As the IT outsourcing market matures, organisations are changing the way they interact with suppliers and the type of deals they make. Miya Knights looks at the road ahead for outsourcing
The decision to outsource any component of an IT infrastructure has become a familiar one in today's highly competitive business world. Common drivers include cost efficiencies and the ability to concentrate on the core business.
In fact, the trend has become so common that organisations now tend to look for the best ways to manage their outsourced IT rather than whether they should be outsourcing in the first place.
"European organisations are starting to be more sophisticated in their outsourcing choices," says Gianluca Tremacere, principal analyst at research firm Gartner.
"They are tending to select multiple suppliers, particularly at infrastructure level. Our research shows organisations are liaising with four suppliers on average at this level."
A move away from monolithic deals with a single supplier is a clear indication that businesses are becoming bolder in their IT sourcing decisions, says Tremacere, making more tactical and strategic deals.
"But these deals are a result of initiatives and decisions made in an ad hoc way," he says, pointing to recent Gartner research suggesting that 56% have no formal outsourcing procurement strategy.
"Organisations should be strategically analysing how IT outsourcing can support the business strategy. We would expect to see a top-down approach to outsourcing, but in reality it is a bottom-up one.
"It is often thought that outsourcing is about getting rid of people. But it is also about acquiring the right level of skills and knowledge to handle the outsourcing contract. The next step in the sourcing cycle is mastering sourcing management."
Tremacere's call to action seems all the more apt given the number of high-profile outsourcing failures recently. It is widely thought that Sainsbury's decision to take its IT operations back in-house from outsourcing partner Accenture followed IT-related difficulties that affected the supermarket's bottom line, and was due in part to supplier management issues.
In response, Gartner is predicting that the role of chief outsourcing officer will become common within large enterprises before long. Given control of outsourcing within an organisation, postholders would need to have in-depth technology and business process knowledge, as well as an understanding of supplier relationship evaluation and management.
Regardless of whether management ranks will get yet another C-level executive post, the general industry consensus is that companies should retain strong in-house management skills if outsourcing.
John Leigh, BT Global Services' marketing head, says a successful outsourcing relationship is based on communication, trust and understanding.
"The UK is particularly mature in terms of outsourcing," he says. "I am meeting customers now who are on their third or fourth outsourcing contracts, and UK consultants are increasingly involved in negotiating deals in the rest of Europe."
Leigh says successful management teams of traditional IT outsourcing deals tend to have developed a good understanding of what is possible in a contract at a departmental level.
"The base outsourcing of IT does not tend to operate at a business process level, but tends to be driven by the department using it, like HR, finance and administration, and customer services," he says.
But Leigh echoes Gartner in calling for the development of outsourcing contract management beyond understanding requirements from a departmental view to a more strategic, business process-led approach.
"The first challenge is often to improve processes. The second is to ship some of the work overseas. And the third is to get cost savings," Leigh says. "Companies that are mature in outsourcing IT have reached the end of their cost-cutting phase and are now looking for innovation to drive more value from IT rather than squeezing even more cost out."
Leigh believes outsourcing management skills needs to evolve, as "the value of IT is measured in business processes now, not in the IT centre". This is translated into more precise, end-to-end service level agreements that measure IT performance at a macro-process level, which maps onto the service oriented architectures increasingly developed by users.
According to Leigh, because BT Global Services is primarily a network outsourcing provider, many of its basic outsourcing contracts are quite simple to drive, measuring availability, downtime and the cost of transmitting information in a timely fashion. But the company is looking to build on delivering existing contracts by moving into business process outsourcing.
"Everybody is in the same place with end-to-end SLAs," says Leigh. "Our AAI [Applications Assured Infrastructure] tools are able to pull tables up from the routers, Unix systems and mainframes, for example, to get a single view of how a business application is performing."
Leigh says this type of service is an example of value-added innovation, enabling the dynamic spreading of application loads across networks more consistently, and creating faster and more reliable IT system response.
