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IT Strategy, Sourcing,and VendorRelationships12

Chapter

Learning Outcomes� Describe how the IT strategy supports business strategy,the strategic planning process, and the role of IT steeringcommittees.

� Explain the importance, potential impacts, functions, andchallenges of IT governance.

� Explain the value of aligning the IT and business strategies,and how this alignment can be achieved.

� Describe IT operating plans, how sourcing strategies canimprove performance, and the risks and challenges of sourcingand offshoring relationships. Identify major types of outsourc-ing, reasons for outsourcing, and the risks and benefits.

� Explain the IT vendor selection and managementprocesses, and how to achieve successful relationshipsthrough the use of contracts and service level agreements.

Quick Look

Case 1, Opening Case: Consumer Banks Reinvent with New Business and IT Strategies

12.1 IT Strategy and the Strategic PlanningProcess

12.2 IT Governance

12.3 Aligning IT with Business Strategy

12.4 IT Operating Plans and Sourcing Strategies

12.5 IT Vendor Relationships

Key Terms

Chapter 12 Link Library

Evaluate and Expand Your Learning

• IT and Data Management Decisions• Questions for Discussion & Review• Online Activities• Collaborative Work

Case 2, Business Case: Puma Sources Its BillingDepartment

Case 3, Webinar Case: Strategic Value of Health InfoExchange at UMass Memorial

Data Analysis & Decision Making: Third-Party vs. Company-Owned Offshoring

References

Part IV IT Planning, Strategy, and Ethics

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What a company can do depends on what its informationsystems can do. This principle explains why planning abusiness strategy in isolation from IT strategic planningwill have suboptimal outcomes. As you know, IT is a dis-ruptive force. IT planning helps put the company in a posi-tion to positively disrupt how they operate, their businessmodels, and even their industry. CIOs need an IT strategyas well as an operating plan for how the IT strategic planwill be achieved. Two examples of operating plans are in-house development with help from a consulting firm orvendor; and sourcing to a third-party in the same countryor offshore. Cloud computing and SaaS are two sourcingoptions.

By aligning IT and business strategies, companies canbuild differentiating capabilities—the three or four things

that a company does exceptionally well that set it apartfrom its competitors.This strategic fit is dynamic becausekeeping the IT and business strategies in alignment is anongoing process. In the mid-2010s, the process takes intoconsideration opportunities provided by cloud delivery,software as a service (SaaS) applications, BYOD (bringyour own device), consumerization, mobile intelligence,and social media. CIOs evaluate various ways of acquir-ing or providing new information technologies and serv-ices that can drive business growth.

The effectiveness of the IT function relies heavily on relationships with vendors and third-party suppliersand on IT governance. IT governance addresses thisquestion: Are you doing what’s right, appropriate, andneeded by the business?

QUICK LOOK at Chapter 12, IT Strategy, Sourcing, and Vendor Relationship

Since 2008, the financial crisis and changing marketplace have caused massive disruptionin the financial services industry, and consumer banks in particular. Banks also face increas-ing greater risk and government regulation. Furthermore, as banking processes becamemore technology intensive, business and IT strategies became inseparable. Bank managersare well aware of the importance of developing an IT strategy that is driven by practicalsolutions to real problems.

Consumer Banking after the Financial CrisisBased on a 2011 survey by the IBM Institute for Business Value, researchers conclude thatbanks need:

1. To move beyond existing organizational silos, infrastructure complexities, and otherconstraints—and toward an operation centered on customers.

2. To leverage information and analytic tools to better manage risk, pricing, channelperformance, and returns.

Need to Reassess Business StrategyConsumer banks need to reassess their business strategies because of the followingpressures and challenges.

• Banks face limited growth opportunities and stronger regulatory constraints related to risk.• Nonfinancial services organizations and social financing sites, such as PayPal, Mint, and

Prosper, are eroding their customer base.• Most banking products and services have lower operating profits.• Fierce competition has decreased revenues.

To address these pressures and challenges, consumer banks are devising customer-centricbusiness and IT strategies.

CASE 1 OPENING CASEConsumer Banks Reinvent with New Business and IT Strategies

Customer-centric means thatbanks design their operationsand services around client needs.

Transparency means no sur-prises—customers know andunderstand the terms and costs ofbanking services.

Service-oriented architecture(SOA) is a business-centric ITarchitecture that makes it fasterand easier to develop new appsand ISs because they are builtwith existing building blocks,called services.


CASE 1 Opening Case 357

Customer-Centric Business � IT StrategiesA customer-centric business strategy gives customers convenience, control, recognition, andtransparency. Transparency means “no surprises”—just clear communication of fee structures,terms, restrictions, and deadlines to customers. Six essential customer-centric technologies are:

1. Mobility to enable anytime/anywhere connectivity to clients, customers, and employees2. High-end analytics for real-time customer insights3. Big data management to process large volumes of unstructured data from social media

and other sources4. Next-generation data processing to manage data from disparate sources and for data

driven business intelligence (BI)5. Cloud computing for infrastructure, data, analytics, and applications6. Service-oriented architecture (SOA) for faster development of new apps, which is made

possible by the reusability of services or functions. A service is a fundamental buildingblock for developing new systems or integrating existing ones. For additional informa-tion about SOA, view the flash demo shown in Video 12.1.

SOA reduces business risk and exposure by helping banks comply with regulations, suchas the Foreign Corrupt Practices Act (FCPA), Sarbanes-Oxley Act, and the USA Patriot Act.

To make the new business strategy work, consumer banks are investing in new orupdated IT architecture, including refining their operating models, governance, and dataand application management. Figure 12.1 shows how the IT build-out strategy enables thebank’s business strategy.

Video 12.1 SOAhttp://www-01.ibm.com/software/solutions/soa/flash/Build03.swf.

Figure 12.1 Consumer banks are implementing new business and IT strategies to counteract negative pressures andimprove profitability. Adapted from Booz&Co, 2012.

Better platformsfor customproducts and servicesComplete viewof customers

Service-basedIT architecture

Reusable,plug-and-playservices

FrontOffice

MiddleOffice

BackOffice

Consumer Banking Supporting Enablers

Service-OrientedArchitecture

‘Anytime, anywhere’ connectivity

Real-time consumer insightsAnalytics embedded into business processes (risk management,marketing, sales)

Data derived from customer bankingData derived from external sources (such as social media)

BI

Specialized datamanagement systems to manage data fromdisparate sources

Key Capability Enablers

Mobility

High-EndAnalytics

Big DataManagement

Next-GenerationData Processing

CloudComputing

Real-time accessto customer dataand insights

More efficientbusinessprocesses anddata management

Private, public,or hybrid cloudarrangements

1

2

3

4

5

6

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Discuss

1. Visit the PayPal, Mint, and Prosper web sites and identify the financial services that eachof them provides to customers. Discuss why customers would use these services insteadof a traditional consumer bank. Compare their customer-centric approach to that ofconsumer banks. What advantage do banks have over Mint and Prosper?

Sources: Compiled from Chatterjee, Nair, & Tatke (2012), Giridhar, Notestein, & Wagle (2011),Booz.com (2012).

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2. Explain the pressures and challenges disrupting the consumer banking industry anddriving them to reassess their business strategies.

3. Could consumer banks separate their customer-centric business strategy from their ITstrategy? Explain.

4. Refer to Figure 12.1. What is the value-added of each of the six technologies to thebank’s customer-centric strategy?

Decide

5. Refer to your answer to question 1. Research users’ feedback about their experienceswith these alternative financial services. Are they an insignificant or serious threat toconsumer banks?

Debate

6. “Whatever ITs consumer banks invest in, nontraditional alternatives can also invest inthem.” Debate the extent to which this statement is accurate. Explain your assumptionsand reasoning.

358 Chapter 12 IT Strategy, Sourcing, and Vendor Relationships

12.1 IT Strategy and the Strategic Planning ProcessCan an effective business strategy exist today without IT? Could nonprofits or gov-ernment agencies fulfill their missions without a technology strategy? Of course not.That’s why IT strategy begins and ends with the business—and must be an integral partof the business strategy. Making IT investments on the basis of an immediate need orthreat is sometimes necessary, but these reactive approaches won’t maximize ROI—and can result in incompatible, redundant, expensive-to-maintain, or failed systems.

Two of the biggest risks and concerns of top management are (1) failing to alignIT to real business needs and,as a result, (2) failing to deliver value to the business.SinceIT has a dramatic effect on business performance and competitiveness, the failure tomanage IT effectively seriously impacts the business. Conversely, payoffs from IT suc-cesses include substantial reductions in operating costs and improvements in agility.

IT STRATEGIES SUPPORTTHE BUSINESS STRATEGY

Organizations develop IT strategies that support the business strategy and objectives.The four main points of IT strategic plans are to:

1. Improve management’s understanding of IT opportunities and limitations2. Assess current performance3. Identify capacity and human resource requirements4. Clarify the level of investment required

Various functions in the organization—such as manufacturing, R&D (research and development), and IT—are most successful when their strategies are forward-looking. To be forward-looking means that they do SWOT analysis (strengths, weak-nesses, opportunities, threats) to prepare for or create their future rather than react tochallenges or crises. And IT implementations that require new infrastructure or themerging of disparate ISs can take years. Long lead times and lack of expertise haveprompted companies to explore a variety of IT strategies, which are discussed next.

IT Deployment Strategies: In-House and Sourcing. IT strategy guides investmentdecisions and decisions on how ISs will be developed, acquired, and/or implemented.IT strategies fall into two broad categories:

1. In-house development in which systems are developed or other IT work is donein-house, possibly with the help of consulting companies or vendors. Typically, ITs


that provide competitive advantages, or that contain proprietary or confidential data,are developed and maintained by the organization’s own in-house IT function.2. Sourcing in which systems are developed or IT work is done by a third party orvendor. There are many versions of sourcing, which also had been called outsourc-ing. Work or development can be sourced to consulting companies or vendors thatare within the same country, which is referred to as onshore sourcing. Or the workcan be sourced off-shore to other countries. Sourcing that is done off-shore is alsocalled offshoring. Other options are to lease or to purchase IT as services. Cloud com-puting and software as a service (SaaS) have expanded sourcing options significantly.Tech Note 12.1 discusses a sourcing challenge and solution.

12.1 IT Strategy and the Strategic Planning Process 359

Tech Note 12.1

Sourcing creates its own set of challenges. For example, companies that have multipleoutsourcers face the challenges of managing all of those relationships as their opera-tions grow increasingly complex. And as companies increase outsourcing activities, a gapis created in their organizational structures, management methods, and software tools.At that point, companies need to hire an outsource relationship management (ORM)company. ORMs can provide automated tools to monitor and manage the outsourcingrelationships leading to more productive service level agreements (SLAs), better alignmentof business objectives, and streamlined communication.

In the mid-2010s, the critical question is no longer whether or not to use cloud com-puting for enterprise systems, such as ERP and SCM. Rather, the question is howcompanies can profit from the capabilities that cloud computing offers.

Organizations use combinations of these IT strategies—in-house, on-shore (domestic) sourcing, offshoring, cloud computing, and SaaS.

