The source of life

It was heralded as the new dawn - but are outsourcing's days numbered?

The steady flow of corporates outsourcing their IT services has, ined? recent months, slowed to a trickle. Some companies are even bringing their outsourced systems back in-house, signalling what could well be the beginnings of an outsourcing backlash and a return to self-management of computer systems.

A survey by Benchmark Research shows attitudes towards outsourcing are changing. Commissioned by data access and information delivery specialists Information Builders, the research shows the frenzied switch by corporates to outsourcing has stalled, giving way to the first rumblings of a move in the opposite direction.

It is too early, though, to say whether or not this is a developing trend.

The Benchmark figures are inconclusive, revealing that only a small percentage of companies have bucked the outsourcing trend and opted for a temporary return to self-management of systems, or 'insourcing'.

From a sample of 200 companies (each employing over 1,000 people), Benchmark found 64 per cent have outsourced some or all of their IT services. This figure is representative of the trend which rapidly developed in the early nineties, when many companies were looking to slash their salary bills - cutting out an entire IT department was clearly one way to do this.

Of the 64 per cent that have outsourced their systems, 42 per cent said they plan to increase the level of outsourcing, 48 per cent expected no change and 10 per cent plan to bring some of their IT services back in-house.

But Benchmark's research echoes a report published last year by the Gartner Group, which underlined the corporate re-evaluation of the value of outsourcing deals. Gartner's research shows that of 221 clients who attended one of its outsourcing sessions, a massive 53 per cent said they had restructured or renegotiated an outsourcing deal or were planning to do so in the next 12 months.

What the figures suggest, according to Pam Pipe, marketing communications manager for Information Builders, is that 'reasons for outsourcing are changing'.

Benchmark says its research shows cost reduction is less of a motivating factor for outsourcing than previously believed. Only 26 per cent of large organisations said lower cost was a factor in their decision to continue outsourcing. This puts cost cutting in sixth place in the reasons to outsource, well behind skills availability (44 per cent), clear business benefits (30 per cent), a lack of employees to handle IT needs (29 per cent), increased productivity (27 per cent) and the need to buy-in best practice (26 per cent).

Information Builders believes those companies that have terminated their outsourcing deals have done so due to failed outsourcing contracts, where the client has claimed 'loss of control, financial savings that were not as fulsome as predicted and service level agreements that were not adhered to'.

These failed contracts have been the catalyst for the recent swing towards insourcing. But Pipe feels the move is more towards a honing of outsourcing, rather than a complete switch away from it.

'It is making many organisations review the way they outsource and what they outsource,' says Pipe. 'It's not turning companies away from outsourcing.

Many large organisations are now looking to outsource just part of their IT requirement, most particularly where they are short on skills.'

It's a view also taken by Tony Field, managing director of asset management specialist ECS. 'I get the impression there is a downturn in total outsourcing but an increase in partial outsourcing,' says Field. 'Helpdesks, asset management and financing seem to be on the increase. It's like making use of best-of-breed services. They can cope with the daily running of networks now, but the more specialist functions require outside help.'

Pipe and Field also agree that the common denominator for changes in outsourcing trends is skills. While an IT skills shortage has been reported, the positive knock-on effect towards outsourcing hasn't. Many firms will suffer from an IT skills shortage. Most large companies now rely on various forms of IT to help run their businesses. Having highly skilled staff in all areas, including telecommunications, is not only bordering on impossible, it is also improbable given the potential wage demands.

So, outsourcing to a specialist service company with the necessary skilled staff appears to be the obvious answer. And it is this kind of niche outsourcing that in the long term may help keep outsourcers at the forefront of IT services. Field and Pipe agree, with the Benchmark figures appearing to back this up.

Field identifies certain specialist areas such as helpdesks, asset management and financing as experiencing gaps in their skilled workforce. Pipe says education, training and application development are other niches that could make use of specialist outsourced services.

Information Builders is picking up a lot of application development business, 'even where the service we are developing the application for already has an outsourcer,' says Pipe.

'This is probably because the outsourcer has a fixed contract which doesn't allow for specialist development.'

Many of Information Builders' customers are multinational corporations with a demand for cross-platform systems. Most of these are outsourcing, says Pipe - which is the reason why Information Builders commissioned the research in the first place - and therefore the need to understand any trends in outsourcing is greater.

'Some companies are still outsourcing just about everything,' adds Pipe.

'We are currently working with one large firm whose IT department consists of four people. Everything is basically outsourced and the company is not interested in getting the skills on the books.'

That, of course, is dependent on whether or not the right skills are available. Yet it's about more than just skills. Pipe refers to flexibility and the ability to change quickly and easily as the core advantages of outsourcing certain IT functions.

