New world order of business

28 Aug 2003

A sudden seismic shift in the direction of IT outsourcing by global businesses either could signal a very bright future or possibly sound the death knell of Ireland’s once-thriving IT economy if this country fails to rein in its rising cost base. The nation, experts say, has less than a year to get its house in order to retain its place in the IT pecking order.

At present, Ireland boasts a rich community of some of the great and the good of the IT world and is not short of doyens who wax lyrical about the fact that Ireland is the largest exporter of software in the world. A post-Enron/11 September business world has resulted in a new generation of business managers that is more reflective about its cost base than its dotcom boom time predecessors and as a result is more welcome to the potential that outsourcing business processes and IT affords.

Ireland boasts some of the biggest players in the international outsourcing arena. These include significant chunks of the international operations of EDS, IBM, Accenture and Hewlett-Packard (HP) and in tune with the country’s aspirations to move higher up the value chain at a first glance it appears that the country is well positioned to take advantage of the growing international trend towards offshore outsourcing. Indeed, international research house Gartner has included Ireland as one of the countries, alongside players such as India, China, Sri Lanka, Poland, Russia and the Philippines, best placed to gain from international ‘tech-tonic’ shifts in the direction of outsourcing.

However, before Ireland can take advantage of this move towards globalisation the country needs to understand the guiding principles of outsourcing — cost, efficiency and competency.

On the latter front, the country is struggling to match the employment aspirations of the IT graduates of the class of 2002, many of whom have yet to find the well-paying jobs that their counterparts enjoyed pre-boom circa 2000. According to the Irish Computer Society, disillusionment amongst college graduates may result in fewer applications for university places on IT courses resulting in Ireland being unable to field the 14,000 IT graduates that are predicted to be in demand by 2005 when a full IT industry recovery is under way.

In terms of cost, Ireland is at a stalemate position. Still regarded as having an economy the envy of Europe, the country is in danger of resting on its laurels and allowing costs to spiral dangerously out of control. Many of the companies that have outsourcing operations in Ireland — IBM, Accenture and EDS — also have equivalent outsourcing operations in emerging IT powerhouses such as India. Dublin, where many of these companies have operations, is already being labelled one of the most expensive cities in Europe to live — this means wage inflation to cope with the cost of living.

In terms of being an attractive market for outsourcing itself, the Irish market is finite. While outsourcing as a principle grew steadily in the US and Europe over the past 10 years, Irish firms by virtue of their size tended to ignore outsourcing as a real strategy. Only in the past three years has this changed, and even firms with less than 20 employees are approaching IT and business process outsourcing (BPO) in a meaningful way.

The very action of outsourcing involves passing over roles and responsibilities to another company that can do the job better, but not always cheaper. The industrial relations difficulties that outsourcing can cause was witnessed in recent weeks when the 350-strong staff of ITSIS, Bank of Ireland’s IT division, went on a one-day strike over the bank’s decision to outsource all its IT needs to HP as part of a €650m deal that would see the workers become employees of the IT giant. The nub of the matter was that the bank could not guarantee jobs for the workers after two years or if the contract failed.

“The fact that cost is the primary mover in outsourcing is not strictly true,” says John Scully, director of global services at IBM Ireland, which employs 800 people in Dublin focused on local and global outsourcing projects. “You might park your car in a certain place based on cost, but IT infrastructure is such an inherently important part of business today you can’t sacrifice quality over cost.

“The most important considerations that organisations have is economies of scale, getting hands on the competencies without worrying about the access to skills. The second thing is that it gives firms the ability to access world-class applications that previously may not have been affordable to the organisation. Instead of spending €10m on a new e-business system, just get the chunks you need as you go along,” Scully says.

He continues: “What really drove outsourcing in the UK was that during the Eighties Margaret Thatcher made a rule of ensuring that all government departments outsourced their local procurement and IT. In Ireland, the market has been slower. The current business recession has ensured that managing directors here have started to enter the thinking process, motivated primarily by cost, but access to skills as well. Database administration is a prime example. Every company needs it, but they don’t need to have three people employed full-time all year long doing it if that’s not what their business is about.”

Derek Wilson, managing director Siemens business services, agrees that outsourcing is not just a phenomenon of the late-Nineties. “Over the past decade, it is true that outsourcing has been one of the strongest and most sustained trends within business — not just IT. For example, in 1998 in the US nine out of 10 manufacturing companies outsourced at least one activity; with an average of nine outsourced per company.

“The increasing trend to outsource has been in evidence in the pre-Enron economy. For instance, external pressures include increased international competition, rapid technological development, sophisticated consumer demand and communications technology, not to mention political ideology, eg the trend towards privatisation by Margaret Thatcher in the UK and Ronald Reagan in the US.

