2007: How was it for outsourcing?

2007 saw government shun colossal outsourcing contracts, while businesses displayed growing confidence in software-as-a-service -- however, sustained skills shortages have plagued deployments, sparking interest in offshoring.

So just how important was IT outsourcing to Australian business? According to analyst group, Gartner, AU$22 billion was spent on IT outsourcing and services this year, including infrastructure, product support and professional services.

As a destination for outsourcing from overseas businesses, Gartner holds high hopes for the Australian outsourcing market next year, recently ranking Australia as the number one destination for offshore work.

The end of the monolith
But 2007 will be remembered for marking the end of mega-outsourcing deals, as some of the largest contracts in Australia came to an end, and the beginning of multi- or selective-sourcing strategies.

A new generation of decision makers, hired long after initial contracts were signed, came out swinging cleavers at decade-long deals made by CIOs and bureaucrats of yesteryear.

The Australian Tax Office, Australian Customs Services and the South Australian government commenced "selective" sourcing strategies -- using multiple vendors to get a depth of expertise, rather than a single vendor to achieve economies of scale -- few of which include significant involvement from the company that controversially dominated Australian outsourcing for the past decade, EDS.

The South Australian government was the first to carve up its outsourcing contract which has been monopolised by EDS since 1995. By 2005, its then CIO, Grantly Mailes, said the nine-year, half billion dollar contract left the government "materially deskilled" and "at the mercy of the market".

In April Mailes decided to reduce contract durations to three years and excluded EDS from much of the work.

Customs followed a similar tack this year when in June it selected IBM for its mainframe and datacentre work, leaving EDS only application and development work, for which it now competes with the Telstra-owned outsourcing outfit, KAZ.

According to its CIO, Murray Harrison, the changed model will bring new vendor management challenges. He warned peers in November to not fall for "innovative" suggestions made by vendors, and to not rely on Service Level Agreements -- they simply don't work, he said.

But the mother of all contracts to go under the knife in 2007 was the Australian Tax Office's IT infrastructure outsourcing work.

Again, EDS has dominated its work for the past decade, including multiple contract extensions. However in September the ATO's hired guns, the Boston Consulting Group, released its advice for the ATO: split the services into three bundles and make the tenders competitive.

The value of its decade-long deal with EDS stood at AU$1.8 billion, however, the ATO has only committed to budgets of AU$1 billion for new tenders, which are set to last for periods of five to seven years.

The ATO, now under the guidance of CIO Bill Gibson -- after the departure of ex-second commissioner of the ATO, Greg Farr -- this week fired the starter's gun for over 60 vendors that are keen to take a chunk of its managed network services contract, currently worth around AU$55 million per year -- a figure which Gibson is hoping to reduce under the new regime.

Managing its new multi-sourcing selection process will be a challenge for the tax department. It plans on establishing isolation chambers to prevent EDS or other competitors from sabotaging trial and development exercises the ATO wants to conduct before it issues requests for tender.

The Department of Immigration's Systems for People half a billion dollar systems overhaul, like the ATO's Change Program, has also faced outsourcing challenges in 2007. In March the department brought back CSC after Unisys snatched a AU$140 million deal with Immigration in January for desktop operations, business support services, applications support and Internet and e-mail security.

Unisys is just one of the tier-two outsourcing players to have enjoyed increasing success as the trend towards selective sourcing took hold at Australia's largest organisations this year.

Unisys also won new work with the Department of Defence in January to supply IT services to its 460 regional centres.

However, EDS continued to make its mark on outsourcing. In July it secured a further five years with the Commonwealth Bank of Australia, albeit on a shorter contract than previously. CBA had signed a 10-year, AU$5 billion outsourcing agreement with EDS in 1997, and even bought a stake in the company, but it has since insourced its identity management systems, divested its stake in EDS and has slashed AU$80 million from its IT spend.

Software-as-a-service feathers a nest in the enterprise
On-demand software or Software-as-a-Service (SaaS) -- where organisations pay a vendor a monthly fee to deliver software over the Web and host information externally -- captured the imagination of IT buyers in 2007. Rather than fork out big bucks to install software on servers within the business, SaaS has allowed many businesses to outsource application management and hosting to third parties.

More than simply application hosting, SaaS vendors promote the delivery model on grounds of lower capital-expenditure requirements, better managed software upgrades and monthly payments rather than one-off purchasing.

SaaS deployments remain limited to SMBs or business units within larger organisations, and still focus on single business functions, such as CRM, e-mail security, and document management, while organisations still need to determine where it fits within overall strategies.

