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Netsourcing: Renting Business Applications and Services Over a Network

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Netsourcing: Renting Business Applications and Services Over a Network

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  • Copyright 2002
  • Edition: 1st
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  • ISBN-10: 0-13-092355-9
  • ISBN-13: 978-0-13-092355-4

In Netsourcing: Renting Business Applications and Services Over a Network, leading outsourcing researchers share new findings on the key success factors associated with outsourcing--offering practical advice for every aspect of the decision and every phase of the project lifecycle. Discover how to minimize technical, contractual, operational, and managerial risk; identify the right applications to outsource; manage and secure outsourced infrastructure; and realistically assess the next generation of outsourcers and outsourced services.

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An Overview of Netsourcing

Table of Contents



Foreword.


Preface.


Acknowledgments.


1. An Overview of Netsourcing.

Netsourcing by Any Other Nameú. Netsourcing Viewed As A Service Stack. Customer Perspective: Who's Buying? Are Early Adopters Satisfied With Netsourcing? Summary. Endnotes.



2. Principles for Effective Sourcing Decisions.

Four General Sourcing Options. Three Paths of Outsourcing. Using External It Services: The Track Record. Case Illustration: United Airlines and Time to Market. Managing Successful Sourcing Decisions. Conclusions. Endnotes.



3. Management Principles: Core.

Capabilities and Contracting. Core It Capabilities. Provider Evaluation and Contracting. Detailed Contracts. Conclusions. Endnotes.



4. Netsourcing Technology Guide for Customers.

Technical Infrastructure. Evaluation of Options. Conclusions. Endnotes.



5. U.S.-Based Netsourcing Case Studies.

Introduction To The Case Studies. Corio. EDS. Host Analytics. Mainpass. Zland. Conclusions. Endnotes.



6. European-Based Netsourcing Case Studies.

Introduction To The Case Studies. Lodge. Marviq. Sap. Siennax. Vistorm. Summary of Case Evaluations. Endnotes.



7. Mitigating and Managing Risks.

In Netsourcing Deals. The Customer Perspective: Primary. Preliminary Risk-Profiling. Risky Asp Practice: Siennax and Abz Case. Risk Mitigation Across A Netsourcing Deal. Better Practices for Netsourcing Risk Mitigation and Management. Conclusions. Endnotes.



8. Netsourcing Drivers: Customer Decision Checklist.

Business Drivers. Technology Drivers. Economic Drivers. Economic Drivers: Checklist Questions. The It Services Market. Relational Drivers: Checklist Questions. Summary: Decision And Selection. Endnotes.



9. Past, Present, and Future Of Netsourcing.

Life-Cycle Stages. Trends Driven by the Tough Customer. Mass Customization. Conclusions. Endnotes.



Appendix A. International Survey of Netsourcing Customers.

Research Method. Research Respondents. Current Netsourcing Customers. Potential Netsourcing Customers. Summary of Findings From the International Survey. Endnotes.



Appendix B. Guide to Authors' Publications On Sourcing It and It-Enabled Business Systems, 1993-2001.

Books and Reports. Refereed Papers: Journals. Refereed Papers: Conference Proceedings. Reprints and Shorter Papers. Contributions to Books. Working Papers.



Index.

Preface

Preface

For most of the twentieth century, business managers were able to focus on their core business responsibilities while delegating the technology support to inside or outside experts. But in the new millennium, nearly every product, service, process, and function is enabled by, and embedded in, networked information technology (IT). Product design, purchasing, scheduling, manufacturing, logistics, recruiting, inventory, customer orders, delivery, customer service, finance, and accounting are all enabled by networked IT. This means that all business managers now have IT responsibilities—whether they want them or not.

Among the most important decisions business managers make is to determine the most effective way of sourcing IT solutions, and beyond those, IT-enabled business processes. They ask: What should we buy? What should we outsource? Should we find a technology partner? And most recently—what value does the explosion in the number of third-party suppliers offering business services over the Internet offer us? Is this netsourcing of my business services safe and reliable? Many business managers feel ill-equipped to answer these questions, particularly because they are intimidated by the vast amount of confusing supplier-driven hype.

