Changing landscapes

Pro

7 July 2010

Faced with the problem of how to reduce overheads at the same time as increasing efficiency, many Irish companies are opting to outsource aspects of their IT infrastructure. In fact, when it comes to cost cutting and streamlining of business processes, outsourcing looks like a recession proof industry.

Based on the hard-to-argue-with logic that it can be cheaper to pay someone else to take on non-core aspects of a business’ day to day functions, outsourcing should be enjoying a boom at the moment. However, the limited size of the Irish market, the lack of major deals being done and the hesitancy of some companies to loosen internal controls, have all contributed to a slower take up of the practice than might have been expected.

“Outsourcing is not as easy a sell as you might think right now, as many companies are fairly wary of letting functions disappear from their view,” said Conor Sexton, head of managed service solutions for Fujitsu Ireland.

“Typically, they’re comfortable outsourcing the help or service desk but they’re worried about the quality of the service that will result and the perceptions of users of the service – the service desk is after all the front window of the organisation. A bad experience here can genuinely damage the company.”

“At the same time, when it comes to outsourcing other functions like infrastructure or applications, there is a perceptual worry regarding security.”

Broadly speaking, Irish companies tend to outsource three aspects of their businesses. The first and most common is the help desk, the second is infrastructure, with an outsourcer running everything from desktops to servers, the network, mobile telephony systems and even entire data centre. The third area is made up of outsourced applications.

“People tend to think that outsourcing the service desk is the obvious thing to do so that usually goes outside the company first. But it’s probable that organisations do this maybe without thinking enough. The service desk is the single point of contact and the front window into the organisation, and if you get it wrong, it really causes some very unpleasant effects,” said Sexton.

“There usually aren’t security implications in outsourcing the service desk, but if you outsource it to India, for example, you may get cultural problems. Accents can be difficult to understand, and even if someone has good English, they may still not understand our idiom or way of thinking. If you’re going to outsource the service desk, you may be better off to do it locally,” he said.

“For example, we do the help desk for the Courts Service of Ireland, and it’s done in Swords, Dublin. A squad of people take the calls, so users of the service get a familiar Irish or at least European voice on the phone who is located here and who also has a direct line into the system. If someone calls in having lost a password or something, it can be fixed in a flash. As far as the courts service is concerned, this function is outsourced, but only as far as Swords, and that data being dealt with is residing in Swords, within Ireland.”

Out in the cloud
In recent years, outsourcing has become synonymous for many observers with the rise of cloud computing. One of the advantages of cloud technology is that it allows companies to transition from having physical servers located in their office or data centre to essentially renting space and functionality in the cloud as and when they need it.

While many companies are perfectly happy to outsource their help desk and even their applications to the cloud, in the form of virtual desktops and software-as-a-service type applications, there is a major cultural issue to be surmounted for many other organisations that see nothing but security risks in the cloud. In addition, in many countries there are regulatory issues regarding where customer data must be stored.

“For companies in the public sector or in the financial services sector, there is a real perception that there are security, regulatory and tracking issues with the cloud – they need to be able to say they have control over these things. By definition, when you outsource data to the cloud, when it’s not directly under their control, there may be legal challenges,” said Sexton.

“There are also issues regarding geographical and regulatory requirements. Different countries have different data protection laws, and putting your data into the cloud can cause issues if you can’t definitively say where that data is physically hosted. Data protection law extends across Europe now, following a 1995 EU directive, so if you have a European wide application you could be okay, but storing data outside the EU can cause legal problems quite apart from perceptions of a lack of security.”

So it seems that while companies are happy to outsource applications to the cloud where those applications aren’t seen to be critical, they’re less likely to embrace remotely provided services or infrastructure where a regulatory issue rears its head. However, there are ways around such problems.

Changing ways
“In traditional organisations, from public services to banking or whatever, there will usually be 100 people in an organisation who will come up with a reason why you can’t do this or that, basically because they don’t like change,” said Declan Kavanagh, chief executive officer of Sogeti.

“It’s down to the leadership of the organisation to lead change, to say that this can be done and to point out that it is already being done elsewhere. For example, I know of one company who are in the business of providing software-as-a-service and who developed their financial application on the Amazon platform. In order to secure a messaging deal with a client, they agreed with Amazon to move the data away from a US data centre to an Irish one. Without this kind of thinking, you will lose competitive advantage.”

By far the biggest outsourcing deal done in the Irish market was between Bank of Ireland and HP back in 2004, reported to have been worth around EUR*600 million over seven years. That deal has been put back out to tender and it’s understood that front runners to win include IBM and Indian company HCL.

