Systems Development: Investigation and Analysis - Principles of Information Systems - page 502

Outsourcing and On-Demand Computing
Many companies hire an outside consulting firm or computer company that specializes in
systems development to take over some or all of its development and operations activ-
ities. 43 Some companies, such as General Electric, have their own outsourcing subunits or
have spun off their outsourcing subunits as separate companies. As mentioned in Chapter 2,
outsourcing and on-demand computing are often used. 44 Table 12.4 describes the circumstances
in which outsourcing is a good idea.

Reason

Example

When a company believes it can cut costs PacifiCare outsourced its IS operations to IBM and Keane, Inc. PacifiCare hopes the

outsourcing will save it about $400 million over ten years.
Kodak outsourced its IS operations, including mainframe processing,
telecommunications, and personal computer support, because it had limited
opportunity to distinguish itself through these IS operations. Kodak kept
application development and support in-house because it thought that these
activities had competitive value.

When a firm has limited opportunity to
distinguish itself competitively through
a particular IS operation or application

When outsourcing does not strip the
company of technical know-how required for
future IS innovation
When the firm's existing IS capabilities are
limited, ineffective, or technically inferior

Firms must ensure that their IS staffs remain technically up-to-date and have the
expertise to develop future applications.

A company might use outsourcing to help it make the transition from a centralized
mainframe environment to a distributed client/server environment.

When a firm is downsizing First Fidelity, a major bank, used outsourcing as part of a program to reduce the

number of employees by 1,600 and slash expenses by $85 million.

Table 12.4

Increasingly, small and medium-sized firms are using outsourcing to cut costs and ac-
quire needed technical expertise that would be difficult to afford with in-house personnel.
Millennium Partners Sports Club Management, for example, used Center Beam to outsource
many of its IS functions, including its help desk operations. The Boston-based company
plans to spend about $30,000 a month on outsourcing services, which it estimates to be less
than it would have to pay in salaries for additional employees. 45 According to a company vice
president, “If we hadn't outsourced, I couldn't focus 100 percent on things that can drive
the company forward.” The market for outsourcing services for small and medium-sized
firms is expected to increase by 15 percent annually through 2010 and beyond.
Reducing costs, obtaining state-of-the-art technology, eliminating staffing and personnel
problems, and increasing technological flexibility are reasons that companies have used the
outsourcing and on-demand computing approaches. 46 Reducing costs is a primary reason for
outsourcing. One American computer company, for example, estimated that a programmer
with three to five years of experience in China would cost about $13 per hour, while a
programmer with similar experience in the United States would cost about $56 per hour.
U.S. companies also provide outsourcing services. Aelera Corporation spent about six months
looking for the best outsourcing deal and determined that a company in Savannah, Georgia
was the best. McKesson Corporation saved about $10 million by outsourcing jobs from San
Francisco to Dubuque, Iowa. Mattel outsourced to rural Jonesboro, Arkansas. Increasingly,
companies are looking to American outsourcing companies to reduce costs and increase
services. Individuals, including students, are also outsourcing tasks they have to perform.
Companies often use several outsourcing services. GM, the large automotive company,
has used six outsourcing companies since its outsourcing agreement with EDS expired. 47
Using more than one outsourcing company can increase competition and reduce outsourcing
costs. According to one GM executive, “That's really just Economics 101.”
A number of companies and nonprofit organizations offer outsourcing and on-demand
computing services—from general systems development to specialized services. 48 IBM's
Global Services, for example, is one of the largest full-service outsourcing and consulting
services. 49 IBM has consultants located in offices around the world. In India, IBM has in-
creased its employees from less than 10,000 people to more than 30,000. 50 The company

When to Use Outsourcing for
Systems Development