Outsourcing IT: An FT Special Report
Model that works even in turbulent times.
In the 25 years since such western multinationals as Eastman Kodak, GE, Citibank and American Express began to outsource their IT operations, the global IT services industry has grown into an $820bn behemoth and outsourcing has gone mainstream.
“Outsourcing is no longer a novel business tactic where companies are forced to farm out a function they cannot manage internally,” says Jagdish Dalal, managing director of the 110,000-member International Association of Outsourcing Professionals.
“Outsourcing is providing companies with alternative business models, whereby they can manage a small but market-differentiating core while engaging expert third parties to perform the necessary work.
“This ‘atomic’ business model is helping them not only weather the [economic] storm, but create a market advantage – even in these turbulent times.”
Companies, big and small, also use outsourcing to give them flexibility as they expand their markets.
In March, Royal Haskoning, an Netherlands-based engineering and environmental consultancy, signed a multiyear, multimillion IT infrastructure outsourcing deal with India’s Tata Consultancy Services.
TCS is providing a full suite of IT infrastructure services, including a multilingual service desk, datacentre hosting and management, end-user computing services and application support services.
“Royal Haskoning is planning to grow, not only in our home countries but across emerging markets,” explains Eric Overvoorde, chief information officer.
“We face interesting challenges, so consistent experience of service delivery is essential for us to be successful.”
With TCS taking care of Royal Haskoning’s IT infrastructure, its management will be able to focus on business performance and international growth plans in Europe and elsewhere.
As Royal Haskoning demonstrates, IT outsourcing is no longer the preserve of big multinationals.
The market has expanded to embrace relatively small and medium-sized companies.
In the UK, for example, Everest, a provider of double glazed windows, wanted to upgrade its network and IT infrastructure but did not want to commit to a long-term deal.
“Initially, we needed a supplier with system expertise but with flexibility in its approach,” explains Dave Gordon, IT services manager. Last year, Everest selected Calyx, a UK-based independent managed service provider for the project.
“We agreed a one-year contract with Calyx that had the merit of minimal set-up costs,” says Mr Gordon.
“Once we had worked with Calyx for a while, its team’s ability to innovate while retaining a flexible approach in day-to-day operations was obvious.
“We have been pleased with the team’s input and extended the managed services agreement and this is helping us ensure enhanced wide area network (WAN) capabilities for our departmental users.”
In the past, outsourcing mainly focused on IT services, but one of the fastest areas of growth over the past decade has been business process outsourcing (BPO).
As with IT outsourcing, there are many reasons why companies such as Microsoft, the US software group, and pharmaceutical companies including AstraZeneca have chosen to hire external help with business processes.
Microsoft set out to re-engineer its global finance processes and operations under its ‘OneFinance initiative’, launched in 2006.
As part of this effort, the company outsourced back-office finance transactions in 95 countries to Accenture, the consultancy, under an agreement designed to promote a commitment to “mutual gains and performance improvements”.
More recently, in 2009, Genpact (the Indian BPO company that was spun out of GE) signed a five-year contract with AstraZeneca to provide the pharmaceutical group with global finance and accounting services, which it did not consider to be a “core competency”.
Tony Glynn, AstraZeneca’s senior director for transformation global transactional finance, explains: “We had entered into a period when the whole pharmaceutical industry was changing and getting ready for greater competition, more uncertainty around patent expiries and so forth.”
Mr Glynn initially identified some six BPO providers that could offer the transactional finance processing services that he was looking for and finally chose Genpact.
“We signed a contract in November 2009, and we are now about 80 per cent of the way through the transition of our activities across to Genpact,” he says.
Like most other big pharmaceutical companies, AstraZeneca has also outsourced much of its IT.
“We have also signed a contract to outsource some of or human resources work, and we’ve already done some selective outsourcing of some of our R&D work,” explains Mr Glynn.
Mr Dalal points out that the pharmaceutical industry is full of examples of companies that outsource their R&D activity for drug development.
On the other hand, he says: “real estate outsourcing provides companies with options for conserving their capital instead of investing in a building.” And IT departments have long used outsourcing to provide innovation and fill skills gaps.
“Manufacturing outsourcing [also] provides many examples of converting fixed cost base for production to a more variable cost basis,” he says.
A recent survey of more than 2,500 chief information officers conducted by PA Consulting and Harvey Nash, the recruitment business, reached similar conclusions.
While cost reduction was the rationale most often given for outsourcing, companies reported that the second most important reason was to to access skills not found in-house.
The same survey also underscores the growing popularity of IT outsourcing.
Almost a third of CIOs said they would spend up to a quarter of their entire IT budget this year on outsourced activity and more than one in 10 said they will spend 50 per cent of their budget on outsourcing.
Software application development remains the most popular outsourced activity, although external help/service desks are now being used by 40 per cent of CIOs worldwide.
Do companies also have an eye on the growth of enterprise cloud computing?
“Cloud computing is one form of outsourcing,” says Daryl Plummer, of Gartner, the research company.
“The difference is in the types of contracts and terms applied.
“In cloud computing, there is one contract that is applied to all customers in the same way.”
Mr Plummer believes cloud computing and traditional outsourcing will both continue to exist side by side.
“Some companies need the customised delivery of services that traditional outsourcers deliver.
“Some need more commoditised services at the large scale that cloud computing delivers.
“But as the cloud model continues to grow, it will steal more and more attention away from traditional outsourcing models.”