UK supermarket chain Somerfield has made significant efficiency gains and saved £1m by outsourcing its complex development work to India.
Offshore outsourcing was the new hot topic for IT directors in the run up to January 2000, with a number of large UK companies contracting Asian IT services firms to oversee their Y2K systems upgrade projects.
Three and a half years on and the offshore outsourcing market is now mature, so much so that it is a "must do" for IT directors in 2003, according to Gartner, which has predicted that the European offshore outsourcing market will grow by more than 40% this year.
While the trend initially was to outsource individual projects to services companies often based in India, UK firms are increasingly entrusting a range of their development work to foreign providers.
Last week, Computer Weekly revealed that supermarket chain Somerfield is planning to outsource 30% of its IT development work to Asian IT services company Tata Consultancy Services (TCS) during the next financial year.
The move to outsource development in areas such as e-business, finance and supply chain systems follows the success of a wide-ranging systems integration project, outsourced in part to TCS, which has cut costs by more than £1m and vastly improved overall business efficiency.
Efficiency gains like these are key for companies in the fiercely competitive UK grocery retail market, where margins are kept very small to ensure that prices stay low.
The £2.4m Sword project, which will be completed in two months, is designed to reduce complexity within Somerfield's IT department by cutting the vast number of disparate systems it has been running. Before the project began in mid 2001, Somerfield was running 300 applications, 900 interfaces, 4,000 batch jobs and 120 different databases.
However, the key problem the company needed to overcome was that it had three different types of coding system for the same set of items, which were stored in three different databases, said Tom Scott, IT director at the retailer.
This made the applications very complex and posed a number of problems for maintaining integrity across the databases. The company decided to re-engineer its systems, creating a single reference database - a task that was too onerous for Somerfield's IT department, Scott said.
"Sword is a massive project which has taken 20,000 man days to deliver. There is no way we could have accomplished it internally," he said. "By using TCS we have doubled the size of our development team and increased flexibility, without using up our office space."
By outsourcing complex development work to TCS, Somerfield was able to save more than £1m on the cost of doing the work internally, without affecting overall quality. "TCS is at least as efficient as our internal IT team and it works out 20% cheaper than doing projects in-house," Scott said.
The savings came from cutting the cost of IT maintenance, software licences and extra labour, Scott said. But he stressed that price was not the only reason for outsourcing to TCS, with specialist IT skills and flexibility other key drivers behind the move.
Looking beyond pure cost savings is key to the success of an offshore outsourcing project, said Alasdair Macarthur, IS partner development manager at Thames Water, which outsources its IT maintenance work to Indian software giant Wipro.
"I always try to put price last," he told Computer Weekly last year. "It would be very easy to throw everything at India because it is cheap, but it is not because it is cheap - it is cost-effective."
The success of an offshore outsourcing project is also based on good communication, Scott said. "It is key that you get a clear definition of requirements and then follow it up with lots of communication. The offshore people need to know exactly what is going on."
It is also a good idea to use more than one offshore supplier to ensure that service levels remain high. "We use another Indian supplier, Zensar, for some projects, primarily for benchmarking purposes," said Scott.
Supermarket rivals Sainsbury's and Asda have matched Somerfield's commitment to offshore outsourcing, and services companies such as TCS believe the retail industry will be a big growth area for them.
With large-scale IT projects such as chip-and-Pin and radio frequency identification tagging in the offing for many retailers, and the challenge of meeting the Basel 2 regulations in banking, IT departments are increasingly likely to use development companies from the Indian sub-continent to rise to the challenge.
How the offshore market is growing
Analysts predict that over the next couple of years, 75% of the top 1,000 companies in Europe will evaluate outsourcing some IT services offshore
A number of large UK firms, including Sainsbury's, Asda, British Airways and Royal Sun Alliance, have signed major offshore deals
Utility companies are also taking an interest. Thames Water last year revealed to Computer Weekly how an IT maintenance project with Indian software company Wipro had saved the organisation £1m
One in five US Fortune 100 companies have outsourced some software development to India.