Firms are increasingly outsourcing their IT requirements, and the deals are getting larger. But many business leaders are still carefully weighing up the pros and cons of farming out IT services. On the one hand, outsourcing allows firms to concentrate on their core products or services, but it also means that if their relationships with outsourcers go sour, problems could arise.
According to analyst firm IDC, a total of 17 outsourcing deals in 2000 were worth over US$1bn, nearly twice as many as in 1999.
Outsourcing is often viewed as a means of cutting the cost of managing and running certain systems, allowing firms to focus on improving their main business while leaving experts to deal with technology requirements. IDC believes that outsourcing will increase as companies based in less technologically advanced areas look for assistance in managing their IT systems, enabling them to remain competitive.
The size of recent outsourcing deals shows a growing number of firms are willing to spend on expert IT management services, rather than use funds to enhance existing systems and run them internally. Packaging company Amcor is to pay $200m over five years to Siemens Business Services, to manage its Australasian IT infrastructure, systems maintenance and support. Amcor said the agreement would allow the introduction of new systems and processes, which will in turn improve its capabilities.
IBM Global Services recently won several big outsourcing contracts. Last month it agreed 10-year technology outsourcing deals with restaurant and pub group Bass Leisure Retail, and with Japan Airlines. The deals were worth $54m and $664m respectively. IBM has also signed a $2bn agreement with NTL and a $6.2bn deal with Fiat to manage technology for the two firms.
Companies are turning to out-sourcing as a way of ensuring they benefit from the latest technology, without having to worry about skills shortages, staff retention or day-to-day system management issues, argued Barrie Baker, engagement manager at IBM Global Services. Firms such as Bass do not specialise in IT and may find it hard to keep up with the speed of change, as well as facing difficulties in attracting and retaining good IT staff, argued Baker. He said outsourcing IT helps firms to remain competitive because they can concentrate on improving their business, while relying on specialists to provide expertise and managed services.
But for any company embarking on an outsourcing agreement, there is always concern that things could go wrong and that the service might not live up to expectations.
According to experts, risks can be drastically reduced if safeguards are put in place to protect firms. Sudip Nandy, vice president of Wipro Europe, an IT outsourcer, said firms should pay close attention to the details of their contracts, and demand extra safeguards where necessary. 'The outsourcing industry has matured. Contracts are very strong on a service level and have clauses to deal with a contract being terminated,' he said. Nandy added that it is possible to cross-source, where technology is managed by selected in-house staff, alongside staff from an outsourcing firm.
Duncan Aitchison, head of Cap Gemini Ernst & Young's UK outsourcing services, said companies could put agreements in place to receive detailed reports, and should consider auditing outsourcers to ensure services are in line with contracts.
Despite the difficulties, it seems that a growing number of firms believe the benefits of outsourcing outweigh the risks, as shown by the growing number and value of outsourcing deals. However, companies would be wise to examine contracts carefully and negotiate additional safeguards before entering into any agreement.
