IT outsourcing is a mature industry, but there are still many first-time outsourcers coming to the party during a period of significant change in the technology and business environments.
IT is increasingly being seen as a way to increase business, SMEs are looking at moving IT to the cloud, in-house IT teams are struggling to keep pace with technology changes, and businesses that are not used to hard times have been forced to cut costs for the first time in the recent recessionary years. These factors are driving first-generation outsourcing agreements.
Paul Hinton, commercial technology partner at law firm Kemp Little, says in finance there is a trend seeing small and mid-sized merchant banks, hedge funds and brokers, are examples of sectors outsourcing IT for the first time.
But high fashion retail, professional services, government sectors, and pharmaceutical organisations are other examples, he adds.
The IT being outsourced ranges from the end-to-end IT to discrete parts. He says datacentres and Software as a Service (SaaS) are examples of IT being outsourced. “We have seen a large number of businesses, for example, migrate to one of the many different types of multi-tenant datacentre offerings and then decide to review the way that they manage and support their systems, often replacing in-house systems and support for fully managed solutions of one kind or another.”
Hinton says there has been a large number of first-time outsourcing to specialist providers that can offer SaaS. “If successful this can often lead to a change in outlook and more systems and services may follow.”
But will first-time outsourcers now avoid many of the problems experienced by the businesses that have been doing it for years?
“The percentage of successful first-time outsourcing is, I suspect, significantly higher than 20, 10 and even five years ago,” says Hinton. “Experiences over the last 25 years or so have generally improved supplier standards, practices and procedures and first-time outsourcers have a broad choice of skilled and experienced suppliers to choose from.”
But he warns that if the in-house teams have little experience of outsourcing and do not engage specialist external expertise the same problems can occur. “First-time outsourcers often still underestimate the time it takes to properly understand what is being outsourced and ensure it is effectively documented and covered in the contract.”
He adds that tried and tested rules apply. “Never outsource a problem – take the time upfront to get it right and make your requirements, services and objectives clear, maintain the skills to manage your outsourcer and actively manage the supplier to keep it on track. Plan for exit and ensure you can transfer smoothly as possible to another supplier if you need.”
Lee Ayling, management consulting partner at KPMG, sees first-time IT outsourcing prevail in the retail and business services (including Professional Services) sectors, with application maintenance and project/development services, and well as datacenters most common.
He warns that first-time outsourcers should use suppliers that have done it before if they want to avoid mistakes of the past. “Pick a supplier who has done it before. This does not have to be a big US player, or top 5 Indian supplier. Do the research.”
Ayling says the cloud is partly responsible for first-time IT outsourcing growth with cloud services replacing applications. “But this is still immature.”
Douglas Hayward, outsourcing analyst at IDC, says the cloud computing is part of the reason for first time outsourcing with SME companies moving IT to the cloud. “There are still issues around security in the cloud for large enterprises but for many SMEs data is more secure in the cloud,” he said.
He says SME moves to the cloud are driven by the fact that there are lots of companies “growing up” and moving to enterprise wide technology. “They are outsourcing as they start to use more heavy duty technology," he said.
“The S part of SME is becoming the M.”
Mark Lewis agrees: “We are beginning to see a step up in the SME market. There is more use of public clouds particularly for IT infrastructure.”
He said it is difficult to find large corporates that are outsourcing for the first time, but there are changes in outsourcing in this sector with a major corporate client deploying software defined networking through an outsourced model.