract update cost/benefit analysis

Today’s agenda Topic Duration • Recap IT outsourcing • Quiz 15 minutes • Finish Procurement • *** Break 25 minutes 35 minutes 15 minutes • Financial Analysis 60 minutes • Assignment 2 reports 10 minutes • Assignment 3 free time 30 minutes

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