The demand to cut costs is forcing the high-street banks to consider the previously unthinkable: large-scale outsourcing of IT. Nick Huber reports The financial services industry has become a testbed for IT outsourcing, experimenting with joint ventures and signing multimillion-pound contracts. However, the UK banking industry...
has generally shied away from outsourcing large chunks of its IT department, which is what makes the news that Barclays Bank is in discussions with IBM Global Services to outsource its IT infrastructure particularly significant. Computer Weekly last week revealed that the high-street bank was in discussions with IBM over a proposed deal estimated to be worth more than £100m a year. Barclays refused to comment on whether it plans to outsource to IBM but said outsourcing was one of a number of options under consideration as part of an ongoing group-wide efficiency review. The bank has told its IT staff it needs to make savings to meet its long-standing target of reducing costs across the group by £1bn by 2003. Outsourcing experts believe that if the deal goes through it will set a trend and trigger similar deals among other high-street banks, which are also eager to use outsourcing to drive down their IT costs. "Wholesale outsourcing among other high-street banks is inevitable," said one industry watcher. The outsourcing market certainly appears to going from strength to strength across all industries, not just the financial services sector. Last month an annual report from the analyst firm Ovum Holway predicted that the outsourcing market in the UK would continue to expand despite the economic slowdown, and grow by 15% to almost £8bn this year. This growth rate is only slightly down on the 19% rise in 2001. Bank of Scotland, which merged with Halifax last year, is the only bank out of the Big Four that has shown it may take the plunge and outsource substantial parts of its IT. In 2000 the bank signed a £700m outsourcing deal with IBM. One of the largest of its kind at the time, it was hailed as a landmark deal. Analysts said the deal broke the mould in the normally conservative banking industry while Bank of Scotland claimed that it would save £150m in IT costs over the 10-year contract. Since then, however, the anticipated outsourcing boom in the banking industry has not occurred. In other areas of financial services, however, companies have embraced outsourcing. Take the $4bn (£2.8bn) seven-year outsourcing deal between American Express and IBM Global Services announced earlier this year. In what is thought to be the biggest outsourcing deal in the financial services sector to date IBM will run American Express' computer systems and its Web sites worldwide. The credit card company will retain control of IT strategy. About 2,000 American Express IT staff will be offered comparable positions at IBM and are due to transfer in the next few months. Other major banks remain tight-lipped about their outsourcing strategy, and even existing arrangements, in some cases. Royal Bank of Scotland, which merged in 2000 with NatWest, refused to comment on either existing outsourcing arrangements, or its future plans. It is due to finish the integration of IT systems by spring 2003. Lloyds TSB has outsourced its desktops to IBM in a managed service deal. So if banks choose not to hand over the running of their IT systems to a supplier, what other areas of their business could they outsource? Business process outsourcing will be the next big growth area for outsourcing across industry, according to Anthony Miller, research manager at Ovum Holway and author of its annual report into the UK IT market. This is where a company pays a supplier to take over a business activity, for instance cheque processing for a bank or claims processing for an insurance company, rather than just some technology and IT systems. "Business process outsourcing, like any other outsourcing [contract] is looking to cut costs and make the service more reliable," said Miller. Indeed, banks and software suppliers have already spotted the commercial opportunities in this area. In 2000 Barclays and Lloyds TSB outsourced their cheque processing to supplier Unisys in a 10-year joint venture. And in a similar deal last year, Abbey National and IT services giant EDS announced a joint venture to service Abbey's mortgages and personal loans. At the time Abbey National planned to invest £35m in the first two years of the venture and there are plans to offer the system as a service to other lenders. However, because the case for outsourcing a business process is primarily not an IT-related issue, IT managers are likely to have little input into any deal, Miller added. It should also be noted that the outsourced business process will not operate in isolation from the company's business, including its existing IT systems. Any changes to the technology supporting the contracted out business process will also be felt by existing IT staff. If the proposed deal between Barclays and IBM does go through other banks are likely to follow their example, in the ongoing crusade to squeeze more cost savings from the IT department. But banks have mostly proved reluctant to sign large-scale deals and there are plenty of examples of aborted or troubled outsourcing contracts in the financial services industry. IT managers in the banking industry are likely to retain a healthy scepticism over outsourcing. Are mega outsourcing deals a good deal? YES
- Potential to reduce costs because the supplier specialises in outsourcing and has far greater resources and IT staff
- Your company can concentrate on what it does best, ie your core business
- Allows you to control IT costs over five to 10 years, if you have the right contract
- Supplier can react more quickly to new technology trends
- Five to 10-year deals are often scrapped because the outsourcing contract is not flexible enough to change with the changing requirements of your company
- Users fail to get the best deal from their supplier when negotiating service level agreements in the contract
- There is still little hard evidence that fashionably large outsourcing deals have delivered the cost savings promised to the corporate user.