For some years now the business logic behind ‘outsourcing’ has been so compelling—even obvious, with that 20/20 hindsight that characterises so many business trend analysts—it begins to seem almost naïve for a business to be involved in anything other than its core competencies. Expertise and services for other business functions and support services can be bought in on a ‘best of breed’ basis, almost like hardware and software. ‘Do what you do best and outsource the rest,’ is the simple slogan of leading US management guru Tom Peters. Put that way, you almost wonder why anything is done ‘in house’ any more.
One part of the answer, of course, is that ‘outsourcing’ is a neat term (surprisingly so, for the industry it comes from) that covers a multitude of activities and levels of service. It has also, like so many other IT terms, extended itself up and down the scale. If you have a simple ‘call for a tech’ maintenance contract with your local friendly vendor, in some sense you are ‘outsourcing the support function’ or so some people will tell you.
In fairness, immediately above that comes a level of genuine IT outsourcing that has been with us for such a long time that we rather take it for granted: Server and LAN maintenance and administration is very frequently and happily, especially in SMEs, contracted out to a supplier. This is a fairly critical business function, yet the majority of Irish businesses entrust it to an outside supplier, from SMEs well up into the realms of IT departments. If you have to invest in IT staff, the rationale says, their expertise should be in forward looking, contributory activity like application development and strategic planning rather than infrastructural stuff and deep and dirty engineering. On the other hand, now you have the technical knowledge in-house to manage the outsourcing of these and other areas of IT.
But ‘outsourcing’ has moved on at the top end and morphed into something altogether more complex both in technical and in management terms—entrusting an entire business process to a service contractor. There is an increasing buzz and even hype about business process outsourcing, especially in the USA and amongst larger organisations, because it seems to offer the same convincing rationale and promises of staff reductions, lower or at least controllable costs and renewed focus on the real goals. All of which are Very Good Things from a corporate boardroom view.
Like so many other things in IT, one side effect of hype is to make outsourcing seem too complex, too near the cutting/bleeding edge with the result that managements are understandably wary. ‘Confidentiality’ will often be invoked as a mantra when the idea of letting strangers near company data and processes is proposed in any shape or form. In reality, of course, business has to trust other parties all the time: Auditors, management consultants, security firms and so on. In fact possibly the oldest form of genuine outsourcing of an IT process in Ireland and still quietly thriving is one of the most confidential areas of all—the payroll calculations for directors and senior staff!
The top end of outsourcing must be seen as an extraordinary early 21st century phenomenon by any student of business history. The contracts are huge, global, long term and involve staff of whole IT and other departments changing employer from the client to the service contractor. Yet often they do not move office or even desk. Just last month, Hewlett Packard announced one of the largest ever, a $1.5 billion seven-year contract with the Canadian Imperial Bank of Commerce, one of the largest banks in North America with more than eight million customers. HP will run most of the bank’s IT infrastructure, from desktop PCs to mission-critical data centres. It will also acquire about 1,280 of the bank’s employees. HP will now manage hardware and software from multiple vendors, including its own and IBM AS/400 midrange servers, as well as Unix and Microsoft NT operating systems and networking systems.
But in terms of user numbers, this is by no means HP’s biggest contract. Microsoft has outsourced its internal help desk function to HP for 11,000 employees, vendors and contractors in 35 EMEA countries for the past two years. That actually started here, according to Brian Hurley of HP Services in Ireland. Now that relationship has developed into a global services contract, signed just last August, to provide centralised end-user support for 61,000 Microsoft people in up to 68 countries. No value has yet been published for this undoubtedly multimillion-dollar contract.
Billions
HP’s fast growing $15bn services business, well advanced in integrating the Compaq staff and client list, has a bit to go to catch up with EDS, the pioneer of IT services. With its famous A.T. Kearney management consulting arm, EDS sold $21.5 billion worth of services in 2001. Yet these services giants are almost dwarfed by the $35bn plus IBM Global Services, with 150,000 employee in 160 countries. The world’s largest IT services provider, its recently confirmed $3.5bn acquisition of PwC Consulting from PriceWaterhouseCoopers just emphasises the sheer scale.
