Outsourcing is now a firmly established part of the business and IT scene, but companies seeking outside help are demanding far more flexible and strategic solutions than the single-supplier, multi-billion pound deals that dominated the 1990s.
"We are seeing companies view outsourcing as an increasingly important business tool," says Julie Giera, an analyst with Giga Information Group. "Although mega-deals have the advantage of lower cost and convenience, they put all the risk into one basket. A single supplier is not always the best choice for every possible IT function," she says.
Giga research shows traditional large single-supplier outsourcing deals accounted for just 40% of the total spent on outsourcing in 2002. With overall spending on outsourcing on the rise, it appears that organisations are increasingly spending their outsourcing pounds on more strategic services.
So how are the new models working out in practice? We talked to three companies which have opted for non-standard outsourcing contracts and asked about their experiences in three key areas: selective outsourcing, utility outsourcing and strategic sourcing.
Selective outsourcing is paying a third party to take over a routine part of the IT infrastructure, such as desktop or datacentre management. What is new with selective outsourcing contracts is that suppliers can use such deals to turn routine tasks into revenue generators.
The upside is that selective outsourcing provides fixed-cost service provision for the IT department, and enables companies to benefit from the service providers' greater economies of scale. The downside, however, is that it requires close supervision to ensure service levels are met. This additional management cost may be enough to wipe out the savings of outsourcing in the first place.
Case study: How LDV stepped on the gas with Gedas
LDV started out as a division of British Leyland. When the manufacturing giant closed its doors many industry observers believed that LDV, which builds commercial vehicles, would soon follow suit. But LDV was saved by a management buyout, and today employs more than 1,000 people at its Birmingham factory.
LDV's history has given the firm great expertise in the automotive market, but has also presented the management with significant challenges. "We specialise in custom-designed vehicles, and rely heavily on our supply chain applications, which run on IBM mainframes," says Chris Linfoot, LDV's IT director. "The problem is that those mainframes were designed to be used by Leyland, which had a far larger IT staff than we can afford."
For five years LDV had outsourced the maintenance of its mainframes to IBM, but Linfoot felt the company was not gaining from the arrangement. When the contract ended, Linfoot switched the outsourcing deal to Gedas, the information services arm of Volkswagen. "It was a smaller company and I liked the fact it was the same size as us," says Linfoot. "Also, it had great expertise in the auto industry and would allow us to make the most of the applications running on the mainframes."
The selective outsourcing contract has allowed LDV to focus on what it does best - manufacturing vans and other commercial vehicles - while still benefiting from the mainframe applications.
"Those systems are a great source of competitive advantage because the supply chain systems enable us to provide customised and individual vehicles," says Linfoot. "People often talk about legacy systems as though they are a ball and chain, but for us they are more like our heritage."
The company has benefited from Gedas' expertise in manufacturing cars. Linfoot says, "We have a highly developed set of business processes and the technology supports them very closely, so it is difficult to unpick the technology from the business." A traditional outsourcing contract, based simply on IT , would diminish the value of the business processes, Linfoot believes.
Working with a specialist provider has helped LDV find new ways of using the mainframe systems. For example, Gedas has helped to develop new processes that will eliminate the need for batch processing and enable the factory to operate 24 hours a day.
"The result is that we are now on the verge of a major growth spurt which will see volume quadruple," says Linfoot. "Outsourcing one part of our business to a company which understands it so much better than a traditional service provider is a key part of that process," says Linfoot.
Utility outsourcing, sometimes called on-demand computing, is relatively new but is beginning to attract customers. It involves paying an outsourcer for the IT resources your business needs, as and when you need them. The idea is that IT departments pay only for the capacity they need, allowing IT to be more responsive to the business.
The upside is that it appeals to business executives, who like the idea of knowing exactly what they are paying for. Utility computing means companies have access to additional hardware, software and services at the touch of a button.
The downside, though, is the uncertainty about demand. Utility outsourcing could be more expensive if IT departments cannot control demand. The flexibility of utility pricing comes at the expense of financial predictability. Prices may also not fall in line with the price reductions in the underlying technology.
Case study: 422 gets it on film with HP Services
In late 2002, the developers at film production company 422 had a serious problem on their hands. The company was running out of computing power.
