The ever-increasing complexity of computer systems, software and networks is making the job of the IT manager more difficult. There are dozens of different skills that need to be learned, and multiple technologies that have to be mastered.
For many companies the difficulties this presents leads to one inescapable solution: let the experts handle it. Outsourcing is the watchword of the age, and whether it's just one specialist IT function or the whole systems department, the farming out of IT is becoming increasingly common.
To find out where UK companies stand in the outsourcing debate, Business Computer World commissioned an exclusive survey from Spikes Cavell. The research specialists questioned IT managers and finance directors about what their companies farm out, why they outsource and what benefits, if any, they gain.
Companies use external experts to run the show in many other areas, such as managing car fleets, catering, cleaning and clerical work. But recently, IT has become such a huge cost centre that outsourcing is now the biggest single supply contract for many companies.
In the UK, the IT outsourcing market in 1996 was worth #2,320m. Richard Holway, publisher of industry newsletter System House, says that the market is growing at a phenomenal rate (in 1994 it was worth a mere #1,160m), and claims that this growth looks set to continue. Holway also points out that 'outsourcing' only includes those contracts where staff and/or assets are transferred to the outsourcer, which makes these figures all the more remarkable.
In this article, we look at some of the leading outsourcing companies and what they can do for businesses which need to offload some of their IT. We also consulted outsourcing guru Peter Bendor-Samuel for his views on the latest trends.
The main motivation for outsourcing IT is cost, cited by more than half the respondents to the survey. Second is the desire to access specialist expertise. These are both sound reasons, so long as the outsourcer delivers the service. But, although outsourcers can bring economies of scale in both procurement and expertise, do they understand the business imperatives?
IT managers also outsource functions to free staff for other projects, and to gain credibility at board level for risky or high-profile projects.
But the vast majority keep outsourcing at a manageable level, and 83 per cent only use three or fewer outsourcers.
Only 2 per cent of companies have gone to the extent of outsourcing their entire IT function. For the rest, popular areas to parcel out are training, off-site disaster recovery, software development, mainframe development, and network management.
Many of these are obvious candidates for outsourcing. Training, for example, has always been an area where a specialist company usually has greater expertise. What's more, it's often difficult for in-house trainers to keep up with new technologies or training methods.
But the fact that only a third of companies farm out their helpdesk function is quite surprising. Like training, it is labour-intensive and fairly specialised, and the demand for help fluctuates with the installation of new systems and software.
The survey found that more than 50 per cent of IT managers would not be contracting out any functions in the future. But, on further analysis, it is apparent that most of these respondents plan their outsourcing on a case-by-case basis. Furthermore, although they may not intend to renew contracts, in practice, 80 per cent have never re-taken control of an outsourced function.
Only two areas show any real planned growth: the proportion of companies farming out their entire IT function should grow from 2 per cent to 4 per cent; and intranet development is likely to be outsourced by 19 per cent, compared to today's figure of 11 per cent.
A few respondents claimed back functions during the lifetime of an outsourcing contract. As one financial director puts it: 'Our outsourcer is not delivering the service it promised. Even though there is a cost reduction, this lack of effort is affecting our company's competitive edge.' Other companies had outsourced their PC support function only to bring it back in-house because response times were too slow.
Most companies say there are several IT functions they would never hand over to outsiders. Chief among these is strategic planning. But even strategy is considered sacrosanct by only 48 per cent of managers.
There were numerous reasons why certain functions couldn't be outsourced, but loss of control and security were the most common. However, 11 per cent claim they would outsource anything in the right circumstances.
Some outsourcers are keen to take on the complete IT function. Even complexities such as transfer of undertakings legislation, where outsourcers are committed to keeping on existing employees, are unlikely to deter larger outsourcers from wanting to run the whole kit and caboodle.
However, companies need to feel they are getting an efficient service from their outsourcer, whatever the extent of the contract. Only 7 per cent of respondents claim to be dissatisfied, and with a further 62 per cent saying they are satisfied or very satisfied, the picture looks reasonably healthy.
However, there are some concerns underlying those figures which businesses should bear in mind. While 60 per cent of the respondents are happy with the overall service, only 44 per cent thought their partner firms had got up to speed quickly enough. And while 6 per cent are actively unsatisfied overall, 18 per cent are unhappy with how quickly outsourcers got to grips with their problems.
IT managers were also unhappy with the amount of information outsourcers give their clients, with only 37 per cent finding it acceptable. Some outsourcing companies were heavily criticised. One IT manager says: 'Sometimes, it can take up to six weeks to get even simple operations completed.' And a finance director complains: 'Our outsourcing company was supposed to be an expert in our field, but the situation isn't turning out that way.'