IT AND BUSINESSSTRATEGY DISCONNECTS

According to a survey of business leaders by Diamond Management & TechnologyConsultants (diamondconsultants.com/), 87 percent believe that IT is critical to theircompanies’ strategic success, but relatively few business leaders work with IT toachieve that success. Other key findings of the Diamond study are the following:

• Only 33 percent of business leaders reported that the IT division is very involvedin the process of developing business strategy.• Only 30 percent reported that the business executive responsible for strategy worksclosely with the IT division.• When the IT strategy is not aligned with the business strategies, there is a high riskthat the IT project will be abandoned before completion. About 75 percent of com-panies abandoned at least one IT project, and 30 percent abandoned more than10 percent of IT projects for this reason.

There are several possible reasons why a high percentage of IT projects areabandoned—the business strategy changed, technology changed, the project was notgoing to be completed on time or budget, the project sponsors responsible did notwork well together, or the IT strategy was changed to cloud or SaaS.

IT AND BUSINESSSTRATEGY SUCCESSCASES

Companies that align their business strategy and IT strategy increase their revenues.Here are two cases as examples.

1. At Travelers Companies, Inc., a property and casualty insurance company, a 75 per-cent increase in new customer sales was realized with the use of a new IS (software)by its independent agents. The success of the software deployment was attributedto the CIO’s extensive involvement in strategy development and the close workingrelationship between the IT division and the responsible business unit.


2. Kraft Foods Inc. launched a master data management (MDM) project to simplifyand harmonize its global business processes and enable strategic enterprise informa-tion capabilities. Kraft had grown through acquisitions resulting in ISs that could notshare data because of differences in the way data was defined—referred to as themaster data. For example, most ISs have lists of data that are shared and used byseveral of the applications that make up the system. A typical ERP system has aCustomer Master, an Item Master, and an Account Master. These master data listsenable apps to share data. Because they are used by multiple apps, any errors orinconsistencies in master data cause errors or failures in apps that use them.

Kraft’s assessment of its master data situation revealed problems that were negativelyimpacting its business strategies. According to IT director Marcelo De Santis:“Our master data management program is a key strategic enabler. It is viewed asfoundational—data is critical to the business. We have executive sponsorship fromthe Chief Financial Officer and Executive Vice President of Operations and BusinessServices.” The MDM project was undertaken for several business reasons; forinstance, to reduce the complexity of its product portfolio leading to inventory reduc-tions. BI initiatives are also being facilitated by this project—the ability to obtain anintegrated sales view of customer and product; higher reliability when measuring andranking partners; enhanced evaluations of product performance during launches;easily identified category/geographical business opportunities; robust analytics andreporting; and the ability to respond faster to business changes, such as acquisitions,regulatory changes, and customer requirements.

The fundamental principle to be learned is that when organizational strategieschange, the IT strategies need to change with them. Both strategies are dynamic.Andwhen people are resistant to change, they create risk because IS success depends onthe skills and cooperation of people as well as the design of business processes andIT capabilities.


BUSINESS AND ITSTRATEGIES DEFINED

Business strategy has its own terms that are important to know.Those key terms aredefined in Table 12.1 and discussed next.

Business strategy sets the overall direction for the business. The IT strategydefines what information, information systems, and IT architecture are required tosupport the business and how the infrastructure and services are to be delivered.

IT–business alignment refers to the degree to which the IT division understandsthe priorities of the business and spends its resources, pursues projects, and provides

TABLE 12.1 Business Strategy Definitions

Definitions of key terms related to organizational strategy.1. Strategy is how an organization intends to accomplish its vision. It’s the overall game

plan.2. Objectives are the building blocks of strategy. Objectives set out what the business is

trying to achieve. They are action-oriented statements (e.g., achieve a ROI of at least10 percent in 201x) that define the continuous improvement activities that must bedone to be successful. Objectives have the following “SMART” criteria:• Specific: define what is to be achieved.• Measurable: are stated in measurable terms.• Achievable: are realistic given available resources and conditions.• Relevant: are relevant to the people who are responsible for achieving them.• Time-frame: include a time dimension.

3. Targets are the desired levels of performance.4. Vision statement is an organization’s picture of where it wants to be in the future.5. Mission statement defines why an organization exists.



information consistent with these priorities. IT–business alignment includes twofacets.

1. One facet is aligning the IT function’s strategy, structure, technology, and processeswith those of the business units so that IT and business units are working toward thesame goals. This facet is referred to as IT alignment.2. Another type of alignment, referred to as IT strategic alignment, involves align-ing IT strategy with organizational strategy. The goal of IT strategic alignment is toensure that IS priorities, decisions, and projects are consistent with the needs of theentire business. Failure to properly align IT with the organizational strategy can resultin large investments in systems that have a low payoff, or not investing in systemsthat potentially have a high payoff.

Business and IT strategies depend on shared IT ownership and shared IT governanceamong all senior managers (Shpilberg et al., 2007). When an IT or any type of fail-ure causes harm to customers, business partners, employees, or the environment, thenregulatory agencies—as well as the public—will hold the CEO accountable. SeeFigure 12.2. A high-profile example is BP CEO Tony Hayward, who is being heldaccountable to Congress for “The Role of BP in the Deepwater Horizon Explosionand Oil Spill,” for the rig explosion that killed 11 workers and caused the subsea oilgusher that was releasing 60,000� barrels per day into the Gulf of Mexico. Hayward’sattempts to claim ignorance of the risks and use the SODDI defense (“some otherdude did it”) doesn’t get him or any CEOs off the hook. A company can outsourcethe work, but not the responsibility for it.

Because of the inter-relationship between IT and business strategies, IT andother business managers share responsibility in developing IT strategic plans.Therefore, a governance structure needs to be in place that crosses organizationallines and makes senior management responsible for the success of key IT initiatives,which is discussed in the next section.

Figure 12.2 Activists protestedthe BP Oil Spill at a BP GasStation in the Soho section ofNew York City.

IT STRATEGIC PLANNINGPROCESS

CIOs undertake IT strategic planning on a yearly, quarterly, or monthly basis.A goodIT planning process helps ensure that IT aligns, and stays aligned, within an organi-zation’s business strategy. Because organizational goals change over time, it is notsufficient to develop a long-term IT strategy and not reexamine the strategy on aregular basis. For this reason, IT planning is an ongoing process. The IT planningprocess results in a formal IT strategy or a re-assessment each year or each quarterof the existing portfolio of IT resources.

Recall that the focus of IT strategy is on how IT creates business value.Typically,annual planning cycles are established to identify potentially beneficial IT services,to perform cost-benefit analyses, and to subject the list of potential projects toresource-allocation analysis. Often the entire process is conducted by an IT steeringcommittee. See IT at Work 12.1 for the duties of an IT steering committee.

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IT at Work 12.1

The corporate steering committee is a group of managers andstaff representing various organizational units that is set up toestablish IT priorities and to ensure the IS department is meetingthe needs of the enterprise. The committee’s major tasks are:

• Direction setting. In linking the corporate strategy with the ITstrategy, planning is the key activity.

• Rationing. The committee approves the allocation of resourcesfor and within the information systems organization. Thisincludes outsourcing policy.

• Structuring. The committee deals with how the IS departmentis positioned in the organization. The issue of centralization–decentralization of IT resources is resolved by the committee.

• Staffing. Key IT personnel decisions involve a consultation-and-approval process made by the committee, including outsourcing decisions.

• Communication. Information regarding IT activities should flowfreely.

• Evaluating. The committee should establish performancemeasures for the IS department and see that they are met. Thisincludes the initiation of SLAs.

The success of steering committees largely depends on the estab-lishment of IT governance, formally established statements thatdirect the policies regarding IT alignment with organizationalgoals and allocation of resources.

IT Steering Committees

Figure 12.3 shows the IT strategic planning process.The planning process begins withthe creation of a strategic business plan.The long-range IT plan, sometimes referredto as the strategic IT plan, is then based on the strategic business plan. The IT strate-gic plan starts with the IT vision and strategy, which defines the future concept ofwhat IT should do to achieve the goals, objectives, and strategic position of the firmand how this will be achieved.The overall direction, requirements, and sourcing (out-sourcing or insourcing) of resources, such as infrastructure, application services, dataservices, security services, IT governance, and management architecture; budget;activities; and timeframes are set for three to five years into the future.The planningprocess continues by addressing lower-level activities with a shorter time frame.

The next level down is a medium-term IT plan, which identifies general projectplans in terms of the specific requirements and sourcing of resources as well asthe project portfolio. The project portfolio lists major resource projects, including

Strategic Business PlanOverall direction of the organization

• Goals• Objectives• Strategic position

IT vision and strategiesOverall directions for: • Resource requirements and sourcing• Budget• Activities• Time frames

IT Strategic(Long-Range) Plan

General project plans• Resource determination• Project portfolio

IT Medium-Term Plan

Current year project plans• Detailed budget• Specific schedule of activities

IT Tactical PlanFigure 12.3 IT strategic

planning process.


infrastructure, application services, data services, and security services that are con-sistent with the long-range plan. Some companies may define their portfolio in termsof applications.The applications portfolio is a list of major, approved IS projects thatare also consistent with the long-range plan. Expectations for sourcing of resourcesin the project or applications portfolio should be driven by the business strategy. Sincesome of these projects will take more than a year to complete, and others will notstart in the current year, this plan extends over several years.

The third level is a tactical plan, which details budgets and schedules for current-year projects and activities. In reality, because of the rapid pace of change intechnology and the environment, short-term plans may include major items not anticipated in the other plans.

The planning process just described is currently practiced by many organizations.Specifics of the IT planning process, of course, vary among organizations. For exam-ple, not all organizations have a high-level IT steering committee. Project prioritiesmay be determined by the IT director, by his or her superior, by company politics,or even on a first-come, first-served basis.

The deliverables from the IT planning process should include the following: anevaluation of the strategic goals and directions of the organization and how IT isaligned; a new or revised IT vision and assessment of the state of the IT division;a statement of the strategies, objectives, and policies for the IT division; and theoverall direction, requirements, and sourcing of resources.

Tools and Methodologies of IT Strategic Planning. Several tools and method-ologies are used to facilitate IT strategic planning. Most of these methodologies startwith some investigation of strategy that checks the industry, competition, and com-petitiveness, and relates them to technology (alignment). Others help create and jus-tify new uses of IT (impact). In the next section, we look briefly at some of thesemethodologies.

Business Service Management. Business service management is an approach forlinking KPIs of IT to business goals to determine the impact on the business. KPIsare metrics that measure the actual performance of critical aspects of IT, such asessential projects and applications, servers, the network, and so forth, against prede-fined business goals, such as revenue growth, reduced costs, and lower risk. For a crit-ical project, for example, performance metrics include the status of the project, theability to track milestones to budget, and a view of how the IT staff spends its time(Biddick, 2008).

KPIs can be classified into two types. The first type includes those that measurereal-time performance or predict future results. These KPIs assist in proactive, ratherthan reactive, responses to potential user and customer problems. For example,80 percent of IT staff may be needed to work on active projects. An evaluation ofKPIs may predict that the following month a projected slowdown of project activ-ity will reduce the utilization rate to 70 percent, allowing time to adjust staffing oradd more projects. The second type of KPI measures results of past activity.

