Organisations that want control of their software are keeping it in-house
To read the headlines, one would think most large businesses have been moving to outsource their entire IT departments. However, the reality seems to be somewhat different.
Certainly, managing their hardware has become a nightmare for many large organisations, and there is plenty of evidence that they are outsourcing their computer infrastructure to one or other of the big players. But what about software?
A survey of accountants in business, which I conducted earlier this year, showed that the main areas for outsourcing of software were payroll systems (30%), followed by tax compliance issues (25%).
The surprise was the number that expect to outsource in the future - only 10%. This is a major reduction, especially as far as payroll is concerned.
Very few firms had outsourced their accounts department, with the percentage outsourcing in single digits in most areas: accounts payable (8%), accounts receivable (5%) and general ledger (8%) - and even fewer said they were planning to outsource.
Outsourcing software has hit many problems. Organisations want control of their applications, they need to be constantly changing configurations, adding new products, developing closer integration between their systems and, more importantly, introducing "best-in-class" processes.
This, of course, is where the outsourcing companies make their money, as many large corporations have found to their cost.
One large, well-known food and hotel group that had outsourced everything chose a spreadsheet interface to enable huge teams of accountants to prepare management information manually and upload it into the outsourced business system.
This was because the cost of internal staff was not as critical as authorising expensive variations to the outsourcing agreement.
The main outsourcing providers today include Accenture, BT, CSC, EDS and IBM. Their clients tend to be very large corporations with huge transaction volumes. The key to successful outsourcing is to have a partnership between the client and the provider to reduce costs and improve efficiency.
Today outsourcing is about improving procedures and efficiency rather than cost reduction.
The market everyone expected to take off was the application service provider (ASP): a brilliant concept, conceived in the mid 1990s, to rent computing facilities instead of buying them.
Many of the Business Application Software Developers' Association's larger members provided an ASP service - Baan, JD Edwards, Microsoft, Oracle, Systems Union, SAP - all with little take-up. ASP was then repositioned to appeal to the SME market - again without any takers.
There were two issues that kept customers away. The first was the high costs of the service - many organisations had not accurately costed their IT function so these costs came as a bit of a surprise.
The second was the reliance on having the data stored locally - they did not want their valuable data stored offsite. This was highlighted when one of the large banks offered an offsite data back-up service - again with no takers.
Dennis Keeling is chief executive of the Business Application Software Developers' Association
This was first published in October 2004