We believe that every business manager will need to understand the principles of sound sourcing, with particular attention focused on the third wave of netsourcing. For managers within small to midsized enterprises, netsourcing will probably become a popular choice for sourcing business applications and services. For large enterprises, netsourcing will become part of an overall sourcing strategy, just one important option among many.

Indeed, netsourcing is already a growing phenomenon. The revenues generated in the netsourcing space—depending on which research firm's report you read—were between $1 billion and $2 billion in 2000. But research firms such as Gartner Group's Dataquest, InfoTech Trends, Phillips Group, International Data Corporation (IDC), and DataMonitor are predicting that the market will grow significantly over the next few years. Total netsourcing estimated spending ranges from a low of $7 billion to a high of $132 billion by 2006. Although nobody knows for sure how large this market will be, all research firms predict significant growth because the underlying value promise is too compelling for business managers to ignore.

The prediction for widespread adoption of netsourcing is also based on the history of information technology sourcing. Since the dawn of computing, customers have adopted the most economical, reliable, secure, and flexible sourcing options to meet their business objectives. Although customers are often slow to adopt new sourcing options, eventually they do so, provided that the underlying value proposition is compelling. Consider a snapshot of IT sourcing options over the past 40 years. During the early 1960s, many customers could not afford expensive mainframes and sourced business applications through the first wave of outsourcing, called time-sharing. In those days, visionaries such as Ross Perot actually picked up reels of data from customers, drove them to a data center for processing, then drove the results back to the customer site. During the late 1960s and 1970s, the advent of minicomputers drove hardware costs low enough to justify customer ownership and control of assets in centrally managed internal IT shops. The trend of insourcing business applications was also bolstered in the late 1980s and 1990s with the introduction of personal computers and client-server computing. Often, the underlying economics of these sourcing options still favored insourcing, but they also promised to dismantle central IT functions in favor of locally deployed IT. Other economic drivers during the 1990s drove the second wave of outsourcing, such as the increasing cost of software, the global IT skills shortage, and fear of Y2K. Often, external suppliers were better able to leverage IT resources in this environment, and outsourcing also served to free customers to focus on their core capabilities. So ballyhooed was this option that global IT outsourcing spend swelled to over $1 trillion by 2000. With the explosion of the Internet, the third wave of outsourcing washed ashore with netsourcing. What netsourcing enables is another dramatic shift in the underlying economics of sourcing—it's essentially the time-sharing concept of the 1960s, but instead of Ross Perot driving customer tapes to a data center, everything is delivered over a network.

Lest this snapshot of sourcing options seems like a technological utopia, we do note that every sourcing option has a life cycle of early supplier hype, naive customer expectations, initial discovery of pitfalls, then a maturing of the option with clearly defined best and worst practices. For example, client-server technology did reduce infrastructure costs but did not truly deliver on the promise of employee empowerment and completely decentralized IT management. (Most large organizations eventually centralized their servers to ensure backup, reliability, and security.) In another example—outsourcing IT to a third party was also fraught with problems until customers learned how to identify outsourcing options, negotiate better deals with suppliers, and manage relationships once contracts were signed. The same will be true for netsourcing: The value proposition is extremely compelling, but early adopters will help us discover the pitfalls and identify the best and worst ways to netsource. As all other sourcing innovations over the years, netsourcing will take its place among the other options rather than replacing them completely.

Although netsourcing services will mature, the suppliers in the netsourcing area will change radically. As of third quarter 2001, more than 1500 companies claimed to be netsourcing providers. To the present time, though, most media attention has focused on the fast-growing U.S. application service provider (ASP) startups such as Corio, Futurelink, and Interreliant. But the marketplace actually consists of a diverse range of service providers, including Internet service providers (ISPs), telecommunication infrastructure providers (telecos), data-center operators, independent software vendors (ISVs), computer manufacturers (CMs), online software companies, systems integrators (SIs) and established outsourcing service vendors.

