Cost cuts are still top of the agenda but other factors
such as access to skills and security are increasingly influencing
the decision to outsource. John Kavanagh
reports
The main reason why organisations move their IT to a services
company is the same now as when business computing started 50 years
ago: to cut costs. If only it were that simple. Nowadays companies
have a wider view of what they mean by saving money.
“Outsourcing used to be characterised by deals in which a client
would simply hand over IT and staff to a supplier,” says Fons
Kuijpers, head of the IT management practice at PA Consulting.
“They simply expected outsourcing to reduce IT costs. Today they
seek the same cost reduction, but expect higher-value rewards such
as access to skills, technological innovation and reduced
risk.”
The wider aspects of cost cutting are underlined by Martyn Hart,
chairman of UK user and supplier body the National Outsourcing
Association (NOA).
“Most research shows that cost is the primary reason for
outsourcing – and people then look at those costs in terms of what
they actually want to do,” Hart says. “They probably want skills
they have not got, for example to move to SAP or Oracle, or they
want to get something developed faster, or to get something done
they know they cannot do themselves.
“They can develop something new without their competitors
knowing. If you do it yourself it takes longer and your staff might
leave to go to a competitor; if you outsource it gets done faster,
so there is less risk of others hearing about it, and
confidentiality can be built into the contract,” he says.
“If you are moving to SAP your staff might only have skills in
your old system. And you need to keep your old systems running
while you make the change.
“By outsourcing you can get the new system and at the same time
off¬load staff who can support your old systems but have the wrong
skills for your new set-up. They will probably benefit too, by
joining a company that has IT as its core business rather than as
just one of several departments.”
Angela Cha, a partner at international law firm Pinsent Masons
and author of its Basic User’s Guide to Outsourcing, lists a
variety of specific savings finance directors will be attracted
to.
“The customer has fewer competencies to maintain. Cost control
increases through greater predictability of costs and the
conversion of fixed costs into variable ones. Ideally you deal with
one party, either the sole service supplier or the key supplier if
there is more than one, and that one supplier should have
end-to-end responsibility for ensuring that all services are
delivered in the agreed way,” says Cha.
Still more practical financial considerations are highlighted by
Gary Woodward, chief executive of services company Pasporte. He
says, “Shareholder profits and streamlined strategy are now
dominating many boardroom decisions, and this is where outsourcing
comes into its own.
“Assets are reduced, and there might be flat fees for ease of
budgeting, on-demand technologies that scale with the business, and
immediate tax relief on service charges rather than capital relief
being spread over several years.”
But if the financial case is still simple and apparently
compelling, the choices and decisions have become more complicated.
This has contributed to an increase in user dissatisfaction and in
the number of contract failures, and to arguments in favour of
shorter and possibly specialist contracts rather than all-embracing
deals.
Several surveys show that about 50% of users are dissatisfied
because their expectations are not being met. New research by
Unilog, part of services group LogicaCMG, says 27% of companies
have problems with their contracts, and although most problems are
resolved, in 13% of cases the contracts are cancelled or are not
renewed.
According to Unilog, 30% of the problems relate to
infrastructure management, and application management accounts for
43% of problems, mainly because there are no agreed standards for
measuring it.
But according to Cha, “Renegotiation is not necessarily the sign
of an unsuccessful relationship. We have known second and
third-generation outsourcing contracts between the same parties
that differ significantly in their basic terms.”
All this points to the often complex issues around the initial
decision, even if cutting costs is the main reason.
“Failure to recognise the risks associated with getting the
business case wrong can push outsourcing programmes in an
inappropriate direction from the start, making delivery of the
target benefits almost impossible,” says Kuijpers.
“Almost 75% of suppliers in our 2006 research said that where
clients got their strategy or business case wrong it was because
they failed to understand the implications of what they were
doing.”
This is perhaps reflected in PA Consulting’s finding that only
21% of suppliers thought that users communicated their aims clearly
to services companies.
Cha backs Kuijpers’ view. “It is self-evident that customers
with a clear idea of their strategic and tactical objectives in
approaching outsourcing have a better chance of ensuring that it
meets those objectives. A key factor is to have a clear idea of the
starting position.”
Indeed, many organisations avoid the issue, says Irene Dawson,
European vice-president at services group Compuware. “Many
companies expect outsourcing to be some kind of miracle cure, and
this leads to dissatisfaction,” she says.
“Most companies turn to outsourcing to save money and improve
quality without really looking deeper into why the IT department is
struggling. So they simply shift the blame rather than solving the
problem. There just is not the industrial rigour and proper process
in place for much of the work that people outsource, and quality
suffers accordingly.”
Dawson adds, “A key problem is that often IT people, rather than
business people, make the decisions about outsourcing. This results
in dissatisfaction with the business value. Involving business
people gives organisations a much better chance of contracts being
set up in a way that meets business needs.”
There are even more subtle issues. “Research by the NOA shows
that politics is the third biggest reason for outsourcing. This
might be because the finance director is fed up with the IT
department’s record and excuses, and wants to get rid of it,” Hart
says.
Ollie Ross, research manager at user group the Corporate IT
Forum, says, “The decision to insource or outsource seems to be
cyclical, and at any point in time you find organisations doing
both.”
“The change of strategy from in to out and back is usually
triggered by a specific event, such as a major business change,
ranging from a takeover to a new IT director, a new business
channel demanding new IT skills, technology life cycles, or service
performance issues.
“There is clearly no best option, only a best option for your
particular organisation at a particular time, under particular
circumstances.”
For example, telecommunications specialist Avaya has contracted
Convergys to handle human resources IT for 15,000 staff in 52
countries and expects to save £6m over five years. By contrast,
Orient-Express Hotels recently contracted Pasporte, working with
IBM and Equant, to manage its entire IT and network in a deal which
it expects to bring 20% annual savings, better service, better
security and the ability to upgrade to new services and
applications on demand.
Whatever the changing decision criteria and project nature,
users still appear to be conservative in the way they use service
suppliers: less than 30% of organisations have looked to their
suppliers for business transformation, according to PA Consulting’s
survey – and less than 50% of those feel they were successful
projects.
“Some clients may be right to drive their transformation
programmes in-house,” Kuijpers says. “But at present it appears
that too many clients are freezing their supplier out because they
mistrust their ability to deliver.
“The size, experience and expertise of many IT outsourcing
suppliers means they may be able to contribute. But only 35% of
clients believe they would use IT outsourcing more to achieve
transformational change in the future.”
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