Lecture Business management information system - Lecture 19: Managing operations

Lecture Business management information system - Lecture 19: Managing operations. This chapter presents the following content: Managing outsourcing, organizational structure, governance, day-to-day working, supplier development, eastman kodak company,...

Lecture 19

SS

Today Lecture

# EASTMAN KODAK COMPANY

Case Example: Managing Outsourcing

#m HONDA MOTOR COMPANY

Case Example: Supplier Development

= Offshoring

# EXULT

Case Example — Offshoring

= Outsourcing — The ‘Final Word’

One reason = it Is a joint effort between parties that

may not have the same goals

= Typically, parties establish layers of joint teams

Top-level team: final word in conflict resolution

Operational team: oversees day-to-day functioning

Relationship Manager(s): look after the ‘relationship’

# Skills = different to those of e.g a data center

manager

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EASTMAN KODAK COMPANY Case Example: Managing Outsourcing

M First IS outsourcing by a ‘good shop’

‘| “Shocked the IS world”

M Four suppliers (ESPs) — manage portions of IS:

Operate data centers and networks Manage telecommunications

= Meets twice a year, includes senior management

from both companies — Focus on strategic issues The Advisory Council

=" Meets monthly, 15 members- handles technical

and operational issues

EASTMAN KODAK COMPANY Case Example: Managing Outsourcing cont

3 The Supplier and Alliance Management Group

= Manages long term outsourcing relationships &

contracts with large IT suppliers

=" Focal point between Itself and service provider —

ensures Kodak gets more than just delivery

EASTMAN KODAK COMPANY Case Example: Managing Outsourcing cont

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EASTMAN KODAK COMPANY Case Example: Managing Outsourcing cont

Mi Kodak needs all these forms of co-ordination for

effective supplier management

M Considered a ‘best practice’ outsourcing and

relationship model

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Managing Outsourcing:

2 Governance

= The foundations of governing an outsourcing relationship

are laid in the (LARGE) contract(s)

# Service Level Agreement (SLA)

Responsibilities, performance requirements, penalties, bonuses

# Another important component of SLAs is metrics An SLA

needs to be measurable to be of use

# |t is only when trust in one another breaks down that they

turn to the contract (Fig 8-4: Governance rules)

SS Service Level Agremeents

FIGURE 8-4 Examples of Outsourcing Governance Rules

e Service levels must stay in the top 25 percent as benchmarked against the client’s peers

e Escalation of problems becomes more painful as it goes higher to encourage early resolution

e The supplier is the grand project manager and is responsible for managing multiple vendors

e Work style is based on respect and confidence; there should be no personalization of problems

e Add significant value

e Aim to operate in an “open book” manner, sharing key operating information with each other

e New services can be put out for bid

e No exclusive agreements

e Meet our standards

e Let us know about potential problems before they happen

e Spend our money as if it were your own

Source: Reprinted with permission of Sourcing Interests Group, Bell Canyon, CA, www.sourcing

interests.org.

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Managing Outsourcing:

3 Day-to-Day Working

Mi Recommendations to manage day-to-day interactions:

Manage expectations, not staff

# Facilitation becomes the mode of working Rather

than say “do this”, the approach becomes “how

can we solve this together”

Realize that informal ways of working may disappear Loss of informal ways of working may add rigor

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Managing Outsourcing:

3 Day-to-Day Working

Integration of the two staffs requires explicit actions

=" Does not happen naturally

" Explicit policies are likely to be needed

The best way to manage day-to-day is communicate

frequently

=" Preferably ‘face to face’!

mồ ts

Managing Outsourcing:

4 Supplier Development

= Topic that is receiving increased attention

= Buying parts and services that go into one’s own

products and services

= Assisting one’s suppliers to improve their product and services by generally improving their processes

= This automobile manufacturer conducted pioneering

work in improving suppliers’ capabilities by pairing Honda

engineers with a supplier’s engineers to drastically lower the cost of one part supplied to Honda

= The results are like “walking around picking money up off the floor.”

Offshoring

= To round out our discussion of outsourcing, we turn to

a topic receiving much attention today: sending work offshore

Now = a big political issue

= Late 1990s — Offshore outsourcing

Started when labor markets were especially tight due to Y2K

Companies turn to offshore outsourcing because labor costs are lower and there is ample supply of

educated people

# Ireland, India, Philippines

SS | Off-shoring vs Outsourcing

Someone else does the work

for us

The work is done overseas

Offshoring

stream of white-collar work going offshore

Application maintenance and development Call centers

whereas service firms have (had?) not

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Offshoring cont

= Offshore outsourcing differs in some unique ways from

domestic outsourcing

Some areas to be considered:

1 Offshoring options are broadening

2 Both parties need cultural training to bridge

cultural differences Clients = cultural integration programs

Providers = accent neutralization

m _ "^^

Offshoring cont

Some areas to be considered cont

3 Communication issues need to be addressed

from the outset

“Yas”

- Asia = “| hear what you are saying’

- West = “I can do what you ask” or “I agree with you”

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Offshoring cont

- Get all commitments in writing

- Include on your team someone who know their culture

Communication issues continue throughout offshore relationships

4 Country laws need to be followed

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EXULT Case Example - Offshoring

= Provides full-service HR outsourcing to Global 500

companies

Mature in outsourcing relationships because

outsourcing Is its primary business

= 2 Indian companies maintain its core HR computer

systems (SAP & Peoplesoft)

Chose 2 Vs 1 to ensure resources could be scaled

up as needed

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ENTERPRISE APPLICATION DEVEL

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EXULT Case Example - Offshoring

= In choosing the providers used consultants to do the

detailed review and content (neolT) and to structure the contract (TPI)

Aim = for best deal Needed to understand the Indian

market and its practices Consultants helped achieve that

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EXULT Case Example - Offshoring

= Current split of maintenance work

70% Indian 15% provider employees ‘onshore’

15% Exult ‘onshore’

= Requires us buyers to work within the highly disciplined Indian maintenance processes rather than to try to

change them

Applies to all outsourcing!

