IT outsourcing

Perhaps the single most important reason for outsourcing IT is the chronic and almost continuous shortage of suitably skilled staff. Organizations based in or near major centres of population like London often feel that they are at the greatest risk of losing key staff because the best people will always want to work in the glamorous areas such as financial investment or the media and major centres of population provide the opportunity to pick and choose from a vast range of employers. Whilst accepting that organizations without an exciting image will probably be disadvantaged in this way, the fact is that the shortage is global – even the glamour organizations have IT recruitment problems.

Despite the mid 1990s speculation that the start of the new century would see, for the first time, widespread unemployment in the ranks of IT specialists, the shortage is likely to be continuous for some time to come. Without doubt, newly IT trained personnel are coming off the University and college production lines in ever increasing numbers in most countries, and this will clearly ease problems for many organizations if they are content to concentrate on existing technology. However, the problem in maintaining competitiveness is that if an organization is to keep abreast of its competition it must be using the most up-to-date technology and be prepared and able to cope with future developments. Simply having IT specialists is only part of the answer if they not being trained in relevant new developments.

A few people believe that the pressure to outsource IT will largely disappear over the next year or so. In Western Europe the amount spent on in-house IT and accounting functions is broadly similar – between 1.5 per cent and 4 per cent of turnover for the average company. As time goes by, most observers anticipate that IT expense will increase rather more quickly than that for finance. However, the fact that they are currently reasonably in line suggests to some optimistic individuals that IT costs may have stabilized and that further outsourcing of the function is not necessary.

On first investigation, the internal IT department looks like a sound concept. The organization can employ its own specialists in the quantity and quality it requires and these people will be available to carry out the specific tasks that are necessary each and every working day. Sadly, for most organizations this ideal concept is flawed due to the skills shortage and the accelerating changes brought on by new technology. Each organization needs to avail itself of the best service that information technology can offer. But the individuals with the skills necessary to bring about the very best service want to be involved with specialist organizations that can offer exciting work and the opportunity for personal development.

One ever present ’nightmare scenario’ for many IT Directors is the need to take on new technology at a time when the ongoing workload is at stressful levels which effectively rule out or limit the chance of widespread re-training. If, as usually happens, some of the staff decide to move on during this period, then the nightmare becomes even more frightening.

The areas where the shortage of qualified IT specialists is now most acute include call centre design, ERP, internet development and data warehousing, all areas that have appeared on the scene relatively recently. The only thing we know about the future is that new specializations and applications are likely to appear at an accelerated rate. Therefore, there may always be a skills shortage relating to the newest developments.

The IT function is now clearly becoming increasingly important for all organizations and for a growing number of them more and more difficult to understand and use. The need to reduce costs, deliver faster cycle times and generally improve the service is going to become increasingly difficult to reconcile when considered against the needs of core activities.

Most sizeable organizations in the Western world now have a target saving of 30 per cent in mind when they begin to consider outsourcing IT. If they could achieve such a saving whilst obtaining a comparable or better service, then logically their management would find it difficult to argue against outsourcing, particularly if they believed that they were ’getting rid of a problem’.

One reason why there is not an automatic rush to outsource IT departments is that so many deals go wrong. It is variously estimated that 20–35 per cent of IT outsourcing arrangements are cancelled or not renewed when the contract is completed. I accept there are reasons why a contract may not be renewed other than client dissatisfaction with the service provider. Nevertheless, a significant number of IT outsourcing arrangements fall far short of keeping the client satisfied and competitive. This is the main reason for caution and improving overall understanding when contemplating such a venture.

Another reason for caution is the fact that the outsourcing service providers, large and small, all find it difficult to find sufficient quality staff to meet their needs. Being IT specialists they will find it easier to recruit good people than their clients, because they offer increased promotion prospects, but they are probably growing much more quickly than other organizations which will act as a balancing factor. It may appear comforting that the service provider has hundreds or thousands of specialist staff on the payroll, but that does not mean that all or any of these people can be switched to your project at a moment’s notice.

Consequently, the client organization should take careful note of how many of its own IT staff will stay with the provider after the transition. If the provider has to replace most of the team early in the arrangement, then there is cause for some concern. It is worth talking to the provider’s last client and asking how frequently short-term contractors are moving in and out of the project. To be fair, though, some providers have done a good job in achieving a smooth transition and successfully implementing new systems on time even when they were unable to add as many specialists to the project as originally thought necessary. It would also be fair to add that if unforeseen problems do occur during the transition or at a later date during the contract, the typical IT service provider will logically have a better chance of overcoming them than the client would on its own.

