Cost cuts are still top of the agenda but other factors such as access to skills and security are increasingly influencing the decision to outsource. John Kavanagh reports
The main reason why organisations move their IT to a services company is the same now as when business computing started 50 years ago: to cut costs. If only it were that simple. Nowadays companies have a wider view of what they mean by saving money.
“Outsourcing used to be characterised by deals in which a client would simply hand over IT and staff to a supplier,” says Fons Kuijpers, head of the IT management practice at PA Consulting. “They simply expected outsourcing to reduce IT costs. Today they seek the same cost reduction, but expect higher-value rewards such as access to skills, technological innovation and reduced risk.”
The wider aspects of cost cutting are underlined by Martyn Hart, chairman of UK user and supplier body the National Outsourcing Association (NOA).
“Most research shows that cost is the primary reason for outsourcing – and people then look at those costs in terms of what they actually want to do,” Hart says. “They probably want skills they have not got, for example to move to SAP or Oracle, or they want to get something developed faster, or to get something done they know they cannot do themselves.
“They can develop something new without their competitors knowing. If you do it yourself it takes longer and your staff might leave to go to a competitor; if you outsource it gets done faster, so there is less risk of others hearing about it, and confidentiality can be built into the contract,” he says.
“If you are moving to SAP your staff might only have skills in your old system. And you need to keep your old systems running while you make the change.
“By outsourcing you can get the new system and at the same time off¬load staff who can support your old systems but have the wrong skills for your new set-up. They will probably benefit too, by joining a company that has IT as its core business rather than as just one of several departments.”
Angela Cha, a partner at international law firm Pinsent Masons and author of its Basic User’s Guide to Outsourcing, lists a variety of specific savings finance directors will be attracted to.
“The customer has fewer competencies to maintain. Cost control increases through greater predictability of costs and the conversion of fixed costs into variable ones. Ideally you deal with one party, either the sole service supplier or the key supplier if there is more than one, and that one supplier should have end-to-end responsibility for ensuring that all services are delivered in the agreed way,” says Cha.
Still more practical financial considerations are highlighted by Gary Woodward, chief executive of services company Pasporte. He says, “Shareholder profits and streamlined strategy are now dominating many boardroom decisions, and this is where outsourcing comes into its own.
“Assets are reduced, and there might be flat fees for ease of budgeting, on-demand technologies that scale with the business, and immediate tax relief on service charges rather than capital relief being spread over several years.”
But if the financial case is still simple and apparently compelling, the choices and decisions have become more complicated. This has contributed to an increase in user dissatisfaction and in the number of contract failures, and to arguments in favour of shorter and possibly specialist contracts rather than all-embracing deals.
Several surveys show that about 50% of users are dissatisfied because their expectations are not being met. New research by Unilog, part of services group LogicaCMG, says 27% of companies have problems with their contracts, and although most problems are resolved, in 13% of cases the contracts are cancelled or are not renewed.
According to Unilog, 30% of the problems relate to infrastructure management, and application management accounts for 43% of problems, mainly because there are no agreed standards for measuring it.
But according to Cha, “Renegotiation is not necessarily the sign of an unsuccessful relationship. We have known second and third-generation outsourcing contracts between the same parties that differ significantly in their basic terms.”
All this points to the often complex issues around the initial decision, even if cutting costs is the main reason.
“Failure to recognise the risks associated with getting the business case wrong can push outsourcing programmes in an inappropriate direction from the start, making delivery of the target benefits almost impossible,” says Kuijpers.
“Almost 75% of suppliers in our 2006 research said that where clients got their strategy or business case wrong it was because they failed to understand the implications of what they were doing.”
This is perhaps reflected in PA Consulting’s finding that only 21% of suppliers thought that users communicated their aims clearly to services companies.
Cha backs Kuijpers’ view. “It is self-evident that customers with a clear idea of their strategic and tactical objectives in approaching outsourcing have a better chance of ensuring that it meets those objectives. A key factor is to have a clear idea of the starting position.”
Indeed, many organisations avoid the issue, says Irene Dawson, European vice-president at services group Compuware. “Many companies expect outsourcing to be some kind of miracle cure, and this leads to dissatisfaction,” she says.
“Most companies turn to outsourcing to save money and improve quality without really looking deeper into why the IT department is struggling. So they simply shift the blame rather than solving the problem. There just is not the industrial rigour and proper process in place for much of the work that people outsource, and quality suffers accordingly.”
Dawson adds, “A key problem is that often IT people, rather than business people, make the decisions about outsourcing. This results in dissatisfaction with the business value. Involving business people gives organisations a much better chance of contracts being set up in a way that meets business needs.”
There are even more subtle issues. “Research by the NOA shows that politics is the third biggest reason for outsourcing. This might be because the finance director is fed up with the IT department’s record and excuses, and wants to get rid of it,” Hart says.
Ollie Ross, research manager at user group the Corporate IT Forum, says, “The decision to insource or outsource seems to be cyclical, and at any point in time you find organisations doing both.”
“The change of strategy from in to out and back is usually triggered by a specific event, such as a major business change, ranging from a takeover to a new IT director, a new business channel demanding new IT skills, technology life cycles, or service performance issues.
“There is clearly no best option, only a best option for your particular organisation at a particular time, under particular circumstances.”
For example, telecommunications specialist Avaya has contracted Convergys to handle human resources IT for 15,000 staff in 52 countries and expects to save £6m over five years. By contrast, Orient-Express Hotels recently contracted Pasporte, working with IBM and Equant, to manage its entire IT and network in a deal which it expects to bring 20% annual savings, better service, better security and the ability to upgrade to new services and applications on demand.
Whatever the changing decision criteria and project nature, users still appear to be conservative in the way they use service suppliers: less than 30% of organisations have looked to their suppliers for business transformation, according to PA Consulting’s survey – and less than 50% of those feel they were successful projects.
“Some clients may be right to drive their transformation programmes in-house,” Kuijpers says. “But at present it appears that too many clients are freezing their supplier out because they mistrust their ability to deliver.
“The size, experience and expertise of many IT outsourcing suppliers means they may be able to contribute. But only 35% of clients believe they would use IT outsourcing more to achieve transformational change in the future.”
Vote for your IT greats
Who have been the most influential people in IT in the past 40 years? The greatest organisations? The best hardware and software technologies? As part of Computer Weekly’s 40th anniversary celebrations, we are asking our readers who and what has really made a difference?
Vote now at: www.computerweekly.com/ITgreats