Feature

Growth in overseas outsourcing will change face of IT in the UK

Industry experts predict that offshore outsourcing of back-office functions is next on the list for cost savings. Nick Huber reports

When insurer Prudential announced plans to close its UK call centre and move operations to an offshore site in India earlier this month, the hundreds of call centre staff who received notice of redundancy were not the only ones left feeling apprehensive.

IT union MSF Amicus claimed that it was unlikely that all of the call centre's IT staff would be kept on.

The union said it was considering a legal challenge to the deal with Indian supplier ICICI OneSource on the grounds that Prudential had not undertaken a proper consultation with its workers.

The prospect of legal action over the Prudential deal appears to have receded but industry experts believe that the benefits of offshore outsourcing to a low-cost, skilled IT workforce will prove irresistible for budget-conscious UK companies.

Cost savings of up to 40% are commonplace on offshore deals, suppliers claim.

Industry watchers also believe the size of offshore outsourcing deals will increase over the next five years, particularly in the fast-growing market for business process outsourcing such as claims processing.

"The key markets are India and South Africa," said John White, executive chairman of Winchester White, an insurance industry consultancy. "We are working with UK and South African companies and looking at whether South African firms can provide a service to the UK that is wider than IT. We are talking about business process outsourcing on a bigger scale than previously done."

Leading offshore outsourcing providers, such as India-based Tata Consultancy Services, are keen to stress that they can provide more than bargain-basement IT grunt-work. Tata has developed a credit risk management software package for Deutsche Bank and sophisticated software for other blue-chip clients including Citibank and Fidelity.

But what impact will offshore outsourcing have on IT professionals within organisations? The prognosis is not good. Industry experts predict that in the long term offshore outsourcing services will reduce demand for IT staff in the UK for certain types of work, by about 30%.

"System development will be top-sliced away," said White. "This is partly because companies like Tata are offering very credible and cost-effective system development."

And if swathes of back offices in companies are being run from overseas the outsourcing supplier will also undertake work to update these systems.

"In the long term these trends will have a significant effect, although it could take 20 to 30 years before the demand for UK IT staff reduces by about 30% to 40%," said White.

Not surprisingly many companies prefer to keep their offshore outsourcing arrangements private and more than 80% of IT managers who responded to a Computer Weekly/Harvey Nash Big Question poll (10 October) said they did not expect to move any of their IT operations to an offshore service centre in the next few years in a bid to reduce costs.

However, these findings are at odds with the current vogue for offshore outsourcing, and recent research into the likely future demand for offshore outsourcing.

Analyst firm Gartner has predicted that three-quarters of the top 1,000 companies in Europe will evaluate offshore outsourcing IT services over the next couple of years. One in five US Fortune 100 companies have outsourced some software requirements to India. In the UK, users of offshore outsourcing include Royal & Sun Alliance, J Sainsbury, Asda and British Airways.

Union leaders, however, have attacked the cost-cutting motives behind recent offshore outsourcing deals and warned that the skills base of the UK workforce could suffer as a result.

"We will oppose offshore outsourcing where it's simply to save money," said Peter Skyte, national secretary of Amicus. "Companies need to invest in skills and training in the UK, rather than invest overseas."

He added that union members had raised concerns over the quality and reliability of the coding work carried out by some offshore outsourcing suppliers.

Despite these concerns the growth in offshore outsourcing appears inevitable.

The low cost of skilled labour in countries such as India is the main incentive for companies to move parts of their IT operation overseas. These potentially hefty cost savings are particularly attractive in the current economic downturn and will remain so even when the economy bounces back.

And for suppliers to deliver the attention-grabbing savings that are being promised to users in domestic outsourcing deals, suppliers themselves will have to outsource more contract work to cheaper markets.

Outsourcing experts predict that offshore outsourcing is set to be commonplace for a wide variety of IT and business processes over the next five years. The long-term effect is likely to be a reduction in the number of IT jobs in the UK and the type of work handled by IT staff within company departments will change.

Predictions for offshore outsourcing
  • Suppliers claim that users can save up to 40%

  • In the next 20 to 30 years demand for UK IT staff will decline by up to 40% for certain types of work

  • Over the next couple of years 75% of the top 1,000 companies in Europe will evaluate offshore outsourcing IT services

  • One in five US Fortune 100 companies have outsourced some software requirements to India.

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This was first published in October 2002

 

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