Paul Carter Hemlin, associate director at communications and contract management services provider Blake Newport, says deals currently reaching the end of their life provide a natural opportunity for users to drive more value from renegotiations.
"In a UK outsourcing market worth somewhere between £40m and £50m, 70% to 80% of contracts are currently under renegotiation," he says. "And we are seeing the next generation of outsourcing contracts: while it is very risky to change suppliers, particularly if they have built up knowledge about your business, most new contracts are driving more value for the customer and assured revenue for the provider."
And this has translated into users agreeing shorter term, tightly specified deals that are less likely to involve the transfer of staff.
Carter Hemlin suggests these new contracts are more likely to include "offshoring, new technologies and SLAs to incentivise the supplier".
User management teams have become more supplier- and service-savvy, and Carter Hemlin believes that document control can help in successfully renegotiating and managing new outsourcing deals.
"Web-based communication, training and refresher tools help with staff training and attrition rates," he says. "It will take time and money to renegotiate any deal. There might be a transfer period, which should contain various milestones. So programme and project management, and dependencies on the user organisation, need to be managed in a formal way."
Duncan Tate, head of global outsourcing and infrastructure services at Unisys, says, "Customers are less interested in the 'how', and far more interested in the 'what'. The expectation now is for the supplier to understand the customer's business and the regulations around it. And clients are getting better at managing the outsourcing process, both in new deals and in existing ones.
"They are looking for us to be a lot more outcome-focused. But to achieve the changes required, change control is vital. It is also vital to set up a governance structure for the deal, to outline how often it is reviewed, for example."
Suppliers agree that users are looking to exploit outsourcing for more than basic IT management and cost savings. Outsourcing is moving up the value chain towards innovation and business process improvement.
But to successfully drive such improvements, firms will need to retain comprehensive technology and business knowledge in-house, and look for providers that reflect and understand the company culture and business.
And those that negotiate contracts with the flexibility to change with their business needs using formalised governance structures are most likely to lead the next generation of IT outsourcing success.
Case study: national rail enquiries gets the answer
National Rail Enquiries, which provides information on UK rail network operations and train running times, outsourced the running of its communications centre earlier this year.
An alliance between the UK IT services arm of technology provider Thales and the country's largest rail freight operator, EWS, took on the role of managing and distributing information about train services, engineering works and train operating company products.
The deal underpins the services provided by National Rail Enquiries to the public and media through its call centres, website and voice-activated, automated service, Traintracker.
"National Rail Enquiries is truly a virtual company because our business expands and changes very quickly - train companies change their service information fairly rapidly," says chief executive Chris Scoggins. "We have exploited technologies such as Traintracker that drive customers towards self-service to the extent that the 62 million calls we had three years ago are down to 20 million a year now, and we operate a website that gets 65 million visits per annum.
"We would have struggled had we built the capacity to handle these volumes in-house. To process all the information we receive and integrate it with our channels, including Wap, SMS, Traintracker and third-party train services, is very difficult."
The deal allows National Rail Enquiries' communications centre infrastructure to flex with demand and capitalise on the latest technology to maintain high availability and service delivery.
"We do a lot of supplier management, but the end result is that only 1,500 people work on behalf of National Rail Enquiries, and only about 20 people, who are knowledge experts, work directly for the organisation itself," Scoggins says.
He says the key to outsourcing the organisation's backbone has been detailed specification, including knowing every last detail of how the contract is operating, staying hands-on as though it were still being handled in-house, and building trust with a transparent cost model, so renegotiations are easy.
"The market has moved to buying services instead of IT systems," Scoggins says. "I did not find it difficult negotiating service level agreements that include business measures because ours are around information accuracy rather than processing volumes."
Vote for your IT greats
Who have been the most influential people in IT in the past 40 years? The greatest organisations? The best hardware and software technologies? As part of Computer Weekly’s 40th anniversary celebrations, we are asking our readers who and what has really made a difference?
Vote now at: www.computerweekly.com/ITgreats