422 specialises in rendering. This is the process of turning animators' computer-generated models into fully realised images by adding texture, colour, light and background. It is a complex process, requiring large amounts of processing power. "If you run out of capacity, you have two choices: lose the job, or lower the quality of the rendering," says Andy Davies-Coward, 422's founder and chief creative officer.
Compromising on quality was not an option, but 422 could not afford to buy the hardware it needed to complete some of the most demanding jobs. "We cannot afford to tool up for the most extreme cases because our workload is so erratic," says Davies-Coward. Instead, 422 worked with Hewlett-Packard to become the first UK customer of the Universal Data Centre utility computing service.
The service involves 422 leasing computer power from HP and paying only for the resources it uses. Designers can connect to more than 100 Pentium 1.4GHz processors over a wide area network. Access is controlled by HP's management software, called Smartfrog. This assesses what resources are needed for a specific task, breaks the task down into small algorithms, and sends the algorithms to idle processors.
The capability of the system was tested when 422 created a four-minute animated film, The Painter. The animation is of particularly high-quality and each frame required a high level of processing power to render. "As a test, we added just about every extra we could think of," says Davies-Coward. Even under extreme stress, the system coped well. The entire film was finished in 12 days - compared to the usual two months.
The remote data centre looks like just another part of the company's own network, and has been a big success, says Davies-Coward. "It lets us compete above our own weight, and we can pass on the cost to clients which want very high-spec work or a fast turnaround," he says.
As a beta customer, 422 does not know the full ongoing cost of the utility service. However, Davies-Coward is certain that the company will continue to use utility computing.
"Outsourcing has allowed us to achieve things we could not do any other way, but utility pricing has allowed us to do even more," he says. "We now only pay when a specific project requires the additional power, and we can build the cost into the project and pass it on to the customer."
Strategic sourcing means completely rewriting relationships with service providers. Rather than outsourcing particular functions or departments, strategic sourcing involves paying a third-party to deliver an entire business strategy, such as improved market share or customer retention.
It sounds complex, but analyst Gartner Group predicts that 40% of all new outsourcing deals in 2004 will be strategic sourcing relationships.
The key benefit of strategic sourcing for IT directors is that it allows them to be far more closely involved with business strategy.
The downside is simply the risk. Hand over desktop management to the wrong service provider and - at worst - you write off a few thousand desktops. Hand over your business strategy to the wrong service provider and it could kill the company.
So if you are considering this option, do your homework: look for examples of previous sourcing contracts, check the financial viability of the provider, draw up a good contract and, perhaps most importantly, make sure there is a clear exit strategy.
Case study: BMS Group spreads the risk with Xaman
Insurance is a highly competitive marketplace, and effective customer service can make the difference between success and failure for insurance brokers.
Following several acquisitions and a period of rapid growth, BMS Group found itself struggling to integrate multiple IT systems and administrative processes effectively. It needed to improve customer support, systems availability and reliability but these were not core areas of expertise within the company, says group IT manager David Park.
"We specialise in high-quality insurance brokering, which depends on good technology and administrative processes," he says. "But that does not mean these are a core part of what we do." Strategic sourcing has enabled BMS Group to outsource most of its IT and administrative functions. Only areas that deliver significant competitive advantage, such as software development, have remained in-house.
Today, Xaman provides a complete IT and administration service for BMS Group's 44 international offices and acts as a gateway to other providers. For example, Xaman manages the BMS Group call centre and helpdesk, in addition to managing shared access to an IBM storage area network. This has enabled BMS to implement clustered servers and datawarehousing for knowledge workers and, 24x7 telephone support across the US and Europe - without hiring any additional staff.
Strategic sourcing can be a high-risk option for businesses, but BMS Group is confident that it has contingency plans should the relationship with Xaman turn sour. At least 50% of the negotiation period was spent agreeing ways the contract could be ended. BMS also spent several months checking references and financial reports from service providers before signing a contract with Xaman, a mid-market provider specialising in Citrix environments.
Running its own support operations was placing a burden on BMS staff who could be more profitably used elsewhere in the business. "Managers were far too heavily involved in the detail of service support," says Park. "We were not able to concentrate on developing projects that would deliver real business benefit."
The key benefit of the contract has been stability, Park says. "We get performance statistics on a monthly basis, and the uptime is very, very good. Now, because we do not have to worry about system maintenance or support, we can concentrate on new projects."