Key Decision Criteria for selecting IT Sourcing Option
IT sourcing is a process of choosing or acquiring information technology resources from external sources outside of the organization. While traditionally sourcing was a way to reduce costs, companies see it now more like an investment designed to enhance capabilities, increase agility and profitability, or gain them a competitive advantage (Tome, 2018). IT Managers must consider four different sourcing options which are In-house, Insource, Outsource and Partnership. The following are the four key decision criteria that needs to be considered for selecting the appropriate sourcing option
Flexibility: Flexibility has two key factors which are response time and capability which defines the quickness and range of IT functionality respectively. Insourcing or a permanent IT staff, is also a highly flexible sourcing option. Outsourcing exhibits less flexibility because of the need to locate an outsourcer who can provide the specific function, negotiate a contract, and monitor progress. Partnerships enjoy considerable flexibility regarding capability but much less in terms of response time (McKeen & Smith, 2015).
Control: There are two dimensions in this criterion as well: ensuring that the delivered IT function complies with requirements and protecting intellectual assets. In-housing and Insourcing are ranked high for these factors where the work needs to be confidential, proprietary and strategic. Insourcing gives an opportunity to track the development process and lets you keep control over the quality of the work, enabling peak in productivity and helps in reaching your desired outputs (Sadhik, 2019). Outsourcing is the preferred delivery option when the function is not considered the deliverable is well understood and easily governed by means of a service-level agreement. In the case of outsourcing, you’re far off the staff working for you, making it inconvenient to trace the quality of the work. So, you lose connectivity with the key members of your project and an opportunity to add flair or tweaks at required sections to increase the quality of the product(Sadhik, 2019). Partnerships are designed to be self-controlling by the membership, and, the functions provided by partnerships tend to be more open ended than those provided by other options (McKeen & Smith, 2015).
Knowledge Enhancement: Capturing or retaining knowledge is a major sourcing decision which weighs in deciding the sourcing options. Organizations consider developing products in-house which would give an advantage of transferring knowledge to IT personnel and business personnel. Some organizations prefer insourcing just the training part while the development can be outsourced. It is not just knowledge development that is the critical factor; knowledge retention is equally important. Whether implicitly or explicitly, knowledge enhancement appears to play a key role in most sourcing decisions (McKeen & Smith, 2015).
Business Exigency: Organizations often get unforeseen or unplanned business opportunities which should be implemented when provided. Since these opportunities are unforeseen, they are not governed or planned for budget and timelines. In this case instead, a decision is made to seize the opportunity, and normal decision criteria are not applicable in order to be responsive to the business. For this scenario, any outsourcing option can be selected depending on which option provides the results faster. The sourcing option could be any of the four but is less likely to be a partnership unless the urgent request can be accommodated within the structure of an existing arrangement. Seen in a resource-planning context, business exigency demands constitute the peaks or pikes (McKeen & Smith, 2015).
Apart from the above factors cost is also an important factor that needs to be considered by IT managers. Saving money on costs is typically the motivation for outsourcing work to another company. Industries such as telecommunications, travel, transport, media, and retail often rely on outsourcing to complete important projects or tasks. Insourcing generally places new operations and processes on-site within the organization. For that reason, insourcing can be more expensive for a company because it often involves the implementation of new processes to start a different division within the organization (Beers, 2019).
Discussion 2 :
Discuss the IT Budget practices that deliver value:
Budget plays a very important role in every organization. If the organizations need to achieve its goals on time and create its own objectives, it needs a good budget. Without it, the whole organization cannot run properly. The budget and success of any organization are proportionate. Even for IT field, the budgeting is a vital aspect. We have five practices in IT budgeting that delivers the value. They are as follows:
Appointing an IT finance specialist: Every organization has a finance expert who takes care of the budget issues. Finance experts can do the job of budgeting easily. The finance helps us and the members of the organization to easily understand the depreciation and can also give us more knowledge about the cost components [Kobelsky, Smith, Zmud (2014)]. The job of the finance specialist is to perform the value and cost analysis of the infrastructure and the services. These finance experts act as the bridge between the Business and IT fields. They monitor the new project cases in the business field. The improvement in the relationship of the IT people and the finance department, the organizations can also see the increase in the IT budgets.
Use of different methodologies and budgeting tools: We use these methodologies and the budgeting tools for doing things like rolling up and tracking the budgets, breaking the budgets into various levels of granularities and also in the reporting [McKeen & Smith (2015)]. These budgeting tools also helps us in setting up the strategic planning. This can help in delivering the value as we wanted. These tools can also help us in getting the transition among various organizations providing them with many accounting operations. The budgeting tools and methodologies helps the IT field in many ways. As we know, the relationship between the IT field and the Business field will be good. So, if the changes are made in IT field, they will be reflected in the Business field and vice versa [Iwaskow (2015)].
Separate operations from innovation: Many organizations are facing a major problem for separating the operations performed. They perform different operations at different times in the Business. The IT funds are allocated to all respective business operations. After that process, the Business unit allocate these operations to a different unit. So, the deliverables are decreased and the allocations that are made are also reduced. So, the organization comes up with the new process by differentiating the operation and also reducing the costs.
Adopting enterprise funding models: Every organization needs to adopt a funding model for the IT initiative purposes. It helps to encourage the deliverables in the accountability. The main task of the IT people is to suggest and develop a budget value that will be applied easily at the enterprise level. Developing a funding model helps us to achieve sustainability and also the financial stability. If the non-profit organizations can focus on the insights clearly using the funding models, they can easily raise their incomes and revenues very much by using all the strategical approaches. These funding models can identify the funders and cultivate various methods. So, the organizations adopt these funding model for increasing their profits efficiently.
