Ready Rural Company - the Benefits of Strategic Information Systems, Outsourcing vs Insourcing - Case Study Example

Strategic Information Systems Abstract Strategic Information System is the process of deciding the objectives of an organizations technological infrastructure, and at the same time identifying potential systems that are ideal for the company. This article will begin by outlining the benefits of strategic information systems. The report will also draw a line on how the outsourcing concept can be holistically applied as part of an organizations Information Systems strategy. The brief will finally discuss a mini survey centered on the effectiveness of the proposed concept with the motive of revealing the perceived benefits from companies that have previously outsourced their IT/IS operations. PART 1 Introduction In order properly manage Information Systems infrastructure, it is advisable to deploy sound strategies that will ultimately define the company’s IT policy. Strategic information systems planning is a very effective method for developing and maintaining technological infrastructures that support an organizations business operations (Salwe & Aloufi) . Strategic information systems planning is one of the critical issues miring information systems executives today. Because the main purpose of Strategic information systems management is to identify appropriate targets for automation, then this particular concept has the potential of making profound contribution to businesses and their partners. When this concept is properly applied, organizations can therefore take advantage and use the deployed system to attain their business goals, objectives, and also impact on their overall business strategies. However, by failing to properly implement strategic information system, these same companies may experience lost business opportunities and also waste of resources in terms of unused expensive information systems products. For a company like Ready Rural (RR) to realize the impact of strategic information management, they have to apply several methodologies that will act as a guiding principle. However, these methodologies have to be properly understood by the stakeholders involved. This is so because it has severally been cited that implementation of a planning technique is usually a major problem. For instance, in the case of RR, there are various techniques that could be applied as part of a wider strategic information systems, these include: Supporting the management decision by deploying executive information systems Outsourcing some of the key ICT processes Keeping IT related costs under control Implementing an ICT driven change Obtaining value from the electronic supply chain PART 2 Outsourcing VS Insourcing RR Company boasts of around 3000 employees across the country, more than 150 suppliers, and several wholesale trade customers. These people who are involved either directly or indirectly in the company’s supply chain need robust and scalable technological infrastructure so that they may collaborate more and make the company’s products more competitive in the market place. In addition, RR is supported by an in-house group of 120 ICT professionals who cover different areas within the company ranging from business analysis, systems development, support infrastructure, and desktop support among others. Personnel who render their services to ensure that the above processes are efficient are constantly in high demand hence very expensive for the company to maintain because of their high wage demands. However, with the recent global financial turmoil, such organizations are under increasing pressure to minimize on their expenses. IT related assets are known to be very capital intensive and companies of such caliber have to find out a workable solution. Like other competing enterprises, RR is being faced with a number of issues related to strategic use of information systems and technology. It is due to this background that it is advisable for the company to outsource some of its key IT related processes to third company providers. Organizations across the globe engage in strategic outsourcing to strengthen their business models and increase on their profitability. To begin with, world’s most iconic companies have already outsourced some of their non-core activities. For instance, Microsoft has already outsourced its entire technical support operations to an independent company, as doe’s Dell. These companies boast of extensive customer support operations in India which are staffed by very skilled personnel and only paid a fraction of what their counterparts in Europe and US earn. American Express has also outsourced its entire IT function to IBM in a seven year deal worth $4 billion (Hill & Jones, 2009, p.304). Benefits of Outsourcing When RR outsource some of its technological processes, the company can now begin focusing on its key competencies rather than maintaining the IT infrastructure. The company’s outsourcing are mandated to design, develop, and deliver customized IT solutions that will in return enable businesses such as RR to streamline their IT functions hence improve on their competitive position. This will enable the management to focus on core areas such as research and development, and marketing thereby freeing the management’s effort and directing their energy into these sensitive areas. IT being knowledge intensive, then a number of key areas can be grossly affected by employee turnover. Employee turnover is generally associated with significant economic and non-economic cost which the company has to bear in one way or another. These costs include re-training new employees, replacement, and separation. For instance, the annual economic per-person cost of turnover ranges $12000 - $ 20000 depending on the position that is being held in the organization. For instance, the replacement cost of a typical experienced computer programmer in a company like RR may reach approximately $20,000 but when programming jobs are outsourced from external providers then this money will be saved by the company. There are non-economic costs as well which may involve leadership, organizational knowledge, innovation capacities, increased stress on remaining workgroup, and disrupted work processes (Garsson, 2007, p.225) IT/IS common outsourced processes by RR IT/IS services Function Access Control Helps the company to establish provision authentification needs IDS monitoring Assists to monitor intrusion detection systems on a 24/7 basis Contingency Planning Facilitate crisis plans and responses Firewall management Assists in the configuration of software application and monitor logs Anti-virus services Monitor and mitigate on malicious attacks Website blocking Filtering services Network Scanning Identifying network vulnerabilities Remote management Monitoring the network Encryption services Managing the Public Key Infrastructure Application Development Developing and maintaining applications Business process re-engineering Re-engineering and outsourcing key business processes in order to evaluate while eliminating non-value added processes and activities. All the above services can be outsourced to third party providers. Focusing on core business Because RR will need to perform various functions in order to experience smooth operations. The company’s business will have a subset of the functions strategically differentiating business from the others which are core to the business and its survival. By the company outsourcing some of these components which are non-core to the operations of the company, and also unnecessarily consuming the company’s resources, the organization will then free up resources so that they may focus their management on key strategic initiatives. Risk Mitigation When the company begins to outsource its non-core functions, there is a very high likelihood that the