Science: Cheaper and better IT? Think again - Lynne Currie examines the move away from buying in information technology services
Monday 17 January 1994
A report now suggests that although there appears to be no let-up in the pace at which IT is being 'outsourced', the trend could go into reverse after 1995. Organisation and Technology Research (OTR) says other European countries consider the UK distinctly 'over-
enthusiastic' about the practice, and warns that companies are throwing the technological baby out with the bath water.
After a decade of rapid growth - from virtually zero in 1984 to a pounds 650m market in 1992 - the concept of buying in IT services is well established in the private sector. But burnt fingers are starting to smart, with companies finding themselves locked into contracts costing more than they had expected, discovering that they needed to retain high-level staff at base, and, in their inexperience, handing over reins that should have been held within the company.
The growth in partnership agreements, in which the company and its IT supplier share profits and risk, could contribute to the decline in outsourcing. Tony Pitcairn, the report's author, says that the question then arises: why should the host company share any profit if it could run the information systems itself and keep the money? 'It is then only a small step to turning the information systems management cycle full circle.'
Once companies get over the expensive and disruptive business of abandoning old-fashioned mainframe systems, he foresees a finite life for farming out IT. But it is the public sector that could make a quiet diversion away from outsourcing - or at least the appointment of external contractors - by applying the principles of private enterprise to internal departments. All local authorities will be forced to put their IT functions out to tender by 1996.
The IT department of Reigate and Banstead Council in Surrey bid successfully to keep its own work, and even produced guides for others to follow suit. The council, which serves a population of 118,000, decided to go out to competitive tender before it was legally obliged to. Unusually, staff in the threatened IT section were not proposing a management buy-out, but wanted to remain as employees.
Mike Shillingford, the assistant director of finance, who heads the department, started to put together a bid in 1991. He was helped by the fact that the department was nearing the end of an onerous four-year programme to upgrade old-fashioned mainframe systems, which had given it a good starting point.
The first significant change of ethos came a year later, when a client manager was appointed to talk to the council's sections and find out what they needed. This was followed by agreements on the service the IT section would provide. 'We started looking at service levels and how best we could provide them; otherwise we were dead,' Mr Shillingford said.
Meetings with departmental directors were organised to maintain close contact. Everyone using the system received regular advice sheets on problems and good practice. Performance statistics, showing how faithfully service-level agreements were being kept, were published. 'It was a total reshuffle and rethink,' Mr Shillingford said.
The bid itself was a considerable reduction in the 15-strong department's budget, although there were no redundancies or wage cuts. 'One of the main factors (in the reduction) was the threat to our suppliers. If we lost, they lost. We talked to our main supplier and did ourselves quite a lot of good.
'The bid also engendered team spirit. Everybody was involved, and instead of me pulling them along, as I did in the beginning, I couldn't keep up with them. It's been good for us and good for the council.'
In the private sector, the trend towards outsourcing seems to be maintaining its momentum, as underlined by the recent awarding of two huge contracts by the Inland Revenue and British Aerospace. OTR, however, is unconvinced that it will continue. Mr Pitcairn points out that in the US, home of outsourcing, this same pattern was seen before the market started to slide.
He bases his findings on a survey of 2,000 companies in Britain and in the Netherlands, which showed no long-term commitment to the idea. He warns that carelessly negotiated contracts can lead to hidden costs and messy and expensive terminations. He cites one large undertaking anxious to dissolve its old-fashioned IT department, which dispensed with it wholesale. When problems arose with the outside contract, the company had to recruit a new senior manager to replace the one it had discarded.
Even those who are convinced of the benefits of outsourcing say that a contract has to be meticulously prepared. The words caveat emptor crop up repeatedly.
Ronnie Yearsley, former deputy chairman of BIS Information Systems and a commentator on the IT market, thinks outsourcing will continue to grow, but many companies must wish they had never gone ahead with it. 'It reminds me of the story of the asthmatic woman with a dog. She gave it away, then found a cure for her asthma and wanted it back. Its new owner said it was his now, and she couldn't have it back.
'The IT phenomenon is like that; you can't have it back. Once you've lost it, you may say that you're losing control of your business as a function of this. What you might see in the future is in-house systems analysis and design, but external hardware. This would leave you with direct control of new systems but not of the hardware and boxes and operators, which are capital intensive.'
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