The £700m 10-year "mega" outsourcing deal between Bank of Scotland and IBM has broken the mould in the normally conservative banking industry.
Bank of Scotland hailed the agreement as one of the largest outsourcing contracts in Europe and a landmark deal for the UK retail banking sector. It has also boasted that the agreement will save it £150m in IT costs over the 10-year contract.
But as euphoria over the deal fades, IT managers are left wondering what lessons can be learned from the radical deal. In the past, 10-year outsourcing contracts have not always run according to plan and industry observers have already highlighted potential pitfalls in the IBM and Bank of Scotland tie-up.
The mechanics of the outsourcing deal are relatively straightforward. From September, IBM will be responsible for managing and operating Bank of Scotland Group's IT infrastructure.
IBM is effectively buying the bank's relevant IT assets and providing managed services in return.
The service will include mainframe AS/400s, desktop PCs, PC servers and running helpdesk support. Tandem, IBM, Compaq and Toshiba are among suppliers currently used by the bank.
Over 500 Bank of Scotland IT staff will transfer to two IT centres in Edinburgh and Chester. A small proportion of staff will also work on support desks throughout the UK. IBM will rent the bank's existing data processing centre in Edinburgh where it will establish a third IBM outsourcing centre. It will use the centre to provide services for its other customers.
One thing is certain: the progress of the deal - two years in the pipeline - will be followed closely by IT managers and suppliers. After all, problematic long-term outsourcing contracts are hardly thin on the ground, both in the public and private sector.
Take East Midlands Electricity for example, which last year pulled out of a 12-year outsourcing deal five years early. It ended the deal - believed to be worth about £150m - when it brought its business systems back in-house. The U-turn followed a review of IT costs and other parts of the business by Powergen which acquired the utility in 1998.
And last month the debate over outsourcing in the financial services sector intensified after a City regulator warned financial companies against abandoning control of their outsourced IT.
Michael Foot, Financial Services Authority's (FSA) head of financial supervision, reiterated the authority's outsourcing guidance. It states that clients should retain responsibility for the delivery of IT-based services. Outsourcing contracts should also ensure that the regulator has the power to inspect the outsourcer.
But Chris Brobbel, managing director of IT for Bank of Scotland, was keen to stress that the bank is still master of its IT strategy. "There is a big difference between outsourcing lock, stock and barrel and where the control of IT remains within the organisation," he said. "We dictate the whole strategy of the bank for IT. We're working with strategic partners so we obviously pool our ideas. But the final decision has to remain with the bank."
The FSA has been "fully supportive" of the outsourcing deal, added Brobbel.
The contract allows the bank to benchmark the quality of IBM's service. And IBM must provide updates to the Bank of Scotland's IT infrastrucure in a "technology refresher" clause.
Although outsourcing experts have given the deal a qualified welcome they questioned the value of benchmarking in a contract.
Only one in 10 clients benchmark their outsourced services, according to Robert Morgan, chief executive of consultancy Morgan Chambers. And benchmarking services do not come cheap. Analyst Gartner could charge between £170,000 to £220,000 for benchmarking the IBM and Bank of Scotland deal, said Morgan.
But on the plus side for the bank, its outsourcing deal is one of the easiest to handle, said Morgan.
He added that most organisations which outsource IT functions generally only provide a handful of project managers to monitor the ongoing project. But the Bank of Scotland is taking no chances and has allocated 70 contract managers to check the outsourcing deal.
The bank's prudence reflects the importance of the deal which looks set to become an outsourcing test case. Although it has a strong record in outsourcing IT. Bank of Scotland is placing considerable faith in the ability of IBM to deliver the service effectively with the promised cost savings.
And with previous outsourcing glitches IT managers are likely to reserve judgement for at least a year.
Bank of Scotland outsourcing history