Contacts and contracts
However, companies can protect themselves against poor service in several ways. Almost 90 per cent have a single point of contact at the outsourcer, through whom all requests are channelled. Also widely used are service level agreements, to guard against shortfalls in standards, knowledge or response time. Only 17 per cent of respondents have ever actually enforced contract penalties against contractors.
Many companies also protect themselves by setting up limited contracts.
For more than a third of companies, the typical length of an IT outsourcing contract is just one year. A mere 5 per cent of companies contract out IT services for more than five years. Shorter contacts usually mean less favourable terms, and in some cases - particularly when the outsourced function is large or mission-critical - re-negotiating contracts every 12 months can be more trouble than it's worth.
A third of managers also believe it is difficult or very difficult to terminate a contract part way through. As Peter Bendor-Samuel points out, if company employees and outsourcing staff don't get on, this inflexibility can be a serious problem.
Managers reported a variety of different problems with outsourcers, though there were few shared experiences. However, poor service, lack of control, lack of understanding of the business, missed deadlines and response times are common themes.
Overall, the outsourcing picture is balanced. On the one hand, every contract causes some stress. But many save the company money, allow it to concentrate on core activities, and reduce problems for managers who should be focusing on strategic issues.
This positive note is accentuated by the 87 per cent of respondents who believe their outsourcing contracts are well under control. But 49 per cent of these - a considerable proportion who are in control - feel they are sometimes or always overly dependent on their outsourcers.
Two thirds of the IT managers believe that outsourcing has saved them money; well over half thought their outsourcer was doing a better job than in-house experts probably could have done; and only 23 per cent feel they are being exploited by their outsourcer. True, a sizeable proportion of companies - 46 per cent - experience internal resistance to outsourcing, but this is largely unavoidable.
The key finding of the Business Computer World survey is that companies should not expect miracles from outsourcing. It can save money; it can also make your systems run more smoothly and minimise the hassle.
But if you end up with an inefficient supplier, outsourcing can be a nightmare. One IT manager sums it up: 'Although a company may have outsourced part or all of its IT function, it must be careful not to underestimate how much work it will still have to do.'
OUTSOURCING: AVOIDING COSTLY MISTAKES
Outsourcing can be enormously beneficial if you do it right. But if you do it wrong, it can be extremely costly. So what are the pitfalls, and how can you avoid them? Business Computer World talked to outsourcing guru Peter Bendor-Samuel to find out:
The benefits of outsourcing
First, it's important to clarify your objectives. Generally, companies are looking for three benefits when they outsource:
This is at the core of as many as 98 to 99 per cent of outsourcing deals. Companies either want to cut costs immediately or stop them increasing.
Spreading costs to match revenue
Here, the aim is to turn a fixed overhead cost into a pay-as-you-go variable outgoing, so what you pay out is matched more directly to the way the revenue comes in. For example, Natwest bank has used outsourcing to defer much of the cost of setting up Mondex, its electronic cash system, until it starts earning.
Improving focus on core business
Today, most companies are focusing on their core competencies. The idea of off-loading other less strategic activities to outsourcing companies is therefore very attractive. For example, Natwest regards cash management as one of its core competencies, which it does in-house. However, it outsources telecommunications.
These are the benefits, and they can be very significant. Unfortunately, many companies run into trouble on the way to attaining outsourcing paradise. Here are some of the common problems:
The two-year itch
Contracts often run into problems after about two years. The situation can become strained as the reality of the situation and the underlying assumptions of the deal begin to diverge. Each party's understanding of the contract tends to alter over time. Ideally therefore, the deal should change too. However, most outsourcing contracts are not flexible enough to allow for this.
Cost benefits fail to materialise
Sometimes, costs simply don't fall as much as expected. In other cases, outsourcing fails to deliver the projected improvement in the cost structure. The outsourcing contract ends up producing another fixed cost remarkably like the one you're trying to get away from. You can end up with an even more inflexible overhead, only this time it is enshrined in a legal agreement. Companies should be extremely careful in this area.
Occasionally, hostility and even outright resistance to outsourcing emerges among company staff. If this gets out of hand, it can jeopardise the chances of achieving any benefits.
Why do things go wrong?
First, anything written in a contract is, by definition, legally binding and therefore inflexible. When negotiating a deal, you naturally build on a set of assumptions that are true at that particular point in time.
Unfortunately, reality usually turns out to be different. The business and underlying technologies change. Often, the managers who negotiated the deal in the first place move on, so new people take on the responsibility for running it.
