Outsourcing grows as companies waste big money

This year's Holway Report on the UK IT software and services sector, due for release at the end of May, will show that in a declining market outsourcing has continued to grow, making up one third of the UK software and services sector.

And figures from analyst Gartner show that, while the rest of the IT services market contracted last year, outsourcing grew by 6.3 per cent in western Europe. But it warned that companies have wasted €6bn through short-sighted and badly managed deals.

Last year the UK IT market fell by five per cent, and Richard Holway, director at Ovum Holway, predicted that it will suffer a three per cent decline this year.

And if outsourcing is taken out, the figures are far worse. The sector dropped by 10 per cent in 2001-2, and Holway believes it will continue to show negative figures through to 2005.

Next year, at best, it will stop getting worse, he said, because replacement cycles will come into play.

"The industry is going through the worst downturn ever experienced in this sector," he warned. "But outsourcing is the one side of this market that continues to grow."

Holway expects IT to bump along at about four per cent of the gross domestic product as the industry has now reached maturity.

He suggested that outsourcing will continue to increase its market share, but that companies are shifting their reasons for entering into contracts.

In the past it was about new projects, controlling costs and concentrating on core competencies. Now cutting costs is a prime motivation for outsourcing.

Holway interviewed the top 15 chief information officer (CIO) budget holders in Europe, many of whom confirmed that budget cuts will continue year on year, even when the market improves.

"They saw outsourcing as a route to achieving that kind of cost control and to cut costs. Now more and more outsourcing is seen as a way of cutting costs," he explained.

This flies in the face of the usual reasoning. Maggie Miller, CIO at Sainsbury's, said recently: "To see outsourcing as a way of cutting costs [ignores] business logic. There are some superb reasons to outsource, but cost isn't one of them."

Sainsbury's is part way through a major outsourcing deal, signed in September 2000 with Accenture. The contract hit a milestone in the past few weeks with the installation by BT of a major network.

Companies are increasingly reluctant to get locked into single-vendor deals, which are difficult to manage and troublesome to get out of if things turn sour.

This has led to what Holway calls multi-sourcing: the use of more than one vendor. And more companies will either handle programme management internally or turn to an independent company.

Richard Granger, director general of IT for the NHS, is implementing just such a strategy. His department is spending £850m on IT this year, and Granger has employed Kellogg Brown & Root as independent experts to manage its programmes.

Pierre Danon, chief executive of BT Retail, which is involved in the contract with Sainsbury's, believes that more companies will look to better manage their outsourcing contracts in future, and gain more control.

"The more you have invested in programme management, the more you can switch [supplier]," he said.

BT Retail admits that outsourcing is key to the telco's future success, and that it must be considered capable of running major outsourcing deals and not just the network infrastructure.

The latter would be "lethal" for BT, according to Danon. "When that happens, we are a pure commodity," he said. "We are in the hands of IBM's or EDS' purchasing department."

Gartner too believes that more emphasis is needed on the management of an outsourcing contract, especially as more companies now audit these deals.

Roger Cox, vice president of IT management strategy and planning research at Gartner, explained that money has been driving much of outsourcing.

"People are desperate to show immediate cost reductions," he said. "So companies are signing long-term deals based on short-term objectives."

Cox argued that many IT departments lack the skills properly to handle outsourcing contracts, because technology professionals are not trained to manage such deals.

"If you look at management capabilities in IT, it's roughly where management was in the construction industry in the 1860s. The future will be about new attitudes, not applications," he insisted.

Gartner's advice to ensure successful outsourcing is to view the service provider in the same way that you would a company you were taking over.

"Outsourcing is not about buying something; it's about a major service provider becoming part of your company," said Cox.

"If you look at it that way, it's more like an acquisition or merger. If you get that shift in attitude at board level, outsourcing works much better."