IT outsourcing is emotive, but it is hard to find a company today that doesn’t do it in some way.
Outsourcing is also changing fast. In the past, IT outsourcing was a case of handing over the running of the back office, with suppliers offering to manage “the mess for less”.
This extended to companies choosing to have mess managed for even less in offshore locations, particularly India, where the cost of labour is lower.
But developments in cloud computing, automation software and big data technology are changing the way outsourcers offer services and how businesses consume them.
Traditional application development and maintenance outsourcing is being shaken up as a result of cloud computing and the software as a service it brings. Offshore business processes and IT services are being replaced by automation technology, reducing the need for low-cost, full-time staff to run them. Meanwhile, big data is turning suppliers into information gatherers and translators rather than software maintainers.
Another change taking place is the digitisation of business, which is placing difficult demands on in-house IT resources. Businesses want support in the back end to free up staff for digital projects at the front, where their business knowledge is vital.
All this means IT outsourcing is set to continue, but will change in its form.
Computer Weekly’s CW500 Club recently discussed the future of IT outsourcing. CIOs from Croydon Council, Cambridge University Press and clothes retailer Monsoon Accessorize described some of the changes happening now and their impact on IT outsourcing.
Public sector is open to change
The fact that the public sector is transparent is the reason we hear so many public sector IT outsourcing horror stories, not simply because there are more of them. Private sector companies, on the other hand, are unlikely to publicise failed outsourcing arrangements. But outsourcing in the public sector does have its challenges.
Outsourcing is an attractive cost-cutting mechanism for any organisation forced to cut costs. The London Borough of Croydon is a good example of an organisation facing this, as the council has to cut £100m from its budget over the next three years.
Nick Roberts, head of ICT at London Borough of Croydon, and former president of local authority user group Socitm, says while many commercial organisations are coming out of austerity and are able to invest, local government is only about halfway through the process.
Outsourcing provides cost-cutting opportunities, so public sector bodies, with seemingly impossible austerity targets, will inevitably look to the market for options. But while outsourcing contracts promise cost savings, it seems they are failing to support the future plans of customers, despite the importance of IT in these plans.
Roberts says government organisations have had bad experiences with large outsourcing contracts, many of which were set up with the knowledge of what was required from day one, with the supplier offering a competitive price to deliver.
“But then day two comes and you have to change things, but this is a commercial process,” he says.
The supplier has its own targets, so making changes to the agreed contract is not easy.
He says this situation inevitably causes problems, with the inability to change being “difficult to manage in a world where the only constant is change”.
Roberts, not surprisingly, “has a few gripes” about traditional outsourcing contracts.
“They focus on the current operational state and are not built for change,” he says. “That change process is always mired in a commercial process. The business wants to change, but it can’t because it has to go through this commercial process.”
He says contracts reinforce this because they are written to measure success in terms of support rather than the ability to change and be flexible.
But cloud is bringing change, according to Roberts. “A lot of the contracts in place are effectively in-house datacentre support contracts. But the big change is the move to native cloud, which takes that out of the equation,” he says.
For example, enterprise applications that were kept up to date by suppliers are not relevant with software as a service. The hardware estate is also not managed in the same way, with staff using a large number of different devices.
IT that supports the customer-facing operation needs to be in-house. The in-house teams that understand the relationship with customers have vital skills for IT today, because IT is an interface with citizens rather than just underpinning systems.
Roberts says increased multi-sourcing mixed with in-house services and shared services will be the make-up of IT services going forward.
Where shall I take my IT?
While outsourcing changes, so do the locations from which it is delivered.
Mark Maddocks, CIO at Cambridge University Press, says the medium-sized publisher is in the process of moving from print to digital publishing, which is a big step for an organisation that is almost 500 years old.
Cambridge University Press publishes academic journals and books and has English language courses and education businesses across the world. Most of its sales are outside the UK.
The company has significant outsourced operations, many of which are in offshore locations.
Maddocks says the company uses four types of outsourcing and, following success with the approach, has increased its offshore operations over the last five years.
“We have a traditional outsourcing model. We buy services where we are looking for scale and cost reduction. Here we are not really looking for differentiation and I would be quite happy if all our competitors used the same service,” he says. “This works a treat when you have a really clear interface and when you can measure it. We use this for all sorts of things, such as hosting.”
The company also has offshore captives.
Its first was in Manila, Philippines, where it started around five years ago with 40 staff focused on software development and testing, supporting its online digital product. Currently, it has just over 250 people and expects over 300 by the end of 2015. The Manila centre now has 18 seperate teams carrying out a wide range of internal services.
According to Maddocks, it is “cost-effective, low attrition and wage inflation is not as bad as people say”.
But there are disadvantages. Maddocks says it requires management time and overhead. “They are my team and I still have to manage them.”
The company’s third model is offshore software development in India, with development centres in Calcutta and Hyderabad. These are with two very large Indian IT services providers and both centres have about 50 people in them.
The Calcutta centre supports the organisation’s learning management platform, which is an English language resource used by about 500,000 people worldwide.
“I put this in Calcutta, rather than Manila, for access to skills. There was a particular technology stack I did not think I could bring in quick enough in Manila,” says Maddocks.
“We have built a long-term relationship and are in the fourth year of working with that supplier. In Hyderabad we are in the third year of a deal to run one of our internal systems,” he adds.
The fourth model, a hybrid of traditional offshoring to a supplier and a captive, has just been launched through a business process outsourcing operation, where it shares a building with the existing team in Hyderabad.
“We have big growth plans and will expand from about 10 people to over 100 by the end of the year,” says Maddocks.
This model uses an Indian partner to help the company recruit for a centre that uses a traditional supplier/customer model, but will have the ability to change to a captive centre easily if the organisation wants it to, he says.
His advice to CIOs thinking about outsourcing and offshoring is to “be really clear what your aims are and think beyond cost reduction and getting rid of a problem”.
“Think about accountabilities and make sure teams have ownership of the relationships with the people you work with and have good offshore leads,” he adds.“Spend time building relationships with teams offshore.”
It is clear the changing role of the IT department is moving it from the dark depths of the basement to the shop window.
Retail’s speedy and necessary take-up of digital customer services is a good example of a sector where IT is split in two. Today there will be teams, probably outsourced, supporting legacy systems, while in-house IT, which understands the business, focuses on providing customer facing apps and understanding customer behaviour through data.
John Bovill, IT and e-commerce director at Monsoon Accessorize, says the retail industry is in a state of flux.
“People are interacting with our company in different ways and this has put IT at the front of house,” he says.
About 50% of Monsoon Accessorize’s customers have first contact with the store via the website and the other 50% through the store, but 75% of final transactions are still in-store.
These changes in customer behaviour meant in-house IT had to change. Resources can no longer focus on the systems that keep the company running but must be dedicated to attracting customers.
In the past, says Bovill, stock was sent to outlets and sold on the high street to consumers physcially browsing in the stores. But today it is about drawing customers in, which means understanding them.
“The corporate IT function as we know it in our industry will be very different. Consumerisation will turn it on its head. It will be analytics-based and all about understanding data and using it in an intelligent way,” says Bovill. “The day-to-day IT grunt and robust solutions will be provided by suppliers.”