What is a Good Way to Outsource IS? | Article

man thinking at computerA large Canadian bank wanted to develop a new computer program to support its mortgage accounts. The project director, having enjoyed many successes with IT outsourcing, felt an outsourcing supplier could complete the project faster and better than its in-house programmers.

The bank selected a provider who had all the requisite technical resources. The supplier built a computer system that tracked mortgages. But it didn’t track this bank’s mortgages. Once it was clear that the new system wasn’t working, the bank changed project leaders, three times. Many people lost their jobs. The project took twice as long, cost twice as much and delivered only half of what it was supposed to do. The final price was almost CD $30 million.

“The project crashed,” reports Vital Roy, a professor of MIS at the University of Montreal’s School of Business (HEC) who studied the failure. “But the bank has to use it. The bank had invested so much in the project it couldn’t afford to throw it away.”

What went wrong? Roy says the bank never explained to its provider the fine points of its mortgage system. The outsourcer “had no idea what rules applied,” says Roy. Without this knowledge, the provider used generic mortgage rules. These rules turned out to be as different as English and French.

Roy says the buyer was unable to communicate its corporate culture to the outsourcing provider. The buyer should have kept the development of this system in-house or formed a partnership with the provider, which would have forced the two parties to combine their specific expertise to make the system work the bank’s way.

IS Development Strategies

The professor studied this project as part of a paper he presented at the Hawaii International Conference on System Sciences 2000. He researched 20 Canadian outsourcing relationships to discover the strategies companies use to acquire information systems.

His thesis was that companies could get their systems from two sources: They could choose to build them internally using a department that would then maintain and operate the system. Or they could outsource all or part of the delivery of these services. Roy says selecting either alternative requires “decisions fraught with potentially threatening consequences for the firm and may put at risk its future capacity to adapt in a turbulent environment.”

First, Roy noticed that the companies he studied focused on the financial aspects of an outsourcing arrangement, ignoring other considerations. Roy feels this financial tunnel vision can be a mistake, as in the bank’s case. “This perspective is not enough for IS development projects,” the professor says. Factoring in the nuances of the corporate culture is equally valid, in his view.

Trouble arises when an outsider fails to understand the specific characteristics of a company. “Outsourcing providers offer standard solutions,” reports Roy. “That is never the case when the project is done in-house because people are attuned to special needs.”

Roy’s research notes that a company must have two different types of expertise when making the decision to outsource an IS development project. First, there is the technical know-how, an obvious requirement. However, many companies in his study didn’t realize they needed managerial expertise, too. The managers have to explain to the supplier how the processes work and how they will be supported within the company.

“Outsourcing doesn’t always work for IS development projects,” Roy reports.

New Way Of Thinking For IS Departments

The professor says he was surprised to find IS departments are undergoing a major shift. “There’s a new way of thinking about the mission of the IS department,” he says. For the first time, he’s finding when companies decide to acquire new systems, the business side of the equation is becoming more important than in the past. Previously, technical considerations reigned supreme. He found “the business side of the development team was more active in expressing their needs. They told the programmers what they wanted the IS to do,” Roy reports.

The technical side was now adjusting to these new needs. Roy attributes this change to the pressure from competitors.

Finally, the study documents a new phenomenon: association between competitors. For example, Roy found two regional banks that have competed against each other for years joining hands to present a united front against a new entrant in their market. In Canada, the global competitors are mainly American banks. “These two joined hands to build a new system to deal with a much larger global competitor,” says Roy. “It’s the only way either party can afford the very expensive system they need to compete.”

Lessons from the Outsourcing Primer:

  • Deciding whether to outsource the development of an IT system is a complicated decision that can have enormous financial consequences. Don’t just look at the financials.
  • Companies need managerial expertise to help the outsourcing supplier understand the corporate culture of a company.
  • The business side is becoming more vocal and is explaining what it needs when developers are discussing the parameters of a new IS system.
  • Former competitors are joining hands to share the expenses of building new IS systems so they can compete with global competitors who enter their market.

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