Choices in Systems Acquisition

This week we look at the choices an organization must make when acquiring new hardware and software. The choices usually aren't as easy as in government where the contracts often seem to go to friends and campaign contributors. In business, there is usually some responsibility to try to make the right choices.

Organizations have more than one alternative way to obtain ISs and IT services. Purchasing "canned" software and outsourcing parts or all of the corporate IS functions are becoming increasingly popular. On the one hand, more choices offer more flexibility; on the other hand, they make the selection process more complex. You should be aware of the pros and cons of each alternative.

Objectives

• explain the differences among the alternatives to tailored (custom) system development: outsourcing, licensing ready-made software, contracting with an application service provider, and encouraging users to develop their own applications
• list the tradeoffs inherent in the various system acquisition methods
• describe which systems acquisition approach is appropriate for a particular set of circumstances
• discuss organizational policies on employee computer use

Terminology

• ASP: Application Service Provider; offers software applications for use via the Internet
• SaaS: Software as a Service; the concept of selling applications as subscription-type services provided over the Internet
• SSP: Storage Service Provider; offers storage space accessible over the Internet
• SLA: Service Level Agreement; a contract guaranteeing the level of quality for a service
• ERP: Enterprise Resource Planning
• RFI: Request for Information; an initial request for information from a vendor made when an organization is looking to acquire a system or service
• RFP: Request for Proposal; includes technical requirements, implementation details, timetable, and budget.
• Benchmarking: Comparing one system's performance with another, using a set of non-system-specific criteria. Benchmarking tests should be run under a range of typical usage conditions, including extreme system load.
• UCITA: Uniform Computer Information Transactions Act - proposed addition to the Uniform Product Code which gives software vendors great authority to specify licensing agreements, reduces liability for faulty software, etc.
• User Application Development: development of (restricted scope) applications by end users themselves
• offshoring: moving organizational functions out of the country, usually to take advantage of lower costs (regulations, wages, taxes, materials, etc.)

Advantages of in-house developed custom software

• It can be tailored to meet the exact needs of the business.
• It can be made to fit an organization's specific processes and organizational culture.
• It can be designed to fit well with other systems already in place.
• You will have developers with expertise available to maintain the system (if you can keep them).
• There is a potential for strategic advantage if competitors do not have access to your software.

Disadvantages of in-house developed custom software

• The development and maintenance costs are high.
• The development may take a long time and use resources you could be using elsewhere.
• Writing custom software may make it harder to interface with other organizations using more standard software.

Alternatives to in-house development of ISs

• Outsourcing
• Ready-made software packages
• Application rental
• Application service provider (ASP)
• IS subsidiaries
• User-developed applications

Trade journals (paper and online) are a good source of information about these options.

Outsourcing options

• System development (hardware and/or software) - short term commitment
• Long term commitment (5-10 years) for one or more IS services/operations:
  • Application development and maintenance
  • Hardware purchase and maintenance
  • Telecommunications equipment installation and maintenance
  • Help desk operation
  • Website design and maintenance
  • Training
  • Data storage and backup
  • Data processing
  • Transaction processing

All of these areas may be outsourced to a single vendor, some may be outsourced and some kept in-house, or different areas may be outsourced to different vendors.

Advantages of outsourcing

• Fixed IS costs make better financial planning possible for the duration of the outsourcing contract
• Volume discounts negotiated by the vendor may result in lower software costs
• Organization's staff is able to concentrate on core business
• Reduced staff and fixed IT-related costs - fixed costs for vendor are spread over multiple clients so per-client cost is lower
• Higher experience level of vendor's employees can result in shorter implementation cycles
• Access to vendor expertise, consulting
• Improved handling of security due to experience
• Shorter development cycles for projects due to vendor experience and expertise

Risks of outsourcing

• Loss of control (especially risky in fast-changing areas, since contract may not support evolving needs)
• Loss of experienced employees (frequently IS employees are transferred to outsourcing vendor)
• Possible loss of competitive advantage
• Cost may be higher than expected, even higher than in-house

Service Level Agreements (SLAs) are essential when outsourcing. The client must specify in detail what services are expected and the metrics to be used in assessing how well the vendor supplied those services.

Purchased (ready-made) applications

Advantages:

• Immediately available (though installation of enterprise software packages can take months)
• High quality (business imperative for vendor)
• Low price (development cost spread over multiple customers)
• Support available

Enterprise software packages can cost hundreds of thousands of dollars, and installation can bring the cost to several million dollars.

Project management activities when considering ready-made packages

• Identify problem - high level functional requirements, major interfaces to other systems
• Identify potential vendors
• Request vendor information
• Define requirements; include what features are provided by which vendor
• Request proposals for the system from each vendor
• Review proposals and screen vendors
• Visit sites where the application is already in use
• Select vendor
• Benchmark selected product (before final commitment to purchase, and after system is implemented)
• Negotiate contract
• Implement system
• Manage post-implementation support

Risks of purchasing ready-made software

• May not be a good match for organization's needs
• Vendor may go out of business
• High turnover of vendor personnel may negate any experience advantages
• UCITA gives vendors too much power
• Software licensing may increase costs of ownership

Software rental

Renting instead of buying software makes it less costly to upgrade to a new version. It also reduces the initial cost, which can be a barrier for small organizations.

ASPs

ASPs provide a form of software rental; the software is installed on the ASP's system(s) and the client accessed the application over the Internet. The client's data files may be stored on the ASP's systems or on the client's computers. Advantages are:

• No maintenance
• No hardware (on which to install the application)
• No need to hire installation and maintenance staff
• Available faster than in-house installation

Disadvantages include:

• Uncertain Internet response time
• Security risks (can be mitigated by using leased lines, at considerable cost)
• Lack of control
• Inability to make modifications (unless agreed to by the ASP)
• Instability of ASPs (many have only stayed in business a short time)

Given the uncertainty of the ASP market, there are a number of factors to investigate:

• History of the ASP; talk to other users
• Financial status of the ASP
• Pricing structure
• Hardware, software, and telecommunication facilities - uptime is a particularly important consideration. Look for "5 9's" (99.999%) uptime.
• Make sure contract contains penalties for ASP's failure to deliver and does NOT include penalties for early termination of the contract

IS Subsidiary

Developing an IS organization into a business of its own is only a viable option for large companies. It is appealing because the parent organization can have priority access while sharing the cost of the IS organization with other companies. However, it takes considerable resources to keep the subsidiary going until it becomes self-sustaining.

User Application Development

Some applications can now simply be developed by those who want to use them, thanks to the widespread use of PCs and software that requires little programming expertise to product applications. This reduces the pressure on an IT staff already overloaded with projects.

User application development is a good choice if:

• User has necessary skills
• The application is small
• The application is needed immediately
• The user can maintain the application
• The application is expected to have a short lifespan

User application development is NOT a good idea if:

• The application is large or complex
• The application interfaces to other systems
• The application is mission critical
• The application will be used longer than its developer will be available to maintain it

Advantages of user application development are:

• Rapid development
• Good match for user's needs
• Fits organizational culture
• Frees up IS staff and increases skills of others

Disadvantages are:

• Applications tend to be poorly developed
• Pockets of isolated information/private databases develop
• Duplication will occur
• There may be security issues not considered by the user
• Documentation is likely to be poor

The IS management needs to provide guidance on what applications are suitable for user development, and limit choices of tools to be used to develop them.