Out with it
You've decided to outsource your IT division. Now what? Well, get ready to fork out some cash and change your infrastructure.
So, how's the outsourcing going? Oh, you don't do it, you say? Of ready to fork out some cash and change your infrastructure. course you do - every year when you publish your annual report and attach your accounts for the auditor. That, in case you didn't know, is a form of outsourcing.
The businesses that hire out consultants, like accountants, tend to be smaller firms - even if it's just for a little basic bookkeeping. Here's how outsourcing works.
You identify a need, address it and charge for your time. It's really not complicated, so it's surprising that more IT companies don't make a play for the business.
Outsourcing deals don't have to be as big as the one announced in November between British Steel and French consultancy firm Cap Gemini. Four hundred million pounds were set to change hands after a year of squabbling between Cap Gemini and EDS, but EDS promptly attacked Cap Gemini's offering as 'only a simple IT service'. Cap Gemini rightly points out that if British Steel had not wanted the service, it certainly didn't have to take it.
It was all very entertaining - a bit of a slanging match is always a giggle - but some of EDS' comments have raised an important issue. In a prepared statement, the company said it understood that the commercial arrangements for a proposal in which IT support would underpin corporate objectives would be far more complex than those for a simple IT service. But this is true of every contract.
Not only is Cap Gemini taking over the IT function, it is taking on 600 more staff and pledging not to make any redundancies. If resellers want to get involved in outsourcing, the chances are they will have to consider having someone on site with the customer.
There are cashflow implications and personnel issues which should be taken into account before contracts are signed. If this all sounds a bit daunting, then outsourcing is probably not the sort of business you should get into.
Customers report a great deal of satisfaction. Mike Grabiner, chief executive of telecoms company Energis, took the decision to outsource the company's internal network and payroll system. 'We kept our costs fixed, which enabled us to devote our resources to responding to our customers.'
Freeing up personnel to talk to clients rather than concentrate on internal issues gave the company a competitive advantage, compared with how it might otherwise have run. It might not have been successful in getting to its flotation within two years of its launch had it been focusing solely on in-house business matters.
Larger companies tend to offer an outsourcing service. ICL will send staff in to manage one of its installations in the field. This service can be sold to users by dealers with the right accreditation.
The baffling thing is that if a client company is paying an outsourcer's business costs as well as the cost of running an IT installation - which they must be if the outsourcer is to survive - how do the figures add up to offer the customer value for money? This has been highlighted in a report by Compass (see box, page 54).
The time and resource saved by not running an IT infrastructure can be deployed in generating profits elsewhere, so although the technology could run more cheaply it wouldn't actually make any money if it were taken in-house.
This is why companies like ICL find that customers tend to go for the service. Steve Morton, marketing communications manager for ICL CFM, confirms that over 200 customers currently enjoy the service. They vary from local government departments to large organisations. ICL believes the advantage it offers even the smallest organisation is in spreading the cost of an outsourced team between multiple sites. 'We can cross-fertilise,' he says, which is an important economy of scale to take into account.
ICL's early decision was to attack specific markets, which is why the company began by looking at financial services and manufacturing, then it looked at the health market. By targeting individual niches, the organisation was able to build a reputation and offer specific bands of expertise.
What has come as a surprise, even to ICL, has been the increase in demand for the service as the shape of the economic and political climate has changed over time. 'It is often a case of the government doing a bit of social engineering,' Morton says. 'They want to move a couple of thousand civil servants to private employment.'
This is where the size of the undertaking comes into view. You need to be a certain size before you take on a few thousand civil servants, or they are likely to become decidedly uncivil servants very quickly.
A quick chat with anyone who has worked in a privatised environment will confirm that there is more to it than simply throwing money at a problem.
For instance, if someone is no longer employed by the government, they will no longer be eligible to participate in their pre-existing pension scheme.
Replacing a public sector pension scheme with one from the private sector can have two effects. First, it will reduce its value immediately should the individual decide to transfer a pre-existing pension into your scheme.
The transfer value is always less than that of a pension that stays where it is.
Second, the performance of a private sector scheme is rarely comparable to that which you would find in the public sector, so it will sink in with your loyal staff that they will have less cash to play with when they hit their 60s.
In spite of such issues, a recent survey by the Foundation of Manufacturing and Industry has concluded that British industry uses a greater level of outsourcing than any other major economy. This is surprising since the UK normally trails the US in most IT-related issues, but not this time.
