Outsourcing demand increasing according to Equaterra research

Now, more than ever, businesses are outsourcing IT to reduce the expense of running large IT operations inhouse.

Now, more than ever, businesses are outsourcing IT to reduce the expense of running large IT operations inhouse. A new study of the outsourcing market in the UK from sourcing advisor Equaterra shows that outsourcing is increasing in popularity among major UK organisations.

The UK study examined £8bn worth of contracts, which included 330 of the biggest UK contracts from 125 of the top IT spending organisations in the UK. Of those surveyed, 63% are looking to outsource more this year, compared with 54% last year. The report states, "Sourcing or the use of third-party business and IT services in general, and the outsourcing model to access those services in particular, has become an established and commonly used business tool.

In its Outsourcing Service Provider Performance and Satisfaction Study 2008-09, Equaterra found no indication that economic conditions will have a significant negative impact on outsourcing demand in the UK market.

It expects that economic conditions will further drive demand for outsourcing as UK organisations more aggressively seek means to reduce costs, defer or limit future investments, and realign operating models to lower revenue levels. According to the report, 80% of those surveyed cite further cost savings as the principal driver for increasing existing levels of outsourcing, while 25% would outsource more to gain greater financial flexibility.

There is price pressure from within the business for IT to extract more value from existing contracts. Equally, outsourcers are under increased pressure to demonstrate greater value for money and the ability to listen and understand the pain points end-user IT departments now face.

Customer satisfaction

So which supplier has been rated the highest? InfoSys gained the top spot for customer satisfaction this year (75%), followed by Cognizant (74%) and Capgemini (73%). The level of customer satisfaction among Capgemini's customers increased 11% from the previous year, which Equaterra'sLee Ayling believes is probably down to some major restructuring by the outsourcer. "Capgemini has built a near-shore centre in Poland to help it compete with Indian outsourcers, which allows it to compete on price. It also has major contracts, including Aspire [HMRC], which has also helped it to boost its customer satisfaction levels."

BT was the worst performing outsourcer in terms of customer satisfaction, with a 10% drop on 2006 levels to 50%.

Equaterra notes in the report that the Indian offshore providers are continuing to compete successfully with the main global providers. "They are also achieving relatively high levels of satisfaction, although respondents' satisfaction with a few Indian providers has declined since last year, with Satyam down 15%, TCS down 8% and Wipro down 4%."

By contrast, satisfaction with three of the global providers has improved since last year's study. In the report Equaterra states, "The gap between the traditional players is closing. It seems that the Indian providers are losing their traditional advantage against the global players and there is more choice for customers the world is becoming a more level playing field."

The location equation

That said, if the Equaterra figures are indicative of UK IT, then heads of IT are quite specific on the types of services and skills they choose to outsource to India, and those contracts offered to European and global IT services companies.

For instance, heads of IT appear more comfortable outsourcing PC support services (or end-user management) to European or global providers, rather than using an Indian outsourcer. "Given the nature of PC support, if your supplier does not have the capabilities to support end-users you will hear about it," Ayling warns. Either some Indian providers are not be as strong as European and global providers or there is a perceived weakness in their ability to deliver high-quality PC support services.

Multi-language skills is one area where India may be less capable, according to Ayling, in spite of the fact that India has traditionally been associated with high-calibre, multi-lingual graduates.

According to Ayling, India is better with technology and English than other languages, but in central Europe, language skills are foremost, followed by technology skills. But this is changing. Eastern European providers are catching up with India in terms of technical skills. "Businesses began moving outsourced business processes to Eastern Europe and the skills have grown to meet capabilities. Now you can get IT staff like Cisco certified engineers. This was less easy a few years ago," he says.

Such multi-lingual skills can become strategic for global businesses. Heads of IT with a long-term strategic vision may be looking at multi-lingual shared IT centres to support end-users globally. "In the UK, multi-language skills come at a 20% price premium, but if you run a multi-lingual shared support centre with German, French, Spanish and English, you can support users across most of the world." Ayling believes Eastern Europe is well placed to provide lower-cost multi-lingual IT skills needed to operate such shared services centres.

India is still low cost, but this situation may change. "While India is still pretty much a low wage region, salaries are rising, with an average salary inflation in 2007 of 12%. We may find parity between India and Eastern Europe over the next few years."

Areas of improvement

For 2009, Ayling recommends CIOs focus on ensuring that their contract is the right size for their organisation.

"Given that at least 20% of IT outsourcing contracts will be up for renewal in 2009, CIOs need to focus on driving value with limited investment by looking at innovative ways to partner with the right outsourcer to deliver high-quality IT services." This does not necessarily have to be wholesale change. It should not be necessary to go through the expense and disruption of switching outsourcing provider.

Instead, Ayling urges CIOs who have a contract up for renewal this year to look at the portfolio of services they receive from their outsourcers and identify areas of improvement. "Benchmark your contracts and extend the 80% part of the contract that works and leave out the 20% that does not work." It is all about focusing on the bits that work and make them better. Any services that have not met expectations can then be passed on to another provider.

Governance in outsourcing

In the 2007-2008 study, Equaterra found that governance in outsourcing was poor and was having a negative impact on results. "This year's findings do little to alleviate those concerns. However, our research shows that companies are attuned to this situation," the report states. 77% of respondents say that they are either already improving sourcing governance processes, or are planning to do so.

According to Lee Ayling, strong governance in outsourcing can be the difference between a successful project and a costly failure. He says, "Even a small reduction in the benefits from a contract can amount to a big capital cost, given the significant size of some of these outsourcing contracts."

Of the heads of IT questioned in the Equaterra study, 50% admitted the governance of their existing outsourcing contracts was weak or average. As such, Ayling recommends IT heads bolster their internal outsourcing governance teams. "A small investment in governance can make a huge difference to the success of the contract." Now is probably the best time, he says, given the fluidity in the labour market. "Due to the job cuts in financial services, there are plenty of people looking for work, so perhaps it is worth hiring relationship managers, performance managers and financial managers who have expertise in outsourcing contracts." Equaterra has found that 39% of heads of IT surveyed are willing to employ new staff with governance expertise.

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