This chapter proposes strategies to the IT department of both Buyer and Vendor organisation in achieving their business objectives

and taking decisions related to outsourcing and in-house development. The proposed strategies are based on the data analysed in Chapter 4 amalgamated with Strategic Management tools and techniques. The chapter is divided into two sections - Related Strategic Resource Areas and Proposed Strategic Model.

5.1.

Related Strategic Resource Areas

A two-way relationship is necessary between overall business strategies and strategies in separate resource areas like people, information, technology and finance. Refer to Fig. 2.11 in Chapter 2. This section further elaborates these resource areas with respect to the need of the IT department for outsourcing to vendors.

5.2.1 Managing People

Based on the analysed data in Chapter 4, strategic resource area people, plays a key role in the decision-making of outsourcing as a mode of implementation. Refer to Fig. 5.1 below for the factors.
Rationale - Variable Capacity Management - Free Up Internal Resource - Access to World Class skills - Reallocation of Resource People Concerns - Employee backlash -Union/Political Pressure

Risks - Control of resources - Proximity to Staff

Challenges - Inadequate proficiency and experience - Effective Communication - High attrition

Fig. 5.1 Analysed factors for strategic resource area 'People'

Better management of variable capacity and freeing up internal resources for more critical purposes continues to be the important reasons for outsourcing to vendors. Other reasons include access to world class skills and ease of allocation of resources at the local environment. The concerns associated with outsourcing model are
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resistance from employees - fear of becoming redundant or outdated, and pressures from unions and political parties. 5.2.1.1 Managing People - Buyer and Vendor perspective

L. Gratton, V. Hope Hailey, P. Stiles and C. Truss (1999, p.185) have proposed a model have proposed a model for organisations on having competitive advantage through people. Refer to Fig. 5.2 below.
Leadership development Workforce development Organisational development

Scanning long-term people trends

Long-term cycle

Long-term people strategy

BUSINESS STRATEGY

Gap analysis

PERFORMANCE

Scanning current capability

Short-term cycle

Short-term business/people strategy

Objective setting Performance metrics Rewards Short-term training

Fig. 5.2 Competitive advantage through people

Both buyer and vendor organisations can adapt this proposed model to justify their rationale, mitigate their risks, address the concerns and overcome the challenges for their competitive advantage. The long-term cycle will assist the buyer to strategise their people towards developing competences for their core business via in-house development. Other non-core functions can be passed on to the short-term cycle by outsourcing their needs to more competent third-party vendors. An interactive gap analysis between the business strategy and the existing performance of people should be carried out to
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strike a balance. Similarly for a vendor organisation, the core competences - areas in which they are the leaders in serving the buyers, needs to be fulfilled by the longterm cycle. Vendors in their short-term strategy can further outsource (back to back agreement) other not-so relevant areas to other sub-vendors. The required skill, proficiency and communications levels can be attained by the trainings conducted in short-term cycle and coaching and mentoring process done over a long duration.

5.2.2 Managing Information

Information, a strategic resource area, is another important aspect for making the decision for outsourcing. Based on the analysed data in Chapter 4, Fig 5.3 below depicts key points related to information.
Rationale - Manage Complex Functions - Avoid the need to eliminate current product and services Concerns - Customer reaction - Negative publicity - Competitor criticism - Market reaction Information

Risks - Quality of output - Reduced effectiveness - Information Confidentiality

Challenges - Poor Quality assurance & control - Ensuring use of best practices - Lack of professionalism - Conflicting Commn. styles

Fig. 5.3 Analysed factors for strategic resource area 'Information'

5.2.2.1

Managing Information - Buyer and Vendor perspective

Both buyer and vendor share the same perspective regarding managing information. This strategic resource deals with the complexity of transformation processes and methodologies used for the project implementation. It also involves the quality assurance processes that validates, verifies and ensures the output adheres to the given requirements. To standardise the transformation processes, both buyer and vendor can implement organisation-wide proven end-to-end processes,

methodologies and development lifecycles. To overcome the challenge of poor quality assurance and control, organisations need to establish Total Quality Methodology framework for entire processes under IT department. The processes dictated by the chosen framework (e.g. ISO, CMM etc.) and if followed rigorously

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by the IT department employees, will surely raise the customer satisfaction level related to the quality of the product and service.