Business service management software tools provide real-time dashboards fortracking KPIs at the executive, functional business areas, services, and operations lev-els, as you read in Chapter 11. Dashboards make it easier to understand and predicthow IT impacts the business and how business impacts the IT architecture.

Business Systems Planning Model. The business systems planning (BSP) model wasdeveloped by IBM, and has influenced other planning efforts such as Accenture’smethod/1. BSP is a top-down approach that starts with business strategies. It deals withtwo main building blocks—business processes and data classes—which become thebasis of an information architecture. From this architecture, planners can define orga-nizational databases and identify applications that support business strategies, asshown in Figure 12.4. BSP relies heavily on the use of metrics in the analysis ofprocesses and data, with the ultimate goal of developing the information architecture.



Balanced Scorecard. Devised by Robert Kaplan and David Norton in a number ofarticles published in the Harvard Business Review between 1992 and 1996, the balancedscorecard is a business management concept that transforms both financial and non-financial data into a detailed roadmap that helps the company measure performance.

Kaplan and Norton introduced the balanced scorecard as a way of measuringperformance in companies. The major difference with Kaplan’s and Norton’s score-card was that it measured a company’s performance in other than strictly financialterms. For example, it measures performance from any of the following perspectives:

• Customer perspective• Internal business process perspective• Learning and growth perspective• Financial perspective

The balanced scorecard framework supplements traditional tangible financial meas-ures with criteria that measure four intangible perspectives and address importantquestions including (Kaplan and Norton, 2007):

1. How do customers see the company?2. At what must the company excel?3. Can the company continue to improve and create value?4. How does the company appear to shareholders?

The balanced scorecard can be applied to link KPIs of IT to business goals to deter-mine the impact on the business. The focus for the assessment could be, for example,the project portfolio or the applications portfolio.As shown in Table 12.2, the balancedscorecard can be used to assess the IT project portfolio of a retail department store


TABLE 12.2 IT Project Balanced Scorecard

Project’s Degree of Project’s Role Evolving Change Where the Data’s Public orin Strategic versus Stable Needed in Project Gets Proprietary Project

IT Project Business Plan Knowledge the Project Sourced Nature Budget

Infrastructure Efficiency Stable Low Outsourced Proprietary Small Application Customer focus Evolving High ERP software Proprietary High

ServicesData Services Innovation Evolving High Business Proprietary High

intelligence software

Security Compliance Evolving Low Outsourced Proprietary Small Services requirement

Information architecture

Business strategies

Organizational databasesData classes

ApplicationsBusiness processes

Figure 12.4 Business systemsplanning (BSP) approach.


chain. Projects are listed along the vertical dimension, and specific measures, criticalto what the organization needs to track, are presented horizontally. The balancedscorecard helps managers to clarify and update strategy; align IT strategy with busi-ness strategy; and link strategic objectives to long-term goals and annual budgets.

Critical Success Factors Model. Critical success factors (CSFs) are the most essen-tial things (factors) that must go right or be closely tracked in order to ensure theorganization’s survival and success. For companies dependent on the price of oil, oilprices would be a CSF. The CSF approach to IT planning was developed to help iden-tify the information needs of managers.The fundamental assumption is that in everyorganization there are three to six key factors that, if done well, will result in the orga-nization’s success. The reverse is also true. The failure of these factors will result insome degree of failure.Therefore, organizations continuously measure performancein these areas, taking corrective action whenever necessary. CSFs also exist inbusiness units, departments, and other organizational units.

CSFs vary by industry—manufacturing, service, or government—and by specificindustries within these categories. For organizations in the same industry, CSFs varydepending on whether the firms are market leaders or weaker competitors, wherethey are located, and what competitive strategies they follow. Environmental issues,such as the degree of regulation or amount of technology used, influence CSFs.In addition, CSFs change over time, based on temporary conditions, such as highinterest rates or long-term trends.

IT planners identify CSFs by interviewing managers in an initial session, and thenrefine CSFs in one or two additional sessions. Sample questions asked in the CSFapproach are

• What objectives are central to your organization?• What are the critical factors that are essential to meeting these objectives?• What decisions or actions are key to these critical factors?• What variables underlie these decisions, and how are they measured?• What information systems can supply these measures?

The first step following the interviews is to determine the organizational objectives forwhich the manager is responsible, and then the factors that are critical to attaining theseobjectives. The second step is to select a small number of CSFs. Then, determine theinformation requirements for those CSFs and measure to see whether the CSFs are met.If they are not met, it is necessary to build appropriate applications. See Figure 12.5.


Information toMeasure

Performance

23

Optionsfor

Evaluation

1 23

CSFsDC

BA

E

SWOTCSF

12

3

BusinessObjectives

Mission

12

3D

EF

Critical SuccessFactors

AB

C

BalancedScorecard

Figure 12.5 Critical successfactors—basic processes.


The CSF approach encourages managers to identify what is most important totheir performance and then develop good indicators of performance in these areas.

Scenario Planning. Scenario planning is a methodology in which planners first cre-ate several scenarios; then a team compiles as many future events as possible thatmay influence the outcome of each scenario. This approach is used in planning situ-ations that involve much uncertainty, like that of IT in general and e-commerce inparticular. Five reasons to do scenario planning are

1. To ensure that you are not focusing on catastrophe to the exclusion of opportunity2. To help you allocate resources more prudently3. To preserve your options4. To ensure that you are not still “fighting the last war”5. To give you the opportunity to rehearse testing and training of people to gothrough the process.

Scenario planning follows a rigorous process; the essential steps are summarized inTable 12.3. Scenario planning has been widely used by major corporations to facili-tate IT planning (e.g., ncri.com and gbn.com). It also has been particularly impor-tant to e-commerce planning. For instance, creating customer scenarios helps thecompany better fit the products and services into the real lives of customers, result-ing in sales expansion and customer loyalty. National Semiconductor, Tesco, andBuzzsaw.com, for example, have used customer scenarios to strengthen customerrelationships, to guide business strategy, and to deliver business value.

A major aspect of IT planning is properly allocating IT resources to the rightset of projects. Organizations simply cannot afford to develop or purchase each appli-cation or undertake each application enhancement that business units and end usersmight like.The IT steering committee has an important responsibility in deciding howIT resources will be allocated.

Resource Allocation. Resource allocation consists of developing the plans forhardware, software, data communications and networks, facilities, personnel, andfinancial resources needed to execute the master development plan, as defined inthe requirements analysis. Resource allocation can be a contentious processbecause requests for spending far exceed the available funds. This can lead to


TABLE 12.3 Essential Steps of Scenario Planning

• Determine the scope and time frame of the scenario you are flashing out.• Identify the current assumptions and mental models of individuals who influence

these decisions.• Create a manageable number of divergent, yet plausible, scenarios. Spell out the

underlying assumptions of how each of these imagined futures might evolve.• Test the impact of key variables in each scenario.• Develop action plans based on either (a) the solutions that play most robustly across

scenarios, or (b) the most desirable outcome toward which a company can direct itsefforts.

• Monitor events as they unfold to test the corporate direction; be prepared to modify itas required.

The educational experience that results from this process includes• Stretching your mind beyond the groupthink that can slowly and imperceptibly

produce a sameness of minds among top team members in any organization.• Learning the ways in which seemingly remote potential developments may have

repercussions that hit close to home.• Learning how you and your colleagues might respond under both adverse and

favorable circumstances.


intense, highly political competition among organizational units, which makes it difficult to objectively identify the most desirable investments.

Requests for funding approval from the steering committee fall into two cate-gories.The first category consists of projects and infrastructure that are critical for theorganization to stay in business. For example, it may be imperative to purchase orupgrade hardware if the network, or disk drives, or the processor on the main com-puter are approaching capacity limits. Obtaining approval for this type of spending islargely a matter of communicating the gravity of the problems to decision makers.

The second category includes less-critical items, such as new projects, mainte-nance or upgrades of existing systems, and infrastructure to support these systemsand future needs. Approval for projects in this category may become more difficultto obtain because the IS department is already receiving funding for the criticalprojects. Generally speaking, organizations set aside funds for the first category ofprojects and then use the remainder of the IT budget for the second category.

12.2 IT Governance 367

Questions1. What are the four main points of IT strategic plans?2. Explain the difference between in-house and sourcing IT strategies.3. What are the main types of sourcing?4. What are possible reasons why a high percentage of IT projects are abandoned?5. Define business strategy and IT strategy.6. What is the goal of IT–business alignment?7. Why must IT strategic planning be revisited on a regular basis?8. Describe the committee that usually conducts the IT strategic planning process?

Who is included on this committee? What are the major tasks of this committee?On what is this committee’s success dependent?

9. What is the focus of IT strategy?10. Describe the IT strategic planning process.11. Describe the project portfolio. Describe the applications portfolio. When are these

portfolios developed?12. What tools and methodologies are available to assist in the IT strategic planning

process? How are these methods used to help organizations?13. What is resource allocation? What are the two types of funding requests?

12.2 IT GovernanceThe purpose of IT governance is the creation of a management framework that max-imizes the value that an organization derives from IT in support of its strategic objec-tives. In short, IT governance is about doing things right the first time around. ITgovernance is part of a wider corporate governance activity, but has its own specificfocus.The benefits of effective IT governance are reduced costs and damages causedby IT failures; and more trust, teamwork, and confidence in the use of IT and thepeople providing IT services.

IT GOVERNANCE ANDPERFORMANCE

IT governance is concerned with insuring that IT investments deliver full value. Assuch, IT performance management—being able to predict and anticipate failuresbefore it’s too late—is a big part of IT governance. IT performance managementfunctions include the following: verifies that strategic IT objectives are beingachieved; reviews IT performance, and assesses the contribution of IT to the busi-ness. For example, IT performance management assesses outcomes to answer thequestion: Did the IT investment deliver the promised business value?

In order for IT to deliver full value, three objectives must be met (the first objec-tive you’re already familiar with).

1. IT has to be fully aligned to business strategies and direction.2. Key risks have to be identified and controlled.3. Compliance with laws, industry rules,and regulatory agencies must be demonstrated.


In light of many corporate failures and scandals, corporate and IT governance havea higher profile today than ever before. Risk management, oversight, and clearcommunication are all parts of governance.

Individuals Concerned with IT Governance. Individuals who are concerned aboutIT governance are:

• Top-level business leaders, who are the Board, executives, managers, and especiallyheads of finance, operations, and IT• Public relations and investor relations managers• Internal and external auditors and regulators• Middle-level business and IT management• Supply chain and business partners• Customers and shareholders

As the preceding lists of issues and concerned individuals indicate, IT governance isnot just an IT issue or only of interest to the IT function. It is an integral part ofcorporate governance focused on improving the management and control of IT.Ultimately, it is the duty of the Board of Directors (BOD) to insure that IT and othercritical activities are effectively governed.

IT plays a pivotal role in improving corporate governance practices because mostcritical business processes are automated; and managers rely on information providedby these processes for their decision making.