On top of this, both parties have to make a significant up-front investment in most outsourcing deals. Customers also make a huge emotional investment because, in adapting to the new working practices, they usually have to get rid of people or transfer them to the outsourcer. Indeed, the turmoil experienced by a company as the outsourcer makes alterations to its infrastructure can prove painful.
Because the outsourcing company wants to protect the return on its initial investment, it will be reluctant to make changes after the deal has been signed.
Outsourcing suppliers have a tendency to exploit the contractual status quo by holding companies to ransom over trivial changes to the basis of the deal. In the US, this behaviour is called nickel-and-diming. This could cause major problems for companies that are locked into a 10-year deal.
It is important for companies not to let the basic power in the relationship shift to the outsourcer, who could end up trying to run the part of the business that has been outsourced.
There is a common problem experienced by companies that outsource some of their IT function: once they have handed over their infrastructure, they discover that the information they thought was unimportant, but which they actually depend upon, is no longer available. It now belongs to the outsourcer
You have to be careful if you complain, because you might be flooded with huge volumes of unsorted and unstructured data. This can be difficult to interpret because you have probably got rid of the people that knew enough about the outsourced process to make sense of it all.
Even if you can understand it, you may find that the data is selective and incomplete. The supplier won't be worried - if it's not contractually stipulated, providing you with useful information is unlikely to be a priority.
So much for the vendor. What about your own staff? They might not like the outsourcer. The deal may have been forced on them by senior managers, engendering a natural distrust between the outsourcer and surviving in-house staff. In certain cases, company staff may deliberately set up an outsourcer to fail.
Furthermore, your staff may try to recreate the outsourced function.
They may not buy-in to the strategic goal of focusing on core competencies; they may still want to control the situation. So, over time, you often see the outsourced services re-emerging, albeit with a different title, elsewhere within the organisation.
But many companies treat their outsourcers badly, so are partly to blame for distrustful relationships. Often, they keep outsourcers at arm's length and don't involve them in their ongoing plans.
Managers forget that there is an interdependency between the parts of the business that have been outsourced and the areas that have been kept in-house. But obviously the success of a company depends on everything working together as a single unit.
Companies should not be surprised if suppliers get upset when costs are passed on to them. After all, an outsourcer is motivated by profit. If the relationship deteriorates, it's easy for the customer to imagine they are behaving as if they have something to hide - and in some cases they do have something to hide.
Making sure that your outsourcing works is a matter of common sense.
However, it's surprising how often companies fail to follow the basic principles for success:
Measure the right things
It is important to remember that if it can't be measured it won't be done. Of course, to measure the right things you have to understand the processes involved, and that's a lot easier said than done. But it's something that can't be overlooked.
Define the right boundaries
Once you understand the process structure, you have to select sensible, controllable boundaries for the part you outsource. This is absolutely key to the future success of your outsourcing project. Usually, it is a good idea to extend the outsourcing contract to the process boundary.
It is much easier to hold the vendor accountable for an entire business process, rather than a sub-process. Otherwise, there can be endless 'grey area' disputes about who is to blame if things go wrong.
Take your time
Another old saying is 'marry in haste, repent at leisure'. It is particularly applicable to outsourcing. You have to be sure that you know what you want done, and specify your objectives in detail before handing over the infrastructure to a supplier.
Unfortunately, it is quite possible that senior management will not give you the time you need to do this. Sometimes, management decides to outsource an IT function, regardless of how staff feel. Because it can be an emotionally-charged issue, management may want it done quickly. The phenomenon of companies jumping into very sudden marriages is quite common in outsourcing.
Manage by results
Once you're in the relationship, be careful not to confuse activity with results. What matters is what actually happens. The key to managing outsourcing is to manage the results. It all boils down to whether you think the supplier has done a good job.
Don't forget, it's still your business whoever is doing it
While you can take part of your infrastructure and give it to a supplier, the outsourcer's activities still remain part of your business. You can outsource processes, but you can never farm out accountability. There can be no delegation of ultimate responsibility to an outsourcer or anyone else.
www.everestsw.com or 001 972 437 7617
OUTSOURCING: THE EXPERTS ADVISE:
To find out first-hand about the positive aspects and the pitfalls, Jane Dudman profiles the leading players in the increasingly competitive world of IT outsourcing.
Company: The Decisions Group Specialist areas: call centre management; telemarketing
Ownership: originally a UK company, The Decisions Group was taken over by US group Sitel in September 1996
UK head office: Kingston Upon Thames, Surrey
UK staff: 1,000
Contact: 0181 784 1000
The Decisions Group represents one of the fastest-growing areas in IT outsourcing: niche operators, which can expand by offering specialist services.