“Companies are viewing outsourcing not so much as a solution to all IT problems but rather as a means of developing their core competence to deliver best-in-class products and services to their customers,” Wilson says.

Like Scully, HP’s managed services manager Brian Hurley agrees that outsourcing has picked up momentum locally. “Selective outsourcing of particular IT and business process needs has cropped up more. Compared to the rest of Europe, Ireland is not as developed a market due to the size of companies here, but a lot of international business is conducted from here, particularly by ourselves,” he explains. HP provides managed services outsourcing to some 30 companies in Ireland as well as international services from a number of locations. The company has 900 people based in Belfield, Dublin, working on managed services and technical support for Europe, with a further 100 people providing services to the northern European market from its technology campus in Leixlip. “We are providing monitoring operations supporting 15,000 servers across Europe from Dublin,” he adds.

In Dublin, Accenture employs 400 people at Grand Canal Docks in providing outsourced IT and shared services to the European market. The company’s Stuart McLoughlin comments: “What we’re observing in the Irish market is a shift in terms of growing enthusiasm for adopting outsourcing as a strategic way to manage business issues. For example, we have overseen the transfer of 130 staff members from Excel Logistics into Accenture and now they manage Excel’s European logistics and tech support from Accenture. Irish organisations have become more aware of outsourcing as an opportunity. They have got over the concerns about security but elements such as staff transfer are clearly still taboo. In terms of the future of the market, outsourcing is predicted to be the only area of IT services that will achieve double-digit growth over the coming decade.

“In terms of IT and BPO, the old mantra to do what you do best and outsource the rest is more common now than it was a year ago. For example, a few years ago a bank would have considered cheque processing to be a core function at the bank. Today it is a transactional activity that adds no value. Firms want to be leaner and meaner and to do so means giving the non-profit-making activities to someone who can do it better and for less,” McLoughlin says.

Ireland’s ability to win and provide IT and BPO services to the rest of Europe by having a base of premier organisations such as IBM, EDS, Accenture and HP could be seen as an advantage. However, the seismic shift of technology services towards outsourcing at present may be an opportunity, but in time will seriously threaten the Irish economy as the aspirations of lower cost economies elsewhere in the world start to rise.

When policy-makers and pundits dismiss countries such as India and China as lower down the value chain in the global software hierarchy than Ireland, specialising in cheap software coding and project turnaround, try to imagine the feeling of standing on the prow of the Titanic shouting out that there’s a gigantic iceberg coming our way and being ignored.

It was less than 20 years ago, before Intel, IBM and HP et al invested their billions, that this country was considered in international eyes as little more than a box shifter, the same way that overconfident policy-makers are describing countries like India. In fact, the first Microsoft jobs in this country involved the packaging of diskettes, far removed from the internationalisation and complex e-business projects conducted in Sandyford today. When you consider that an Indian outsourcing giant, InfoSys, is currently spending millions acquiring European product development companies and is taking on outsourcing giants EDS and IBM on their home turf in the US, it doesn’t take too much imagination to realise that as far as India, which churns out 300,000 IT graduates a year and more than the combined total of all of western Europe, is concerned, its status in the pecking order is merely temporary.

In recent weeks Goldman Sachs caused considerable consternation in the UK when it moved its operations to India, swiftly followed by Reuters’ decision to move more than 4,000 IT workers there. A well-known personality in the Irish business world recently described Ireland as “complacent and arrogant” in its present predicament, resting on the laurels of the late Celtic tiger. The same personality predicts that many of the International Financial Services Centre jobs in this country could be lost by 2010.

According to an industry observer with extensive government and economic knowledge/connections: “The competitive threat from India to Ireland is serious and substantial. They have a good standard of education, a highly intelligent and productive workforce and are cost efficient compared to Europe. In short, Ireland needs to slash the cost out of the Irish economy. Ireland is no longer an attractive location and the country hasn’t been for some time. Everyone talks about moving up the value chain, without really knowing what he or she is talking about. There is a view that the country needs to get away from manufacturing, for example. That view is fallacious and fraught with unimaginable danger. Manufacturing will remain critical to the Irish economy going forward,” he adds.

“Ireland has a chance to maintain its present advantage. It’s not just about cost reduction, but capability enhancement. Outsourcing isn’t all bad. The danger that Ireland faces is complacency and arrogance in the face of what is a clear threat if the country doesn’t get its cost base in order. The standard of Indian outsourcing companies is very high and they are not solely interested in the cheap coding work — just look at players such as Tatra Consulting and InfoSys that are gaining global respect. Ireland doesn’t even have indigenous players to compete with them.