The governance structure within an organization can either facilitate IT–businessalignment—or hinder that alignment.The CIO oversees the IT division and is respon-sible for the company’s technology direction.The CIO is a member of the C-suite ofchief officers in the company who share authority in their respective areas of respon-sibility, such as CEO, chief financial officer (CFO), chief marketing officer (CMO),or chief compliance officer (CCO). To whom the CIO reports is telling of how IT isperceived within the company. For example, if IT is perceived as a strategic weaponto grow revenues and increase operational effectiveness, then the CIO likely reportsto the CEO. If IT is perceived as a cost-cutting center, the CIO likely reports to theCFO. Table 12.4 lists the important skills of CIOs.


TABLE 12.4 Skill Set of the CIO

Skills that CIOs need to improve IT governance and the IT-business alignment include:• Political savvy. Effectively understand managers, workers, and their priorities and use

that knowledge to influence others to support organizational objectives.• Influence, leadership, and power. Inspire a shared vision and influence subordinates

and superiors.• Relationship management. Build and maintain working relationships with coworkers and

those external to the organization. Negotiate problem solutions without alienating thoseimpacted. Understand others and get their cooperation in nonauthority relationships.

• Resourcefulness. Think strategically and make good decisions under pressure. Can setup complex work systems and engage in flexible problem resolution.

• Strategic planning. Capable of developing long-term objectives and strategies, andtranslating vision into realistic business strategies.

• Doing what it takes. Persevering in the face of obstacles.• Leading employees. Delegating work to employees effectively; broadening employee

opportunities; and interacting fairly with employees.

WHAT IT GOVERNANCECOVERS

IT governance covers IT management and control across five key areas:

1. Supports the strategy: Provides for strategic direction of IT and the alignment ofIT and the business.


12.3 Aligning IT with Business Strategy 369

2. Delivers value: Confirms that the IT/Business organization is designed to drivemaximum business value from IT. Oversees the delivery of value by IT to the business, and assesses ROI.3. Risk management: Confirms that processes are in place to ensure that risks havebeen adequately managed. Includes assessment of the risk of IT investments.4. Resource management: Provides high-level direction for sourcing and use of ITresources. Oversees funding of IT at the enterprise level. Ensures there is an ade-quate IT capability and infrastructure to support current and expected businessrequirements.5. IT Performance management: (Refer also to the beginning of Section 12.2.)Verifies achievement of strategic IT objectives by measuring IT performance andbusiness value.

IT governance, like security, is not a one-time exercise or something achieved by amandate or setting of rules. It requires a commitment from the top of the organiza-tion to instill a better way of dealing with the management and control of IT. IT gov-ernance is an ongoing activity that requires a continuous improvement mentality andresponsiveness to the fast-changing IT environment.When companies run into legalor regulatory challenges, IT governance is what saves or dooms them.

Questions1. What is the importance of IT governance?2. Why is IT performance management a key part of IT governance?3. In order for IT to deliver full value, what three objectives must be met?4. Identify four issues driving the need for IT governance.5. Who is concerned about IT governance?6. What does IT governance cover?

12.3 Aligning IT with Business StrategyAlignment is a complex management activity, and its complexity increases as the paceof global competition and technological change increases. IT–business alignment canbe improved by focusing on the following activities:

1. Understanding IT and corporate planning. A prerequisite for effective IT–businessalignment is for the CIO to understand business planning and for the CEO and businessplanners to understand their company’s IT planning.2. CIO is a member of senior management. The key to achieving IT-businessalignment is for the CIO to attain strategic influence. Rather than being narrowtechnologists, CIOs must be both business- and technology-savvy.3. Shared culture and good communication. The CIO must understand and buy into the corporate culture so that IS planning does not occur in isolation. Frequent,open, and effective communication is essential to ensure a shared culture and keepeveryone aware of planning activities and business dynamics.4. Commitment to IT planning by senior management. Senior managementcommitment to IT planning is essential to success.5. Multi-level links. Links between business and IT plans should be made at thestrategic, tactical, and operational levels.

STRATEGIC ROLE OF IT Companies must determine the use, value, and impact of IT to identify opportuni-ties that create value and supports the strategic vision. This requires that the CIO,and other senior IT staff, closely interact with the CEO and the senior managementin functional areas or business units. And the CIO must be in a position to influencehow IT can assume a strategic role in the firm.



COMPETITIVEADVANTAGE THROUGH IT

Competitive advantage is gained by a company by providing real or perceived valueto customers. To determine how IT can provide a competitive advantage, the firmmust know its products and services, its customers and competitors, its industry andrelated industries, and environmental forces—and it must have insight about how ITcan enhance value for each of these areas. To understand the relationship of IT inproviding a competitive advantage, we next consider the potential of a firm’s ITresources to add value to a company.

Three characteristics of resources give firms the potential to create a competi-tive advantage:

1. Value. Resources are a source of competitive advantage only when they are valu-able. A resource has value to the extent that it enables a firm to implement strate-gies that improve efficiency and effectiveness. But even if valuable, resources thatare equitably distributed across organizations are only commodities.2. Rarity. Resources also must be rare in order to confer competitive advantages.3. Appropriability. Appropriability refers to the ability of the firm to generate earn-ings from the resource. Even if a resource is rare and valuable, if the firm expendsmore effort or expense to obtain the resource than it generates through the resource,then the resource will not create a competitive advantage.

Table 12.5 lists the three characteristics necessary to achieve competitive advantageand three additional factors needed to sustain it.

The first three characteristics described in Table 12.5 are used to characterizeresources that can create an initial competitive advantage. In order for the compet-itive advantage to be sustained, however, the resources must be inimitable, imper-fectly mobile, and have low substitutability. Imitability is the feature that determineswhether a competitor can imitate or copy the resource. Mobility (or tradability) refersto the degree to which a firm may easily acquire the resource necessary to imitate arival’s competitive advantage. Some resources, such as hardware and software, areeasy to acquire and are thus highly mobile and unlikely to generate sustained com-petitive advantage. Even if a resource is rare, when it’s possible to purchase or hirethe resource, then the resource is mobile and incapable of contributing to a sustainedadvantage. Finally, substitutability refers to the ability of competing firms to utilizean alternative resource.

Information systems can contribute three types of resources: technologyresources, technical capabilities, and IT managerial resources, as listed in Table 12.6.

Technology resources include the IT infrastructure, proprietary technology, hard-ware, and software.The creation of a successful infrastructure may take several yearsto achieve. Thus, even while competitors might readily purchase the same hardwareand software, the combination of these resources to develop a flexible infrastructure

TABLE 12.5 Key Resource Attributes that Build a Competitive Edge

Resource Description

Value Degree to which a resource helps a firm improve efficiency or effectiveness

Rarity Degree to which a resource is unique and cannot be duplicated by other firms in an industry

Appropriability Degree to which a firm can make use of a resource without incurring an expense that exceeds the value of the resource

Imitability Degree to which a resource can be readily matchedMobility Degree to which a resource is easy to transportSubstitutability Degree to which another resource can be used in lieu

of the original resource to achieve value


is a complex task. It may take firms many years to catch up with the infrastructurecapabilities of its competitors.

Technical capabilities include IS technical knowledge such as app developmentskills; IS development knowledge such as experience with social media or develop-ment platforms; and IS operations. Technical IT skills include the expertise neededto build and use IT apps.

Managerial resources include IS managerial resources such as vendor relationships,outsourcer relationship management, market responsiveness, IS-business partnerships,and IS planning and change management.

12.3 Aligning IT with Business Strategy 371

TABLE 12.6 IS Resources and Capabilities

IS Resources and Capabilities Descriptions Relationship to Resources

Technology resources Includes infrastructure, proprietary Not necessarily rare or valuable, but difficult technology, hardware, and software. to appropriate and imitate. Low mobility but

a fair degree of substitutability.IT skills Includes technical knowledge, Highly mobile, but less imitable or substitutable.

development knowledge, and Not necessarily rare but highly valuable.operational skills.

Managerial IT resources Includes vendor and outsourcer Somewhat more rare than the technology and relationship skills, market IT skill resources. Also of higher value. High responsiveness, IS–business mobility given the short tenure of CIOs.partnerships, IS planning, and Non-substitutable.management skills.

BUSINESS IMPROVEMENTOPPORTUNITY MATRIX

IT can improve many domains of business activity, as presented in the opportunitymatrix shown in Table 12.7.

To ensure that business and IT executives have a common understanding ofpotential business improvements attainable through the use of IT, each of these ben-efits should be evaluated in terms of the value to be provided to the business. Oneor more improvements may be attained through IT. For example, if customer serv-ice, number 8 in Table 12.7 is expected to be improved through the use of IT in a

TABLE 12.7 Business Improvement Opportunity Matrix

Description of the High Impact Low Impact Business Value of

Business Improvement with IT Value Value No Value the Improvement

1. Improve process efficiencies2. Increase market share and global reach3. Reach new markets, audiences, and channels4. Improve external partnering capabilities5. Enable internal collaboration6. Launch innovative product and service offerings7. Improve time to market8. Enhance customer service experience9. Improve information access and effectiveness in

decision-making processes10. Bring about new business models11. Enable a business to gain, or simply maintain, a

competitive advantage12. Other

Sources: Compiled from Kesner (2003) and Center for CIO Leadership (2007).


package delivery service, such an improvement may be regarded as providing highimpact value.The description of the business value of enhancing the customer serviceexperience would state:

The currently high volume of customer complaints about late delivery of pack-ages will be addressed with an automatically generated personalized e-mailmessage, to each customer experiencing late delivery, to provide notificationof the revised delivery date. This e-mail communication also provides anopportunity for each customer to express any remaining concerns. The exter-nal focus on improving customer service will contribute to a positive imageof the company.

This process change to improve customer service may also improve processefficiencies, number 1 in the table, providing low impact value to the business. Thedescription of the business value of this process improvement would state:

Customer service agents will be freed from personally attending to all customercomplaints, allowing them to focus on resolving the most serious complaints.This improved use of customer service agents’ time is expected to improveoperational efficiencies and costs.

Being able to explain how IT adds business value can be facilitated with thismatrix. To provide a common understanding, this matrix serves as a tool to discussand clarify expectations concerning the potential impact of the improvements to thebusiness. Clear, frequent, and effective communication is critical to achieving thispotential.


IT DIVISION ANDBUSINESS MANAGEMENTPARTNERSHIP

Including the CIO on the CEO’s senior management team promotes a partnershipbetween them. For example, at Walgreen Company, a leading drugstore chain, theCIO has been on the top management team since the late 1990s (Worthen, 2007).This arrangement facilitated the delivery of a single IS to connect all Walgreen phar-macies, with continual improvements based on feedback and suggestions from bothemployees and customers. The CEO recognizes that including the CIO in strategymeetings encourages teamwork.To maintain this mutually beneficial relationship, theCIO must continually educate and update the other executives in the C-suite (chiefexecutive) team about technological advances and capabilities relevant to the businessneeds.

The partnership between the IT division and business management can extendto fuse with the business, as you read in IT at Work 12.2. Such a fusion could beachieved with a new organizational structure, wherein the CIO becomes responsi-ble for managing some core business functions. For example, the CIO at HessCorporation, a leading energy company based in New York City, is part of a new orga-nizational structure. The CIO began managing several core business functions.Additionally, Hess Corporation is creating a joint IT and business group to developnew operating processes and advanced technologies. Comprised of IT workerswith geologists, scientists, and other employees, this unit will report to the senior vicepresident of oil exploration and production.

