ERP Outsourcing Evaluation David L. Olson, Evaluation of ERP outsourcing, Computers & Operations Research 34:12, 2007, 3715-3724
Outsourcing reduces costs
Reduces one type of risk
Introduces other risks
Scope of ERP Outsourcing
ERP rental estimated at $6.4 billion in 2001
Forrester Research Inc.
Induced by competitive pressures
Gartner: monthly outsourcing fees $300 to $1,000 per user
Relative IT Costs T. Hoffman, P. Thibodeau, Wage inflation unlikely to soon end India’ s offshore dominance. Computerworld 38:14, 2004, 11-12.
Dial soap Schwartz (2003)
Installed SAP suite run by EDS
18 month, $35 million project
Overall transfer expense $110 million
Replace mix of Siebel, Oracle, Manugistics, and other applications
50 IT employees transferred to EDS
Only a small governance team retained by Dial
Other outsourcings
Will outsource about 90% of IT jobs
California State Automobile Association
Accenture to run PeopleSoft system
ASAT Holdings
IBM to run SAP system
Targeted Outsourcing
Informatica Inc.
Outsourced HR, felt could operate even if it went down
Didn’ t outsource other modules
Federal-Mogul Corp.
Experienced quick growth through acquisitions
Needed to consolidate 27 different ERPs
Outsourced only technical work such as SAP programming
Government ERP Outsourcing
Can lower costs of software ownership
Avoid problems of developing & retaining IT staff
More difficult to get approval for large ERP projects
Need to defend proposals in public hearings
Reduction of State jobs has led to difficulties with information workers’ unions
Reasons to Outsource Bryson & Sullivan (2003); Clymer (2004)
Reduced capital expenditure
ASP economies of scale
More flexibility & agility
Increased service levels at lower cost
Gain expertise unaffordable in-house
Allow focus on core business
Continuous access to the latest technology
Reduced risk of infrastructure failure
Manage IT workload variability
Replace obsolete systems
Reasons Against Outsourcing Bryson & Sullivan (2003); Clymer (2004)
Security & privacy
Dependency on vendor (lock-in)
Availability, performance, reliability
High migration costs
ERP expertise may be critical to organizational success
ERP systems tied to IT infrastructure
Key applications may need to be in-house
May have existing efficient operation
Corporate culture
Russ Berrie & Co. Nash (2002)
Gift-related retailer
1998 & 1999 spent $19.2 million on SAP
Problems tracking orders
Wrote off $10.4 million to revert to old systems
2001 supply chain inefficiencies
Investigated 4 ERP vendors (not SAP)
Gave hard technical criteria
User ability to access via Web
Software resident on user PCs
Installation in stages
Used weighted scoring system, selected JDEdwards
General Motors eWeek (2003)
Outsourced ERP in early 1990s
One of first to outsource such a large system
Acquired EDS
Problems: no management control
Second generation:
Combination of outsourcing companies
2003 Third generation:
Outsource all IT
Retain control over everything
Wanted competing outsourcing companies
In 2003 spending $1 billion less on IT than in 1996
Soft Impacts of Outsourcing McCarthy (2001)
Software upgrades over time
Integration, implementation, testing, maintenance
User functionality, technical support, service
Disaster recovery
Selection Criteria Van Everdingen et al. (2000)
ASP Evaluation Factors Ekanayaka et al. (2003)
Example: Start with Life Cycle Cost
Criteria, Scores by Alternative
Develop Weights
Rank order criteria by importance
Identify worst measure by criteria
Give worst 10, others assigned proportionally
Identify best measure by criteria
Give best 100, others assigned proportionally
Weight estimates
Value = Weights time Scores
Outsourcing ERP an important new option
Hard to figure impact on:
Multicriteria methods can help evaluate

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