Analyst firm Gartner predicted this year that by 2011, SaaS will account for 25 percent of the world software market, a prize worth $US55 billion. But today, SaaS accounts for just five percent of the global software spend.

While the cheerleaders of Software-as-a-Service -- Google and Salesforce.com -- have vigorously promoted this new "outsourcing" option, traditional vendors such as Oracle, Adobe, SAP, Microsoft and IBM have also jumped on the SaaS bandwagon, hoping to appeal to SMBs or business units within larger organisations, with Microsoft in February announcing it will spend US$6 billion developing SaaS products.

In September, SAP launched Business ByDemand, distinguishing itself from Salesforce.com by promoting its ability to integrate CRM with ERP.

By December, Oracle's CEO, Larry Ellison, decided to hit the bitumen raising money for the company's on-demand division, NetSuite through an IPO.

Attempting to loosen Microsoft's stranglehold over the desktop, Google announced a partnership with Capgemini in September to offer desktop support and installation services to large corporations that use Google Apps Premier Edition.

Google also acquired hosted messaging security and archiving vendor Postini in July, adding to Google's compliance capabilities.

However, if research firm Frost and Sullivan is correct in its 2007 assessment of the hosted messaging security market, many more companies will be opting for hosted messaging security services in the coming years. Worth US$9.9 million in 2007, it estimates the Australian market will triple in size by 2011 to US$31.1 million.

SaaS backup and disaster recovery offerings for the enterprise have emerged in 2007 also. Thanks to deduplication technologies, Parks Victoria this year outsourced this function to Global Storage, which bought a bunch of EMC's storage units and its deduplication product, Avamar, to overcome throughput limitations that once made this offering unfeasible.

Offshoring: Can it beat Australia's skills crisis?
Skills shortages have prevailed as a key business and political issue in this election year, prompting speculation that next year more businesses will turn to offshore outsourcing to meet the lack of skilled personnel.

Although analyst firm Gartner has pegged Australia as the number one offshoring destination for organisations seeking outsourced options for sensitive business information -- thanks to Australia's mature legal and financial systems, high standard of education and stable economy -- the question remains: can Australia's outsourcers maintain current productivity levels when companies are already struggling to deliver local projects on time and under budget?

Consultants this year complained that Australia's tertiary sector is letting business down by failing to produce capable students in high-end technology areas such as business intelligence -- a field which, according to Gartner, is expected to grow, in terms of spend, at about 16 percent per annum over the next five years. With fewer skilled graduates, both outsourcers and end users are prompted to look abroad for recruits.

While Australia might look to India to fill demand for skilled labour, some analysts reckon that the India's middle class offspring aren't interested in IT -- they want sexy jobs and nice cars rather than suffer the rigours of the engineering and science degrees their parents laboured through.

Meanwhile, Satyam in September announced it will partner with the Australian Computer Society to help fight the skills crisis locally by training local graduates.

Despite discovering in August that Australians prefer speaking with robots to foreign people, Australians may have no choice in the matter if the skills crisis continues through next year.

In October JP Morgan Chase admitted concerns over security: the bank revealed it had acquired previously outsourced call centre operations to achieve greater control over security practices after finding employees using mobile phones to take screenshots of banking details they were privy to.

Changes to Australia's 20-year-old Privacy Act were proposed in September by the Australian Law Reform Commission (ALRC). If its suggestions are enacted, it will bring information held on behalf of Australian government agencies or companies, by companies outside the country, under local privacy legislation, affecting how information is managed under offshore outsourcing contracts.

If the ALRC's recommendations are approved next year, organisations seeking to outsource back-office functions to offshore locations may face tighter regulations around the handling of customer information.

With the popularity of offshoring set to grow next year, ANZ Bank is already reporting some success with this model, and currently owns its Bangalore operations which do most of the bank's application development and testing work. This year it boosted its operations in the city, where it has an estimated 1,600 staff developing the bank's software.

The bank in March reported a AU$20 million year on year increase in IT costs associated with its Indian operations, as it continues to divert application development resources away from Australia and the UK.

However the Indian development centre is also driving the bank's thirst for labour in its UK, US, European and South East Asian centres, causing it to take on an extra 623 new staff since March 2006.

NAB this month confirmed it will pursue a similar strategy by exploring options to offshore information management, SAP software development and the testing of banking operations.

While it is unclear to what extent the credit crisis in the US financial markets will affect the Australian economy, the outlook is considered by most to be strong in the coming year. Australia will continue being hampered by skilled labour shortages, which analysts believe will negatively impact the productivity of all projects next year, one that will force business to seek offshore options.