Adopting rolling budget cycles: A rolling budget is also named as the continuous budget because it keeps on changing continuously. These changes are seen throughout the year. If the budget is defined for one month initially, then it changes for the next month and keep on adding. So, these budgets cycles are mostly adopted by the IT field because they need to maintain it the whole year. This also will help these IT sector people for saving the budget by not spending more unnecessarily.
Which of the practices do you consider to be the most important and why?
In my opinion, the best practice is to appoint a finance specialist. This is because the finance expert can decide what all operations needed and how much budget should be invested in an operation in the organization. They also make sure that every operation performed will give the efficient outcomes in the end.
Discuss the IT Budgeting practices that deliver value
Organizations of all types struggle with information technology (IT) budgeting. This often happens because the IT team doesn’t understand the budgeting process and the finance team doesn’t understand IT. If you look at IT spending as an investment in your organization’s future, you may see that effective IT budgeting has much in common with personal financial planning. To give appropriate savings and investment guidance, financial planners first must understand their short- and long-term goals of the company. The IT budget works the same way. Once IT initiatives have been evaluated and incorporated into the budget, organizations should take a step back from the details and look at the big picture. There are certain ways to do IT budget and planning practices with quite many factors that can affect IT spending levels. Some of the following are the IT budgeting practices which deliver value for the overall company.
1. Appoint an IT finance specialist: While doing IT budgeting the job of a financial planners is to consider each client’s short- and long-term constraints for example: What is the organization’s cash flow? How will IT spending impact the organization’s overall capital and operating budgets? What are the main cost drivers? Are any major projects occurring that might impact the IT infrastructure? Remember to consider both the financial and nonfinancial implications of IT-related initiatives. IT finance specialist help clients look at various investment options and savings strategies for bring IT based changes into the company, to determine what makes the most sense based on organization type, its risk tolerance and savings ability.
2. Use budgeting tools and methodologies: Once IT initiatives have been evaluated and incorporated into the budget, organizations should look into the big picture. What strategies and tools should be used which are well aligned with our company initiatives? Do the selected IT initiatives align with and support the organization’s strategic objectives? Should any initiatives that weren’t selected for the budget be reconsidered? Would any of the organization’s strategic initiatives make one of the selected IT initiatives obsolete? These are the basic elements which needs clarity before investing big budgets into IT projects.
3. Separate operations from innovation: Managers need to understand that the operations cost is not part of any new project / product development cost. It’s the company development cost which provides positive results over the period of time if done accurately and strategically. This is because when company finances are tight, IT operations budgets often are the first to be cut or deferred unless they are associated with key strategic initiatives that the organization views as essential to its continued operation. Even if the organization doesn’t deem certain transform initiatives immediately essential, care should be taken when considering cutting or deferring them.
4. Adopt enterprise funding models: It should be determined whether the IT budget makes financial sense or not keeping the business unit budgets separate. In making that determination, the following considerations are key: impact on financial key performance indicators (KPIs); impact on financial statements; and impact on cash flow. Because IT budgets often have large capital and operating-expenditure components, the final IT budget needs to be incorporated into the organization’s overall budget to determine whether the timing or financing options for IT initiatives could have any unintended consequences.
5. Adopt rolling budget cycles: IT plans and IT budgets need consideration and updating more than once per year as these changes are the big budgets with major implications if goes wrong. One way to manage cash flow is to use a reserve approach to IT budgeting, an organization can plan to set aside cash each year to ensure that it has the funds necessary to execute future IT initiatives. This process also helps reduce the risk that an unexpected technology failure and early replacement would have a negative impact on the organization’s cash flow. But then again, every organization is different and functions according to their circumstances. The IT budget’s financial impact should be access often, not only for the current or upcoming year, but also for future periods that IT initiatives might affect. Too often, organizations “balance the budget” for the current year, only to run into unintended consequences in a future period. Remember, a good IT budget balances both short-term and long-term financial implications.
One needs to consider that employing a strategic approach for IT budgeting, create a planning and decision-making tool that can help maximize the benefits of IT investments. A good IT budget not only gives the organization the ability to manage its IT costs in both the short and long term, but it also provides the agility needed to adjust IT spending in response to changes in the business environment. In the final analysis, a good IT budget provides a competitive advantage because it helps organizations better execute in achieving their missions.
Which of the practices do you consider to be the most important and why?
I believe the first point which is to appoint a IT finance specialist is a one major thing to be consider and makes a huge impact on the overall IT budgeting plus the company’s health. To bring in operational changes and investing big in these projects need special consideration of key drivers, the actual need and requirement of those new strategical plans to bring in. IT finance specialist can manage this transition and can develop business cases for new IT projects with proper budgeting. They know the how to cater the company’s long term and short-term goals keeping finance in mind. How to handle the cash flow and make good use of it in the IT sector of the company. Good IT budget planners look into various investment options and savings strategies to determine what makes the most sense. They use multiple versions of the IT budget to analyze technology options and their associated financing strategies. They look at each IT initiative as an investment option, the timing and execution of which affects the overall IT budget. They consider different timing or initiative phasing to identify how different execution scenarios might impact the organization’s IT budget and cash flow. Therefore, I opt for having a proper IT finance specialist planning the proper budgeting for new IT ventures in the company.