Alternatively, the CIO could work directly with other top executives to influ-ence strategic directions, suggest changes in internal business processes, and lead adiversity of initiatives that encompass more than just technology projects. For exam-ple, the Vice President of IT at PHH Mortgage, in Mount Laurel, NJ, works along-side the sales managers. This working relationship has fostered a rapport betweenthe CIO and sales executives. In discussions with the sales team about potentialchanges in some of the mortgage application processes, the CIO is able to take thelead on business improvement opportunities by communicating his understandingof concerns and offering insightful recommendations.


12.4 IT Operating Plans and Sourcing Strategies 373

IT at Work 12.2

It is not typical for a CIO to work routinely with business leaderson their strategy and translate it into action, and then be askedby the CEO to manage business strategy worldwide. Nor is it typ-ical that the CEO asks the CIO to run a line of business, in addi-tion to the IT function. A CIO would not be expected to managethe process of opening 10,000 seasonal tax preparation locationsand hiring 100,000 seasonal tax preparers, but that’s what hap-pened at H&R Block, a tax and financial services company. Theseresponsibilities are typical for CIOs who are responsible for IT gov-ernance and supporting the business strategy. We’ll refer to themas “strategic CIOs” for clarity.

The strategic CIO is a business leader who leverages IT to addvalue and gain a competitive advantage. The strategist’s focus is onhow a company creates shareholder value and serves its customers.Rather than being focused primarily on internal operations, thestrategic CIO looks at the company from the outside-in by askinghow the company is perceived by customers and how competitorsapply IT to compete. The role of strategic CIO is focused on busi-ness strategy and innovation. This broader, more business-oriented,and strategic focus is the direction for the CIO role.

Marc West, the senior VP and CIO at H&R Block, began as a“traditional CIO,” focusing 95 percent of his efforts on the tech-nology foundation. In preparing for tax season, CIO West wasengaged in delivering tax preparation software for the company’sseasonal storefront locations. This activity helped him to acquireinsight into the core business, operations, and how customers areserved. This further led him to compare what H&R was doingagainst the competition, gaining a big picture perspective of theindustry. He shared his strategic insights with the CEO and man-agement team. Encouraged by the CEO, CIO West continuedhis “outside-inside” strategic assessment, gaining an industry-wide, business-oriented strategic mindset. The CEO then askedCIO West to lead a new line of business, driving growth in thecommercial markets.

Sources: Compiled from Ehrlich and West (2007) and hrblock.com.

Questions

1. Why has the role of CIO expanded?

2. What are the benefits of this strategic CIO role to the company?

The Strategic CIO

Questions1. How can the IT-business alignment be improved?2. What are three characteristics of resources that give firms the potential to create

a competitive advantage?3. Describe the three types of resources that information systems can contribute to

a firm.4. Why is it important for the CIO to be included as a member of the senior manage-

ment team?

12.4 IT Operating Plans and Sourcing StrategiesThe core competencies of many organizations—the things they do best and that rep-resent their competitive strengths—are in retailing, services, manufacturing, orsome other function. IT is an enabler, and it is complex and constantly changing. ITis difficult to manage, even for organizations with above-average IT managementskills.Therefore, many organizations have implemented outsourcing as an IT strategy.Outsourcing can be done domestically or offshore, or via cloud computing or SaaS.Those topics are covered in other chapters, but are mentioned here because they areexamples of IT outsourcing strategies.

Cloud computing is not simply about outsourcing the routine computing tasks.It’s about the delivery of real business services, enabled by the applications neededto support them, and then powered by computing and network infrastructure to hostand deliver them.

SaaS provides an ability to easily extend internal processes outside the organi-zational boundary to support business processing outsourcing (BPO) arrangementsand can become a strong competitive advantage for an organization today and in thefuture. BPO is the process of hiring another company to handle business activitiesfor you.



BPO AND ITES BPO is distinct from IT outsourcing, which focuses on hiring a third-party com-pany or service provider to do IT-related activities, such as application manage-ment and application development, data center operations, or testing and qualityassurance.

Originally, BPO consisted of outsourcing standard processes, such as payroll; andthen expanded to employee benefits management. Currently, BPO includes manyfunctions that are considered non-core to the primary business strategy, such as finan-cial and administration processes, human resource functions, call center and customerservice activities, and accounting.

These outsourcing deals are multi-year contracts that can run into hundreds ofmillions of dollars. Often, the people performing the work internally for the clientfirm are transferred and become employees for the service provider. Dominant out-sourcing service providers in the BPO fields—some of which also dominate the IToutsourcing business—are IBM, Accenture, and Hewitt Associates in the U.S. andEuropean and Asian companies Capgemini, Genpact,TCS,Wipro and Infosys. Manyof these BPO efforts involve offshoring, with India one of the most popular locationfor BPO activities.

BPO is also referred to as ITES, or information technology-enabled services.Since most business processes include some form of automation, IT “enables” theseservices to be performed.

Andrew Pery, Chief Marketing Officer for document management companyKofax (kofax.com/) predicts the BPO market “will likely outgrow all segments ofthe IT industry. There is increased competition and increased choice.”

Why is the BPO industry changing? Don Schulman, General Manager, Financeand Administration for IBM, gives two reasons (Rosenthal, 2010).

1. The economy has triggered a broader group of buyers to consider BPO as a viableoption. In an era where companies are challenged to do more with less, buyers areseeking strategic partnerships that enable them to accelerate transformation.2. The industry has matured. It’s no longer about price, cost, and labor arbitrage.The future will be about enterprise business outcomes, process optimization, andcloud computing.

eBay relies on BPO, as you read in IT at Work 12.3.

IT at Work 12.3

Since its 1998 IPO, eBay has gone from online experiment inconsumer-to-consumer, e-commerce to a Fortune 500 enterprisethat sells $60 billion in goods annually. It supports 88 million indi-vidual buyers and sellers, plus an expanding list of small busi-nesses. This metamorphosis was not without growing pains.Exploding demand for eBay’s services created enviable, butstaggering challenges. By 2004, eBay’s annual revenues hadexceeded $3 billion. Up to then, its accounts payable (AP) func-tion had been able to keep up with the exponentially growingworkload. The AP function was a critical system because sellersexpected to get paid instantaneously. It was foreseeable that amuch larger transaction accounting capacity would be neededthan the current IT structure could deliver quickly. eBay’s acqui-sition of several companies with disparate AP processes createdadditional integration challenges.

Outsourcing Challenges and Lessons LearnedeBay turned to outsourcing for a solution for transaction process-ing of accounts. In early 2005, eBay migrated all of its AP opera-tions to Genpact. Genpact (genpact.com/ ) is a global leader inbusiness process and technology management. The migration ofAP and other business processes to BPO provider Genpact wasnot without challenges, but was ultimately a success. Six lessonsthat eBay and Genpact learned from the BPO implementation arethe following.

1. Manage change by securing the commitment of seniorleaders in an overt fashion, and by recognizing subtle culturaldifferences that can undermine initial transition efforts.

2. Assess organizational readiness for a BPO transition from amental and technical standpoint, and set realistic expectationsand manage them actively.

eBay Challenging Transition to BPO



3. Anticipate risks and formulate a plan for mitigating them,beginning with a strategy for dealing with “loss of control”threats, both real and imagined.

4. Build project-management infrastructure that recognizes the“process of transition” needs to be managed as carefully asprocesses being transitioned. Mapping how the AP processshould look post-transition, and how it will be managedend-to-end, and by whom, are important.

5. Create a governance mechanism that can discreetly collectfeedback from the Transition Project Manager and provideformal executive oversight and guidance. Form an ExecutiveSteering Committee that includes two senior managers fromeach organization and representation from all business unitsimpacted by BPO.

6. Properly define how success will be measured, both quali-tatively and quantitatively. Identifying the right benchmarks forsuccess and vigilantly measuring efforts against them over timeare critical.

Performance ImprovementsThe transition was far from perfect at first and hard lessonslearned early helped achieve impressive results in time. Year-end

2009 revenues were triple 2004 revenues, and AP transactionvolume and headcount doubled, but at a much low cost pervolume. On-time payments grew to 30 percent. In other words,more volume is now being handled, and more effectively per APperson. This success paved the way for migration of other eBaytransaction accounting processes. From 2006 to early 2008, eBayoutsourced its global Vendor/Supplier Maintenance and GeneralLedger (GL) activities.

Sources: Compiled from Genpact (2010), and OutsourcingPapers.com(2010).

Questions

1. Why is the ability to process AP a critical success factor foreBay?

2. Why did eBay choose outsourcing as its IT strategy instead ofin-house development?

3. Why did eBay rely on Genpact for its BPO transition?

4. Given that Genpact is a global leader in business processand technology management, why did eBay encounter challenges?

FACTORS DRIVINGGROWTH IN SOURCINGAS AN IT STRATEGY

Since the late 1980s, many organizations have outsourced the majority of their ITfunctions, rather than just incidental parts. The trend became classic in 1989 whenEastman Kodak transferred its data centers to IBM under a 10-year, $500 millioncontract. This example, at a prominent multibillion-dollar company, gave a clear sig-nal that outsourcing was a legitimate IT strategy. Since then, many mega outsourc-ing deals have been announced, some for several billion dollars.The trend, however,has turned away from the mega-deal in favor of the multi-vendor approach, incor-porating the services of several best-of-breed vendors to meet IT demands.

The major reasons why organizations are increasingly sourcing are:

• To focus on core competency, as you read in the AstraZeneca opening case.• It’s a cheaper and/or faster way to gain or enhance IT capabilities.• To cut operational costs.• Offshoring has become a more accepted IT strategy.• Cloud computing and SaaS have proven to be effective IT strategies.

Increasingly, organizations are leveraging existing global cloud infrastructuresfrom companies like Amazon, Google, Rackspace, and Windows Azure. Establishedcompanies are more willing to outsource company-critical functions in an effort toreduce costs. And new start-up companies typically outsource and rely on SaaS toavoid upfront IT costs. For example, S3, one of Amazon’s web services, lets businessesstore their data in the cloud, avoiding the need to operate their own servers. S3 ispart of the same online infrastructure that Amazon uses to run its own business.Twitter uses S3, as does the New York Times to store and deliver articles from its his-torical archives. Sourcing companies have started to offer some interesting new busi-ness models and services around cloud computing. These innovative new IT modelshave added to the number of options to be considered in IT strategic planning.

CIOs are focusing more on outsourcing to deliver business value, beyond the tra-ditional areas of cost savings and operational efficiencies, in response to an increas-ingly dynamic environment (IBM, 2008). The environment is characterized by rapiddevelopments in IT; firms that are being transformed by global expansion, mergersand acquisition; and new disruptive business models and mobile capabilities. Benefitsof sourcing are listed in Table 12.8.



TABLE 12.8 Benefits of Sourcing

Financial benefits• Avoid heavy capital investment, thereby releasing funds for other uses.• Improved cash flow and cost accountability.• Improved cost benefits from economies of scale and from sharing hardware, software,

and personnel.• Less need for expensive office space.

