The Evolution of Outsourcing

Outsourcing is still growing but at a much slower rate. CIO UK investigates how the market is changing and what it means for IT leaders.

By Cath Everett

If CIOs were to believe everything they hear from vendors, they would think that outsourcing had taken over the world and there were no in-house IT departments left. While this patently is not the case, it is true to say that the market is growing steadily and evolving as maturity sets in.

According to the Department of Trade and Industrys Information Security Breaches Survey 2006, about 53 per cent of UK organizations currently outsource some element of their IT operations. In 2005, the total sector in the U.K., which includes business process outsourcing, was valued by Gartner at €14.3 billion (US$19.2 billion) and was forecast to grow at a respectable compound annual growth rate (CAGR) of 7.8 percent over the next few years to be worth €20.9 billion ($28.1 billion) by 2010. CAGR in Western Europe, meanwhile, was predicted to be slightly lower at 7.5 percent, with a market value of €43.5 billion ($58.4 billion) in 2005 rising to €62.5 billion ($84 billion) in three years time. But the 15 percent growth rates that were experienced in the market up until a few years ago are unlikely to return, says Gianluca Tramacere, a research director at Gartner.

Market Slowdown
This is due to two reasons which, on the one hand, are stimulating the continued uptake of outsourcing and, on the other, are reducing contract values. The first of these factors is the increasing use of offshore and nearshore services. These are leading to downward pressure on prices and will keep on doing so.

The second is the growing commoditization of outsourcing provision and involves suppliers coming out with less bespoke and more standardized offerings in a bid to make them simpler and more repeatable in implementation terms. This process is also referred to as the industrialization or productization of services and is expected to develop as an important trend over the years ahead.

It is likewise anticipated to make outsourcing a more affordable option for heads of IT at mid-market companies or even in small ones and so expand the current market.

What's Being Outsourced
As to who is outsourcing what, Katy Ring, research manager for IT outsourcing at analyst firm NelsonHall, indicates that just under 20 percent of UK deals last year were full-scope IT outsourcing ones, although they account for a huge 59 percent of the sector's value because of their size. These were undertaken mainly by organizations in central government and manufacturing, in a bid to cut costs.

A further 45 percent of contracts, meanwhile, covered managed IT infrastructure services, although they comprised only about 30 percent of the total value of the market.

The highest levels of activity took place among local government bodies, mid-size retailers and mid-size insurance companies as they attempted to contain costs and transform their infrastructure.

The remainder, in both volume and monetary terms, was made up of managed services in other areas such as applications and networks and this pattern has remained fairly consistent for the past five years, says Ring.

An example of an organization that sits in the latter category is Arnold Laver Timberworld (ALT), a timber merchant that services the building industry and has 16 branches across the country, employing 800 staff.

Well-Worn Road
Following a review of its business processes in 2005, the company found that to run its fleet of 160 lorries was costing an average of £2 ($3.96) per mile traveled. All too often drivers could not find their desired destination, which led to delays in deliveries. Vehicles were also being used for non-business purposes and theft was an issue. As a result, ALT opted to implement a global positioning system provided under a managed services contract by Thus Mobile Solutions. The aim was to enable transport managers to track the exact location of vehicles at any time with an on-screen map, to monitor where drivers were throughout the day and help them out if they became lost. The information could also be used to update customers as to any schedule changes.

Colin Dean, the organization's corporate systems director, explains why it opted for a managed service: "It was about expertise. We're timber merchants and want to focus on our core business, not other people's. This type of system requires a specialist skill set and is better outsourced." The move has reduced vehicle costs—including fuel, maintenance and the overtime paid to drivers—and improved customer satisfaction rates.

Wise Investment
Edmund Comber, IT security and infrastructure development manager at NM Rothschild & Sons, believes that there is a host of reasons why a large number of organizations choose to go down the managed IT infrastructure services route.

Not least among these are a lack of in-house staff resources and a desire to provide the IT department with clear fixed costs for non-core activities. The merchant investment bank runs a couple of managed services contracts, one with ScanSafe, which supplies Web filtering services to protect staff from spyware and malicious content, and the other with MessageLabs, which provides e-mail filtering. It also has a managed wide area network in place.

"It would take significantly more in-house resource to do this ourselves and there's also the issue of providing 24x7 cover. We need to focus on providing core investment banking systems, not something that is pretty much bread and butter," says Comber. "It makes sense to use other people's expertise and resources because they can probably do it better than us anyway, but at a known fixed cost and with very little risk."

Retaining Control
Nevertheless, he thinks it unlikely that the firm would ever go down the full IT outsourcing route. "For us, managed services in certain areas makes great sense but I don't believe you can simply say that all IT outsourcing is good. A lot of people thought it would make their problems go away but in many instances, it simply presented them with a different set of problems that they were equally unable to manage," he says.

One of the key challenges in this area is managing relationships, while another is specifying the contract in such a way that "things can't be wriggled out of," says Comber.

"Managed services entail signing up to a specific service to provide a specific function so it's not possible for things to go wrong simply for contractual reasons."