Of the 64 per cent of companies in Benchmark's figures, who have already outsourced some of their IT functions, 10 per cent were planning to bring some functions back in-house. Pipe suggests this 10 per cent figure is more akin to global outsourcing deals where subsidiaries are pulling in parts of services locally. 'There is not really a reduction in total outsourcing,' she says.

Reports from other sectors appear to support this idea. Field says he has seen a sharp growth in organisations wanting ECS to provide asset management services on an outsourcing contract. 'We're growing our asset management business strongly,' he says.

Field says this is not only indicative of skills shortages and a need for specialist knowledge, but also the drive towards total cost of ownership.

As more companies embrace the latest IT industry edict of getting value for money from IT and not just blindly renewing systems every three years, the more those companies are looking to extend ways in which they can decrease cost of ownership while reducing the cost of purchase.

The year 2000 problem has also helped bring in business for outsourcers as organisations start to plan, not just for the new millennium, but beyond. 'How can you plan ahead if you don't know what assets you've got?' asks Field. 'If you want Windows 98, you need to know what hardware you've got first, on which systems you want to install Windows 98 and which systems need to be upgraded. Capacity planning and financial management are crucial and it's what we provide because we have the skills.'

One fast-developing sector where specialist service providers are winning large outsourcing contracts is telecommunications. Market research firm Ovum has issued a report called Telecommunications Outsourcing: The Best Practice Guide, which details how and why companies should consider outsourcing telecommunications services.

'Organisations should be concentrating on their core business,' says the report. 'Outsourcing will reduce your dependence on scarce specialist resources and the threat of technological obsolescence.'

Telecommunications specialist system integrator SDX Business Systems agrees this is an area where changes are happening and where skills needed are harder to find than in IT.

'The integration of new technologies is complex,' says David Spiby, manager of strategy at SDX. 'Users know there are new services and technologies ahead and want someone to manage the transition for them. It comes down to skill factors.'

It is the pace of change that seems to worry most IT managers. According to a report from Banner at the end of last year, the pace of software change and the implications of the year 2000 problem rated highest as the biggest challenges and concerns facing IT managers.

Spiby highlights three areas of opportunity for outsourcing. The first is to meet users' requirements to manage the complexity of multiple carrier selection. 'Users are faced with a wide variety of telecoms carriers from the voice and data markets,' says Spiby. 'It's a specialist knowledge and customers need help to try and take advantage of the various services.'

SDX has a managed network services group specifically focus-ing on the management of wide area communications links. 'This means we have a system which can select appropriate routes through the various carriers, depending on the best deals, destinations, times and so on.'

Spiby's second area is computer and telephony integration (CTI). This is not really an outsourcing service, according to Spiby, who says the user can do it with their own skills or at least set it up through a one-off contract with a systems integrator.

His third area is voice and data integration. 'Users want management of wide area links although over time this will move into the customer's own site,' he says.

'At the moment,' adds Spiby, 'there is a massive changing, technological environment with frame relay, ATM and perhaps voice-over-IP.' The current demand for technical skills in these areas and subsequent shortage is perhaps an indication that if any company wants to implement and manage these new connectivity technologies, it will almost certainly have to be outsourced.

While many organisations may not have a choice but to outsource services if they are to keep pace with technological changes, it does not answer the question of what is the best way to manage systems - by outsourcing or insourcing?

Budgets and availability of skills will always dictate where the services go. Self-management of systems obviously offers more control but if you don't have the skills, you don't have a choice.

The growth in demand for call centres and managed intranets suggests the outsourcing market is healthy and that as long as outsourcing specialists can retain their skills and keep ahead of the emerging technology, there will still be a market for it.

As competition increases in most markets, it has become crucial for companies to concentrate on putting their energies into their core business. IT has often been seen as the naughty child of any company - it should be seen and not heard - yet it has become the lifeblood of business and the key communications tool.

It has therefore become imperative that IT functions be managed by highly skilled professionals - whether or not they are in-house staff of hired outsourcers.

VISION OF THE FUTURE

IT departments must become more commercial or face outsourcing, according to a report from ConnectPlus, the independent connectivity forum organised by Attachmate.

Almost 70 per cent of business managers in the UK feel they are being held back by their IT systems, according to the report. It states: 'IT departments are like pre-privatised utilities, lacking in customer focus, with a public service mentality which blames users for their own connectivity problems.'

It's a damning vision of the UK's IT departments and their management.

Research conducted by Attachmate shows widespread cross-platform connectivity and data integration problems are causing major concern to business managers.

Yet the research also showed that IT departmental budgets are being squeezed and only 55 per cent of IT managers questioned recognised changes. Even fewer have the resources to deal with connectivity problems.

Connect Plus says: 'These two main pressures on IT departments - difficulty of management and a low return on investment mean IT departments face outsourcing unless they can become more commercially aware.'