Firms can rent the software from a software service provider, they can purchase a software package from a commercial vendor, or they can have a custom application developed by an outside outsourcing firm.
Application Software Packages
During the past several decades, many systems have been built on an application software package foundation. Many applications are common to all business organizations for example, payroll, accounts receivable, general ledger, or inventory control. For such universal functions with standard processes that do not change a great deal over time, a generalized system will fulfill the requirements of many organizations.
If a software package can fulfill most of an organization’s requirements, the company does not have to write its own software. The company can save time and money by using the prewritten, predesigned, pretested software programs from the package. Package vendors supply much of the ongoing maintenance and support for the system, including enhancements to keep the system in line with ongoing technical and business developments.
If an organization has unique requirements that the package does not address, many packages include capabilities for customization. Customization features allow a software package to be modified to meet an organization’s unique requirements without destroying the integrity of the packaged software. If a great deal of customization is required, additional programming and customization work may become so expensive and time-consuming that they negate many of the advantages of software packages.
When a system is developed using an application software package, systems analysis will include a package evaluation effort. The most important evaluation criteria are the functions provided by the package, flexibility, user friendliness, hardware and software resources, database requirements, installation and maintenance efforts, documentation, vendor quality, and cost. The package evaluation process often is based on a Request for Proposal (RFP), which is a detailed list of questions submitted to packaged-software vendors. When a software package is selected, the organization no longer has total control over the systems design process. Instead of tailoring the systems design specifications directly to user requirements, the design effort will consist of trying to mold user requirements to conform to the features of the package. If the organization’s requirements conflict with the way the package works and the package cannot be customized, the organization will have to adapt to the package and change its procedures.
Outsourcing
If a firm does not want to use its internal resources to build or operate information systems, it can outsource the work to an external organization that specializes in providing these services. In another form of outsourcing, a company could hire an external vendor to design and create the software for its system, but that company would operate the system on its own computers. The outsourcing vendor might be domestic or in another country.
Domestic outsourcing is driven primarily by the fact that outsourcing firms possess skills, resources, and assets that their clients do not have. Installing a new supply chain management system in a very large company might require hiring an additional 30 to 50 people with specific expertise in supply chain management software, licensed from a vendor. Rather than hire permanent new employees, most of whom would need extensive training in the software package, and then release them after the new system is built, it makes more sense, and is often less expensive, to outsource this work for a 12-month period.
In the case of offshore outsourcing, the decision tends to be much more cost-driven. A skilled programmer in India or Russia earns about USD $10,000– $20,000 per year, compared to $73,000 per year for a comparable programmer in the United States. The Internet and low-cost communications technology have drastically reduced the expense and difficulty of coordinating the work of global teams in faraway locations. In addition to cost savings, many offshore outsourcing firms offer world-class technology assets and skills. Wage inflation outside the United States has recently eroded some of these advantages, and some jobs have moved back to the United States.
Nevertheless, there is a very strong chance that at some point in your career, you’ll be working with offshore outsourcers or global teams. Your firm is most likely to benefit from outsourcing if it takes the time to evaluate all the risks and to make sure outsourcing is appropriate for its particular needs. Any company that outsources its applications must thoroughly understand the project, including its requirements, method of implementation, anticipated benefits, cost components, and metrics for measuring performance.
Many firms underestimate costs for identifying and evaluating vendors of information technology services, for transitioning to a new vendor, for improving internal software development methods to match those of outsourcing vendors, and for monitoring vendors to make sure they are fulfilling their contractual obligations. Companies will need to allocate resources for documenting requirements, sending out RFPs, handling travel expenses, negotiating contracts, and project management. Experts claim it takes from three months to a full year to fully transfer work to an offshore partner and make sure the vendor thoroughly understands your business.
Application Software Packages
During the past several decades, many systems have been built on an application software package foundation. Many applications are common to all business organizations for example, payroll, accounts receivable, general ledger, or inventory control. For such universal functions with standard processes that do not change a great deal over time, a generalized system will fulfill the requirements of many organizations.
If a software package can fulfill most of an organization’s requirements, the company does not have to write its own software. The company can save time and money by using the prewritten, predesigned, pretested software programs from the package. Package vendors supply much of the ongoing maintenance and support for the system, including enhancements to keep the system in line with ongoing technical and business developments.
If an organization has unique requirements that the package does not address, many packages include capabilities for customization. Customization features allow a software package to be modified to meet an organization’s unique requirements without destroying the integrity of the packaged software. If a great deal of customization is required, additional programming and customization work may become so expensive and time-consuming that they negate many of the advantages of software packages.
When a system is developed using an application software package, systems analysis will include a package evaluation effort. The most important evaluation criteria are the functions provided by the package, flexibility, user friendliness, hardware and software resources, database requirements, installation and maintenance efforts, documentation, vendor quality, and cost. The package evaluation process often is based on a Request for Proposal (RFP), which is a detailed list of questions submitted to packaged-software vendors. When a software package is selected, the organization no longer has total control over the systems design process. Instead of tailoring the systems design specifications directly to user requirements, the design effort will consist of trying to mold user requirements to conform to the features of the package. If the organization’s requirements conflict with the way the package works and the package cannot be customized, the organization will have to adapt to the package and change its procedures.