Nearly every analyst, however, predicts that the industry is in the midst of a tremendous shakeout, characterized by failures, mergers, and acquisitions. The Gartner Group estimated that 60% of service providers failed by year end 2001. Service providers that closed shop include Agillion, Hotoffice, eBaseOne, Red Gorilla, Pandesic, and Utility.com. Survivors continue to scramble to find strategic partners to expand their products, markets, and services. Dot.com service providers also continue to face stiff competition not only from their immediate rivals but from the large independent software vendors, systems integrators, telecos, and consulting firms entering the market. For these established suppliers, buying or merging with an existing netsourcing startup may define a market entry strategy. These firms will then be able to offer those kinds of resource capabilities, expertise, technology, and geographical presence that will make the netsourcing business model an attractive option to global 2000 businesses. And, of course, the latter suppliers have deep pockets to survive the shakeout.

Many people suggest that the netsourcing shakeout will result in a handful of players, much like the shakeout in automotive manufacturing at the turn of the century. We believe, however, that more than a handful of players will survive because netsourcing is not about a specific product but an entire new delivery mechanism for business services. Small service providers will probably target a niche set of products and services for a niche set of customers. Large service providers such as Accenture, EDS, and IBM will offer total business solutions, with netsourcing as a delivery option.

Given the instability in the current netsourcing space, business managers need tools to evaluate if, when, and how to adopt netsourcing. In this book, business managers are given tools to identify core and noncore IT capabilities, assess their in-house versus market capabilities, assess the total value added of sourcing options, mitigate sourcing risks, and implement flexible sourcing arrangements that adapt to business and technology changes. Each chapter has extensive lessons for both suppliers and customers (see Table 1).

The target audience for this book is all stakeholders involved in IT-enabled business decisions and management. On the customer side, senior business executives, business unit managers, government officials, IT directors, internal lawyers, and end users will learn how to leverage netsourcing within their overall sourcing portfolio. On the supplier side, service providers will learn key insights as to what early customers are experiencing with netsourcing, and more important, what reticent customers expect from suppliers before they are willing to rely on them.

The tools in this book are based on over 10 years of research by two recent recipients of the PriceWaterhouseCoopers and Michael Corbett & Associates' Global Information Technology Outsourcing Achievement Award, along with a third author who has extensively studied, published on, and worked in traditional as well as netsourcing options. Our research access and expertise and extensive practical experiences give us, as a team, distinctive, and in some ways unrivaled, in-depth insights into the way that the outsourcing market has developed and where netsourcing is now taking that market.