5.2.3 Managing Finance

Based on the analysed data in Chapter 4, the details for the strategic resource area finance are depicted in Fig. 5.4 below. This is applicable to both buyer and vendor.

Rationale - Reduce or Control Costs - Increased shareholder value - Faster time to market

Concerns - Severance costs

Finance

Risk - Financial payback

Challenges - Fundings

Fig. 5.4 Analysed factors for strategic resource area 'Finance'

5.2.3.1

Managing Finance - Buyer and Vendor perspective

Vendor to sustain and command the IT outsourcing market can base their pricing based on Porter's generic strategies - Cost Leadership, Differentiation and Focus. Cost Leadership strategy can be used for product and services in which the vendor has experience, expertise and economies of scale advantage over its competitor. The prices can be lowered and the benefits can be passed on to the buyer. For certain domain and technology areas which are premium and require special skillset, the vendor can base their pricing on differentiation strategy. They can bundle the offer package that include the required skillset and extra value added services to complement it. Vendors who work with individual market segments (e.g. domain expertise with banking industry) can use focus along with cost leadership strategies for pricing their offerings. Buyer's approach for managing finance involves reducing or controlling costs. Before outsourcing the operations, they need to estimate the payback period, calculate cost per transaction and productivity and efficiency level of current
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processes and employees. The aim of a buyer should be to increase the shareholder value to the investors of the organisation.

5.2.4 Managing Technology

The strategic resource area Technology, based on the analysed data in Chapter 4, relates to factors like technology expertise, faster lifecycle development time, new collaborative techniques used for development and leveraging on emerging technologies (internet based). 5.2.4.1 Managing Technology - Buyer and Vendor perspective

Vendors, in order to have a competitive edge, should invest in exploring the emerging technologies. The study should help in improving the existing development tools and techniques used for implementation. New web-based technologies that are transforming the existing way of working should be evaluated and appropriately proposed to the buyer.

5.2.

Proposed Strategic Model

Based on the Strategic Management tools and techniques, analysis of data and other strategic resource areas, a strategic model is proposed that will help an organisation (both buyer and vendor) to evaluate the required details before arriving at a strategic decision for in-house development or outsourcing. Refer to Fig. 5.5 below.

5.2.1 Model Definition

The model is divided into three analytical phases - Environmental Analysis, Internal Appraisal and Analyse Strategic Resource Areas. During the analysis, support from other organisation departments like Human Resource (HRD), Research and Development (R&D), Production/Operations Management (POM - department dealing with Software Engineering processes) and Quality Assurance and Control (TQM) are also required. The remaining section will briefly describe the individual blocks of the model.

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People Resource Audit

HRD

P E S T E L

Information

R&D POM TQM

Technology

Value Chain Analysis Finance Environmental Analysis Internal Appraisal Analyse Strategic Resource Areas Support Functions

Fig. 5.5 Proposed Strategic Model

PESTEL - This block represents the external analysis of the organisation with respect to the environmental factors like political, economic, sociocultural, technological, environmental and legal. The key drivers that should be covered are - market competition, cost/quality with respect to competitors, efficient operational process and legal issues like IPR. For details refer to Fig. 2.7 in Chapter 2. Resource Audit - The internal appraisal phase (within the organisation - IT department) includes resource audit. The purpose of this audit is to gauge the threshold and unique levels of resource and competences within the department with respective to existing requirements and projected requirements. To have a

competitive advantage the level should be well-balanced. For details refer to Fig. 2.8 in Chapter 2. Value Chain Analysis - The other block in internal appraisal phase is meant for the analysing the value chain of the organisation and the impact/areas of concerns the IT department can have with respect to primary and support activities. For details refer to Fig. 2.10 in Chapter 2. During the phase of environmental analysis and internal appraisal, other strategic resource areas are also analysed together due to its dependency and co-relation.