Comber acknowledges that there are many factors to take into consideration when evaluating whether outsourcing in its many shapes and forms is right for any given organization. "To some degree, it's a cultural issue but there are also business, financial and technical elements plus resource availability and capability components," he says. "You have to cherry-pick the systems and services that you want to outsource and that will provide a definite, realizable benefit."

The Whole Shebang
One organization that has chosen to go down the full IT outsourcing route—although, unusually, it still owns the majority of its assets—is Devon and Cornwall Constabulary (DCC).

It first made the move in 1993 when there was significant pressure on public authorities to outsource non-core activities. Paul Lea, head of IT and service management at the force, explains: "Our view was that we might as well jump before we were pushed and we had an opportunity to steer where we were going. Our IT service requirements were also going through a significant expansion and we wanted to do things 24x7 so it was easier to provide that via outsourcing rather than recruit more staff."

At the time, the organization hired McDonald Douglas, which later became Northgate Information Solutions, and renewed the contract for three years following another tender in 2001. However, by late 2002, the DCC's requirements had changed quite considerably and the organization began planning to put the contract up for grabs a third time.

It hired an outsourcing consultancy to help out and following a presentation by Aidan Lawes, the then chief executive of the IT Service Management Forum, decided to use the IT Infrastructure Library (ITIL) best practice guidelines for service delivery as a framework. It wanted to make its new contract output rather than resource-based and to run it on that basis.

Coping with Eeemand
This was not least because the original deal was starting to cause the organization budget-planning issues as and when demand changed.

"It meant that if the number of calls to the customer service desk doubled, the number of staff answering them did too so we had to pay for that," says Lea.

"But it was difficult to predict and it was starting to cause us real strain, so one of the key elements that we wanted was cost predictability." The invitation to tender, which was released in July 2004 and took a year and a half to prepare, was broken down into seven streams and the deal was finally awarded to Sungard Vivista, in January 2005. The seven-year contract, which commenced in April that year, included three single-year extensions and Sungard is the primary supplier, although it also sub-contracts some services such as hardware break-fix to other vendors such as 2e2, formerly known as Norsk Data.

The key change is that the focus is now on customer service rather than simply on managing the IT estate. This means that DCC's supplier has an incentive to reduce calls to the help desk by ensuring that the underlying services it provides are reliable, available and that it fixes any faults as quickly as possible.

Making It Work
To make contracts like this work, it is important to bear several factors in mind, says Lea. The first is that strategic control relating to day-to-day operations and future direction is retained in-house. In DCC's case, Lea heads a contract management team of three to handle this contract as well as another large network one with BT and Cable & Wireless. The second is that any relationship is based on communications and trust. For example, the force has agreed on an open-book accounting policy with its outsourcing provider, which means that it examines Sungard's accounts twice a year to ensure transparency and that it is "not making undue profits or losses" as a result of the deal.

It also has meetings to discuss the performance of each of the contract "streams" on a fortnightly basis, "So that practitioners can pick up issues and escalate them through both sides of the organization and keep communications going." If such matters are not resolved or service levels are not being met, they are dealt with at a monthly meeting of more senior personnel, with strategic meetings held every six to eight weeks to review progress.

But, as Lea says: "Its crucial to get the contract right in the first place because everything else flows out of that."

End of an Era
Nonetheless, Ring believes that the day of the IT outsourcing mega-deal is now largely done.

While the public sector may have generated a spending bubble in the U.K. over the last few years, most of these large contracts have now been let and this has taken the heat out of the market. "IT outsourcing started calming down at the end of 2005 and is slowing down quite a bit now, but a lot of contracts are being or are on the verge of being renewed. So its not so much that there's lots of new business around as about contracts coming up for renewal," says Ring. This process began last year and is likely to continue for the next couple. But many organizations have learned from past mistakes and are reducing the length of their deals from a previously typical seven to 10 years to, like the DCC, five to seven.

This is mainly due to the lack of flexibility of such contracts explains Alan Rodger, a research analyst at the Butler Group, because "it's simply impossible to know what the business is going to look like in 10 years' time."

Manageable Chunks
But rather than choosing a single large supplier to handle all of their requirements, CIOs are also increasingly breaking their contacts down into smaller chunks and opting for either a lead vendor that handles a range of smaller specialist sub-contractors on their behalf or a range of specialist providers that they manage themselves.

According to Gartner's Tramacere, heads of IT now obtain services from an average of 4.1 outsourcing providers. "These days, customers are looking for selective outsourcing with multiple providers. It's a new trend, signing a big deal with a supplier that says they can do it all isnt considered enough anymore," he says.

"In the past, it was an attractive proposition because the bigger the provider, the more money you could save, but cost savings are less important now," says Tramacere.

Instead CIOs are exploring how they can enhance their skills base and flex it up and down as required, while at the same time provide more adaptable systems and services to the business.

As Tramacere concludes: "In a world where people are looking to increase their competencies and become more flexible, service delivery excellence has simply become more crucial."