An industry in flux?

9 Dec 2005

While there have been several well-publicised failures in the outsourcing arena in recent years, paradoxically the demand for such services seems to be on the increase. One of the main drivers is the battery of compliance and corporate governance legislation that has been enacted at a national and international level in recent years.

This includes Sarbanes-Oxley Act, 2002 in the US, Basel II regulations in Europe and, here in Ireland, the Companies (Auditing and Accounting) Act 2003, legislation drawn up by former Finance Minister Charlie McCreevy TD to encourage improved compliance and corporate governance.

Such legislation has prompted companies to use third-party suppliers to provide a range of services in the testing and compliance area to ensure their systems are up to scratch. In the case of the Companies Act 2003, directors that are found guilty of an offence could be subject to fines and penalties not to mention reputational loss, which has acted as a powerful incentive to establish robust, professional-audited systems.

Business processing outsourcing or shared services is another area of outsourcing that has been expanding in recent years. The global shared-services market is expected to reach almost €400bn over the next 10 years based on Deutsche Bank forecasts.
Responding to this opportunity, outsourcing provider IT Alliance has established a new shared-services centre at its Dublin headquarters, employing 30 people. The facility consists of centralised back office covering finance, information systems, human resources, resource management and project management.

This centre will not only allow IT Alliance quickly to enter new markets through having key back-office infrastructure in place in Dublin, it will also be made available as an outsourced facility to Irish-based international and indigenous companies to speed their entry to market. The new centre will be led by IT Alliance’s finance and operations director, Hildagarde McCarville (pictured).

In business, the term partnership has become so overused it has become almost meaningless, but McCarville believes IT Alliance’s approach to outsourcing involves true partnership in the sense of cultivating an extremely close working relationship with its clients. Whereas outsourcing relationships in the past meant handing control of a certain function or functions to an outsourcing partner and putting a service level agreement (SLA) in place to govern this, an outsourcing partner nowadays needs to be as much business consultant as solutions provider.

“Our philosophy is to address customers needs in a flexible and timely way and to spot their needs before they do,” says McCarville. “In that sense, our role is part fortune-teller. It’s like the ad says — ‘If you’re not ready, don’t worry, we will be’.”

Where this business model gets a little complicated is the fact that IT Alliance has not one but two customers in every relationship. Belonging to a category of outsourcing supplier known in the industry as tier two service partners (T2SP), IT Alliance’s direct customers are the massive, often transnational tier one outsourcing firms. These blue-chip players sign major contracts with large institutions and then look to second-tier suppliers to “fill in gaps in their business”, as McCarville puts it. In order to do this, however, the T2SP must have an expert knowledge of the end customer’s business and the particular market vertical in which it operates. By doing so, it can offer its tier one customer exactly right type of services and resources it will need to fulfill its outsourcing contract.

McCarville feels there needs to be a deep understanding of the end client’s business and that outsourcing partnerships are more likely to fail if the agreement is simply about trimming costs. “It’s down to relationships and putting the time and effort into it. It’s should not just be a case of signing a contract and walking away.”

John Collins, managing director of outsourcing provider Original Solutions, agrees the relationship between outsourcing provider and client is becoming richer and deeper than in the past. A 70-strong consultancy based in Dublin but with a large IT services centre in Limerick, Original Solutions conducts applications management and change management on behalf of clients that include Anglo Irish Bank, AOL, Eircom and Vodafone.

“Clients need a broader range of services than just technical,” he asserts, citing the example of a financial services sector facing the challenge of complying with far-reaching new legislation such as the Markets in Financial Instruments Directive. In order to help their customers comply with this new EU law (due to come into force in April 2007) outsourcing firms must, Collins argues, have a real understanding of their clients’ business and need to exhibit “business delivery focus as well as technical competence”.

Collins further argues that businesses do not necessarily want outsourcing providers to run whole processes or manage projects anymore but instead to provide ideas and resources to help them manage and reduce risk.

On the topical onshore/offshore debate, Collins believes the term offshore suggests loss of project control and he prefers the terms onsite and offsite to describe the business relationship between outsourcing provider and client. He believes that retaining an element of management control is not only desirable but essential if an outsourcing relationship is to succeed. “Any offsite delivery we get involved in must be complemented with onsite management capability.”

Collins adds that while offsite can in theory be in India or anywhere else, having local, ie Ireland-based, consultants is better for the business relationship because client and customer can work together more effectively. This is why having an outsource service centre in Limerick is an essential component of Original Solutions’ business model, he says.

McCarville describes the concept of offshoring as “very valid” so long as those looking to engaging in it manage it properly and are wary of the potential pitfalls. She argues that whether or not a company decides to offshore certain activities will depend on their specific requirements and the time pressure they are under but normally clients will look to keep management control in-house.

“Sometimes they will offshore to India, China or South America,” she notes, “but keep core management of the project onshore.”

As its clients have used outsourcing to achieve better business performance, IT Alliance has benefited and expanded to its current employee base of 250. But growth has brought its own challenges and, for McCarville, the biggest of all has been adapting its culture as the company has grown. “We’ve gone from being a small entrepreneurial company to something much bigger. We’ve managed to hold on to that entrepreneurial spirit while embracing a more mature approach built around best practice and good systems.”

By Brian Skelly