The snag, according to a survey by the Institute of Employment Studies (IES), is that it is being done in a non-strategic manner. In other words, it's all happening out there, but only to meet short-term and temporary needs.
The Cranfield School of Management (01234 751122) is holding a conference in late November, where it will address this dichotomy. You would almost think that people were doing it for dogmatic rather than pragmatic reasons.
Morton confirms that opportunities for outsourcing are cropping up in the most unlikely places. 'We have elements of defence that are being considered for outsourcing which, two or three years ago, wouldn't even have been considered,' he says.
'Companies like ours that have built up a bank of security staff are now able to look at those contacts.'
Large government departments are looking to outsource 90 per cent of their staff, and the BBC is looking into outsourcing its entire financial function.
Key to all of this, from the dealer's point of view, is where the smaller company can fit in. Even a reasonably sized, multiple branch dealership isn't going to have the time or the inclination to manage personnel issues over changing cultures, massacred pension rights, inherited redundancy and maternity rights that taking over an entire department can involve. This is especially true when you are looking at an organisation the size of the BBC or the government.
Nevertheless, there are contracts into which a smaller company can fit quite comfortably. ICL confirms that it addresses these as well, but managing a small network in the SME sector shouldn't be beyond the capacity of most reasonably sized resellers.
Everything an organisation buys is a piece of outsourcing in its own way. By buying the most basic PC from a distributor you are outsourcing the initial procurement, warehousing and some of the testing and quality control before despatching it to the customer. But the real work is when customers want to outsource part of their organisation.
Above all, it is useful to guide customers towards making their outsourced function a success. It's easy to find someone who has a problem they haven't evaluated properly and throw some so-called service at them. It can be profitable, but it's not clever, it's not pretty and it certainly won't win you any friends or new clients.
See, that made you sit up - once you're found out, which you probably will be. This means talking them out of the ad hoc approach described by the IES, for a kickoff. It also means acting a bit more like a business consultant than a dealer, at least initially.
In early 1995, Business Intelligence published a report on outsourcing that is still pertinent today, in spite of its age. It was published in the British Computer Society's magazine, Itext, in February of the same year. It made a number of useful points:
Outsourcing IT should not be done because of exasperation with current performance or a simple wish to get rid of a problem. If this is what your client appears to be doing, talk them out of it.
If your customers can't implement their own IT without falling over, they're unlikely to have put together a competent brief and specification for you to work to. The project's failure is the most likely outcome.
It definitely is not wise for an organisation to outsource anything they regard as a key differentiator from the competition as they will stop owning it.
Anyone who wants to outsource anything that is crucial to their business is probably not very interested in running their business.
So it's worth asking yourself if they're going to be around long enough to pay your invoices.
One hundred per cent outsourcing of IT is a definite no-no. If the slightest thing goes wrong, the customer may see it as entirely your fault.
A company must run smoothly before it outsources any part of its business.
Clients must not be encouraged to think they can walk away from any of the functions which they have decided to outsource.
The outsourcer's performance needs to be evaluated constantly while the project is running, and you need to be able to justify your charges the whole time. Otherwise, you might as well pack up and go home now.
Outsourcing is not easy and requires a load of cash and a willingness to change your infrastructure regularly as you take on contracts and pass them on when you lose them - and believe me it will eventually happen.
But if your business can cope with those strictures, outsourcing is worth looking at.
All that glitters ...
Anyone who thinks of outsourcing as some sort of panacea needs to be careful. Management consultancy firm Compass published research this year which suggests that many of the business tools used for measuring the effectiveness of outsourcing a particular task were way off beam.
The July report, Outsourcing Value Analysis, makes the point that it's no use looking at current costs and working out what can be saved. The thing to do is to look at the costs that would be incurred if an organisation implemented best practices throughout rather than the lousy job they might be doing at the moment.
As the report says, swapping out your internal IT department for an outsourced one isn't an automatic panacea for saving money. 'An internal service function that is run as a cost centre and properly managed should be able to run with a significant cost advantage to outsourcers, who need to add cost of sales and profit margins into their equations,' states the report.
It further suggests that as long as users achieve best practise cost levels first and eliminate all their unnecessary flab before negotiating the contract, they may end up negotiating cost savings that are significantly less than those they could achieve without external help.
And if you end up doing that, you only have yourself to blame.
On the other hand, if a customer does that, you will stand to benefit from their sloppiness.