FT.com / Technology - Outsourcing is more than just saving money

FT.com / Technology - Outsourcing is more than just saving money

Outsourcing is more than just saving money
By Kim Thomas

Published: May 9 2007 11:36 | Last updated: May 9 2007 11:36

Large organisations have grown used to outsourcing their IT function to a single supplier. This supplier not only manages every aspect – software development, infrastructure, networks, help desk – but also innovates at the same time. And all for a lower price than could be achieved in-house.

However, a new report argues that this model is on the way out. According to sourcing advisory firm Morgan Chambers, businesses in the UK – although the same issues apply everywhere – are facing “outsourcing turmoil”, with nearly £7bn worth of deals up for renewal by March 2008.

The report, Outsourcing Service Provider Performance 2006, was based on a survey of 500 top executives across Europe, and it found little loyalty to existing providers.

The large outsourcing providers who have dominated the market for the past 10 years will see their high-value contracts broken up and distributed among a number of providers.

Why is this happening?

“There is a sea-change in the marketplace,” says Phil Morris, chief executive of Morgan Chambers. “Clients are thinking: ‘We know there is a much broader choice, and the services we have today are more portable than when we did our original outsourcing’.”

With hindsight, there are obvious flaws with the traditional model. It takes a long time, perhaps nine months to a year, says Claudio Da Rold, vice-president of sourcing at analyst Gartner, to negotiate and transfer a function to another supplier.

Once responsibility is in the hands of a outsider, it is much harder for the IT function to respond to the changing needs of the business. While the client organisation wants to look forward, an outsourcing deal is usually about fixing problems from the past, says Mr Da Rold.

Many deals founder because of the focus on cost, says Jimmy Harris, managing director of infrastructure outsourcing at Accenture: “Many of the ‘disasters’ we have seen are a function of the client getting exactly what they asked for.”

Companies increasingly recognise that they need more from an outsourcer than an ability to save money. IT has to be able to respond to the changing requirements of the business, and that requires a set of skilled individuals who can innovate, not just a pool of software coders and support teams.

As Sanjiv Gossain, managing director of outsourcer Cognizant puts it: “We’re moving from arbitrage of labour to arbitrage of intellect: where can I get the smartest brains for my money?”

As a result, the outsourcing market is changing rapidly. Indian offshore companies, such as TCS, Wipro and Infosys, are now challenging the established giants such as EDS, Accenture and IBM. Once concerned exclusively with providing cheap low-level services such as software maintenance, they are now offering high-end functions, often in the client’s home country.

These companies, says Mr Morris, “are competing on innovation, value-add, closeness of relationship and absolute focus on customer needs”.

At the same time, the large providers are taking advantage of cheap labour in places such as India, China and eastern Europe to provide offshore services. Clients now expect global delivery to be part of the outsourcing deal, says Mr Harris.

Accenture supplies infrastructure management services from delivery centres in India, China, eastern Europe, the Philippines and South America, for example.

Because software is increasingly standardised, it is easier for clients to switch between suppliers. Smaller companies offering specialised services have emerged to take on part of the IT function, giving clients the opportunity to take a best-of-breed approach.

Businesses can also opt for software-as-a-service, as offered by salesforce.com, in which a third party hosts a software application and delivers it over the internet.

British Airways has taken advantage of the increasingly competitive nature of the outsourcing market to implement deals that match its business requirements.

“Five years ago, we saw a need to be more flexible with resourcing,” explains Mike Croucher, head of IT delivery at BA. “We didn’t want to expand our headcount. We wanted to be able to flex resources, both skills and technology, depending on business demands.”

BA approached two providers it already had dealings with: the large Indian outsourcer Tata Consultancy Services (TCS) and a smaller Indian provider, Navayuga Infotech (NIT).

Rather than set up a single five-year contract, it asked the companies to tender for each piece of work. “One minute I might need a lot of resource in an Oracle environment, and the next I might need a lot of resource in a Java environment,” says Mr Croucher.

As a result, the company now has framework agreements with its two main suppliers: “It’s a very simple framework that allows my project managers to contract with them quickly around the piece of work they want to do. The basic framework gives all the terms and conditions and the payment schedules. None of that has to be reinvented each time – it’s simply the work we require and the price for that work.”

The model has worked well, says Mr Croucher, and has enabled BA to increase the number of projects it carries out without taking on more staff. Its own staff, meanwhile, have had the opportunity to move out of software development and support work and into different roles, such as business analysis.

A pick-and-mix approach may offer greater flexibility than the old one-stop shop model, but its complexity provides new challenges. Businesses need to tackle the problem strategically, says Mr Da Rold: “Multisourcing is not about selecting a number of providers. It’s about managing internal and external providers.”

Before entering into outsourcing relationships, a company needs to understand exactly what it wants from them and how it is going to manage them – and how the providers are going to work with each other.

“You need an architecture and a strategy in which everyone knows exactly what they are expected to do, and the requirements and boundaries between different providers are defined.

“On top of that, you need to have a strategy when you select the service providers so that they sign up not only to deliver their own piece of work, but to co-operate with other providers and internal IT to manage their end-to-end service,” says Mr Da Rold.

A common approach is to have a strategic relationship with one key supplier, says Ollie Ross, head of research at the Corporate IT Forum: “At that level, there is a great understanding on both sides of what that partnership is about and what it’s going to deliver to both parties, and what risks and effort it will take to deliver that.”

That key supplier can then manage the relationships with the other, smaller suppliers. ING Bank, which has recently outsourced its infrastructure management to four providers, is using this approach.

IT outsourcing has come a long way in the past 15 years, but it is still evolving. If the unwieldy model of outsourcing the IT function to one provider is nearing extinction, then its replacement still needs some fine-tuning.

“Multisourcing is a reality: the practices to nail it down and get the best out of it are still a work in progress,” says Mr Da Rold.

●FT Global Outsourcing and Offshoring Conference in London, May 14-15: www.ft.com/conferences

Copyright The Financial Times Limited 2007