But back here at home, those astronomical numbers may shine brightly in the IT firmament but they do not cast much light. IBM, EDS and HP have well-established teams in place, so the local delivery of those global outsourcing contracts is a major feature of our IT services landscape. But what was believed to be the largest outsourcing contract for an indigenous company, the Perot Systems deal to run the Bank of Ireland data centre function, was recently terminated. The 320 employees will now revert to a new BoI subsidiary IT services company.
Otherwise, there has been no significant commitment to outsourcing by the larger Irish commercial organisations. Government agencies have awarded some longer term project contracts that amount to outsourcing, notably the 6.4 million document transformation of the Land Registry and its systems being undertaken by EDS. Other public agencies are looking very actively at outsourcing—the Courts Service is examining tenders for a fully outsourced IT service—as are elements of business units within departments and, it is believed, some of the smaller departments themselves. The Public Service Broker element of our move to e-Government will be completely outsourced.
But elsewhere there is little movement so far and according to William McAuliffe of EDS that is down to the small scale and immaturity of the Irish market: ‘The business impact of managing desktop services for large numbers of end-users has still not reached crisis level. What users want is a utility service for their information needs, a service that’s available, dependable and resilient. IT departments really cannot continue to provide this level of service from their own resources. In time they will come to recognise the efficiencies of scale and performance available from a specialist provider with the processes and tool set to cope with the plethora of PCs and PC software.’ He believes the patience of end users and their managements is wearing thin.
Yet it is arguable that although the Irish large corporate market may be caught in scale and culture between the multinationals and small business, our SME sector has in fact been embracing different levels of outsourcing for many years. ‘The Irish managed services market is actually quite mature,’ says Dave Moore of Cara, which has been the largest indigenous IT service provider for a generation. ‘Like everyone else, we learned our way up from service contracts and project-oriented work through network management to today’s managed services.’ He adds that the clients have also learned along the way and worked their way up the value chain, so that now they are buying sophisticated, scalable services and managing the outside suppliers very well.
Cap Gemini Ernst & Young recently commissioned research that focuses on IT and senior managers’ attitudes to outsourcing in the Irish market. Initial findings show that although 97 per cent of respondents were aware of the concept of IT outsourcing, 41 per cent were not outsourcing any of their IT functions and many were only outsourcing in specialist areas (eg ERP implementation). The highest area of outsourcing in the market is IT services, not surprisingly, which focuses on the traditional desktop maintenance market.
Yet there has been considerable growth in the market in recent years and Eamonn Doyle, managing director of Cap Gemini Ernst & Young, attributes it in large part to that growing awareness: ‘The benefits of working with third parties to deliver IT services are being seen clearly now by most Irish firms. If efficient management of the IT function is a key to business development, then it is futile to struggle with an infrastructure that actually limits growth. That can go further—failure to keep up with development in IT can also impact performance and give competitors a strategic edge.’
Yet with the Europe-wide view of Cap Gemini, Doyle says we lag behind in take-up of the full range of managed services. It is in the higher value-add sectors of outsourcing where take-up has been slow with just two or three examples of contracts that span the full outsource of the IT function. Although it is likely that this number will increase over the coming years, the future growth probably lies in selective outsourcing—the selection of an area of the business eg applications management and development, where best service and best value can be obtained from working with a third party in a specific area of the business.’
Brian Hurley of HP Services, which like the other bigger players brings its international experience on the Irish market, points out that there is a natural progression up the value chain through managed services to full outsourcing of a business function or process. ‘But it has to be seen as an extension of your own ongoing development. The new and deeper relationship even goes beyond “partnership” because this is a committed relationship in which both sides have to achieve business wins.’ He suggests that in fact managing the relationship is as important as the technologies and skills involved. There is a serious cultural shift involved where people on the same team have different employers and where staff change to the contractor. This is reflected in minimum contract periods of three to five years, with ten or even twelve years becoming almost common—positive aeons in traditional IT terms.