The company runs 80 separate call centres at its Kingston head office.
Its largest and most prestigious contract is managing the Microsoft Network - Microsoft's international customer support service.
Winning the Microsoft deal in April 1995 was a major coup for The Decisions Group. It was up against BT, which won the telecoms contract. According to Debbie Hogarth, marketing manager at The Decisions Group, it was the first time the company pitched against international competition.
'It doesn't matter whether a call centre is in the UK or anywhere else in the world. We saw this as a terrific boost for the UK's reputation as the base for call centres,' she says.
Hogarth also points out that there are a number of reasons for a US company such as Microsoft to locate a call centre operation in the UK. For a start, there is no language problem. Also, the labour market in the UK is not as restricted as in some European countries.
But why choose a small company such as The Decisions Group, rather than one of the large, well-known outsourcing companies? Hogarth says: 'Large outsourcing companies don't have specialised knowledge of call centre management, and call centres seem technical. However, setting them up is the only technical aspect. What really counts is handling people: it's ongoing management abilities that are important.'
Like other facilities' management companies, The Decisions Group's main advantage over in-house operations is the flexibility offered by its size and expertise.
'Recently, we set up 55 new stations in six days,' says Hogarth. 'If a company is running its own call centre, there is inevitably a time lag involved in upsizing and downsizing. But we have the flexibility to iron out the peaks and troughs.'
Specialist areas: networked desktop systems
Ownership: UK - management buyout from Thorn EMI, 1994
UK head office: Farnborough, Hampshire
Contact: [email protected]
Computeraid began business as a maintenance company and, until a management buyout two years ago, was part of the Thorn empire, which still has a 20 per cent stake.
Under chairman Chris Wood and managing director Maurice O'Brien, Computeraid has moved on and now concentrates its attentions on a whole range of desktop services, including outsourcing. In May 1996, the company expanded substantially by taking over the retail part of Alcatel's business. This will push up its 1996/97 figures well beyond the #33m turnover of its previous financial year.
Computeraid's managed and professional services business is responsible for up to 25 per cent of its turnover, and the company has experienced tremendous growth in this area over the last three years. It offers services such as remote support facilities for customers from its client support centre.
The company concentrates on selling its outsourcing services to businesses.
It tends to bid for business alongside industry partners, such as Racal.
The idea is that Racal handles the communications infrastructure and Computeraid looks after the desktop IT systems.
Because of its maintenance background, Computeraid sees outsourcing as part of its overall distributed services portfolio, rather than as a key focus. It can provide network, project and helpdesk services for customers, as well as outsourcing for selected support functions, including hardware maintenance and software support.
According to Mark Sawicki, marketing director at Computeraid: 'The market for outsourced desktop services in the UK is set to grow fast, by as much as 17 per cent in 1997.
'The market for multi-support facilities management, in which companies such as Computeraid work with other specialists, is the way things will develop, rather than the traditional approach of a single supplier handling all aspects of the contract,' he says. 'Customers accept that suppliers cannot be masters of all trades. This approach allows companies to pick up the work they do well.'
For Computeraid, that means running desktop systems which range from relatively small sites with 100 PCs, to the largest businesses that may have anything up to 20,000 PCs.
Company: Computer Sciences Corporation (CSC)
Specialist areas: major outsourcing operation, covering large-scale commercial and public-sector contracts
Ownership: US. UK subsidiary provides outsourcing and other IT services as part of the CSC European Group
US head office: El Segundo, California
UK head office: Farnborough, Hampshire
UK staff: 4,000
Group turnover: $5billion; UK turnover is #115m
Contact: 01252 363000
CSC is a major player in the UK outsourcing market, and is often seen as the arch rival of market leader EDS.
Almost half of CSC's European business is outsourcing. This includes complete contracts, as well as running specific parts of a customer's IT processes. These range from business process and applications management to systems operations and network management.
The other half of its turnover in Europe comes mainly from CSC's systems integration work. A total of 12 per cent of its business comes from professional services such as business re-engineering and management consulting.
CSC has been active in the UK market for longer than EDS, having set up its UK subsidiary in 1969. It also claims that 90 per cent of its contracts are renewed.
In the US, the public sector is the company's core business. It is also involved in the public sector in the UK but, for many years, it was associated with providing contract staff rather than with major outsourcing deals.
From this base, the company has grown, trading on its strengths in the government field, but also with a number of commercial deals under its belt.
In 1994, CSC lost out to EDS in the bid for the biggest UK outsourcing deal of the decade: the Inland Revenue contract. But some of CSC's recent contracts include a 10-year worldwide outsourcing agreement with Lucas Industries, signed in 1995. CSC beat off EDS to win the deal, worth about $750m. Since then, the company has signed an outsourcing deal with Guinness that includes 10-year contracts with two UK Guinness operations.
