Outsourcing's chequered history has created the perception that outsourcing services are unreliable with users fearing that a long-term contract will lock them into using a single supplier. Yet, according to a recent study by market research organisation Vanson Bourne, one in two companies outsource some or all of IT function in the UK, suggesting that outsourcing is becoming the standard way for businesses to run IT.
Companies that outsource their entire IT departments still constitute a small minority and it appears that businesses are becoming more selective over the parts of their IT function they outsource. However, as the current economic downturn continues, it seems likely that the huge multibillion-pound outsourcing deals of recent years will become increasingly common as firms outsource IT operations in a bid to cap IT expenditure and focus on core business interests.
To get a feeling of what's to come, here is a look back at some of the biggest outsourcing deals in 2001.
The newly created government body the National Care Standards Commission signed an £18m deal with ICL to design, build and operate the IT infrastructure, offering telephony, videoconferencing and IT facilities to more than 2,000 end-users.
Pharmaceuticals giant AstraZeneca outsourced the lion's share of its IT to IBM Global Services for £1.2bn. Under the deal, said to be the largest IT contract in the pharmaceuticals industry, IBM undertook to oversee the provision of helpdesk services, PC desktop support, e-mail, intranet, telecoms networking, wide and local area networks and most servers for AstraZeneca in 45 countries. The pharmaceuticals firm retained control of IT activities directly associated with production and the knowledge-sharing activities of its research community.
The recently merged insurance giant CGNU terminated its seven-year £124m outsourcing contract with IBM after only two years as part of a drive to consolidate its IT systems. The early termination of the deal was seen by some analysts as illustrating the dangers of entering into long-term outsourcing agreements that are too inflexible to accommodate company mergers and restructuring.
Insurance firm AXA Sun Life signed a £70m outsourcing contract, transferring more than 400 of its application management services staff to the FI Group. AXA said it hoped the five-year deal would reduce its IT spending by half, saving £20m a year. FI Group took over responsibility for the support and development of AXA's legacy life and pensions administration system and undertook to implement new systems that would increase speed to market and improve flexibility.
Supermarket chain Sainsbury's outsourced its payroll operation in an eight-year, £20m contract with RebusHR, constituting the biggest payroll-outsourcing contract awarded by a UK commercial organisation to date. About 50 Sainsbury's staff transferred to the third party in the deal.
Consignia signed a £40m contract with Computacenter for all its IT hardware and shrink-wrapped software following an overhaul of its supplier arrangements. The agreement, which covered all desktops, servers, laptops and packaged software was initially for one year but had a renewal option.
Also in the public sector, Hackney council's 10-year outsourcing deal, signed in 1997, with ITNet, which covered its benefits and revenue services, ended in acrimony. The council sought £30m in compensation from the supplier because it said ITNet's service failings had led to 100,000 images of paperwork on the benefits system not being processed.
Analysts warned companies of the need to negotiate tough service level agreements for outsourced services after a file error by an IT service supplier resulted in more than 100,000 Abbey National customers being debited twice for mortgage payments. Royal Bank of Scotland, which was handling Abbey National's mortgage direct debits, had sent out duplicate direct debit files to bank clearing house Bacs.
Royal Dutch Shell Group, which in 1998 had spun out its IT operations as a separate for-profit company, offering services for clients both within and outside the Shell group, announced it was bringing its IT function back in-house. Shell said the decision followed concerns that the spin-off was not working well enough commercially. It added that the new IT group, IT for Shell, would not look for new external business.
The big news in the outsourcing world was that Fiat and NTL were outsourcing IT operations with a combined value of $9bn (£6bn) to IBM. The Fiat deal alone was worth $7bn, constituting the largest-ever European outsourcing deal.
IT services giant EDS, which had failed to win the Fiat deal, consoled itself by signing a 10-year outsourcing deal with Abbey National. EDS undertook to handle the billing, taking of bill payments and routine call centre enquiries for the company, plus an extra $400m over the period for providing business process management services. Abbey said about 1,700 staff would move to the joint venture and both companies would enjoy a 50-50 economic interest in the deal, which it hoped would save it £90m in IT spending over the period.