Benchmarking
There is a qualitative difference also at this level in how performance standards are to be measured. Like employee management, it is subtler and broader than simple Service Level Agreements or other numerical criteria (although they certainly form a key element at lower levels of any contract). ‘Benchmarking’ is a term that is beginning to creep in, reflecting the attempt to make sure there are formal and objective review processes in so far as is possible. ‘The actual criteria will vary for every contract,’ says Danny Doyle of IBM. ‘The principle is to look for objective data from outside the relationship, so you have to go and do your research to find best practice—the next level of toughness so you can keep up with the rest of your industry.’
But there has to be the distinct suspicion that a lot of this will sound like classic international management consultancy speak—male bovine excrement—to a large swathe of Irish business. Quite happily fixed in the SME class and culture of this small island and currently examining every inflating euro for best value, most managements find the comforting solidity of a Service Level Agreement is hard to beat. Three-hour guaranteed response time by a real live technician is a real life solution—not cheap, but if that’s the level you need for critical systems then you pay what it costs. Insurance is hardly cheap these days and you will probably get to test your SLA more often. On the other hand, most SMEs find that elements like a telephone help desk for applications, complete management of the servers and network, installing new users or rolling out upgrades are very good value. On a cost per seat basis you can buy an awful lot of expertise and genuine looking after for a couple of hundred euro a year.
‘We call it ‘infrastructure managed services’ and the whole idea is that a business can use its IT investment directly for its business without worrying about any of the technical elements,’ says Larry Banville of Datapac, ‘from installation to upgrading to emergencies. There is a help desk telephone service for users and our technicians in an area quickly get to know their clients and the people. That’s not a sell—it’s a normal, quality service that we and others offer SMEs. It’s what they need and are willing to pay for.’ Where the likes of Datapac have been adding value in recent times is in managing the infrastructure fully, including pro-active measures as well as routine maintenance and break/fix. ‘That would cover a range of hard and software elements including operating systems, firewalls and antivirus and standard office applications.’
Larry Banville sees managed services moving steadily up the value chain, although there is quite a way to go to the full outsource model. ‘The print function is a good example of the kind of direction in which we are headed. In a reasonable size organisation with network printing, it makes good sense for an organisation to let us supply and manage the whole thing and simply pay on a per-copy basis, usually monthly with reconciliation between forecast and actual at regular intervals. No hassle—inserting paper is all the client needs to worry about!’
Over in the West, a good example of an outsource outsourcing is M&M Qualtech in Galway. This is a 120-staff engineering manufacturer of sub-components on a contract basis for local clients like Nortel, APC and Thermo King. ‘We wanted to stick to our specialised field and get IT specialists to mind our IT,’ says Managing Director John Power. Qualtech has outsourced its IT almost entirely to Evolve Computing, a small 15-engineer company set up in 2000 specifically to provide managed services. ‘We had staff people, it was an expensive overhead, and still problems would arise—usually when our resource was on holidays!,’ John Power says. ‘We also have our own challenges with surges in business—we have often geared up to 24 hour, three shift operation to help meet targets for our clients. But then things would settle back to a more normal level. The thing with Evolve is that a full service is always available to us and we can invoke whatever higher level is needed—although it’s less formal than that sounds. Yet the whole deal is cheaper than one skilled IT person on staff.’
That is probably, behind all the ‘new business concept’ stuff, the bottom line in every sense: Outsourcing is always cheaper in real terms than doing it yourself. The Outsourcing Institute in the USA in a 1998 survey established that the top 10 reasons companies outsource were:
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Reduce and control operating costsImprove company focusGain access to world-class capabilitiesFree internal resources for other purposesResources are not available internallyAccelerate reengineering benefitsFunction difficult to manage or out of controlMake capital funds availableShare risksCash infusion
We have a way to go before No. 10 catches on here: That arises when the new contractor has to buy out the equipment its client already owns. Of course the costs are then built in over the life of the contract. But the new client gets a cash rebate up front even as it contracts for the monthly payments. But most of the rest of the reasons are as valid here as there—for Mullaghmore as well as for Manhattan.
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