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Outsourcing a Decision Support System When Does it Make Sense?

  Article published in DM Direct Newsletter
July 16, 2004 Issue
 
  By Bjarne Berg

As companies have become more focused on IT expenditures over the last few years, some have decided to outsource parts of their transaction processing systems. As a result, many are now asking how much of their decision support system (DSS) infrastructure they can outsource. This article looks at the criteria for outsourcing management tools and provides a framework for deciding when it makes sense.

When organizations embarked on implementing ERP solutions in the 1990s, many did not foresee the natural progression of their implementation. By adapting standardized processes and standardized technology, they laid the foundation for the wave of outsourcing we see today. Today the knowledge of ERP technologies is easily available and the systems are quite mature. As a result, the benefits of scale in supporting them are hard to ignore.

As an example, a company that serves multiple organizations can afford to have specialized staff for upgrades, installations, help desk, 24-hour support and disaster recovery. On the other hand, this costly infrastructure may be hard to justify for a single organization. Outsourcing has often been the logical way to realize these cost savings.

As part of the outsourcing, many companies are debating when to outsource their management support tools as well. This is a complex question that must consider the competitive advantage which a tool may provide. The company must also account for how ready the market is to support such a tool in an outsourcing model. The final direction should not solely be question of cost savings, but must consider the benefits and the strategic position of the company in the marketplace. Figure 1 shows a simplified framework how to make this decision in a practical manner.


Figure 1: When to Outsource a DSS Environment1

Eliminate. Unfortunately, some custom management tools are built on a "nice-to-know" basis. These are systems that do not measure what drives the business but are satisfying some department's wants instead of needs. In general these are often found at regional levels or in subsidiaries that are allowed to evolve their reporting tools over time. Since these are not providing a competitive advantage and are often not required from a regulatory standpoint, they should be eliminated from the organization.

A small case for keeping these tools can be made if the industry solutions are highly standardized and, therefore, very low cost. However, these system normally also impact the focus of the organization, and benefits can be realized from removing these distractions.

In House. Most companies aspire to build decision support systems that are so good that they become a source for competitive insights that lead to an advantage in the marketplace. These tools can naturally not be bought out of the box (even though some vendors can provide the tools to build them). Normally, one can find them in critical areas of the organizations, such as lending policy groups in banks, underwriters in insurance companies and production planning groups in manufacturing companies.

It is important to note that while the processes of executing the decisions may be standardized, support for making decisions is often not. Therefore, it is increasingly important to maintain flexibility and responsiveness to the users. In addition, outsourcing these tools may lead to sharing "know-how" that can be made available to competitors. This may reduce the company's long-term market advantage. As a result of these factors, these tools are best developed and maintained in house.

Evolve. Early adaptors of industry DSSs may experience a period of good competitive advantages. However, as the rest of the industry adapts these standardized tools, the systems are no longer a source of competitive advantage. Instead, they have become a part of the "must-have" infrastructure. We often find this type of analytical support tool in standardized process areas such as shipping, receiving, call centers, customer interaction tracking, etc.

To maintain any form of continuous competitive advantage, these systems must continue to evolve or risk becoming an industry commodity. If the tool is allowed to become a commodity, and the competitive advantage is surrendered, it will become a candidate for outsourcing. The decision to evolve the system is therefore a strategic one.

Outsource. While IT support organizations may argue to the contrary, there are some management tools that can be outsourced. These are systems that serve the function of monitoring the business, rather than supporting complex business decisions. We often find them in companies that have implemented industry ERP solutions that are relatively mature.

These decision support systems do not provide a competitive advantage, but are essential for good "business practices." They are often reactive in nature. As a result, they are required in the organization but not a source for future growth or a focus of new business development. In addition, the technology knowledge is available in the marketplace. With this backdrop, a company can focus on a cost-benefit analysis of the outsourcing decision and often realize substantial financial benefits of removing these tools from their internal infrastructure.

The Direction of DSS Outsourcing

As the outsourcing wave of the transaction processing continues, there are mounting pressures to seriously examine which DSS tools can be bundled into the outsourcing packages. In this environment, it is important that companies does not blindly look at cost savings, but also considers which management tools are critical to their competitive advantage. A company that signs any deal based solely on cost savings can risk becoming a commodity business with no real ability to take advantage of future opportunities to distinguish themselves from the competition.

However, to blindly state that there are no management tools that can be outsourced is equally shortsighted. A balanced view must be taken when deciding where to draw the line. This decision should be based on the level of maturity of the industry (as demonstrated by standardization) as well as the competitive standpoint of the company.

In short, as the pressure to reduce IT spending continues, the decision when to outsource management systems is being forced on companies. A strategic balanced approach is the only thing that makes sense.

References:
1. Lacity, M., Wilcox, P., and Feeny, D. The Value of Selective IT Outsourcing. Sloan Management Review, Spring 96, pp. 13-25.

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For more information on related topics visit the following related portals...
Business Intelligence (BI) and Outsourcing.

Dr. Bjarne Berg is the director of Business Intelligence at MyITGroup Ltd. and a professor of Computing Sciences at Lenoir-Rhyne College. He has managed many large scale Fortune-500 data warehouse implementations and is also a frequent speaker at conferences and is a recognized subject matter expert in Business Intelligence. He can be reached at bberg@myitgroup.com.



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