“India is our main competitive threat, followed by eastern Europe. That said, Scandinavia is battling us hard in the areas we’re claiming to show prowess, such as research and development and pharmaceuticals. They are impressive and aggressive, we are complacent. What Ireland needs is a six- to nine-month programme of cutting costs in areas such as broadband and insurance as well as a raft of reform legislation,” the observer says.

Irish Software Association chairman and Merrion Capital executive Cathal Friel believes the threat is not just from India, but primarily from the US, a country that has been fundamental in the construction of the Irish software sector. “US multinationals based here have confirmed that unit costs in Ireland are greater than in the US. Irish wages are more expensive because of the difference between the US dollar and the euro,” he explains. “Multinationals are discovering three things about the Irish economy — it is expensive to do business here; wage deflation in the US means it’s cheaper to hire US workers than Irish workers; and the inflation rate in Ireland is twice that of the US.”

“The Irish Government needs to control inflation and set a better example to the private sector in terms of the debacle surrounding benchmarking. If the average civil servant who already has permanency guarantees and a pension is earning more than the private sector employee, that will cause further wage inflation. It’s hard to ask IT workers to take a cut in salary if civil servants are getting large handouts. The Government is setting a very bad example right now,” he argues.

“Ireland was a box shifter in the 1980s. It is only a matter of time before India is competing for the higher level engineering skills that Ireland reckons will keep it safe. Ireland needs to field more entrepreneurs to build the companies. We need to keep building world-class companies,” Friel advises.

“In management circles, it’s called ‘corporate memory’,” explains McLoughlin. “There are more than 20 years of Irish operations working very well with head offices in US and European companies. That kind of experience is priceless and positions the country well for higher value roles. Undoubtedly India poses a threat to Ireland from the cost point of view, but also an opportunity if we take advantage of this as we move forward. India’s facilities are well developed, they are no longer mere coding shops. Ireland seriously needs to review where its skills and capabilities lie and develop particular competencies that can’t be replicated anywhere else.”

Scully is more sanguine about the outsourcing threat from India and eastern Europe. “There has been an inevitable drift to lower cost markets over the years. It may be a threat, but it’s also an opportunity for Ireland to leverage these lower cost resources in its move higher up the chain,” Scully concludes.

IT crawled in from the east

The US$556bn worldwide IT service market is experiencing one of the biggest changes in its history — a paradigm shift to offshore outsourcing. There are implications for one of the industry’s most precious assets — the people

Gartner Dataquest expects that offshore business process outsourcing (BPO) services will represent 14pc of the total BPO market by 2007; India’s share of supply will be around 57pc of this.

Well-known software entrepreneur and investor John Shiel is chairing a group that is compiling a study on the competitiveness of the Irish software industry for the Irish Software Association. Shiel sold his e-learning firm AES to SmartForce in 2000 and has established a venture capital firm called EVP with former Davy Stockbrokers technology boss Tom Byrne.

“While the Irish software industry has come a long way from its box-shifting past and is now a vibrant world leader, the question is how do we keep and maintain this valuable foothold,” he says. “We are the only English-speaking country in the eurozone, which is an advantage, but India has plenty of English speakers. In terms of our cost base, granted costs are high, but the country cannot afford to regress on its costs.”

“The key is to build intelligence into products and processes ahead of everybody else. We need to take advantage of local value and add experience and knowledge that emerging economies don’t have yet. We have 20 years of ‘corporate memory’ in this regard. The advantage is still there, but it won’t be in five or 10 years’ time, something altogether different will be required,” Shiel concludes.

International impact of tech-tonic shift:

Western Europe
Analysts predict a total of two million jobs will migrate from western Europe by 2008. This will result in a 75pc reduction in wage bills.

North America
US high-tech firms will outsource one out of 10 jobs to low-cost emerging markets by the end of 2004, according to a new report by market research firm Gartner.

The UK
Britain’s largest professional union Amicus is warning that the Goldman Sachs decision to outsource its operations will spark a flood of copycat actions. Accenture, Adecco and Deloitte predict that up to 200,000 UK jobs are likely to be lost in the biggest industrial collapse since manufacturing was decimated in the early 1980s.

The rampant outsourcing of IT jobs could well sound the death knell of Australia’s tech industry, an IT Manager Australia survey has revealed. More than 90pc of members said, based upon current conditions, that they wouldn’t recommend IT as a viable career path.

India’s call centre and back office processing industry currently employs over 100,000 people. The average salary is €2,500 per annum. The Indian IT industry churns out approximately 300,000 IT graduates per annum, more than the entire output of western Europe. Oracle has announced that its workforce in India will soon double to 6,000 people whilst rival Microsoft recently announced plans to expand its IT operations in India.

By John Kennedy