Technical benefits• Access to new information technologies.• Ability to achieve technological improvements more easily.• Faster application development and placement of IT apps into service.

Management benefits• Concentration on developing and running core business activity. Improved company

focus.• Delegation of IT development (design, production, and acquisition) and operational

responsibility to suppliers.• Elimination of need to recruit and retain competent IT staff.• Reduced risk of bad software.

Human resources benefits• Opportunity to draw on specialist skills available from a pool of expertise.• Faster career development and opportunities for remaining staff.

Quality benefits• Clearly defined service levels.• Improved performance accountability.• Quick response to business demands (agility).• Ability to handle IT peaks and valleys more effectively (flexibility).

IT at Work 12.4

British-Swedish company AstraZeneca (astrazeneca.com/ ) is oneof the world’s leading biopharmaceutical companies. The companyfocuses on the discovery, development, and commercializationof prescription medicines for six health care areas. AstraZenecaexplains its forward-looking business strategy as follows:

Each year, at the beginning of our business planning cycle,we assess the challenges and opportunities presented by themarket, stress test our short and long-term planning assump-tions, and critically assess our strengths and weaknesses asan organisation. We do so to assure ourselves that, whateverour past successes, the strategic path we are following is theright one for the future.

Foreseeing a Threat to Its BusinessIn 2007, management forecasted that the company was going tolose 38 per cent of its revenues over the next five years becausepatents on its key drug were expiring. Once the patents hadexpired, competitors could legally produce and sell drugs thatAstraZeneca had developed, cutting into their sales and profit. Tocounter that threat, management launched a radically new business

strategy and began major restructuring. David Smith, executivevice-president of operations, was responsible for restructuring to cutcosts and improve profitability before the patents expired.

Restructuring from Tightly-Bound to Loosely-CoupledSmith, who previously worked for cosmetics group Este’ e Lauderand clothing group Timberland, wanted to follow the restruc-turing model set years ago in the fashion, electronics, and autoindustries. Those industries had shifted away from the traditionaltightly-bound model of a vertically integrated company. Verticallyintegrated companies control every part of their business fromresearch and development (R&D) to manufacturing and logistics.Smith shifted AstraZeneca from a vertically integrated biophar-maceutical company to a loosely-coupled organizational modelconnected by outsourced arrangements and relationships.

Looking to AstraZeneca’s new strategy, Smith explained that:

We would own the IP [intellectual property], the research,branding and the quality and safety issues . . . but [everythingelse] would be outsourced. The idea is to take out as manystages as you can.

AstraZeneca Sources R&D, Manufacturing, and IT



Because of its new business strategy, by 2014 AstraZenecawould have completed its shift toward outsourcing R&D, themanufacturing of active pharmaceutical ingredients, and the ITfunction. Outsourcing relationships would take several years tocomplete largely because of complex regulatory hurdles.

R&D and Manufacturing Outsourcing—Radical ChangesThe R&D function is the heart of any pharmaceutical company.R&D leads to the discovery of breakthrough drugs that could gen-erate huge profits. So when AstraZeneca cut 7,600 R&D jobsworldwide in 2010, it triggered one of the biggest shake-ups inthe industry’s history. Jobs were cut because of management’splan to outsource drug manufacturing activities within ten years.Most of AstraZeneca’s R&D work was offshored to pharmaemerging markets, such as China. According to Smith:

Manufacturing for AstraZeneca is not a core activity. AstraZenecais about innovation and brand-building. . . . There are lots of peo-ple and organizations that can manufacture better than wecan. . . . We are going to go through a model of outsourcing theback-end . . . we don’t see manufacturing as core.

Later, the company planned to strip out and outsource moresophisticated manufacturing and supply-chain operations, andlogistics activities. These transformations are especially radicalbecause the pharmaceutical industry had been among the mostconservative global industries in its attitude towards manufactur-ing and the supply chain.

IT Outsourcing Arrangements with Multiple VendorsAstraZeneca depends on its IT capabilities as much as it dependson its R&D—both are crucial. Outsourcing also became a majorIT strategy, which was achieved by creating outsourcing relation-ships with several vendors. Infosys (infosys.com/ ) managesAstraZeneca’s manufacturing, supply chain, finance, and humanresources applications. Cognizant (cognizant.com/ ) runs the cen-tralized data storage. And IBM (ibm.com/ ) hosts the e-mail and

office infrastructure. In 2007, AstraZeneca had signed a seven-yearglobal outsourcing agreement with IBM. Under the deal, IBMprovides a single global technical infrastructure for AstraZenecacovering 60 countries. The contract includes server hosting andstorage for scientific, network and communications, commercialand supply chain operations. The former infrastructure was limitedto major operations in the U.S., U.K., and Sweden. AstraZenecaretains control of its overall IT strategy and development and sup-port of its application systems.

With these outsourcing relationships, AstraZeneca has a single infrastructure linking all functions, regions, and markets.Richard Williams, CIO of AstraZeneca, said the outsourcing dealenables the company to provide greater value to the business byproviding a consistent infrastructure across all its global sites. Theconsistent infrastructure enables it to roll out new technologies,reporting systems, and apps more quickly and efficiently. Williamsadded: “In allowing IBM greater autonomy on methods of deliv-ery, the agreement will result in cost efficiencies when comparedwith running in-house systems.”

Sources: Compiled from Boyle (2010), Lomas (2007), and Pagnamenta(2007).

Questions

1. What will AstraZeneca look like in 2014 after its restructuringand outsourcing strategies have been completed? That is,which functions will be performed by the company and whichones won’t be?

2. What new types of management skills will be necessary?

3. Do you think that this organizational model is the model of thefuture?

4. IT offshoring is a very controversial issue because it shifts jobsto other countries. At the same time, it has the potential todecrease the organization’s costs significantly. Whether off-shoring is good or bad for the people of affected countries isan issue of constant controversy. What are the benefits toAstraZeneca of using offshoring as part of its business and ITstrategy?

RISK CONCERNS ANDHIDDEN COSTS

As companies find their business strategy is increasingly tied to IT solutions, theconcerns about outsourcing risks increase. Risks associated with outsourcing are:

• Shirking: The vendor deliberately underperforms while claiming full payment.For example, billing for more hours than were worked and/or providing excellentstaff at first and later replacing them with less qualified ones.• Poaching: The vendor develops a strategic application for a client and then usesit for other clients.• Opportunistic repricing: When a client enters into a long-term contract with a vendor, the vendor changes financial terms at some point or over-charges for unanticipated enhancements and contract extensions.

Other risks are possible breach of contract by the vendor or its inability to deliver,vendor lock-in, loss of control over data, and loss of employee morale.

Depending on what is outsourced and to whom,an organization might end up spend-ing 10 percent above the budgeted amount to set up the relationship and manage it overtime.The budgeted amount may increase anywhere from 15 to 65 percent when outsourc-ing is sent offshore and the costs of travel and cultural differences are added in.


Offshoring of software development has become a common practice due to globalmarkets, lower costs, and increased access to skilled labor.About one-third of Fortune500 companies outsource software development to software companies in India.

It is not only the cost and the technical capabilities that matter. Several otherfactors to consider are the business and political climates in the selected country, thequality of the infrastructure, and risks such as IT competency, human capital, theeconomy, the legal environment, and cultural differences.

Duke University’s Center for International Business Education and Research stud-ied actual offshoring results.According to their study, Fortune 500 companies reducedcosts by offshoring—63 percent of the companies achieved over 30 percent annualsavings and 14 percent of them achieved savings over 50 percent. The respondentswere overwhelmingly satisfied with their offshore operations.Three-quarters (72 per-cent) said their offshore implementations met or exceeded their expected cost savings. Almost one-third of the respondents (31 percent) achieved their service level goals within the first five months of their contracts while 75 percent did so within 12 months. The study concluded that “offshoring delivers faster results thanaverage domestic improvement efforts.” Even though these are very general results,offshoring success stories ease the fears about the risks of offshoring.

Based on case studies, the types of work that are not readily offshored includethe following:

• Work that has not been routinized.• Work that if offshored would result in the client company losing too much controlover critical operations.• Situations in which offshoring would place the client company at too great a risk to its data security, data privacy, or intellectual property and proprietary information.• Business activities that rely on an uncommon combination of specific application-domain knowledge and IT knowledge in order to do the work properly.

IT at Work 12.5 gives an example of insourcing becomes preferable to outsourcing.


OFFSHORING

IT at Work 12.5

JP Morgan Chase is one of the world’s largest financial institutions.In September 2004, Chase scrapped a seven-year, $5 billion IT out-sourcing contract with IBM after its $58 billion acquisition of BankOne. The merger automatically voided the outsourcing contract.As a result, the company carefully evaluated its sourcing optionsover two to three months and decided to bring IT back in-house,a strategy known as insourcing. The acquisition created massiveeconomies of scale, and such a large organization is able to attractand retain talented IT professionals. Furthermore, CIO AustinAdams achieved early career success by building on his ability tointegrate bank mergers quickly and make the merged entity morecompetitive through its use of technology.

People who oppose offshoring declared the “end of out-sourcing.” As a matter of fact, Adams, who pushed for the scrap-ping, said that his move was greatly misunderstood by the mediawho pegged him as a patriot trying to keep IT jobs in the U.S. “I am clearly an advocate of offshoring.” While in the case of sucha large bank there was a reason for insourcing, mainly to get a bet-ter competitive advantage from IT, Adams believes that in smallerorganizations, large-scale outsourcing is logical. Further, Adams

JP Morgan Chase Moves from Outsourcing to Insourcing

manages over 3,000 offshore employees in India, who work in thebank’s call center and do basic operations and accounting func-tions. This offshoring is expected to grow rapidly.

Adams was key in the decision to insource IT at JP MorganChase and offers his observations:

• The cancellation was driven mainly by the merger with BankOne, which made the combined bank very large.

• Outsourcing of major parts of mission-critical technologies isnot a best solution for a large firm. Technology developmentshould be in-house; support services can be outsourced.

• Four criteria were used to determine what and how much tooutsource: (1) the size of the company (should be large enoughto attract good IS employees), (2) cost of outsourcing vs. costof insourcing, (3) the interest level of top management to haveand properly manage IT assets, and (4) financial arrangementsof the outsourcing.

• It may be difficult to align business and technology objectiveswhen large-scale outsourcing exists.


The lnternational Association of Outsourcing Professionals (IAOP) has defined 9critical stages in the outsourcing life cycle that managers need to understand priorto outsourcing (IAOP, 2009).