= Good economic outcomes

m _ "^^

Offshoring cont

A major criticism is that it decreases skills and

know-how of its client’s IS organization

= This need not be so

= Redefine Services Using Offshoring

Understand customers Understand demographics

mẻ _ ` tts

Offshoring cont

Stay in touch with customers

Offer end-to-end service Dominate the screen

= As information moves online, companies are

vying to control “the screen” = where the

information ends up

m D_—è nh

Offshoring IS Activities

= Outsourcing was caused by the emphasis on

organizations sticking to their core competencies,

offshoring was caused by scarce resources

= Offshore outsourcing occurs when products and services are procured from locations in other countries Offshore out-sourcing of information systems services Is,

arguably, the most significant phenomenon to occur In recent decades

Offshorin American ING IS been vi IS Activities cS their back-office

processing services in India since 1994

GE Capital opened its GE Capital International

Services (GECIS) in India in 1997

Given the abundance of skilled professionals at offshore sites as well as pressure on executives to drive down costs, It Is very likely that this trend will continue and

even increase for some time, despite negative public

reaction

Offshoring IS Activities

™ Many of these outsourcing vendors are “offshore” in large part because of the lower costs that can be

attained outside of countries in the industrialized West

= This exploitation of international cost differentials has been termed “global arbitrage,” as it is an extension of

the classic economic arbitrage strategy

SS

Offshoring Factors

Bandwidth growth and telecommunication

Scarce human expertise Increased demand

Available global talents Routine tasks

Changing goals and objectives

Innovation Imitation

SS -

Offshoring Factors

= Offshore outsourcing of information systems activities Is

broadly accomplished

In one of two ways:

First, the client or offshoring organization sets up units

in other countries and hires local talent to develop, maintain, and provide services

In this case,the company maintains responsibility for

training, Supervision, quality control, and the like

These responsibilities can be managed locally or

remotely

SS

Offshoring Factors

= Second, the client or offshoring organization contracts

out services to providers in locations in other

countries

In this case, responsibility for hiring, training,

Supervision, quality control,and the like rests with the provider

2 Information systems research and development;

3 high-end jobs such as software architecture, product

design, project management, information systems consulting, and business strategy; that are often

offshored:

SS -

Offshoring Factors

4 Physical product manufacturing—semiconductors,

computer components, computers;

Insurance claim processing, medical billing,

accounting, bookkeeping, medical transcription, digitization of engineering drawings, desktop publishing, and high-end IT enabled services such as financial

analysis and the reading of X-rays;

6 Call centers and telemarketing

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Controlling information systems

# Controlling information systems development and

maintenance costs Is necessary for an organization in general and the information systems function In

particular

= Inthe early days of computers, investment in hardware,

software, and IS products and personnel faced little

scrutiny

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Risks in Offshore Outsourcing IS Activities

= Any business decision involves risks, and that risk Is

greater in situations when there Is increased change or

= Good management practice suggests careful

assessment of potential risks for any decision

Risks in Offshore Outsourcing IS Activities

Although offshore outsourcing of information systems services has been going on for some time now, our

understanding of Its impact Is still evolving

The trend in offshoring has been rapid, and there Is little

doubt that it will continue in the foreseeable future

It is critical that offshored projects are carefully studied and costbenefit analyses are carried out to make

sure benefits overweigh costs beyond a margin

Only significant cost benefits will warrant offshore

outsourcing of information systems services

With only a marginal cost benefit of say 10-15%, most organizations are better off retaining their

information systems activities in-house or in-shore

mẻ _Š — nh

Risks in Offshore Outsourcing IS Activities

= The offshore outsourcing of information systems

activities is primarily based on transaction cost

economics

= That rationale is narrowed down to the cost of labor toa

large extent

= There is an extant discourse among academics,

professionals, and business leaders as to the exact

nature of this cost advantage

(Cc) discounting non-cost factors that influence offshore outsourcing outcome

The tangible transaction-cost economics of

offshore outsourcing is more readily measured by economics and cost accounting models

The intangible costs or benefits of offshore

outsourcing include issues of organization, behavior, morale, social, strategy, and the like, and

these require acute management skills and insight

Risks of Offshore Outsourcing

= Decline in employee morale

= Loss of innovation and know-how

= Public reaction to corporate citizenship

= Regional instability of host country

= Quality control and standards

= Communications and culture

m — ltt

The Management of Offshore

Information Systems Projects

= Offshore outsourcing of information systems services

has added new dimensions to duties and responsibilities

of project managers

= Systems that are developed at remote sites in different countries are more difficult to manage due to differences

in culture,language, time zone, labor law, work habits,

and the like

= These issues are relevant even to cases when a firm

operates its own offshore practice

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The Management of Offshore

Information Systems Projects

Project managers are often involved with negotiation and management of contract with international vendors for

the delivery of information systems services

Many firms have their legal division draw and finalize

these offshore contracts

Project managers often interact directly with offshore

vendors to negotiate and clarify responsibilities

Communication skills and clear understanding of the

culture and language of offshore vendors are essential to successful negotiation