ANALYSIS: BoI deal shows outsourcing model remains robust

4 Nov 2010

It was the poster child for full-scale IT outsourcing in Ireland: seven years ago, Bank of Ireland announced a $600m contract with HP, reputed to be the largest of its kind in Ireland or the UK.

The scale of the deal was significant enough to warrant HP’s then-CEO Carly Fiorina jetting into Dublin for a signing ceremony. It went ahead only after a fractious industrial relations dispute over assurances about 500 workers’ positions after the transfer to HP.

Bank of Ireland’s decision to outsource its entire IT function came after it initially looked at merging IT operations with rival AIB in order to achieve economies of scale. That failed a regulatory hurdle but it was an indication of how serious the bank was about changing its IT delivery model.

The agreement with HP reached the end of its term this year and automatically went back out to tender. By this summer, the bank had whittled its shortlist of suitors down to the Indian outsourcing provider HCL and IBM. In July, the latter was chosen for exclusive negotiations and the new five-year agreement came into force from the beginning of this week. Ironically, IBM lost out on the original deal seven years ago.

What the new arrangement covers

All of the elements that had been outsourced before are covered by the new arrangement, including desktops, servers, mainframes, local area networks, service desk and printing operations. The deal also expands on this to bring in the bank’s Capital Markets division, effective from 1 November. Bank sources confirmed a small number of IT staff, probably fewer than 30 people, will move to IBM.

The contract officially came into force at the start of this week and the full transition from HP to IBM is expected to be completed by the end of the first quarter next year.

The value of the new contract certainly appears to bear out the current management-speak of IT’s need to do more with less. Siliconrepublic understands the current contract is valued at €260m. The original seven-year deal signed in 2003 was priced at $600m (around €678m based on the exchange rate at the time).

“No contract will ever come down to price alone; the most important aspect is stability of the system. We’re so reliant on technology,” said a Bank of Ireland source, who confirmed the bank expects to see enhancements to its IT service over time.

According to Brendan McGettrick, enterprise director with the IT consultancy Version 1, many outsourcing providers lose money in the early years of a contract while they work on automating certain IT processes. “In many cases, the supplier factors that into their plan, to be cash negative for the first couple of years until efficiencies are introduced,” he said.

John Collins, who headed the IT service provider Original Solutions until its sale to Perot Systems in 2008, said the difference in cost between the two contracts suggests IBM may provide some of the work on an offshore basis.

Anne Fitzsimons

Director of Global Technology Services with IBM Ireland Anne Fitzsimons

Anne Fitzsimons, director of Global Technology Services with IBM Ireland, said the company would use its global delivery model, although she did not specify how much would be provided from Ireland and to what extent some of the skills would be sourced elsewhere. “We’re able to call on experts across the world,” she said. However, she also pointed out that IBM’s Irish operation has specialists in banking models, including retail and business banking, based in Dublin but with a global remit.

Fitzsimons said the financial environment is putting outsourcing firmly on the agenda. “I think the deal is indicative of the broader trends – the general economic climate is pushing all levels of clients to look at this,” she added.

Collins warned against businesses falling into the trap of viewing IT as separate to the rest of the business when in reality it’s intertwined in all parts of how an organisation operates. “If outsourcing is to be successful it has to be about a collaborative partnership – not an ‘us and them’ arrangement.”

In the case of IBM’s deal with Bank of Ireland, Collins said the outsourcing should be about giving the bank a competitive advantage. “The risk is, if what they’re asking for out of the contract are IT skills, I don’t think that’s going to offer added value, even if it gives them cost savings. What you want in a true outsourcing partnership is for the partner to understand what’s good for your business, not just what’s good for your IT.”

Fitzsimons confirmed business consultants would be involved in providing the service, not just technical services staff. “If we were just going to look at IT in isolation, we’d have missed a trick,” she said. “The key thing is, it’s business-driven. That’s where the bank gets most from the partnership and it’s where we do, as well. If it’s just at the IT level, we’ll have failed.”

McGettrick said the bank’s decision to continue with outsourcing rather than take some or all of its IT back in-house is an endorsement of the model. “What it shows is the outsourcing model obviously works for the bank – the supplier notwithstanding,” he said.

Typical outsourcing obstacle

One of the obstacles in typical outsourcing deals is that it can become difficult to make changes to applications or react to changes in the business if they fall outside the strict terms and conditions of the contract. Fitzsimons said best practice was to build flexibility into these agreements. “Generally, we tend to offer a certain amount of ‘project days’ in the contract. In an outsourcing contract that runs over several years, that allows the client to say ‘right now my priority is this, but in two years it could be different’.”

McGettrick also believes the deal lays to rest one of the big fears around full outsourcing. “This demonstrates that concern about vendor lock-in can be overcome,” he said. The biggest impediment to IT outsourcing is lack of sponsorship from the business, he added. “IT departments will always find ways not to do it – it’s like turkeys voting for Christmas. But unless there is clear leadership from the board for IT outsourcing, it won’t happen because typically they have bigger fish to fry in the business. On a top 10 list it might be No 10, which usually means that it doesn’t get done.”

Gordon Smith was a contributor to Silicon Republic