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People - This block represents the employees of the IT department. With the support of HRD, details like required skillset, competence framework, recruitment procedure, appraisal process, remuneration/reward policies, training and development plan etc. should be analysed. Information - This block represents the information requirement in terms of existing and required implementation models (electronic/online/web-based processing), improved products/service, robust and secure design and competitive performance. It also deals with the development methodologies used for implementing projects and services. With the support of software engineering process group (POM) and quality assurance and control group (TQM), the details should be analysed. Technology - Details related to technology are covered in this block. An evaluation of existing and emerging technologies with respect to competitive advantage, development model and core competence should be performed here. Finance - The key purpose of this block is to analyse the impact of cost incurred due to the existing and requested operations performed by the IT department. It also analyse the payback period and the return value to shareholders. HRD - This block represents a support function which supports strategic resource area People and Internal Appraisal phase. R&D - This block represents a support function which supports strategic resource area Technology and Internal Appraisal phase. POM - This block represents a support function which supports strategic resource area Information and Internal Appraisal phase. TQM - This block represents a support function which supports strategic resource area Information, Technology and Internal Appraisal phase. 5.2.2

How this model works?

The purpose of this model is to analyse the new requirement with respect to existing external and internal environment factors influencing the IT department and propose the appropriate implementation model for it. Refer to Fig. 5.6 below.

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New Requirement

Environmental Analysis

Support Functions

Internal Appraisal

Analyse Strategic Resource Areas

Details related to In-house development OR Outsourcing OR Both Fig. 5.6 Proposed Strategic Model - How it works.

The new requirement denotes a new project, new operation, improvement/ transformation of existing processes etc. Step 1. Capture the scope, objective and benefits for the new requirement from the stakeholders. Step 2. Conduct the environmental analysis of the new requirement with respect to existing factors. Step 3. Initiate the internal appraisal - resource audit and value chain analysis along with other strategic resource area people with the support of HRD. Step 4. Continue the internal appraisal - resource audit and value chain analysis along with other strategic resource areas like information and technology with the support of POM and TQM (group associated with engineering processes and quality assurance and control). Step 5. Complete the internal appraisal and remaining strategic resource area finance. Step 6. Collate the analytical details and arrive at a conclusion for In-house development or Outsourcing to a vendor or both based on the development decision matrix mentioned in the subsequent section.

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5.2.2.1

Development Decision matrix

Mentioned below is a development decision matrix which favours in-house development. The conclusion is based on the tools and techniques used for analysis and appraisal and outcome of the results captured. In general, if the outcome is similar to the ones mentioned below for corresponding tools/technique, the decision should be made in favour of In-house development. For any different set of results for the same analysis, the new requirement should be outsourced to a vendor.

Analysis/Appraisal Tools & Techniques

Results

Resource Audit Internal Appraisal Value Chain Analysis

Unique Resources

Core Competences

People

Long-term cycle Skillset available/will be developed Aligned with Core Competency framework In-house Development

Information

Manage complex functions, Confidentiality, Product/service going to last for a long period, New core functions, Competitive edge

Strategic Resource Areas Technology

First mover advantage, IPR, Competitive edge Emerging technology benefits Product/service going to last for a long period

Finance

Increased shareholder value Improved efficiency in core competences Financial payback

Fig. 5.7 Development decision matrix

Again for the outsourcing decision, one more level of judgement is required for whether the model should be onsite of offshore. The second level of decision can be based on the level of importance pressed by the buyer for the following points like Variable Capacity Management, Free up Internal Resource, Access World Class Skills, Reduce or Control Cost and Manage Complex Functions.

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Onsite Rationale Variable Capacity Management Free Up Internal Resource Access World Class Skills Reduce or Control Cost Manage Complex Functions

Offshore Rationale

5 4 3 2 1

Reduce or Control Cost Variable Capacity Management Free Up Internal Resource Access World Class Skills Manage Complex Functions

5 4 3 2 1

Fig. 5.8 Importance level for Onsite vs. Offshore

Fig. 5.8 lists down importance levels influencing buyer's for their decision of outsourcing - onsite and offshore. Offshore mode is mainly driven by its advantage of lower cost whereas the purpose for onsite is to provide world class skills, resource pool and efficient and best implementation practices and methodologies. The analysis from this model will be providing a generic impression about the current and the required state of resources for implementing any new requirement. The gap should be analysed properly and based on the importance level appropriate decision should be taken. The objective of the model is more towards ensuring capturing complete details for analysis and providing a comparison between the "AsIs" and "To-Be" state. The final decision about in-house development or outsourcing totally depends upon the stakeholders involved with the requirement.

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