Financial services companies are failing to keep enough expertise
in-house to manage their IT outsourcers, the Financial Services
Authority warns. Guy Campos reports
When City regulator Michael Foot warned financial services
companies against abandoning control of outsourced IT last week, he
did not want to name the organisations that were causing him
worry.
But in an interview with Computer Weekly this week, one
organisation he did name was the London Stock Exchange. This was
the only one of several cases concerning him where problems had
become public knowledge.
The stock exchange's systems went into meltdown on 5 April after
a delay in overnight data processing hit daytime trading systems.
IT at the stock exchange is outsourced to Andersen Consulting.
Foot is managing director and head of financial supervision at
the Financial Services Authority (FSA), which has the power to
close companies down. He said he was worried that companies were
not keeping enough expertise in-house to manage the outsourcer.
Foot reiterated two points from FSA guidance on outsourcing:
- the client remains responsible for the delivery of IT-based
services
- the authority expects clients to ensure in their contracts that
the regulator can inspect the outsourcer.
"Foot is absolutely correct to worry," said Robert Morgan, chief
executive of outsourcing consultancy Morgan Chambers.
In his view, outsourcing is plagued by companies that do not
have a sourcing strategy. These businesses fail to prepare and
define service standards and protocols. They put little or no
thought into maintaining control of the supplier. They do not
allocate dedicated management or funds to keeping control and
merely trust in the service provider's ability to do their job.
"A major disaster is inevitable," Morgan said.
He sees the financial industry as having a worse outsourcing
record than others because of its conservatism.
"Many of the major banks are still very hierarchical and have
their feet in the past. Generally they believe their internal
processes are robust enough to handle the complexities of
outsourcing IT - but frankly they are not."
Morgan regards banking procurement staff as very good at buying
in hardware and software and quite good at turnkey application
development, but not so good at buying in intangible services.
It is not just in-house incompetence that is a danger.
"Vendors are desperate to move into the financial market because
of its size and the profits to be made in replacing old systems to
face up to e-business. Suppliers will take a much higher risk than
normal to gain financial market share," Morgan said.
To make matters worse, in-house staff with knowledge of the
outsourcing contract and process often leave because they feel they
have no prospects in the client company. Either that or they are
headhunted to work for clients who feel it is important to have
in-house expertise.
Sound advice
Morgan advises companies to make a board director ultimately
responsible for the outsourced service. He also recommends that the
salaries of the remaining in-house IT staff be freed from pay scale
restrictions, that they be given plenty of training and a vision of
their future in the company to make them stay.
Maintaining in-house expertise means more than keeping the IT
director on. In fact, the IT director will probably not have the
contract management needed and will be tempted to carry on managing
staff rather than concentrating on strategy and service levels.
Companies need to appoint someone who has this additional contract
management experience or offer training in commercial skills.
One person who has taken on the role of managing outsourced
services provided by Cap Gemini is John Hetherington, head of
strategic contracts at the Thomas Cook Group and formerly a
consultant with Morgan Chambers and outsourcing executive at the
Sema Group.
Hetherington backs the regulator's comments to the hilt. In his
view, failures of control have been most prevalent in contracts
where cost was the main driver for outsourcing. Where outsourcing
took place as a result of a company's decision to focus on its core
competencies, it was more likely to retain the in-house expertise
needed for a partnership with the outsourcer.
Roger Bickerstaffe, partner in the IT group at law firm Bird
& Bird, says outsourcing the entire IT function is becoming
rarer at the solicitors' investment banking clients. Instead, firms
are contracting out particular functions which are easier to
control.
He has seen customer relief at getting IT off their hands, but
says "an intelligent customer function" is essential.
This could mean just keeping two or three people out of a
department of 100 when outsourcing, Hetherington said. Selective
outsourcing could increase management costs, but allowed the client
to pick best-of-breed outsourcers for particular functions.
Meanwhile, Foot is taking his message on the need to maintain
control over outsourcing to discussions with his counterparts in
other European Union member states. He hopes that they too will
ensure that financial services companies regulated in their
jurisdictions will be required to maintain some strategic in-house
expertise and inspection rights.
With cross-border trading in financial services increasing, the
need for sophistication in the internal control of outsourcing is
unlikely to diminish.
FSA guidance on outsourcing is available.