Outsourcing - The source of IT success

Figures from analyst Gartner illustrate that, while the rest of the IT services market contracted last year, outsourcing grew by 6.3% in western Europe. But it warned that companies have wasted EUR6bn (#4.18bn) through short-sighted and badly managed deals.

Last year, the UK IT market fell by 5%, and Richard Holway, director at Ovum Holway, predicts it will suffer a 3% decline this year.

If outsourcing is taken out, the figures are far worse. The sector dropped by 10% in 2001-02, and Holway believes it will continue to show negative figures up to 2005.

He claims that next year, at best, will stop getting worse, because replacement cycles will come into play. ‘The industry is going through the worst downturn ever experienced in this sector,’ he warns. ‘But outsourcing is the one side of this market that continues to grow.’

Holway expects IT to bump along at about 4% of the gross domestic product as the industry has now reached maturity. He suggests that outsourcing will continue to increase its market share, but that companies are shifting their reasons for entering into contracts.

There have been some big deals signed in recent weeks. April saw HP land its third major outsourcing deal in quick succession, agreeing a contract worth $3bn (£1.9bn) over the next 10 years with consumer goods giant Procter & Gamble.

Set to be finalised in mid-May, HP will manage P&G’s IT infrastructure, from data centre operations through to network management and end-user desktop support. HP services will be rolled out over the firm’s worldwide operations, with 1,850 P&G global business services unit employees from 50 countries transferring to HP’s services division.

Simultaneously, HP says it has agreed outsourcing deals with mobile phone giant Ericsson and the Bank of Ireland. HP will provide IT services for Ericsson’s global operations, but no further details were disclosed. The Bank of Ireland has outsourced its infrastructure services to HP on a seven-year contract worth about $600m.

Meanwhile in March, the Manchester office of Xansa won a contract to handle part of O2’s accounting and finance business processes after the mobile service provider agreed a £21m five-year contract with the outsourcing giant.

The contract will cover accounts receivable, fixed assets, ledger services, accounts payable, purchase and procurement, supply chain and inventory management, project accounting, cash management, business expenses, payroll and business reporting.

Xansa said the service should allow O2 to trim around 25% off its cost base, with its shared service centres in Manchester, Birmingham and Bedford handling operations. Around 7,000 O2 employees will access the service.

In the past, it was about new projects, controlling costs and concentrating on core competencies. Now cutting costs is a prime motivation for outsourcing.

Holway interviewed the top 15 chief information officers (CIO) and budget holders in Europe, many of whom confirmed that budget cuts will continue year-on-year, even when the market improves.

‘They saw outsourcing as a route to achieving that kind of cost control and to cut costs. Now more and more outsourcing is seen as a way of cutting costs,’ he says.

This flies in the face of the usual reasoning. Sainsbury’s CIO Maggie Miller said recently: ‘To see out-sourcing as a way of cutting costs (ignores) business logic. There are some superb reasons to outsource, but cost isn’t one of them.’

Sainsbury’s is part way through a major outsourcing deal with Accenture, which was signed in September 2000. The contract hit a milestone in the past few weeks with the installation of a major IT network by BT.

Companies are increasingly reluctant to get locked into single-vendor deals, which are difficult to manage and troublesome to get out of if things turn sour.

This has led to what Holway calls multisourcing: the use of more than one vendor. More companies will either handle programme management internally or turn to an independent company.

Richard Granger, director general of IT for the NHS, is implementing this strategy. His department is spending £850m on IT this year, and Granger has employed Kellogg Brown & Root as independent experts to manage its programmes.

Pierre Danon, chief executive of BT Retail, which is involved in the contract with Sainsbury’s, believes that more companies will look to better manage their outsourcing contracts in future, and gain more control. ‘The more you have invested in programme management, the more you can switch (supplier),’ he says.

BT Retail admits that outsourcing is key to the telecoms company’s future success, and that it must be considered capable of running major outsourcing deals, not just the network infrastructure.

The latter would be ‘lethal’ for BT, according to Danon: ‘When that happens, we are a pure commodity. We are in the hands of IBM’s or EDS’ purchasing department.’

Gartner too believes that more emphasis is needed on the management of an outsourcing contract, especially as more companies now audit these deals. Roger Cox, vice-president of IT management strategy and planning research at Gartner, explains that money has been driving much of outsourcing. ‘People are desperate to show immediate cost reductions.

So companies are signing long-term deals based on short-term objectives,’ he says.

Cox argues that many IT departments lack the skills to properly handle outsourcing contracts, because technology professionals are not trained to manage such deals.

‘If you look at management capabilities in IT, it’s roughly where management was in the construction industry in the 1860s. The future will be about new attitudes, not applications,’ he insists.

Gartner’s advice on how to ensure successful outsourcing is to view the service provider in the same way you would a company you were taking over.

‘Outsourcing is not about buying something; it’s about a major service provider becoming part of your company,’ says Cox.

‘If you look at it that way, it’s more like an acquisition or merger. If you get that shift in attitude at board level, outsourcing works much better.’

GOVERNMENT OUTSOURCING DEPLORED

Little else riles MPs like government outsourcing, write our parliamentary staff.

Last month, accountant and former local government computer boss David Taylor launched a fierce attack on the Department of Environment, Food and Rural Affairs’ ‘woeful’ decision to outsource its IT system.

The MP for North West Leicestershire called a special debate at the end of Commons business to condemn ‘the sad rush of the department towards the expensive abandonment of control called “outsourcing”.’ The former Leicestershire county council IT manager is a member of the Commons committee that oversees DEFRA’s activities and concentrates on its IT strategy.

Taylor, a CIPFA member, said: ‘I think I am right in saying that we on the committee were all disappointed at the weak, perhaps even woeful, approach to IT.

‘My public sector experience has been that outsourcing can be the last desperate act of an IT-illiterate top management who are drowning in a whirlpool of technology they do not understand and who are seduced by private sector IT sharks into buying solutions claimed to be a panacea for all ills, including their organisational incompetence.

‘I regret the lack of an IT strategy, other than to sell off IT and throw DEFRA to the mercies of the private sector.’ The Labour MP said that after the foot and mouth epidemic, DEFRA opted for privatisation before developing its IT strategy which he claimed ‘flies in the face of all the potentially successful approaches that I have encountered over decades’.

He concluded his speech by saying: ‘The chosen route of privatisation is as astonishing as it is unnecessary. It could well prove to be a most costly folly, which will doubtless be criticised by future MPs and ministers, but defended by that impervious layer of top civil servants who forget nothing and learn nothing, and who are paid for by poor long-suffering taxpayers and citizens.’ Rural affairs minister Alun Michael said he had thoroughly questioned the IT strategy for outsourcing when he took office. Michael said he agreed with the department that its job was tackling the problems of the countryside not providing IT services as part of its ‘core business’.

The minister said that DEFRA had a ‘major programme to deliver’ and outsourcing IT was a key way of doing that and getting the best way of meeting the department’s needs.

He said the project would be tendered under EU proposals and the scheme would be led by a recently appointed ‘IT director from the private sector who has led previous outsourcing projects’.

MPs are bound to turn their attention next to the Inland Revenue’s Aspire deal. The Revenue is currently evaluating proposals from consortia led by EDS, BT and Cap Gemini Ernst & Young for the #4bn Aspire contract, which is expected to be signed in December.

EDS is bidding alongside Accenture to retain the contract it has held since 1994. MPs have been highly critical of many aspects of the arrangements, with critics also saying the cost of bidding for the contract would put potential bidders off.