Bank of Scotland is taking no chances with its £700m mega deal with
IBM.
The £700m 10-year "mega" outsourcing deal between Bank of
Scotland and IBM has broken the mould in the normally conservative
banking industry.
Bank of Scotland hailed the agreement as one of the largest
outsourcing contracts in Europe and a landmark deal for the UK
retail banking sector. It has also boasted that the agreement will
save it £150m in IT costs over the 10-year contract.
But as euphoria over the deal fades, IT managers are left
wondering what lessons can be learned from the radical deal. In the
past, 10-year outsourcing contracts have not always run according
to plan and industry observers have already highlighted potential
pitfalls in the IBM and Bank of Scotland tie-up.
The mechanics of the outsourcing deal are relatively
straightforward. From September, IBM will be responsible for
managing and operating Bank of Scotland Group's IT
infrastructure.
IBM is effectively buying the bank's relevant IT assets and
providing managed services in return.
The service will include mainframe AS/400s, desktop PCs, PC
servers and running helpdesk support. Tandem, IBM, Compaq and
Toshiba are among suppliers currently used by the bank.
Over 500 Bank of Scotland IT staff will transfer to two IT
centres in Edinburgh and Chester. A small proportion of staff will
also work on support desks throughout the UK. IBM will rent the
bank's existing data processing centre in Edinburgh where it will
establish a third IBM outsourcing centre. It will use the centre to
provide services for its other customers.
One thing is certain: the progress of the deal - two years in
the pipeline - will be followed closely by IT managers and
suppliers. After all, problematic long-term outsourcing contracts
are hardly thin on the ground, both in the public and private
sector.
Take East Midlands Electricity for example, which last year
pulled out of a 12-year outsourcing deal five years early. It ended
the deal - believed to be worth about £150m - when it brought its
business systems back in-house. The U-turn followed a review of IT
costs and other parts of the business by Powergen which acquired
the utility in 1998.
And last month the debate over outsourcing in the financial
services sector intensified after a City regulator warned financial
companies against abandoning control of their outsourced IT.
Michael Foot, Financial Services Authority's (FSA) head of
financial supervision, reiterated the authority's outsourcing
guidance. It states that clients should retain responsibility for
the delivery of IT-based services. Outsourcing contracts should
also ensure that the regulator has the power to inspect the
outsourcer.
But Chris Brobbel, managing director of IT for Bank of Scotland,
was keen to stress that the bank is still master of its IT
strategy. "There is a big difference between outsourcing lock,
stock and barrel and where the control of IT remains within the
organisation," he said. "We dictate the whole strategy of the bank
for IT. We're working with strategic partners so we obviously pool
our ideas. But the final decision has to remain with the bank."
The FSA has been "fully supportive" of the outsourcing deal,
added Brobbel.
The contract allows the bank to benchmark the quality of IBM's
service. And IBM must provide updates to the Bank of Scotland's IT
infrastrucure in a "technology refresher" clause.
Although outsourcing experts have given the deal a qualified
welcome they questioned the value of benchmarking in a
contract.
Only one in 10 clients benchmark their outsourced services,
according to Robert Morgan, chief executive of consultancy Morgan
Chambers. And benchmarking services do not come cheap. Analyst
Gartner could charge between £170,000 to £220,000 for benchmarking
the IBM and Bank of Scotland deal, said Morgan.
But on the plus side for the bank, its outsourcing deal is one
of the easiest to handle, said Morgan.
He added that most organisations which outsource IT functions
generally only provide a handful of project managers to monitor the
ongoing project. But the Bank of Scotland is taking no chances and
has allocated 70 contract managers to check the outsourcing
deal.
The bank's prudence reflects the importance of the deal which
looks set to become an outsourcing test case. Although it has a
strong record in outsourcing IT. Bank of Scotland is placing
considerable faith in the ability of IBM to deliver the service
effectively with the promised cost savings.
And with previous outsourcing glitches IT managers are likely to
reserve judgement for at least a year.
Bank of Scotland outsourcing history
- June 1999: Joint venture with application and support firm FI
Group, to develop commercial banking software. The outsourced joint
venture is called First Banking Systems. Said to save £60m over
five years in efficiency gains
- September 1999: Bank of Scotland hands over communications
network to British Telecom Syncordia Solutions. Includes voice,
data and mobile traffic. Worth £100m over five years
- June 2000: Entire IT infrastructure outsourced to "strategic
partner" IBM. Estimated savings of £150m over the 10-year
contract.