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We want you to practice a business summary style – writing in a clear, structured manner, but not in paragraph form. If you feel you must write in a paragraph, then address the question at hand in bullets or tables (as appropriate) and then summarize your points in an executive summary-type paragraph. In general, you are attempting to efficiently and effectively make your arguments for a particular solution, describe the associated implementation tasks (“to dos”), identify the benefits and costs of the undertaking, and then drive your point home with additional considerations (risk management).Reading materials and fill out “homework” attachment.The thing I need to repeat is that do not use whole sentences to answer, use bullet point instead.


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Session 22: Three IT Sourcing Cases – Homework Questions
1. What drove the sourcing decisions on the part of all three business organizations
described in the case studies for this session?
Reasons Behind Sourcing Decision
Southwest Bank outsourcing
Reliable Utilities – partnering
State Retirement System Insourcing
2. What were the risks associated with each of these undertakings?
Risks with Sourcing Decision
Southwest Bank outsourcing
Reliable Utilities – partnering
State Retirement System Insourcing
3. What actions on the part of each company mitigated these risks?
Risk Mitigation Steps
Southwest Bank outsourcing
Reliable Utilities – partnering
State Retirement System Insourcing
prepared by rmk 080718
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Session 22: Three IT Sourcing Case Studies
Case 1: Outsourcing1
Southwest Bankers, Inc. (not it’s real name) through its subsidiaries, provides financing for industrial
and commercial properties, for interim construction related to industrial and commercial properties,
and for equipment, inventories, and accounts receivable. The bank also offers acquisition financing,
commercial leasing, and treasury management services as well as a host of consumer banking products
and services, such as checking accounts, savings programs, automated teller machines, overdraft
facilities, installment and real estate loans, home equity loans and lines of credit, drive-in and night
deposit services, and safe deposit facilities. Internationally, Southwest has both a commercial and a
consumer banking presence in Mexico where it accepts deposits, makes loans, issues letters of credit,
handles foreign collections, transmits funds, and deals with matters of foreign exchange.
The company also acts as a correspondent for other financial institutions, primarily other, local banks in
Texas, providing trust, investment, agency and custodial services for individual and corporate customers,
and sales and trading, new issue underwriting, money market trading, and securities safekeeping and
clearance services for fixed-income institutional investors. In line with its overall business strategy to
provide the most complete portfolio of financial management services, Southwest also offers insurance
and securities brokerage services, advisory and private equity services to middle market companies in
Texas, and loans to qualified borrowers for the purpose of financing the purchase of property and
casualty insurance. In terms of corporate clients, Southwest Bankers focuses on the energy,
manufacturing, services, construction, retail, telecommunications, healthcare, military, and
transportation industries. The company was founded in 1868 and is headquartered in San Antonio,
Texas. For all intents and purposes, Southwest is a healthy and viable financial services institution.
Recent business growth has placed the organization in the position of requiring a series of major
computer hardware and software upgrades. Although the IT organization is performing well, with high
marks from the user community, the company has decided to explore whether to outsource some, or
perhaps all, of its IT organization. Their thinking in this matter is driven by the view of executive
management that though IT is a key enabler of the bank’s operational (a.k.a. transactional) and
management activities, the running of a successful IT services organization is not one of Southwest’s
core competencies. Their strategic focus is the expansion of their banking services into the
Southwestern United State, Mexico and perhaps other Latin American countries.
Southwest therefore developed a request for proposal (RFP) to outsource their internal IT organization
and sent this document to several companies with the capabilities and tested experience to provide the
necessary range of IT services required of the bank. After evaluating the responses and visiting the
facilities of those who responded, the decision was made to outsource the entire IT organization to XYZ
Computer Services (not their real name). A contract was signed with the successful bidder. The
transition was accomplished smoothly over a period of months. The outsourcing vendor hired most of
Southwest’s IT staff onto their own payroll and now operates and updates Southwest’s entire IT
platform as required to meet the needs of the client under this fee-based arrangement.
Unlike a few of the other of the cases in MISM 2301 that feature fictitious but highly-representative business
organizations, the companies mentioned in these three case studies are in fact real but their identities are
disguised at the request of the sourcing specialist who consulted with these organizations.
prepared by rmk 080718
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Session 22: Three IT Sourcing Case Studies
Case 2: Partnering
Reliable Utilities, Inc. (not it’s real name) is a regional, investor-owned electric and gas utility, with
revenues of approximately $3.3 billion and assets totaling approximately $7.8 billion. The company
transmits and delivers electricity and gas to 1.1 million electric customers in 81 communities and nearly
300,000 gas customers in 51 communities. Reliable employs more than 3,100 employees in its
regulated business.
Reliable Communications, Inc. is an unregulated subsidiary involved in telecommunications activities
over fiber optic networks.