organization will minimize on risk or minimize on the chances of lack of business continuity in that particular area that is likely to be affected. Such risks mitigation policies can be made explicit by including penalties for third party providers in the eventuality that they fail to provide the level of service or product that had initially been agreed on. Enhanced client and employee satisfaction When third party providers improve the functions which previously were performed internally, overall customer satisfaction is attained. This same logic can be replicated to other services that are geared towards employee satisfaction (Langfield- Smith, Smith, Stringer, 2000, p.23). Staffing flexibility By using these third party providers, there are a number of skill related benefits. This includes retaining employees because mundane non-core work is outsourced hence keeping employees interested while providing access to specialized skills via third party. According to a certain study by the IBM T.J Watson Research Center which investigated the long term effect of organizations that have outsourced significant portion of their IT infrastructure, it was concluded that companies which engaged themselves in IT outsourcing, outperformed their peers on a long term basis in key business metrics specifically on earnings before interest and taxes, return on assets, general and administrative expenses, and selling. In this same study IBM utilized rigorous statistical approaches whereby the company analyzed the financials of 56 public traded organizations (38 non IBM , 18 IBM clients). It was revealed that there is a direct correlation between major IT outsourcing deals and significant improvements in key business metrics for the analyzed organizations. The companies that were studied realized improvements in their business performances compared to their peers. Lower administrative expenses In the study about 75% of the companies realized significant reduction in their general administrative expense. This is so because prior to outsourcing, annual growth of the companies interviewed was 4.2 points which was way below than the sectors median. After 1-2 years after outsourcing, these organizations recorded some improvements and their annual growth in expenses was 9.9 points lower than the sector median. Enhanced growth in return on investments Approximately 66% of the companies analyzed outperformed their peers in ROA after three years when their IT outsourcing commenced. This is so because prior to the outsourcing initiatives, these companies growth rate was 7.5 points lower than the sector median. After outsourcing these same organizations growth rate soared to 8.6 points compared to sectors median of 8.6 points translating into a gain of 16.1 points. Increased earnings after interest and taxes Also approximately 66% of the companies interviewed grew faster than their peers and three years after outsourcing companies experienced annual growth rate of earnings 11.8 points higher than the sector median. Companies improves on Return on Investments According to the study organizations which had outsourcing agreements above US$50 million achieved annual growth rate of 8.6 points higher than the sectors median and also more than 60% of these companies outperformed their peers in ROA. Research Results This particular research has indicated that the bigger the outsourcing contract, then the more likely there will be an improvement in the bottom line. In the study 54% of the organizations which engaged in IT outsourcing agreements of less than US$100 million per year experienced positive growth earnings, 71% of the organizations engaged in IT outsourcing agreements bigger than US$100 million per year experienced positive growth in earnings. Research analysis and methodology The research used quantitative analysis and it was performed by scientists from IBM research center. Company’s financial records were analyzed in the year prior to outsourcing and the results were measured 3 years after outsourcing commenced. The investigations were mainly centered on Selling & general administrative expenses, Return on assets, and Earnings before interest and taxes. IBM research center used data monitor computer wire database of historical services signings to identify candidates of the study. The database contained approximately 5,000 services which were announced between may 1994- may 2004. In order to minimize the selection bias, the company utilized an automatic filter that searched the database based on the below criteria. Multinational organization that is listed in the US Organizations that had issued a total contract value of US $ 50 million or higher to a single outsourcing provider The outsourcing agreement was between Jan 1998- Nov 2002 The scope of the Outsourcing contract was directly related to IT (Hosting, desk side support, and data centers). The contract was the organizations first major IT outsourcing initiative. To cement the results of the study, the research team ran a parallel Monte Carlo simulation which computed the probability of observing the same results randomly from different companies. 56 companies were randomly selected and the same analysis was performed 1000 times and at the end the same financial improvements occurred in less than 5% of the samples which indicated a 95% confidence level with the results (IBM, 2005). Also according to a certain survey that has been carried out by Accenture which involved more than 800 executives in the US and Europe, It has been revealed that apart from cost savings, there is additional business controls generated by outsourcing which is also driving the trend to external providers. In the survey, approximately 25% of the respondents reported first day improvements in their company’s business processes. The levels of control increased throughout the transition (to outsourcing) and stabilization periods. The most frequently cited improvements were increased planning ability, advanced levels of operational reliability, and more rapid implementation of new strategies and initiatives (Information week, 2003). Conclusion Outsourcing IT functions is a very strategic business decision that is likely to enhance an organizations operational performance. With the global financial crisis, it is advisable for businesses to cut cost and one of the ways to go about it is outsourcing non core functions such as IT. When most of these functions are outsourced to external providers, RR can begin applying its new efforts towards more strategic initiatives such as Research and development. This would provide the company with a competitive advantage because they will have understood their clients better. This would results into products that are easily acceptable by clients, hence sell fast, and the company will significantly increase on their revenues while minimizing on their expenses. References Abdisalam Issa-Salwe, Khalid Aloufi, Integrating Competitive Advantage with Strategic Information Systems Planning: A Review. Retrieved 25th September, 2011 from http://bai-conference.org/BAI2011/Papers/4.MIS/4020.pdf David Garson, 2007, Modern Public information technology systems: issues and challenges, Idea Group Inc (IGI). International Business Machines (IBM), 2005, Business Impact of Outsourcing – A fact based analysis. Retrieved 27th September, 2011 from http://www-03.ibm.com/services/ca/en/ams/documents/business_impact_of_outsourcing.pdf Information week, 2003, Outsourcing benefits May be more than Monetary, retrieved 30th September, 2011 from http://www.informationweek.com/news/15200441 Kim Langfield-Smith, David Smith, Carolyn Stringer, 2000, Managing the outsourcing relationship, UNSW Press. Charles Hill, Gareth Jones, 2009, Strategic Management Theory: An integrated approach, 9th Edition, Cengage Learning. Bibliography Christopher R. 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