Karl Cushing looks at last year's best and the worst outsourcing
deals
Outsourcing's chequered history has created the perception that
outsourcing services are unreliable with users fearing that a
long-term contract will lock them into using a single supplier.
Yet, according to a recent study by market research organisation
Vanson Bourne, one in two companies outsource some or all of IT
function in the UK, suggesting that outsourcing is becoming the
standard way for businesses to run IT.
Companies that outsource their entire IT departments still
constitute a small minority and it appears that businesses are
becoming more selective over the parts of their IT function they
outsource. However, as the current economic downturn continues, it
seems likely that the huge multibillion-pound outsourcing deals of
recent years will become increasingly common as firms outsource IT
operations in a bid to cap IT expenditure and focus on core
business interests.
To get a feeling of what's to come, here is a look back at some of
the biggest outsourcing deals in 2001.
January
The newly created government body the National
Care Standards Commission signed an £18m deal with ICL to design,
build and operate the IT infrastructure, offering telephony,
videoconferencing and IT facilities to more than 2,000 end-users.
February
Pharmaceuticals giant AstraZeneca outsourced
the lion's share of its IT to IBM Global Services for £1.2bn. Under
the deal, said to be the largest IT contract in the pharmaceuticals
industry, IBM undertook to oversee the provision of helpdesk
services, PC desktop support, e-mail, intranet, telecoms
networking, wide and local area networks and most servers for
AstraZeneca in 45 countries. The pharmaceuticals firm retained
control of IT activities directly associated with production and
the knowledge-sharing activities of its research community.
The recently merged insurance giant CGNU terminated its seven-year
£124m outsourcing contract with IBM after only two years as part of
a drive to consolidate its IT systems. The early termination of the
deal was seen by some analysts as illustrating the dangers of
entering into long-term outsourcing agreements that are too
inflexible to accommodate company mergers and restructuring.
March
Insurance firm AXA Sun Life signed a £70m
outsourcing contract, transferring more than 400 of its application
management services staff to the FI Group. AXA said it hoped the
five-year deal would reduce its IT spending by half, saving £20m a
year. FI Group took over responsibility for the support and
development of AXA's legacy life and pensions administration system
and undertook to implement new systems that would increase speed to
market and improve flexibility.
April
Supermarket chain Sainsbury's outsourced its
payroll operation in an eight-year, £20m contract with RebusHR,
constituting the biggest payroll-outsourcing contract awarded by a
UK commercial organisation to date. About 50 Sainsbury's staff
transferred to the third party in the deal.
Consignia signed a £40m contract with Computacenter for all its IT
hardware and shrink-wrapped software following an overhaul of its
supplier arrangements. The agreement, which covered all desktops,
servers, laptops and packaged software was initially for one year
but had a renewal option.
Also in the public sector, Hackney council's 10-year outsourcing
deal, signed in 1997, with ITNet, which covered its benefits and
revenue services, ended in acrimony. The council sought £30m in
compensation from the supplier because it said ITNet's service
failings had led to 100,000 images of paperwork on the benefits
system not being processed.
Analysts warned companies of the need to negotiate tough service
level agreements for outsourced services after a file error by an
IT service supplier resulted in more than 100,000 Abbey National
customers being debited twice for mortgage payments. Royal Bank of
Scotland, which was handling Abbey National's mortgage direct
debits, had sent out duplicate direct debit files to bank clearing
house Bacs.
Royal Dutch Shell Group, which in 1998 had spun out its IT
operations as a separate for-profit company, offering services for
clients both within and outside the Shell group, announced it was
bringing its IT function back in-house. Shell said the decision
followed concerns that the spin-off was not working well enough
commercially. It added that the new IT group, IT for Shell, would
not look for new external business.
May
The big news in the outsourcing world was that
Fiat and NTL were outsourcing IT operations with a combined value
of $9bn (£6bn) to IBM. The Fiat deal alone was worth $7bn,
constituting the largest-ever European outsourcing deal.