Reliable Energy Systems, Inc. is an unregulated subsidiary that provides heating, chilled water services,
and electricity to several hospitals, medical research centers and teaching institutions in its major
metropolitan service area.
Reliable LNG Corp., a third unregulated subsidiary, operates liquefied natural gas facilities in two local
communities to supplement pipeline supply during the winter months.
The IT Organization within Reliable Utilities, Inc. services the IT needs of the parent organization and all
of its subsidiaries.
The drive for increased efficiency and cost management led the Reliable Utilities, Inc. IT organization to
employ increasingly sophisticated and complex technologies (e.g., wireless remote meter reading; GPS
systems in service vehicles; complex mapping systems of embedded pipes, conduits and wiring, etc.).
Challenged to find, hire, and retain staff to deploy and maintain these systems, the IT organization
launched a search for a partner who could provide a wide range of technical personnel for short- or
long-term assignments as needed, and who could flexibly respond to evolving IT staffing needs on short
notice. However, in order to maintain close relationships with the user community and to be on top of
or to anticipate staffing and expertise requirements as these emerged from planning discussions, this
partner needed to work in-house, as though he/she was part of the Reliable Utilities, Inc. IT
The CIO of Reliable Utilities, Inc. therefore developed a request for proposal (RFP) and sent this
document to several companies with the necessary range of services. After evaluating bidder responses
and interviewing their key personnel, she negotiated a contract with the winning bidder. Under this
agreement, a senior on-site partner executive operates as a member of the Reliable Utilities, Inc. CIO’s
staff, attending staff meetings and participating in strategic planning sessions. This individual then
dynamically assigns external IT resources to Reliable IT projects as the need arises. Once a project is
completed, the partner’s people will leave, turning over the day-to-day running of the new IT-enabled
platforms and services to Reliable’s own IT organization. As part of this hand-off, the departing experts
will transfer their knowledge of the new systems to Reliable personnel. This process is referred to as
“technology transfer.”
prepared by rmk 080718
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Session 22: Three IT Sourcing Case Studies
Case 3: Unwinding an outsourcing relationship
The State Retirement System (SRS) (not its real name) is a defined benefit plan qualified under section
401(a) of the Internal Revenue Code. SRS provides benefits to its eligible members and their
beneficiaries upon retirement, disability, or death. SRS has approximately 53,000 active members
including firefighters, police officers, teachers, and state and local government employees.
Approximately 22,000 individuals currently receive a monthly benefit from the System.
For many years, consistent with best practice, SRS had retained a consulting actuary to guide its
calculations of benefits that would be paid to its members based on the terms in their respective
contracts and the level of their past contributions to the retirement funds managed by SRS. In addition
to consulting services, the consultant has provided SRS with a unique payroll system under an
outsourcing agreement, where SRS members make payroll contributions into the system and they then
receive benefit checks from the system upon retirement. Other services, such as investment
management, are also provided by other external third-party vendors.
Over the years both Federal and State tax law changes have required the consultant to reprogram his
software to bring it into compliance. Given the ager of the information system in question, these
changes have become increasing difficult to accomplish. The added effort required has been billed to
SRS. Faced with increasing administrative costs, and given difficulties in modifying the payroll system to
accommodate legislative changes, SRS decided to explore whether to work with their vendor on
modifying the existing arrangement and system or to acquire and operate a state-of-the-art retirement
management system in house. As it so often happens, in the many years since in inception of SRS’s
home-grown system, a number of commercial product equivalents have entered the market place.
To make this decision, SRS first developed the overall requirements for the new system. This exercise
revealed a number of issues with the existing system. Then they developed a RFP describing their needs
and sent this document to qualified IT system providers. The companies were required to define the
costs to obtain and configure the hardware that would be needed to operate their prosed product
offering (i.e. the proposed information system), the installation costs for the new system, the costs to
convert and move the SRS data from the existing vendor-based system to the envisioned in-house
system, and the cost to train SRS staff on system operations. Per the RFP, the vendor would perform
system maintenance under a separate agreement.
After evaluating the responses and interviewing the bidders, SRS found that they were much better off
with bringing this core service of the firm back in house. They therefore reached an agreement with the
chosen vendor and implementation began. First the hardware was ordered and a data center was
located and built within the SRS building. The vendor then assisted with configuring the hardware, and
installing the software. The firm’s records on the old system were converted to run on the new
software. User training and system acceptance testing took place over a period of several months. Once
the parallel run results were certified by the auditors, SRS began operations with the new system and
sunset the old outsourced solution and its own – their former actuary.
prepared by rmk 080718
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IT Sourcing within The
Note: These slides have been compiled
through the collaborative efforts of
Professor Richard Kesner of
Northeastern University and Ralph Loftin
of The Capable Company, Inc .
What needs to be sourced:
Key Infrastructure Components

