update Two top-level current and former Australian banking executives today warned their peers not to poison outsourcing arrangements by obsessing over costs.
A correction was made to this article. Please go to the end of the article for details.
"The problem underlying [large scale outsourcing] is that there is a very strong momentum behind the business case that is purely financially driven," Westpac's former consumer CIO Patrick Eltridge, who left the bank in July, told the BankTech conference in Sydney today.
Eltridge later clarified his comments, saying he was not speaking on Westpac's behalf, and that his comments did not relate specifically to Westpac's situation: they related generally to the industry.
Eltridge, along with Paul Rickard, executive general manager and CIO of Commonwealth Bank of Australia client services, agreed that massive outsourcing deals would save money but could result in pitfalls such as a loss of intellectual property, low staff morale and increased security woes.
Over the past decade, both CommBank and Westpac have outsourced their core IT systems — including mainframes, servers, application management and security — to EDS and IBM respectively.
CommBank made its move in 1997, handing the keys to EDS Australia under a decade-long $5 billion deal. Three years later, Westpac followed suit with a $4.3 billion, 10-year deal with IBM.
Today, Westpac is still tied to IBM, unlike CommBank, which last year broke its singular relationship with EDS when CEO Ralph Norris heralded the bank's move to "multi-sourcing", which has resulted in the bank selecting several vendors to provide its application services for around $200 million a year.
Drawing a line
CommBank's Rickard said defining the responsibilities of its own staff and that of the service provider had been a major challenge.
"I think a lot of effort needs to go into thinking and defining what your operating model with your partner is — getting that articulated right through the organisation and getting everyone from both organisations understanding who does what with who and when. That takes a lot of work," he said.
In 2006, Westpac's chief information security officer David Backley said the bank made a "small blunder" when it outsourced its systems to IBM. "We outsourced all our security to them," he said at the time. "We struggled with IBM to get them to understand what we wanted."
Eltridge added to those concerns today. "Over those long life holistic arrangements, [the service provider] becomes your intellectual property. They own it and you have no control anymore," he said.
However, the executive pointed out that an equally important problem was highlighting an organisation's broader objectives, which could get tangled up in an outsourcing arrangement.
"It's not just about bottom line cost savings — you get those anyway, but actually crafting your outsourcing strategy so that it protects the other strategic imperatives, whether that's quality of customer service, privacy, security of customer information, intellectual property, competitive differentiation, employee satisfaction or morale," he said.
Focusing too much on cost at the outset could also undermine what Eltridge described as the "competitive tension" required to keep an outsourcing arrangement healthy.
"If the outsourcing strategy is financially driven and is primarily geared at getting costs back, then there's a compelling argument that the outsourcer says: 'Give me a 10-year deal, give me as much of your business as possible and I'll give you as much scale efficiency as possible'," said Eltridge.
Eltridge explained that this kind of arrangement would maximise savings but it meant the services firm had no competition for the duration of the agreement.
"Yes, you may harness the cost savings, but you throw competitive tension out the window," he told the conference.
This article was updated to reflect the fact that Patrick Eltridge was not a current employee of Westpac, having left the bank in July.
Why anybody would think about a career in IT now baffles me.