Your IT heart in their hands: The success of outsourcing technology has created a multi-million pound industry, but it could trigger its own decline, says Lynne Curry

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The Independent Online
Local authorities 'outsource' dustbin collections to private companies; businesses outsource their staff canteens to caterers and their mops and buckets to cleaning firms. Elonex, the London computer manufacturer which is providing scoring and graphics systems for BBC TV cricket coverage, has announced that it is outsourcing its public relations.

Now outsourcing information technology is becoming one of Britain's boom industries. Crudely, it means farming out everything that is computerised to an outside supplier.

The 1994 Holway report, the annual review of the financial performance of computing services companies in the UK, puts the value of the market at more than pounds 835m in 1993 and expects that to rise by 25 per cent by the end of this year. Growth of up to 40 per cent is then predicted through to 1997.

Contracts awarded in the past year, the report says, were worth more than pounds 3bn. Spread over their lengths (often several years) this works out at pounds 400m a year.

Computer Sciences Corporation has just pulled off the coup of a pounds 1bn 10-year contract with British Aerospace. It preceded that with a pounds 100m 11-year contract with the stores group BhS to take over its IT functions. This involved CSC acquiring BhS's computer hardware, including the tills in its 137 stores, taking over BhS's data centre in Luton and becoming the employer of 115 staff.

Not everyone shares the belief that the boom will continue. A report last year from Organisation and Technology Research (OTR), a business consultancy concerned with the practical application of IT advances, says other European countries consider the UK distinctly 'overenthusiastic' towards outsourcing.

After a decade of rapid growth, OTR says burnt fingers are starting to smart, with companies finding themselves locked into contracts costing more than they had expected, discovering that they needed to spend on retaining high- level staff at base and, in their inexperience, handing over reins that should have been held on to within the company.

OTR says that one of the current trends in outsourcing is likely to contribute to its decline. This is the growth in partnership agreements, in which the company and its IT supplier share profits and risk. Tony Pitcairn, the report's author, points out 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.'

Jerry Scott, director of IT outsourcing for CSC, replies that the advantage for the client is a job done by experts and an end saving in the cost. In the case of BhS, he says, 'substantial savings' were guaranteed.

To the lay person, it may be hard to understand how computer services companies, with their high salaries, can do a job more cheaply than in-house IT departments, which have not been particularly high earners. 'It is merely a recognition that there are many benefits to be gained that an internal department cannot achieve when an external company has as its core business the provision of IT,' says Mr Scott. 'We have service-level agreements which specify in detail what service will be provided to the client, backed by penalty clauses, so if we fail to deliver we have to pay. The other side of it is that if we deliver more and are able to achieve more for the business than they have imagined, there is a mechanism for rewarding our initiative.'

General Dynamics, in the US, agreed to share these benefits and to 'incentivise' CSC to find more. BhS has also entered an 'IT partnership' with CSC, which also does work for the National Health Service's North-west supplies, Ford's parts and service operations, and Ideal Standard. Organisations like CSC, Mr Scott says, have the resources to orchestrate large-scale change in the way companies are run.

They also have the money to keep investing in new technology - an ability which comes from being able to spread the cost over a large client base. Mr Scott says: 'One of the economic drivers is technological change; it always has been. You cannot stop technological advance. What we have to do is understand how to use it in a mature way.'