TABLE 1 Summary of Lessons Learned
Chapter Customer Lessons Supplier Lessons
Chapter 1: An Overview of Netsourcing Understand what netsourcing promises you in terms of value, products, and services. Understand the actual experiences of early netsourcing adopters. Learn how to position your products and services within a service stack. Understand what reticent customers expect from netsourcing before they will adopt.
Chapter 2: Principles for Effective Sourcing Decisions Understand sourcing options (of which netsourcing is only one option). Learn to evaluate your IT portfolio in terms of business contribution, costs, and technical capability vis-a-vis supplier offerings. Understand how to market products and services based on the customer's view of the contribution of their IT-enabled systems.
Chapter 3: Management Principles: Core Capabilities and Contracting Learn one of the most valuable models for identifying core internal IT capabilities.Learn the principles of sound contracting. Help customers retain core capabilities to ensure that you can be a successful supplier. Prepare for the impending future where netsourcing contracts will hold suppliers much more accountable for performance.
Chapter 4: Netsourcing Technology Guide for Customers Deconstruct the technical terminology associated with netsourcing into simple concepts. Understand the business trade-offs between various netsourcing technical platforms such as using the Internet versus a virtual private network. Learn to approach customers by using simple explanations for the technical aspects of netsourcing.
Chapter 5: U.S.-Based Netsourcing Case Studies Learn how netsourcing suppliers are providing customers with various services ranging from simple application access through to total business solutions with netsourcing as an embedded delivery option; the first five cases are U.S.-based: Corio, Host Analytics, EDS, MainPass, and Zland. Learn how 10 suppliers are constantly adapting to changes in the emerging netsourcing space as customers become more savvy and demanding.
Chapter 6: European-Based Netsourcing Case Studies Learn about five European-based suppliers and their customers: Lodge, marviQ, SAP, Siennax, and Vistorm.
Chapter 7: Mitigating and Managing Risks in Netsourcing Deals Understand how to mitigate and manage 15 netsourcing risks, demonstrated through a customer case history. Understand the difference between actual risks experienced by netsourcing customers and the perceived risks of customers not ready to adopt netsourcing. The implication for suppliers is that educating the public continues to be a major requirement.
Chapter 8: Netsourcing Drivers: Customer Decision Checklist Based on all the learning of previous chapters, this chapter presents the business, economic, technical, market, and relational drivers of netsourcing to help customers fully evaluate netsourcing. Suppliers are given over 30 guidelines on how to deliver customer requirements.
Chapter 9: Past, Present, and Future of Netsourcing Understand how, like any other new industry, netsourcing will evolve, and how to determine the right time of adoption for your company. Understand how early "tough" customers are shaping the future of netsourcing. Their demands will require suppliers to alter their business models, including service offerings, pricing options, and contracting.

Thomas Kern has built a rich understanding of what makes relationships in outsourcing work in his five-year longitudinal study of major IT sourcing deals sponsored by Lloyd's of London, resulting in a D.Phil. at the University of Oxford. This research was published in late 2001 as The Relationship Advantage: Information Technologies, Sourcing and Management (Oxford University Press) and was coauthored with Leslie Willcocks. Thomas also draws upon three years of focused work on application service provision solutions and their strategic impact on customers, which led to a large-scale project on customer expectations sponsored by the European-based consultancy CMG Benelux. Thomas is currently CIO of KERN AG, an international company headquartered in Germany.

Mary Lacity and Leslie Willcocks are coauthors of some of the most referenced and widely read texts and papers in the IT outsourcing field. They are sought internationally for advisory work and speaker engagements. Before becoming an academic and professor, Mary worked in the IT industry as adviser and consultant, a role she actively continues with several major corporations and government institutions. In 2001, she and Leslie Willcocks published Global Information Technology Outsourcing: In Search of Business Advantage (Wiley), representing a state-of-the-art summation of IT outsourcing and their research study findings over 10 years. Leslie also has an international reputation for his work on IT outsourcing, e-business, and information management, having published 20 books and over 130 papers on these subjects. He also worked in management consulting for 12 years before taking up leading academic appointments, including Oxford University and most recently, Warwick University. Drawing on this expertise, all three of us are now busily engaged in advising client companies and supplier companies alike on their business, Internet, and outsourcing opportunities and options.

We have tested the many managerial tools, developed and refined in the heat of outsourcing developments over the last 10 years, against a new body of research in the netsourcing space, based on over a dozen detailed case studies (fully described in Chapters 5 and 6) and a major international survey of customers and potential customers (see Appendix A). This book represents the result of what has been an exhausting, but highly satisfying and rewarding year. Through our research, we have sought to make sense of the conflicting and confusing evidence being produced about an easily misunderstood, but on our evidence and analysis, highly important emerging market. It has been genuinely exciting to be in at the birth of some fundamental underlying changes in the marketplace and how technologies are going to be applied. These changes are as yet only just beginning to be understood, but their impact and significance are going to be truly considerable. Netsourcing is going to be a fundamental and lasting set of changes in the way in which business applications and services are delivered. Netsourcing alters the ways in which clients relate to IT service companies, the ways in which IT service companies will need to behave, and the sorts of offerings they will need to make to their customers. But if the idea is revolutionary in concept, we expect to see in practice a more evolutionary rollout than most forecasts have predicted.

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