An organization considering outsourcing a non-core IT function must look very carefully at what it might be giving away. Some organizations have retained the senior 10 to 15 per cent of staff in house and still found that they have handed over skills to the service provider which are key to its future wellbeing. If this happens then it will be very important to have set up a good relationship with the provider. Although losing valuable skills in this way does sometimes occur, this is not the same as sharing skills. It would be surprising if the provider’s staff did not learn something new from working with the client organization, but that is not normally a problem because on the plus side each client will benefit from the ideas the provider has picked up from other clients.

Management differs strongly regarding potential loss of knowledge or skills. There are managers who fret about the use of contractors or consultants for fear that they could pick up information that will be given to other organizations and so damage the competitive situation. Other managers appear to believe that any knowledge or skills advantage they have is likely to be fleeting and therefore not worth trying to protect. However, the vast majority will recognize the need to be prudent with the organization’s intellectual capital whilst accepting that there has to be some give and take.

The number of organizations which have suffered serious knowledge and skills losses from outsourcing IT must be relatively small. It would normally only occur where key individuals left the client but refused to join the provider, or the loss occurred somewhere in the system during the transition, i.e. as sometimes happens with lost legacy systems which are later found to be important.

In the past, organizations tended to outsource IT without considering loss of knowledge and skills as a serious problem – it was after all a non-core function and the desire or need to outsource was often an admission that there was not much at risk. If that was ever really true for the majority of organizations, there must be some doubt that it is still true today and serious doubt that it will be true tomorrow.

If the various business functions are pictured as branches on a tree, then when IT outsourcing got underway in the 1970s and 1980s, the IT branch was a relatively thin but quick growing limb. Even then, its enabling qualities had resulted in small shoots going out to other branches and giving the tree a lop-sided appearance. Since then the branch has become very strong, it is firmly attached to most of the other branches and entwines the trunk. In effect the IT branch could be likened to a parasite ivy plant apparently intent on strangling a giant oak. The ivy has a different agenda from the oak tree and the oak might be better off without it.

Is it possible that the typical IT department is strangling the organization and confusing its need to concentrate on core functions? Let’s face it, functions like finance and HR would probably not be candidates for outsourcing if technology played no part in their operation.

All the various ways in which IT permeates an organization and the growing trend to integrate all the functions by the use of enterprise resource planning (ERP) systems does not mean that IT has become a core function but it might be even more difficult in time to outsource than a core function. In the past, management gurus have likened the chief executive or the board of directors to the business equivalent of the human brain. Few business brains could function without IT in today’s competitive market and so any operation to remove and outsource these key links to the brain must be thought out very carefully. This does not mean that you cannot improve the brain’s capability by outsourcing, but the subject is worthy of deep thought.

The usual reaction to the fear of outsourcing part of the organization’s grey matter is to bring in the strategic argument. It sounds simple ’Keep the strategic technology in house and outsource the rest’. But what is strategic in IT terms? It’s unlikely to be the most expensive hardware purchased because that’s probably the mainframe ’rusting’ in the shed. Is it the most recent hardware purchased, or the software systems currently in use or the combined skills and knowledge of the IT team? The strategic IT argument will be valid for many organizations but for others it is meaningless. Obviously it is possible to outsource parts of IT that are clearly defined entities such as legacy systems, desk top support, applications development, etc. However, as previously stated, IT has spread its tentacles right through the organization, therefore in many situations it would be difficult for anyone to separate the strategic elements.

In any case, why should all organizations want to outsource everything but the strategic-element? Those organizations that outsource for the original negative reasons, i.e. poor systems, cash flow problems, etc. must anticipate getting an improved service from the outsourcing service provider. Why then separate what they consider to be the strategic systems and prevent them getting a better service?

I appreciate I have been making arguments both in favour and against outsourcing in the above paragraphs. But in all IT outsourcing situations there are arguments for and against. For most organizations the IT function continues to offer the greatest benefits from outsourcing, but also the greatest risk. With this function more than any other, the client needs to be confident that the service provider will strive to improve the service throughout the length of the contract. A risk/reward sharing partnership will go some way towards achieving this aim, but short of owning part of the provider’s equity, how can the client guarantee it?