Systems hardware
Operating systems
Network infrastructure
Security systems
Support and Training Services
IT Functional Relationships

How are the responsibilities for IT
systems divided among the

Executive management
Enterprise staff
IT staff
Business partners
IT vendors
Critical Factors for Successful

IT/business alignment
Flexible organizations
Appropriate technology
Flexible processes
Continuous process review
IT Delivery Models

Most organizations today employ a hybrid model of IT delivery – some
centralized, some decentralized, some in-house and some outsourced…..
Therefore most IT shops must Manage Vendor Relationships

Monitor vendor landscape
Facilitate partner vs vendor decision
Document strong SLA

SMART goals
Regulatory compliance
Fair for all parties
Monitor and safeguard against typical
mistakes in sourcing management
Adapted by Martin Dias from original by Luth Computer Specialists, Inc.
Sourcing Objectives

Close Capability Gaps Quickly
Cost Savings

Improve Quality
Displace Responsibility (reduce hassle factor)

Economies of scale and scope
Moving assets ‘off the books’
Access to business continuity facility
‘Outsource’ integration headaches
Regulatory issues & compliance
IT staff retention
Enable Agility

Access to skilled resources
Access to ‘state of the art’ technology
Access to technology updates
External Sourcing Options

Joint venture
External Sourcing:
Outsourcing / Outtasking
Client Agreement
Outtasking – contracting for a specific, narrowly defined service (e.g., Unix
server administration)
Outsourcing – contracting for a complete function (e.g., call center)


Arm’s length buyer-seller relationship
Minimal buyer involvement in vendor’s internal operations
Vendor performance gauged by well-defined, easily quantifiable measures

Office Depot: HR administration with Convergys; call centers with
WillowCSN ; accounts payable invoice processing, mailroom, scanning,
indexing, and document management to ACS
Sainsbury’s signed a seven-year deal with Accenture in 2000 to
outsource all of its IT operations and transfer about 800 employees to
Accenture. It retained a small in-house staff to oversee the new IT
External Sourcing:
Outsourcing / Outtasking