Outsourcing
If a firm does not want to use its internal resources to build or operate information systems, it can outsource the work to an external organization that specializes in providing these services. In another form of outsourcing, a company could hire an external vendor to design and create the software for its system, but that company would operate the system on its own computers. The outsourcing vendor might be domestic or in another country.
Domestic outsourcing is driven primarily by the fact that outsourcing firms possess skills, resources, and assets that their clients do not have. Installing a new supply chain management system in a very large company might require hiring an additional 30 to 50 people with specific expertise in supply chain management software, licensed from a vendor. Rather than hire permanent new employees, most of whom would need extensive training in the software package, and then release them after the new system is built, it makes more sense, and is often less expensive, to outsource this work for a 12-month period.
In the case of offshore outsourcing, the decision tends to be much more cost-driven. A skilled programmer in India or Russia earns about USD $10,000– $20,000 per year, compared to $73,000 per year for a comparable programmer in the United States. The Internet and low-cost communications technology have drastically reduced the expense and difficulty of coordinating the work of global teams in faraway locations. In addition to cost savings, many offshore outsourcing firms offer world-class technology assets and skills. Wage inflation outside the United States has recently eroded some of these advantages, and some jobs have moved back to the United States.
Nevertheless, there is a very strong chance that at some point in your career, you’ll be working with offshore outsourcers or global teams. Your firm is most likely to benefit from outsourcing if it takes the time to evaluate all the risks and to make sure outsourcing is appropriate for its particular needs. Any company that outsources its applications must thoroughly understand the project, including its requirements, method of implementation, anticipated benefits, cost components, and metrics for measuring performance.
Many firms underestimate costs for identifying and evaluating vendors of information technology services, for transitioning to a new vendor, for improving internal software development methods to match those of outsourcing vendors, and for monitoring vendors to make sure they are fulfilling their contractual obligations. Companies will need to allocate resources for documenting requirements, sending out RFPs, handling travel expenses, negotiating contracts, and project management. Experts claim it takes from three months to a full year to fully transfer work to an offshore partner and make sure the vendor thoroughly understands your business.
Outsourcing offshore incurs additional costs for coping with cultural differences that drain productivity and dealing with human resources issues, such as terminating or relocating domestic employees. All of these hidden costs undercut some of the anticipated benefits from outsourcing. Firms should be especially cautious when using an outsourcer to develop or to operate applications that give it some type of competitive advantage.
General Motors Corporation (GM) had outsourced 90 percent of its IT services, including its data centers and application development. The company recently decided to bring 90 percent of its IT infrastructure in-house, with only 10 percent managed by outsourcers. Lowering costs is important, but GM’s primary reason for cutting back outsourcing is to take back control of its information systems, which it believes were preventing the company from responding quickly to competitive opportunities. Bringing information systems in-house will make it easier for GM to cut its sprawling list of IT applications by at least 40 percent, move to a more standardized platform, complete innovative IT projects more quickly, and get a better grip on customer and production data, which had been housed in too many different systems. The automaker will consolidate 23 data centers worldwide into just two, both in Michigan, and run four software development centers
Figure 13.11 shows best- and worst-case scenarios for the total cost of an offshore outsourcing project. It shows how much hidden costs affect the total project cost. The best case reflects the lowest estimates for additional costs, and the worst case reflects the highest estimates for these costs. As you can see, hidden costs increase the total cost of an offshore outsourcing project by an extra 15 to 57 percent. Even with these extra costs, many firms will benefit from offshore outsourcing if they manage the work well. Under the worst-case scenario, a firm would still save about 15 percent.
General Motors Corporation (GM) had outsourced 90 percent of its IT services, including its data centers and application development. The company recently decided to bring 90 percent of its IT infrastructure in-house, with only 10 percent managed by outsourcers. Lowering costs is important, but GM’s primary reason for cutting back outsourcing is to take back control of its information systems, which it believes were preventing the company from responding quickly to competitive opportunities. Bringing information systems in-house will make it easier for GM to cut its sprawling list of IT applications by at least 40 percent, move to a more standardized platform, complete innovative IT projects more quickly, and get a better grip on customer and production data, which had been housed in too many different systems. The automaker will consolidate 23 data centers worldwide into just two, both in Michigan, and run four software development centers
Figure 13.11 shows best- and worst-case scenarios for the total cost of an offshore outsourcing project. It shows how much hidden costs affect the total project cost. The best case reflects the lowest estimates for additional costs, and the worst case reflects the highest estimates for these costs. As you can see, hidden costs increase the total cost of an offshore outsourcing project by an extra 15 to 57 percent. Even with these extra costs, many firms will benefit from offshore outsourcing if they manage the work well. Under the worst-case scenario, a firm would still save about 15 percent.
If a firm spends $10 million on offshore outsourcing contracts, that company will actually spend 15.2 percent in extra costs even under the best-case scenario. In the worst-case scenario, where there is a dramatic drop in productivity along with exceptionally high transition and layoff costs, a firm can expect to pay up to 57 percent in extra costs on top of the $10 million outlay for an offshore contract.
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