Inside outsourcing on inside out sourcing

The inside outsourcing blog is now up and running.

As often as possible I will blog about what I am hearing and seeing in the outsourcing industry.

It’s controversial when companies hand over IT processes to third parties. It is often even more controversial when they send it overseas.

But whatever you think outsourcing is here to stay.

So with a name like the insideoutsourcing blog I thought it apt to start with a post about an inside out sourcing deal.

The deal in question is the London Stock Exchange’s decision to replace its trading platform. It bought an IT supplier in the form of Sri Lankan firm MillenniumIT, which provides trading systems and services.

So in effect it has in-sourced by bringing an outsourcer into the group. It is also planning to keep MillenniumIT as a separate company with customers of its own.

Previously the exchange employed Accenture for development but now it will do it itself. It now has 300 developers in Sri Lanka. And according to the exchange the £18m it spent on MilleniumIT is less than it paid Accenture every year.

The stock exchange did this when it realised the system known as Tradelect could not attract algorithmic traders which complete massive volumes of trades. Tradelect was not fast enough, its throughput was too low and it was not reliable enough.

Today’s problems at the exchange are a case in point.

Traders using algorithmic trading systems make a small amount of money on lots of trades and even hold shares for milliseconds. Although I must point out that after talking to techies that work in the trading sector, a millisecond doesn’t seen that quick anymore.

MilleniumIT can complete a trade in microseconds as can other trading systems.

So the London Stock Exchange will make its technology competitive, cut costs and make money through MilleniumIT.

So is this deal a stroke of genius?

Could it become common that when big companies recognise that a supplier has a better system, but are afraid to give their critical systems to a third party, they buy them?

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This is an interesting development: it is the reverse of the trend where companies that have created captives sell them off to suppliers. So the LSE has bought in an offshore captive, and will turn it into the "insource/outsource" model.This was fashionable about 20 years ago. For example, Barclays Bank had a company called Barclays Computer Operations. It supplied IT and services to the Barclays group, but was also tasked with providing services to third parties. I suppose what the LSE/MilleniumIT deal shows is that IT is absolutely critical to exchanges: in other words, it is core business. So you don't outsource it, you have it in-house. Is this the start of a trend? Could be very interesting for M&A in the sector!

Thanks Mark

I think it is a very interesting move by the LSE. I think it will work as long as MilleniumIT is noit stifled. A contact told me that when the NASDAQ bought supplier OMX it blunted its innovative edge.

I think the price that the LSE paid for Millennium reflects the Sri Lankan firms desire to be part of something bigger.

And yes technology really is business critical to exchanges. They are basically technology companies these days. Even without MilleniumIT and its own revenues over 30% of teh LSE's revenues are from technology services. Things like informations services and also server hosting.

This will be a good one to keep an eye on.