IT outsourcing is here to stay and IT directors should not hold back from preparing for the inevitable, with changing the skills of the IT department a top priority.
Many IT departments have recognised this and remodelled the skills within to get the best out of the skills outside. This involves developing more business, commercial, contractual and people management skills alongside more strategically minded technical people. But the trend could also lead to the setting up of a new department to sit between the IT and business folk and even the creation of the next-generation CIO.
The pressure for change comes from the popularity of IT outsourcing. According to analyst Gartner, the value of IT outsourcing contracts in western Europe will be worth €228bn by 2011. The take up of IT outsourcing is accelerating: between 2002 and 2006 it increased by 1.5% a year (from €162bn to €172bn) and yearly increases of 5.9% are expected between 2006 and 2011.
In its current form, the corporate IT department faces extinction unless it can prove its worth. And to do that, it will have to change the skills found in the department.
Outsourcers have demonstrated they can adapt their offerings to appeal to business decision makers. The IT department must now do the same.
New balance of skills
The IT department of the future will be a mix of business, commercial, relationship management and technology know-how.
According to Gartner analyst Andy Kyte, some IT competencies have moved to outsourcers for good, and businesses no longer need to invest in in-house skills in these areas.
"If you have industrial-strength third-party solutions which are mature, commercially competitive and widely available, then businesses are confident they are going to be able to continue to use them," he says.
Kyte believes IT departments must develop the skills to manage these relationships to ensure they get the best out of them.
"The key issue is the skill of managing outsourcers," he says. "This is what is missing and is the root cause of so many problems."
Managing outsourcers requires a completely different skill set to traditional IT, adds Kyte. "You cannot take a programmer and turn him into a manager for an outsourcer."
Understanding the needs of the business
Phil Morris, managing director for Europe at sourcing consultant Equaterra, agrees that IT departments must learn business engagement skills if they are to put the right kind of outsourcing contracts in place.
"Talking to, listening to and understanding the needs of internal business IT users and working as an internal consultancy to achieve the objectives of internal IT demand is essential," he says.
Morris says IT departments are evolving to cope with this but not as quickly as they could because there is some reluctance.
"IT departments are changing but not fast enough," he says. "The pressure to modernise is being resisted, which is crazy because they need to modernise."
One business that is not dragging its heels is Scottish Water. The utility company has recognised the importance of changing its internal skills mix and is transitioning to three major outsourcers for a large part of its IT. BT, Fujitsu and Tata will run the communications, the IT infrastructure and application management respectively.
David Brown, general manager for IT at Scottish Water, says the company has created a new structure in its IT department to ensure it has the right mix of skills to get the best out of outsourced contracts.
The company has 43 in-house IT staff: people with mainly managerial and project management skills, plus a few highly skilled technology people.
"We have always bought services in so we always had the skills to manage service providers, but this is more full-on," Brown says. "We had to create much more of a commercial focus, so we have beefed up our contract management skills."
Many outsourcers are paid on performance and Scottish Water has ensured its in-house staff can manage this complicated process. This involves analytics as well as a good understanding of contracts.
"We have also focused on performance management to monitor KPIs [key performance indicators], so have employed people to analyse data and performance," says Brown. "This includes people with financial skills that can marry up performance with KPIs."
He says that technical people are still essential for setting the company's technology strategies. To this end, Scottish Water has created groups within the IT department to focus on IT strategies.
"In the application and infrastructure space we have created technical development groups. These are the guys driving the technology requirements strategy," Brown explains.
Almost all technology support is provided by outsourcers at Scottish Water, which reflects a trend where the balance between technical and business skills has shifted towards business experience.
Westminster Council is also modernising its IT rapidly and has bought into the outsourcing methodology. The council will be infrastructure-free by 2015, when all its IT services will have been outsourced.
The council's CIO David Wilde says the IT department will need more project management skills as well as a strong focus on IT strategy. Staff will need to retain some technical expertise, and have commissioning and project management skills as well.
"It means quite a big skills change for IT staff," he says. "They'll need to know how contracts work and how supplier management works. We need to retain some technical expertise so we can be an intelligent customer."
Taking away the responsibility for IT roles such as support and maintenance will allow remaining IT staff time to focus on what the IT users and business really need.
Nick Mayes, head of IT at nightclub owner Luminar, says his company has a wide range of in-house IT skills and outsources management of its Wan as well as first-line support.
He says that, in response to more outsourcing, the in-house IT staff have become more service-oriented, proactive and strategic and have a good understanding of the IT requirements of the entire business. "The IT team is an equal balance of technical and business skills, and my management team all have experience of other areas of the business."
There are now greater contract management, budget management and service level agreement (SLA) management skills in Luminar's IT team. "As a result we are far more involved in the business decision-making process and strategy," says Mayes.
IT teams at Luminar are trained in basic financial skills such as budgeting. They are also given an understanding of contracts and negotiation techniques and SLA management through ITIL training.
A whole new department
The modernisation of the IT department's skills to accommodate outsourcing contracts requires an additional layer of IT management, according to Robert Morgan, director at Hamilton Bailey, which advices outsourcing service providers.
He says a successful outsourcing relationship involves the creation of a whole new IT department to interface between the outsourcer and the business.
This interface, which will have between five and 10 staff, is an essential component of the relationship. It should be made up of people with technology and business skills and be led by someone with CIO-level experience.
"You need the interface to have the business skills to understand if the technology decisions fit with what the business wants today and the future. This is usually a well-paid CIO-type person who really does have the ability to blend these different skills," he adds.
Morgan says the department must also have someone with commercial experience who can understand contracts and get the best out of them as well as someone capable of motivating staff who work for suppliers.
Evolve or die
Like the 13 species of finches that Charles Darwin noted on the Galapagos Islands, IT departments must evolve if they are to survive and prosper in the environment they inhabit.
Darwin's theory of evolution was constructed as a result of observations made while on a British science expedition around the world aboard HMS Beagle. His recordings showed that species adapt to the environment they inhabit over time, which eventually results in new species.
IT departments must likewise evolve to work alongside outsourcers, which are increasingly taking over their traditional roles.
BOX: NEXT-GENERATION CIO
Outsourcing is also changing and if software as a service (SaaS) continues its momentous growth the CIO of today might look very different to the CIO of the future. As an alternative form of outsourcing applications, SaaS is changing IT departments across the board.
Carl Bate, CTO at Capgemini, says SaaS will lead to the creation of a new generation of CIOs leading next-generation IT departments.
He says SaaS - which delivers applications hosted, maintained and managed by suppliers - is the future and that companies must change IT departments to manage it.
Bate believes a new type of CIO must be in place to manage the move to SaaS for businesses. "All sizes of companies are going for SaaS at the moment, but most are doing it departmentally or in individual business units," he says. "This is now getting on the CIO agenda. Where there is change there is risk, and introducing technology without an over-arching approach can cause problems."
Bate says there are already next-generation CIOs out there who understand the SaaS model but there are still major evolutions of IT departments on the horizon.
"A very people-centric IT team is needed and a shift towards a real 50/50 mix of people skills and technology skills," he says.