Straightforward contract

Low buyer overhead

Well-defined services
◼ Performance easy to

Short lead time (few

Tendency to neglect
External Sourcing: Consortium
Consortium Agreement
Co. 2
Co. 3
A cooperative, mutually beneficial arrangement among companies (co-opetition)


All companies operate under a common, written agreement
Minimum tailoring of services to individual companies
▪Credit Unions (CUNA)
▪Industry associations
▪Exchanges (steel, cotton)
▪Standards groups (e.g., ANSI)
▪Shared service centers (internal consortium)
External Sourcing: Consortium

Straightforward contract
Well defined services
Low customer overhead
Short lead time (weeks to

Limited range of services

Limited customization
External Sourcing: Alliance
• Governance
V. 1
V. 2
V. n
A close association of companies or groups, formed to advance common
interests or causes
◼ Characteristics

Highly customized services and agreements
Closed membership

Banc One (AT&T and IBM)
External Sourcing: Alliance

Services can be tailored

Wide range of services can
be provided

Success is critically
dependent on the
relationship between alliance
partners (limited control by

Complex contractual issues

Difficult to change vendors

Long lead time
External Sourcing: Joint Venture
Legal Entity
A legal entity formed to share risk or expertise
◼ Characteristics:

Customer can have name on door
Vendor operates
Joint management
Negotiated sharing of investment, risk and rewards

Call center
Facility management
Business process (BPO)
External Sourcing: Joint Venture

Services can be tailored

Wide range of services can
be provided

Customer can exert
significant control

Can provide asset
management benefits

Can shield both parties
from certain liabilities

Can resolve local approval

Complex contract; requires
establishing separate legal

Significant customer
overhead (support,
relationship management)

Long lead time

Difficult and costly to

Customer must commit
External Sourcing: Partnership
A legal contract entered into by two or more organizations in which
each agrees to furnish a part of the resources for a business
enterprise, and by which each shares a fixed proportion of the


Mutual cooperation and responsibility
Reciprocity – both parties benefit

Client and UPS
Stop & Shop and Citizen’s Bank
Desktop support for remote locations
External Sourcing: Partnership

Services can be tailored

Wide range of services can
be provided

Complex contract

Significant customer
overhead (relationship

Long lead time

Difficult and costly to
External Sourcing: ‘Onshoring’

Quicker start to project
Fewer contracting / legal
Fewer cultural and
language issues
Avoids political issues, e.g.
“exporting jobs”

Typically most expensive
External Sourcing: ‘Nearshoring’

The performance of certain tasks by a third party
whose base of operations and resources are
located in a country in close proximity to the US
(Canada, Mexico, Bermuda,…). Some vendor
resources may be located on-site as well.
External Sourcing: ‘Nearshoring’

Relatively quick start to
Easier to visit vendor sites
Same as US time zones
Fewer cultural and
language barriers

More expensive than offshore
Luxury of proximity reduced
More complex contractual /
legal issues
May introduce political issues
External Sourcing: ‘Offshoring’

The performance of certain tasks by a
third party whose base of operations
and resources are located in a country
distant from the US; typically a
developing nation offering very low
labor rates
External Sourcing: ‘Offshoring’

Least expensive model
Leverage in negotiating
price reductions

Difficult to visit vendor site, esp. on
short notice
Time zones often 10+ hours out of
Cultural and communication issues
Most complex contractual / legal
Introduces political issues
Possible unstable geo-political
Difficult to repatriate
Suitable Vendor Checklist

Availability: Based on a cursory analysis, are there
vendors who appear able to satisfy the requirement?
Number of sources: How many potential vendors
appear suitable? Ideally there should be at least
Location: Are the potential vendors located
Industry knowledge required: Do the vendors have
experience in the specific industry?
Specific company knowledge required: Do the
vendors have a prior or existing relationship with the
Due Diligence Questions Checklist

What would you change about the contractual relationship?
How do actual costs compare with estimates?
How does the vendor respond to programming needs?
How does the vendor respond to requests for spe …
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