1. Strategy: Outsourcing is strategic decision that is typically developed at senior lev-els within a business. It may be part of a larger strategy to move the company to aleveraged business model and to focus on core competencies. Or it may be to savenet costs or due to a lack of internal resources. Outsourcing may act as a key differ-entiator that will give your business a competitive advantage over your competitors.Too few businesses consider taking legal counsel at this stage, but they should. Forexample, difficulties about licensing, intellectual property rights or a pre-existingcontractual or leasing arrangement require legal expertise.2. Reassessment: This stage is not given enough consideration. But organizationsshould look again at their business processes, IT capabilities, internal supply, or otherproblems to see if they could be re-engineered to meet the requirements so thatoutsourcing is not needed.3. Selection: This stage involves identifying and defining the work to be outsourced,as well as the selection of the vendors using RFI (request for information) or RFP(request for proposals) processes. The best value outsourcer is selected.4. Negotiation: In this phase, contracts, schedules, and agreements are negotiatedby someone experienced in these issues. Then the final contract is reviewed exten-sively before signing. This negotiation process must involve adequate resources andsenior executives from both sides—the key issues in a long-term relationship, suchas outsourcing, are too important not to justify executive engagement from supplierand customer.5. Implementation: This phase involves the start-up activities of planning the tran-sition and the implementation of the outsourced agreement, as well as establishingthe detailed budget and administrative functions needed for its management, and formal launching of the program.6. Oversight Management: This phase encompasses all ongoing activities requiredto manage the program, and achieve the contracted results. Specifically, this includesliaison between the customers and the supplier; performance monitoring; contractadministration, vendor/partnership management; delivery integration; and vendortransition. Inevitably stresses will develop in a contract, and it is important for bothsides to take an adult approach to contract interpretation. Remember that these arelong-term relationships that need to flex with time.7. Build Completion: This phase covers all completion activities of the build phase,including any development program and then acceptance and the introduction of newservices.8. Change: All complex outsourcing contracts will be subject to change and alter-ation. These are either run as minor changes to the outsourcing contract or majorchanges, which might involve a re-tendering process. Your contract will—orshould—have built into it a contract change procedure to deal with changes that arein the broad scope of the original procurement.9. Exit: All outsourcing relationships end either because the contract has expired,by mutual agreement, or failure of the outsourcing relationship. The terms of thecontract become very important at this time.


• The insourcing includes data centers, help desks, data process-ing networks, and systems development.

• Buying technology directly from vendors saved the bank aconsiderable amount of money (10 to 15 percent).

Sources: Compiled from Adams (2005) and Strassman (2005).

Questions

1. How can one determine when a company is large enough forinsourcing?

2. How important is the financial consideration?

3. What other factors needs to be assessed in the decision?

OUTSOURCING LIFE-CYCLE


12.5 IT Vendor RelationshipsThe starting point in building a positive and strong vendor relationship is vendorselection. If a company makes a bad selection, most likely the vendor-provided sys-tem software, app, or implementation will fail, and the vendor won’t be able to resolvethe problems fast enough, if at all.

IT is complex and can be very confusing to those without technical expertise, sothere is a high risk of miscommunications between businesses and IT vendors.Thesemiscommunications are the main reason why relationships can turn sour betweenbusinesses and IT vendors. It’s up to the IT managers keep vendor relationshipshealthy.


Questions1. What is sourcing?2. What are the major reasons for sourcing?3. Distinguish between mega outsourcing and the multi-vendor approach to

outsourcing.4. What are the benefits of outsourcing? What are the risks of outsourcing?5. Discuss the strategies organizations should consider in managing the risks associ-

ated with outsourcing contracts.6. Distinguish between outsourcing and offshore outsourcing.7. What types of work are not readily outsourced offshore?8. Describe a tool useful in measuring the business value of outsourcing relationships.

VENDOR SELECTION To avoid any interpersonal or technical conflicts with IT vendors, businesses needto thoroughly research the vendor. It’s very important to ask questions about theservices and products the vendor will provide and get as many specifics as possible.Also take the time to verify the vendor’s claims about its products and check all itsreferences to make sure that the vendor has a proven track record of success.

When selecting a vendor, two criteria to assess first are experience and stability.

1. Experience with very similar systems of similar size, scope, and requirements.Experience with the ITs that are needed, integrating those ITs into the existing infrastructure, and the customer’s industry.2. Financial and qualified personnel stability. A vendor’s reputation impacts its stability.

Of course, for innovative IT implementations, vendors won’t have experience andone major failure—and the lawsuit that follows—can create instability. If those criteria are not met, there is no reason to further consider the vendor.

Research by McKinsey indicates that a majority of technology executives wantto have stronger relationships with their IT suppliers, but they often act in ways thatundermine that goal. In fact, many corporate customers lose out on the potential ben-efit of close relationships by an overemphasis on costs instead of value. Ideally, a customer/vendor relationship is a mutually-beneficial partnership, and both sides arebest served by treating it as such.

Vendors often buy hardware or software from other vendors. In order to avoidproblems with the primary IT vendor, check secondary suppliers as well.Ask the pri-mary vendor how they will deliver on their promises if the secondary vendors go outof business or otherwise end their relationship.

Consider a Demo or Trial Run. Vendors may offer the option to test their prod-ucts or services in a pilot study or a small portion of the business to verify that it fitsthe company’s needs. If the vendor relationship adds value on a small scale, then the


system can be rolled out on a larger scale. But if the vendor can’t meet the require-ments, then the company avoids a failure.

Contracts: Get Everything in Writing. Before entering into any service contractwith an IT vendor, get a promise of service in writing. You want a document thatspells out every aspect of their services with the company. The contract needs to bereviewed by the IT department to check for accuracy and to make sure the vendorcan meet your technology needs; and by the legal department to make sure the com-pany is protected. Businesses need to know what a vendor must do according to the terms of the service-level agreement (SLA), or contract, and to not expect thevendor to do anything more.

The contract should identify the terms clearly before it is signed.The SLA man-ages expectations so there is no mismatch between what the customer expects toreceive and what the vendor is committed to provide. The contract is the only thinga company can count on when there is a problem so it must be understood andaligned with expectations.

Key Terms 381

Questions1. Describe the importance of vendor selection.2. When selecting a vendor, what two criteria need to be assessed? Explain both

criteria.3. What is the risk of an overemphasis on cost when selecting or dealing with an IT

vendor?4. What needs to be done before signing a contract with an IT vendor?

Key Termsapplications portfolio 363balanced scorecard 364big data management 357business processing outsourcing

(BPO) 373business strategy 360cloud computing 357critical success factors (CSFs) 365customer-centric 357high-end analytics 357imitability 370in-house development 358insourcing 378

IT alignment 361IT-business alignment 360IT governance 367ITES (information technology-

enabled services) 374IT governance 367IT performance management 367IT strategic alignment 361IT strategic plan 358IT strategy 360mobility 370offshoring 357onshore sourcing 359

outsource relationship management(ORM) company 359

project portfolio 362resource allocation 366S3 375scenario planning 366service 356, 357service-oriented architecture

(SOA) 356, 357sourcing 359vertically integrated company 376vision statement 360


Evaluate and Expand Your Learning

Chapter 12 LINK LIBRARY

You find clickable Link Libraries for each chapter on the Companion website.FedRAMP gsa.gov/portal/category/102375Balanced Scorecard Institute balancedscorecard.org/International Association of Outsourcing Professionals’ best outsourcing service providers, The

Global Outsourcing 100 outsourcingprofessional.org/content/23/152/1197/CIO Insights and Strategy IBM.com/CIO/Outsource Blog theoutsourceblog.com/Bloomberg Real-time Information Services bloomberg.com/Debate Over Offshore Outsourcing quality-web-solutions.com/offshore-outsourcing-debate.phpIT Governance Institute itgi.org/Video interview on SaaS and Outsourcing Relationship Management janeeva.com/blog/Association for Computing Machinery (ACM); access their report on “Globalization and

Offshoring of Software” acm.org/globalizationreportGovernment Technology, 5 Tips for Managing Successful Vendor Relationships govtech.com/

policy-management/5-Tips-for-Managing-Successful-Vendor-Relationships.htmlStrategic Value of Health Information Exchange at UMass Memorial Health Care http://www.

HealthDataManagement.com/web_seminars/-40414-1.html or http://bit.ly/UMassHIEWebinar

IT and Data Management Decisions (see LinkLibrary for links in this section)

1. Vinay Gupta, President and CEO of Janeeva, which sellssoftware to help companies manage outsourcing relation-ships, gave this advice:

I would strongly encourage business owners to visitthe vendor’s facilities. There are a lot of fly-by-nightoperators, so you want to make sure you have touchedand seen the facility before you hand them yourbusiness. And I would do at least a 30-day free pilotwith the provider.You want to see if it is a good fit andfind out who you will be interacting with on a day-to-day basis.

Not all companies follow this advice.

a. Discuss why companies would take these precautionswhen setting up an outsourcing relationship.

b. Discuss why companies would not take these precau-tions when setting up an outsourcing relationship.

Questions for Discussion & Review

1. What might be some reasons why companies considersourcing?

2. What are the benefits and disadvantages of outsourcingwork/jobs to other companies within the country?

3. What are the benefits and disadvantages of offshoringwork/jobs to other countries, e.g., to China or India?Compare your answers to your answers to questions 1 and2 about outsourcing and offshoring.

4. What issues does IT governance cover?

5. Why is IT governance the responsibility of the BOD?

6. What does failure to properly align IT with the organiza-tional strategy result in?

7. Why does IT–business alignment continue to be animportant issue for CIOs?

8. What does successful IT–business alignment require?

9. Discuss how a CIO might interact with executive man-agement as technology becomes increasingly central to abusiness.

10. Three characteristics of resources give firms the potentialto create a competitive advantage. Discuss the potentialof a firm’s IT resources to add value to a company.

11. Discuss how the partnership between the IT division and business management can extend to fuse with thebusiness.

12. Describe the IT strategic planning process.

13. What tools facilitate IT strategic planning?

14. Describe strategies for outsourcing.

15. Describe how a company might assess the business valuedelivered by an outsourcing relationship.

382


CASE 2 Business Case 383

Online Activities

1. Visit accenture.com and search on “outsourcing.”Describe the IT outsourcing services offered byAccenture. Do the same for two other large internationalaccountancy and professional services firms, such asDeloitte at deloitte.com, Ernst & Young at ey.com,KPMG at kpmg.com, or PricewaterhouseCoopers atpwc.com. Create a table that compares the outsourcingservices of the three firms.

2. Visit the Government Technology web site atgovtech.com. Search for “tips for managing successfulvendor relationships.” Prepare a list of recommendationsbased on what you learn.

3. Visit the IBM CIO Interaction Channel at http://www-935.ibm.com/services/ie/cio. This site showcases insightsand perspectives on the issues that matter most to CIOs,including the most important one of all—aligning IT withoverall business goals. Select a topic that interests you,read a report on that topic, and summarize the mainpoints of the report.

4. Visit Cognos at cognos.com and search on balancedscorecard software. Identify and describe their balancedscorecard software product.

5. Visit FireScope at firescope.com. Discuss how businessservice management software tools provide real-time

dashboard views for tracking key performance indicatorsat the executive, functional business areas, services, andoperations levels.

6. Visit the web site for the Association for ComputingMachinery (ACM) and access their report on“Globalization and Offshoring of Software” atacm.org/globalizationreport. Select two of the case stud-ies presented in Section 4.2 on pages 136–152. Write areport comparing and contrasting the two companies.

Collaborative Work

1. Innovative use of IT has become increasingly importantin the global economy. Choose multiple industries andprovide an example company for each industry in whichIT plays a strategic role by adding value and providing acompetitive advantage through innovative application ofIT. Now identify competitive counterpart companies forwhich IT does not play a strategic role. Report on thesuccesses/failures of each pair of companies.