EDS also teamed up with the Employment Service to roll out job-search kiosks in supermarkets. The Employment Service said it had adopted an innovative outsourcing technique that bound the business into IT projects and a system of IT buddying, where their IT staff were paired with EDS technical employees and a business manager.
In a busy month for outsourcing deals, health and beauty retailer Superdrug outsourced the IT support for its 700 UK stores to IT services company Computeraid Services. As part of the three-year multimillion-pound deal, Computeraid undertook to provide maintenance support services and end-user support to Superdrug's nationwide network of stores, including the provision of a permanent on-site engineer based at the company's headquarters in Croydon, south London.
The European arm of US consumer products and food group Sara Lee signed a deal to outsource about $800m worth of e-procurement purchasing through pan-European exchange ICG Commerce.
In the financial sector, the limitations of the outsourcing model were becoming clearer. It emerged that Royal & Sun Alliance's hopes of cutting its IT bill by 90% through large-scale outsourcing to India had come unstuck. In-depth trials, carried out at the behest of the insurer's directors, showed that such savings were impossible, leaving the Royal & Sun Alliance board with egg on its face.
The Health & Safety Executive signed a £120m outsourcing contract with CMG Admiral and Computacenter covering management consultancy and IT infrastructure management, along with products such as Bluetooth wireless applications and mobile Internet services. The 10-year project was snappily called Retendering for IT - also known as Refit.
Also in the public sector, a damning government report from the Benefit Fraud Inspectorate exposed the problems of outsourcing local authority IT and business process services. Lambeth, which had outsourced its benefits and revenue service to Capita Business Services in 1997, had taken back control earlier in the month.
Financial services company Friends Provident outsourced its IT function to focus on projects related to its demutualisation and reduce costs in a £1m business analysis contract with CMG Admiral and a further agreement with India-based Wipro Technologies for development work.
The London Borough of Lewisham struck a five-year £70m outsourcing deal with ICL and KPMG to put the council's services online by 2004. The two companies undertook to update the council's IT infrastructure and identify business processes that could be rationalised. The council said much of the optimisation and all of the delivery phase could be outsourced to other suppliers if it was not satisfied with the contractors' work, with the two suppliers working on a risk-and-reward basis.
Global travel and real estate giant Cendant Corporation signed a $1.4bn IT services deal with IBM, in one of the travel industry's largest-ever outsourcing contracts.
Under the terms of the 10-year deal, IBM Global Services undertook to manage the IT operations of Cendant's 40 business units, including Avis Rental Cars and National Car Parks. However, some industry observers, like outsourcing consultant Robert Morgan, questioned the "one size fits all" nature of the deal.
Winners and losers
- Pharmaceuticals giant AstraZeneca outsourced the bulk of its IT to IBM Global Services for £1.2bn in February
- Fiat and NTL announced in May that they were outsourcing IT operations with a combined value of $9bn to IBM
- Global travel and real estate giant Cendant Corporation signed a $1.4bn IT services deal with IBM in December.
and the cock-ups
- Merged insurance giant CGNU terminated its seven-year £124m outsourcing contract with IBM after only two years in February
- More than 100,000 Abbey National customers were debited twice in April for mortgage payments following an error by its IT service supplier Royal Bank of Scotland. Also in April Hackney council announced it was seeking £30m in compensation from ITNet following the acrimonious collapse of its 10-year outsourcing deal with the supplier, signed in 1997
- Royal & Sun Alliance's hopes of cutting its IT bill by 90% through large-scale outsourcing to India came unstuck in May after trials showed the proposed savings were unattainable
- The Benefit Fraud Inspectorate released a damning report in July of outsourcing IT and business process services in local authorities following the collapse of Lambeth council's outsourcing contract with Capita Business Services for its benefits and revenue service.