IT services giant EDS, which had failed to win the Fiat deal,
consoled itself by signing a 10-year outsourcing deal with Abbey
National. EDS undertook to handle the billing, taking of bill
payments and routine call centre enquiries for the company, plus an
extra $400m over the period for providing business process
management services. Abbey said about 1,700 staff would move to the
joint venture and both companies would enjoy a 50-50 economic
interest in the deal, which it hoped would save it £90m in IT
spending over the period.
EDS also teamed up with the Employment Service to roll out
job-search kiosks in supermarkets. The Employment Service said it
had adopted an innovative outsourcing technique that bound the
business into IT projects and a system of IT buddying, where their
IT staff were paired with EDS technical employees and a business
manager.
In a busy month for outsourcing deals, health and beauty retailer
Superdrug outsourced the IT support for its 700 UK stores to IT
services company Computeraid Services. As part of the three-year
multimillion-pound deal, Computeraid undertook to provide
maintenance support services and end-user support to Superdrug's
nationwide network of stores, including the provision of a
permanent on-site engineer based at the company's headquarters in
Croydon, south London.
The European arm of US consumer products and food group Sara Lee
signed a deal to outsource about $800m worth of e-procurement
purchasing through pan-European exchange ICG Commerce.
In the financial sector, the limitations of the outsourcing model
were becoming clearer. It emerged that Royal & Sun Alliance's
hopes of cutting its IT bill by 90% through large-scale outsourcing
to India had come unstuck. In-depth trials, carried out at the
behest of the insurer's directors, showed that such savings were
impossible, leaving the Royal & Sun Alliance board with egg on
its face.
July
The Health & Safety Executive signed a £120m outsourcing
contract with CMG Admiral and Computacenter covering management
consultancy and IT infrastructure management, along with products
such as Bluetooth wireless applications and mobile Internet
services. The 10-year project was snappily called Retendering for
IT - also known as Refit.
Also in the public sector, a damning government report from the
Benefit Fraud Inspectorate exposed the problems of outsourcing
local authority IT and business process services. Lambeth, which
had outsourced its benefits and revenue service to Capita Business
Services in 1997, had taken back control earlier in the month.
August
Financial services company Friends Provident
outsourced its IT function to focus on projects related to its
demutualisation and reduce costs in a £1m business analysis
contract with CMG Admiral and a further agreement with India-based
Wipro Technologies for development work.
September
The London Borough of Lewisham struck a
five-year £70m outsourcing deal with ICL and KPMG to put the
council's services online by 2004. The two companies undertook to
update the council's IT infrastructure and identify business
processes that could be rationalised. The council said much of the
optimisation and all of the delivery phase could be outsourced to
other suppliers if it was not satisfied with the contractors' work,
with the two suppliers working on a risk-and-reward basis.
December
Global travel and real estate giant Cendant
Corporation signed a $1.4bn IT services deal with IBM, in one of
the travel industry's largest-ever outsourcing contracts.
Under the terms of the 10-year deal, IBM Global Services undertook
to manage the IT operations of Cendant's 40 business units,
including Avis Rental Cars and National Car Parks. However, some
industry observers, like outsourcing consultant Robert Morgan,
questioned the "one size fits all" nature of the deal.
Winners and losers
The biggest- Pharmaceuticals giant AstraZeneca outsourced the bulk of its IT
to IBM Global Services for £1.2bn in February
- Fiat and NTL announced in May that they were outsourcing IT
operations with a combined value of $9bn to IBM
- Global travel and real estate giant Cendant Corporation signed
a $1.4bn IT services deal with IBM in December.
and the cock-ups
- Merged insurance giant CGNU terminated its seven-year £124m
outsourcing contract with IBM after only two years in February
- More than 100,000 Abbey National customers were debited twice
in April for mortgage payments following an error by its IT service
supplier Royal Bank of Scotland. Also in April Hackney council
announced it was seeking £30m in compensation from ITNet following
the acrimonious collapse of its 10-year outsourcing deal with the
supplier, signed in 1997
- Royal & Sun Alliance's hopes of cutting its IT bill by 90%
through large-scale outsourcing to India came unstuck in May after
trials showed the proposed savings were unattainable
- The Benefit Fraud Inspectorate released a damning report in
July of outsourcing IT and business process services in local
authorities following the collapse of Lambeth council's outsourcing
contract with Capita Business Services for its benefits and revenue
service.