“That deal remains the biggest deal ever done in Ireland in this area – O2 outsourced a very large deal to IBM, but it wasn’t as big as the Bank of Ireland deal. It was a market-making deal,” said Mark McKeon, head of enterprise servers storage network for HP Ireland.

“It suddenly gave exposure to this type of service and validated it all in one go as a sound business strategy to pursue. Bank of Ireland had already engaged in a joint venture with Perot Systems so it had some experience with outsourcing before on a smaller scale. Even so, the scale of the deal opened other doors.”

McKeon won’t discuss the current status of the Bank of Ireland deal, other than to say it’s “the subject of a competitive process” but it’s safe to say the size of the contract will make this one of the most hotly contested outsourcing deals of 2010.

“There aren’t too many companies entering into very large enterprise wide outsourcing agreements of this scale in Ireland,” said John Purdy, chief executive officer with Ergo. “That’s an exceptional deal, because of the scale of it and the size of the country we’re operating in.”

Purdy reports that his company is seeing growth in a niche aspect of outsourcing – insourcing.

Insourcing
“This is where a CEO or finance director wants to reduce headcount, but not lose access to skill sets in the process. They’re outsourcing the requirement to companies like us, and we’re providing staff to work in-house with them.”

“This way they get access to the expertise, but don’t have to pay for holidays or sick leave – that’s now our responsibility. These contracts tend to be around very specific domain specialities – they tend to be ring fenced. For example, a company might ask us to provide a [help] desk service on their behalf because they’re diminishing the size of their own helpdesk, or are getting rid of it entirely,” he said.

Purdy also suggests that similar levels of deals are being done in the Irish market for application management and remote managed network services where organisations no longer want to employ in-house staff to carry out these functions and instead wants an outsourcer to manage the function remotely.

“There are big deals out there to be done, but it’s important to know that it’s often easier to win a deal than it is to actually fulfil it, ” said Sexton of Fujitsu Ireland. “If you take on the help desk of a very large company then you quickly find out that you have to not just handle incoming incidents, or calls, you have to actually know how the client company works, from the inside out. If a problem is caused by organisational issues, then you as the outsourced service provider may not be able to fix it.”

“We’re beginning to see more serious enquiries from companies reacting to what’s happened in the economy in the last few years,” said Kavanagh of Sogeti.

“Companies are driven by competitiveness and they are asking themselves hard questions about how to consolidate their position in the current market. Part of that is asking what their core competencies are and what business processes and functions could just as easily be done for less cost by someone else.”

“There is also pressure on the public sector to be more efficient, to achieve and to deliver better services, so it’s likely that there will be more interest in outsourcing from this sector in the near future. I suspect you’ll see some shared services type models evolving.”

Savings had
David Pentony, global services manager for Xerox Ireland, agrees that the outsourcing market is healthy, but argues that to make the most of it outsourcers have to have many strings to their bows.

“It’s our observation that cost savings aren’t that big a deal anymore — most of the savings to be had have been had, mostly three or four years ago for many outsourcing customers,” he said.

“The lower end cost savings, the 20% you’ll hear advertised on the radio, that’s commoditised – it’s done. We still make a nice living on part of that, but mostly customers are looking for consultative workflow improvements.”

According to Pentony, Xerox Ireland is currently attempting to reposition itself in the outsourcing market to take advantage of the company’s acquisition of Affiliated Computer Services earlier this year. While it’s best known for its document management services, through this acquisition, it is now pitching itself as an IT, document and business process outsourcing provider.

As outsourcing ceases to be a new offering in the market and becomes an increasingly mainstream business tool, the way in which outsourcing deals are negotiated is changing.

Performance based
“We’re seeing a switch from the old availability-based service level agreements to performance-based service level agreements,” said Mark McKeon of HP Ireland.

“Where we used to get asked to guarantee that a particular service would be available for certain minimum periods of time, we’re now being asked to guarantee instead that calls will be answered in five rings or that some other qualitative measurement is achieved.”

McKeon points out that these agreements are designed to protect the client company’s customers from problems that might occur as a result of a service being outsourced.

“A classic mistake companies make is to outsource something because it’s a problem,” said Sexton. “The golden rule of outsourcing is only outsource functioning and healthy services.”

“Often the IT or technical people will be dubious about outsourcing but the accountants in the organisation look at the proposition and just see the bottom line saving. Superficially it makes accounting sense, but if you don’t really know how to do helpdesk within your own organisation, then outsourcing it is only going to make the problem worse. The service will take a dip, with users annoyed and feeling undervalued.”

“If you throw technology at a problem, hoping to solve it, your problem will only occur more quickly – it won’t be solved,” he said.

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