2. Considerable discussions and disagreements occuramong IT professionals regarding outsourcing. Dividethe group into two parts. One will defend the strategy oflarge-scale outsourcing. One will oppose it. Start by col-lecting recent material at google.com and cio.com.Consider the issue of offshoring.

Collecting customer payments is one of the most importantparts of a business. Switching from in-house billing, oraccounts payable (A/P), to a third party is a tough decisionthat companies of all sizes may face. PUMA (puma.com), aglobal sports lifestyle company (Figure 12.6), had strong indi-cators from customers of problems with its billing department.Its customers range from major buyers like Footlocker to smallretailers.

One frustrated customer sent a letter to the billing depart-ment saying he hated PUMA’s paper invoices and to empha-size his dissatisfaction, he recommended that whoeverdesigned their invoices be fired. However, PUMA’s paperbilling processes could not be easily or quickly fixed. Table 12.9 lists common customer invoicing problems—andthe problems that PUMA faced because of its outdated paper-based invoicing method.

CASE 2 BUSINESS CASEPuma Sources Its Billing Department

Figure 12.6 PUMA sells to customers worldwide.

TABLE 12.9 Customer Invoicing Challenges

Billing is a complex process, and when it’s not donecorrectly, the problems are:

• High cost per invoice (delivery + archiving)• High invoice processing error rates• Customer dissatisfaction• Long delays in cash collections

Billing problems delay the receipt of payments from cus-tomers who wait for resolution of billing errors. Delays incollection have a negative impact on cash flow.©

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Billing InefficienciesPUMA has to wait for the U.S. Postal Service and other postalservices to deliver its invoices and payments. It was taking along time to get bills to the customers because PUMA sellsits products all over the world, but was mailing invoices fromits corporate headquarters in Massachusetts. And postal serv-ices kept raising rates.

Criteria for New Billing SystemPUMA managers’ priority was to meet customers’ expecta-tions of being easy to do business with. Their business planincluded the following billing improvements:• Stop aggravating corporate customers and start meeting

their needs• Move to electronic invoicing using e-mail• Personalize the invoices• Reduce billing costs by 25 percent

Sending invoices in paper format involved manual pro-duction and distribution processes that were having a directnegative impact on the company’s cash flow and profitability.However, switching to electronic invoicing would not be easybecause of the need to invest in new infrastructure, andbecause customers would have to approve the new format,the system had to be in compliance with local regulations, andemployees would need to be trained in new procedures.

Sourcing DecisionTaking into consideration the business plan and requirements,PUMA decided to source its billing department. Billtrust was thesourcing provider PUMA selected. Billtrust had experience withcorporate customers that acquired other companies—and wasable to complete the complexities of integrating the billing sys-tems within a few months. That’s a big advantage of sourcing.

Within three months, billing processes for the company’stwo brands–PUMA and Tretorn–were up and running. Sixmonths later PUMA acquired another athletic goods manufac-turer, Cobra Golf, whose billing was also taken over by Billtrust.

In 2012, Cobra PUMA Golf has 10,000 active clients.Tretorn has 500 active clients, and PUMA has 2,500. Billtrustcan send up to 5,000 invoices a day for PUMA with no issues.

PUMA employees in the finance department no longerspend their time making copies of invoices for customers whomisplaced them because now customers can log into theirpersonalized portal and review any errors in the invoice them-selves. PUMA’s employees make collection calls, which is amore valuable use of their time.

Sourcing BenefitsBilltrust mails PUMA’s bills from eight facilities, dependingon the recipient’s zip or country code to speed up getting

the bills to the customers. The quicker turnaround cut 10 days from days sales outstanding (DSO) in the first sixmonths. Customers don’t pay any faster, but it’s easier forthem to pay.

How the New Billing Process WorksAs soon as a product leaves the warehouse, PUMA’s systemautomatically electronically transmits the data to Billtrust. Theservice provider then sends an invoice to the customer in theform they prefer—fax, e-mail, or mail. About 70 percent ofcustomer selected electronic invoices via e-mail.

Every customer logs into the PUMA payment portal. Theportal has an online payment tool; customers can pay bycredit card or ACH (automated clearing house). The ACH pro-cessing network allows customers to pay by online by debit-ing or credit of checking or savings accounts. Each invoice hasits own URL and password. Customers see invoices that areopen and account history for up to a year.

OutcomesBy sourcing to Billtrust, PUMA transformed its billing pro-cess into a highly efficient, advanced business function thatreduced its billing costs and improved cash flow. PUMA’spartnership with Billtrust is a contributing factor to the success of the sourcing arrangement. PUMA had preparedfor the process transformation by setting clearly definedgoals.

PUMA won the 2011 Huntington Bank AccountsReceivable Innovation Award at Fusion 2011, the annualconference of the Institute of Financial Operations (IFO).PUMA was recognized for its “creative use of technology toproduce more efficient results in its accounts receivabledepartment.”

Sources: Rosenthal (2012), puma.com (2012), and Pitney Bowes(pb.com).

Questions

1. Explain the importance of an efficient and effective billingsystem.

2. What are common customer invoicing problems?3. What factors contributed to PUMA’s inefficient billing and

invoicing system?4. Describe PUMA’s sourcing benefits.5. Describe how PUMA’s new billing system works.6. How does PUMA’s new billing system overcome the limi-

tations of its former system?7. Why did PUMA source its billing process?8. What impact did sourcing billing process have on the

billing department?


Data Analysis & Decision Making

Data Analysis & Decision Making 385

Visit http://www.HealthDataManagement.com/web_seminars/-40414-1.html or the short URL http://bit.ly/UMassHIEWebinar.Register and watch the Webinar, which is available ondemand.

UMass Memorial Health Care Hospital SystemUMass Memorial Health Care (umassmemorial.org/ ) is an aca-demic medical center and the largest health care hospital sys-tem in Central and Western Massachusetts. UMass Memorial isusing the health information exchange (HIE) to facilitate patient-centered care. That is, it has aligned its IT with its businessstrategy to be responsive to the need to share information.

One of the critical components of the HIE is the ability tomanage and answer questions about a patient’s identity anddiscover what information is sharable for the patient, no mat-ter where it is stored. Medical privacy legislation, such as theHealth Information Portability and Accountability Act (HIPAA),mandates the ability to control access while at the same timeto make information sharable for legitimate health care reasons.

All of this is well and good, but if patients, physicians, oranyone involved with the health care ecosystem, doesn’t trustthe system or have confidence that personal data is protected,it won’t be used, and we won’t realize any of the potentialbenefits of the HIE.

Security isn’t just about protecting an individual’s per-sonal information from hackers and fraud, nor is it merelyabout complying with new regulations. Security is aboutensuring the proper privacy of patients’ data while improvingthe quality and accuracy of care.

This really means that not only should the right patientdata be available to the right care giver or care system at theright time, but the system must reliably and continuously buildtrust for all parties involved.

Obstacles to Information SharingWith seven hospitals and over 1100 beds, UMass Memorialhas 13,500 employees and $1.4 billion in annual revenue,UMass Memorial faced many of the problems plaguing otherindustries. A lack of information sharing adversely impactedquality, costs, and efficiency—not to mention patient safety.

UMass Memorial turned to master data management (MDM)with a number of objectives, including:• Knowing patients wherever they are seen in the system• Enabling seamless interoperability with community health

care providers• Meeting Meaningful Use guidelines defined by the

American Reinvestment & Recovery Act (ARRA, the StimulusBill)

• Facing competitive pressures from other health care systems

Information Sharing and Data GovernanceImprove Quality of Health CareThe HIE architecture had to enable information sharing acrossnumerous legacy systems while also ensuring data privacy andsecurity. With the right architectural approach and a sharedvision, UMass Memorial is overcoming data governance challenges and being seen by others as an innovator.

By modernizing its IT infrastructure, UMass Memorial hasimproved quality and patient safety, increased efficiency, andenhanced patient satisfaction—all essential for success intoday’s competitive health care market. With its new patient-centric information architecture, UMass Memorial delivers acomprehensive view of a patient’s entire clinical history tophysicians and care providers across the health care commu-nity, irrespective of the care setting or clinical applicationbeing used.

Questions

1. What role does information play in the reputation of UMassMemorial?

2. In the case of health care, what are the consequences ofnot having data that can be trusted—or one version of thetruth?

3. How has UMass Memorial aligned its IT and businessstrategies?

4. Compare the importance of MDM at UMass Memorial andat Kraft Foods Inc. discussed in Section 12.1. Why do disparate or legacy systems create the need for MDM?

CASE 3 WEBINAR CASEStrategic Value of Health Info Exchange at UMass Memorial

Third-Party vs. Company-Owned Offshoring

Major companies, such as Citigroup, had wholly-owned off-shore service centers. Those types of company-owned off-shore centers are called captive models. Captive offshoringmodels reduce the risk of offshoring. A recent study from theEverest Research Institute estimated the costs of third-party

offshoring and captive offshoring. The estimates are in thechart below.

Create a spreadsheet that totals the average cost of eachmodel for each cost item. For example, average the annualsalary based on the range for third parties and also the cap-tives. Then calculate the total cost of ownership (TCO) ofeach model. The difference is the cost of risk.


Resources on the Book’s Web Site


Full-time equivalents (FTE) are used to standardizelabor costs since workers may be part-time or full-time. Forexample, two part-time workers equal 1 FTE.The estimatesare given in terms of FTE so the conversion is already done.

Based on your results, how much does the CaptiveOffshoring Model allow for risk? The answer is the differencebetween the TCOs of the two models.

Third-Party CaptiveOffshoring Offshoring

Model Model

Office space: Annual RentalCost per square foot(assume 10,000 square feetof office space)

$11 to $13 $14 to $16

Base Salary Costs of workers(assume 1,000 FTEs)

$7,770 to $8,200 $9,500 to $10,300

General management stafffor every 1,000 FTEs

12 to 14 16 to 18

General Management Salary $55,000 to $65,000 $70,000 to $90,000

Travel and housing costs perFTE

$280 to $320 $900 to $1,060

You’ll find additional chapter materials and useful web links. In addition, self-quizzes that provideindividualized feedback are available for each chapter.

Adams,A.“Prominent ‘Opponent’ of Offshoring, Isn’t.” CIO Insight, March 5,2005.

Aspray,W., Mayadas, F., and Vardi, M.Y. (eds.). Globalization and Offshoringof Software, Report of the ACM Job Migration Task Force. NY:ACM, 2006.

Biddick, M.“Hunting the Elusive CIO Dashboard” InformationWeek, March3, 2008.

Boyle, C. “AstraZeneca to axe 8,000 jobs in global cull.” Times Online,January 28, 2010.

Center for CIO Leadership. “The CIO Profession: Driving Innovation andCompetitive Advantage,” October 2007.

Chatterjee,A., Nair, R., & Tatke, R.“The Challenge for the New Bank CIO:How to Achieve Customer-Centricity by Making Better Use of SixEmerging Technologies.” Booz&Co. Report, March 19, 2012.

Ehrlich, L., and West, M. “The Strategic CIO: Using Leadership Skills andIT to Create Competitive Advantage.” CIO.com, May 1, 2007.

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