If another organization develops or runs a computer application for your organization, that practice is called outsourcing. Outsourcing includes a spectrum of working arrangements. At one extreme is having a firm develop and run your application on its computers—you only supply input and take output. A common example is a company that runs payroll applications for clients so that clients don’t have to develop an independent in-house payroll system. Instead they simply provide employee payroll information to the company and, for a fee, the company returns completed paychecks, payroll accounting reports, and tax and other statements for employees. For many organizations, the most cost-effective way to manage payroll operations is through outsourcing.
In another example of outsourcing arrangements, you hire a company to run your applications at your site on your computers. In some cases, an organization employing such an arrangement will dissolve some or all of its information systems unit and transfer most or all of its information systems employees to the company brought in to run the organization’s computing. Why would an organization outsource its information systems operations? As we saw in the payroll example, outsourcing may be cost effective. If a company specializes in running payroll for other companies, it can leverage the economies of scale it achieves from running one stable computer application for many organizations into low prices. But why would an organization dissolve its entire information processing unit and bring in an outside firm to manage its computer applications? One reason may be to overcome operating problems the organization faces in its information systems unit.
For example, the city of Grand Rapids, Michigan, hired an outside firm to run its computing center thirty years ago in order to manage its computing center employees better. Union contracts and civil service constraints, then in force, made it difficult to fire people, so the city brought in a facilities management organization to run its computing operations, and it was able to get rid of problem employees at the same time. Another reason for total outsourcing is that an organization’s management may feel its core mission does not involve managing an information systems unit and that it might achieve more effective computing by turning over all of its operations to a more experienced, computer-oriented company.
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Kodak decided in the late 1980s that it was not in the computer applications business and turned over management of its mainframes to IBM and management of its personal computers to Businessland. Outsourcing is big business. Some organizations outsource the IT development and many of their IT functions, at a cost of billions of dollars. The traditional outsourcing market is now a $280 billion industry, and the offshoring market is worth $70 billion. Individual outsourcing vendors sign large contracts for their services. IBM and HP are two of the biggest, bestknown global outsourcing firms. Both companies have multiple outsourcing contracts in place with many different firms. Outsourcing is an alternative that analysts definitely need to be aware of.
When generating alternative system development strategies for a system, you as an analyst should consult organizations in your area that provide outsourcing services. It may well be that at least one such organization has already been developed and is running an application similar to what your users are asking for. Perhaps outsourcing the replacement system should be one of your alternatives. Knowing what your system requirements are before you consider outsourcing means that you can carefully assess how well the suppliers of outsourcing services can respond to your needs. However, should you decide not to outsource, you need to consider whether some software components of your replacement system should be purchased and not built