Professor Joe Peppard (pictured) is not your typical management guru. He is not American. He is not over 70. He is certainly not full of from-the-trench type stories culled from decades of bruising business encounters. Instead, he is young (41), Irish and possesses an engaging shoot-from-the-hip style that involves lobbing verbal grenades at a variety of targets.
But who is Joe Peppard and why do his opinions matter? He holds the chair in Information Systems at the Business School, Loughborough University and he is a former lecturer at Trinity College Dublin, having completed a degree and MSc there. But he is probably best known for two things. First, he has written several books including Strategic Planning for Information Systems (a global bestseller; 100,000 copies shifted). The other area in which he made his mark was in research: he spent 10 years at the world renowned Cranfield School of Management, Bedfordshire where he helped establish the Information Systems Research Centre in 1993. He is also a technology strategy consultant to a number of businesses.
Outsourcing is one of a number of research areas of interest to Peppard, having recently completed a major report on the topic. The study, commissioned by Irish-owned outsourcing provider IT Alliance, comes to a number of significant conclusions about the state of the global IT services market.
The report entitled ‘Crumbs from the table or an ingredient in the meal? The Emergence of Tier 2 Service Alliances’ suggests that a key challenge for IT outsourcing vendors is to remain competitive in an environment in which there is reduced spending on IT services, increased pressure on price and tough demands for quick and concrete economic benefits. Peppard argues that the cost structures of many big vendors are such that they must find new ways of delivering outsourcing services.
To achieve this, he predicts a new business model in which IT outsourcing vendors will make more use of what he terms ‘Tier-2 Service Alliances’ (T2SAs). Peppard’s research suggests that IT services is taking the same evolutionary path as a number of other global industries. Increasingly, Tier 1 IT services firms such as Electronic Data Systems (EDS) and Accenture are managing their brands in the same way that companies like Nike or Mercedes manage theirs. Just as these companies rely on a complex network of Tier 2 and even Tier 3 suppliers to achieve the necessary efficiencies and quality levels, IT services firms are using best-of-breed providers – Tier 2 Service Providers (T2SPs) in Pepper’s words – to source the services their clients require and then manage the delivery of those services. The Tier 1 firm effectively becomes a ‘relationship consolidator’ on behalf of its client and, in so doing, resolves one of the traditional problems facing a company that decides to outsource: that of managing multiple vendors providing a range of technology services, from telecommunications to technical infrastructure.
Peppard believes that this model is emerging as the most popular one today for outsourcing arrangements. “By developing Tier-2 Service Alliances the vendor is able to provide a quality service at lower cost than providing it directly, while the customer has the reassurance of seamless delivery.” He adds: “Even with ‘mega deals’, few vendors have the reach and range to provide all services or are world class in all areas. Typically, 30-35pc of most contracts today are outsourced to sub-contractors.”
Keen to stress that his T2SA theory is more than just that – a theory – Peppard claims that IT Alliance has itself adopted the business model he advocates with apparently impressive results. The Dublin firm has enjoyed 80pc revenue growth since it implemented the new strategy a year ago. And the reason for this turnaround? “They are not just a service provider anymore; they are a strategic partner of the Tier 1 player,” notes Peppard.
His strong opinions on the supply side of outsourcing also carry over to the demand side, where he reckons organisations are often ill equipped to devise strategy in this area. He is “sceptical” about whether company directors actually understand what outsourcing involves and what consequences could result from the decision. “Most Irish boards – and indeed those in the UK and Europe generally – do not have the competence to make such decisions,” he declares.
The proof of this, he says, is the relatively high failure rate of IT outsourcing contracts. According to his own research, an estimated 25pc of traditional outsourcing contracts fail within the first 12 months and only half of them make it past five years.
“There’s a big underestimation of the management time involved in managing an outsourcing relationship,” he remarks. “What I see is that companies outsource because they have a problem with IT. They think if they outsource, the problem will be solved. But if you outsource a mess, it’s still a mess.”
Another common management misconception is to see IT as an end in itself – that the very fact of having it will bring the desired benefits such as productivity improvements. The opposite is true, Peppard argues: technology has no inherent value and the real benefits and value come from business changes that should go hand-in-hand with implementing a new technology.
He also takes issue with the cost argument for outsourcing. “If look at a lot of IT services, there are absolutely no scale economies. All the research shows that the reason IT outsourcing vendors can save money is because they have better management practices – that’s all. So, if organisations that are outsourcing could in some way instill those management practices within their own organisations, they could achieve the same savings.
“Companies should be asking themselves: ‘If the likes of EDS and Accenture say they can achieve cost savings of 20pc or 30pc, then why can’t we?'” he says. Not only does Peppard believe organisations should take their IT back in house but he cites evidence that it’s already beginning to happen: JP Morgan Chase recently decided to terminate a seven-year US$5bn outsourcing deal with IBM two years ahead of schedule.
Having earlier criticised software firms for misselling IT as an instant panacea, he now whacks them for pushing unrealistic return on investment expectations. He says the vendors are doing this because they know their customers are under pressure to get value for money. “Most companies when they make an IT investment are looking for a very quick return. The IT directors I work with say they are looking for a return on investment within one year.” But, he points out, such quick ROI is impossible in many cases. He cites the example of an unnamed Irish banking institution that invested in a CRM system and was thinking of scrapping it after a year. It didn’t and five years later it won a prize for best customer service from brokers. “It took that length of time for it to embed itself and also the employees have to change,” notes Peppard.
‘Crumbs from the table or an ingredient in the meal? The emergence of Tier 2 Service Alliances’ is available from IT Alliance Group, Dublin. Tel +353 1 869 0200. Email: email@example.com.
By Brian Skelly