News Analysis

Is IT offshoring inevitable to meet government cuts?

Kathleen Hall

Large-scale offshoring of IT and business processes is seen by many as the way government departments can cut costs, but the ineffective procurement of the past could mean there is an alternative way to reduce budgets.

In the government spending review last month, chancellor George Osborne outlined spending cuts of £81bn over four years.

Although the government will use IT to help cut costs across the public sector, Whitehall departments and their suppliers will be forced to offshore to reduce the amount of money spent on technology, some experts believe.

Sarah Burnett, analyst at Ovum, says demand for offshoring will increase as a result of the government's negotiations with IT suppliers to deliver the same for less. Business process outsourcing (BPO) is the area most likely to move overseas. "Offshoring is one way for suppliers to deliver the requisite cuts in prices," she says.

Indian outsourcing companies are already positioning themselves to take a slice of the UK public sector market. Suppliers such as Mahindra Satyam, Wipro, TCS and HCL Technologies have declared their intent. "We can deliver twice the service quality and at half the price [of current providers]," says Vineet Nayar, CEO at HCL.

Doubts over offshoring

Public sector IT chiefs recognise the need to outsource but are less certain about offshoring work.

David Wilde, CIO at the City of Westminster, says outsourcing is likely to increase to maximise the benefits of large virtualised environments as well as helping to establish more shared services.

But he says government bodies should not treat outsourcing as a blanket approach to reducing costs. "It really depends on the specific service, and offshoring should not be looked at as an end in itself, just one of a number of business options," he says.

"I think there is a fundamental question about the extent to which offshoring actually does cut costs."

Many public sector outsourcing contracts have come under fire for proving too costly, with the government having lost billions in project overspends, delays and cancellations in the past. But the complexity of those projects could end up being a reason not to offshore, and to cut costs instead by improving what has come before.

Jos Creese, president of public sector IT user group Socitm, says offshoring is not always the best option. "Offshoring can work well for a clearly defined service or product, but the greater the complexity, the less likely remote delivery will result in a satisfactory outcome," he says.

Robert Morgan, director of consultancy Burnt Oak Partners, says, "Outsourcing is absolutely not the only way to meet spending targets. The waste is within the old system."

David Cameron's visit to India, where he declared that the UK was "open for business" suggested that the government has already positioned itself to outsource more of its contracts, says Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner.

But the issue of UK jobs vanishing overseas remains politically sensitive, he says. "The government will be looking at offshoring providers that have an onshore presence. Tata Consultancy Services, for example, has well over 5,000 staff in the UK and HCL also has several thousand. To talk about offshoring as an option is not just about seeing jobs disappear from the UK. And, of course, that is something the government can mandate on," he says.

Big businesses have been offshoring IT in increasing volumes for at least a decade. Although the government is the biggest business of them all, it is a different beast. Sending work offshore makes business sense, but it might not make political sense.

Examples of IT waste in government

Inland Revenue

  • Contract value: £1,033m
  • Supplier: EDS
  • Costs soared from £1,033m to £2,426m, a 135% increase between 1994-2000. The increased costs were due to new work and projects (£533m), capital expenditure (£409m) and post contract adjustment (£203m).

Swansea City Council

  • Contract value: £83m
  • Supplier: Capgemini
  • IT was outsourced in 2005 and the council decided the second phase call centre was not affordable only two years into the 10-year contract. The full contract cost £40m more than its normal IT budget over 10-year period.

Source: European Services Strategy Unit


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