Today, the largest outsourcing deals seem to be going to consortia, rather than to single suppliers. In 1996 CSC joined companies such as Andersen Consulting and AT&T Solutions to form the Pinnacle Alliance. The consortium was set up to manage part of JP Morgan's global technology infrastructure, worth more than $2b over seven years.
Company: Electronic Data Systems (EDS)
Specialist areas: major outsourcing operations, covering large-scale commercial and public sector contracts
US head office: Plano, Texas UK head office: Stockley Park, Heathrow
UK staff: 9,000
Group turnover: $12.4bn;
UK turnover is #312m
Don't mention Ross Perot at EDS. The US multi-millionaire may have founded the group, but his ties with the company have long been severed. EDS prefers to look to the future rather than the past, jettisoning along with Perot its earlier reputation as a severe employer.
These days, EDS in the UK is too big to spend time mulling over the past.
It recently spun off from former owner General Motors, which bought the company from Perot in 1984. EDS now has its work cut out wrestling with what was, when it was awarded in 1994, the UK's plum contract - outsourcing the Inland Revenue's IT.
Despite the prestigious nature of the deal, some in the industry may be asking whether it might be a poisoned chalice. EDS is used to having a high profile, but taking over the inner workings of the UK tax systems has raised this to a new level.
Questions are being asked over the security risks of allowing a US-owned private company to handle UK tax matters. There is also concern over whether it has the technical capabilities to manage such large systems, with the added complication of the Inland Revenue's changeover to the self-assessment system.
The recent announcement that the 10-year deal, originally worth #1bn, has already escalated to #1.6bn, has exacerbated the situation. Both EDS and the Inland Revenue claim the contract is under control. They say the cost increase reflects an error in calculating the initial figure, as well as an increased workload.
EDS is by far the largest outsourcing company in the UK, almost twice the size of its nearest rival, Hoskyns, which had a turnover of #165m in 1995. EDS's hold on the UK public sector is unmatched, although the company itself points out that only 7 per cent of all UK government spend comes its way. This is compared with the 15 per cent of IT UK public-sector spending that ends up with ICL.
Nonetheless, in the outsourcing market, EDS is well ahead. In addition to its deal with the Inland Revenue, the company has contracts with the Metropolitan Police, the Driver and Vehicle Licensing Agency and the Ministry of Defence.
Company: Logica Specialist areas: service supplier tiering
Head Office: London
Contact: www.logica.com or 0171 637 9111
UK systems and software consultancy Logica is not usually thought of as an outsourcer. But, in November 1996, it announced a three-year, #27m deal with Ford.
The deal forms part of Ford's 2000 strategy, in which the car giant is cutting the number of suppliers it deals with.
Logica will not take over Ford's IT hardware or its staff, but manage Ford's relationships with other suppliers, technical contract staff and agencies. Chris Oliver, divisional director at Logica's managed services division, says the deal will make people look again at the benefits of outsourcing, and at the different ways contracts can be structured. He also expects more business on the back of the Ford deal: 'This is an unusual concept, and we expect interest and growth in this area.'
The Logica deal is different because the company is taking on more than just a fixed-price, single project for Ford, and will be managing other suppliers. 'Ford will be using our management skills at the apex of the supply chain,' says Oliver. 'We will look at the best ways to resource Ford's IT work, through a combination of Logica and Ford staff. It is a new variant of outsourcing.'
Oliver adds that this is just one of several Logica contracts in which the company is involved, not just with IT itself, but with its customers' business processes.
He believes this new approach is a growing trend. Consultancies sell themselves on their strength in applications management and software, rather than looking after hardware or network management, as in more traditional outsourcing. Logica calls its new approach service supplier tiering, and feels it is 'the intelligent way forward'.
Half of companies which outsource IT cite cost as a major motive; only 15 per cent cite better service
62 per cent of IT managers are satisfied with the overall state of their IT outsourcing
Nearly half of companies feel, to some degree, dependent on outsourcers
46 per cent of managers experienced internal resistance to outsourcers ...
... but 59 per cent feel they run the outsourced IT functions better than in-house staff
87 per cent of companies have their outsourcing 'under control'
Peter Bendor-Samuel is a poacher turned gamekeeper, with more than 15 years in the outsourcing industry. He started his career with EDS, the world's largest outsourcing company. He is now President of Everest Software, a Texas-based software and consultancy firm that specialises in tools for managing outsourcing relationships.
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