Outsourcing Part 1: Hired help makes perfect sense

4 Mar 2004

Talk to anyone in the technology business about outsourcing and it’s odds on that sooner rather than later Bank of Ireland’s (BoI) deal with Hewlett-Packard (HP) will be mentioned. That €600m seven-year contract put the concept of outsourcing firmly on the Irish corporate agenda — after all, if one of the country’s largest financial institutions trusts a third party to take over its IT infrastructure and offer it back to the bank as a service shouldn’t everyone be considering it?

Pat Moran, director of technology risk services with Ernst & Young, believes that while Ireland may have lagged other markets in the adoption of outsourcing, things are changing fast. “It’s very much on the table in Irish boardrooms and it’s top of the agenda due to the fact that cost management is now an essential part of doing business,” says Moran.

Colm Reilly of the PA Consulting Group, which advises businesses on how to adopt an outsourcing strategy, suggests that the late adoption of outsourcing is related to the country’s economic development. “Up to the late Nineties there was a surplus of skills available so companies didn’t need to outsource,” Reilly explains. “As the economy became more successful competition for skills entered the picture. Outsourcing enters at that point because it’s a mechanism of competitiveness.”

In fact, Reilly points to figures that indicate the growth of managed services in Ireland may even have passed its peak. Overall employment in IT services only broke the 500 mark in 1997, grew to more than 1,000 in 1998 and was about 2,200 in 2001. Employment figures fell off in 2002, which is the most recent year that figures are available for, but wider economic circumstances are a major contributory factor for that year.

PA now conducts annual research into Irish businesses’ attitude to outsourcing. The most recent data released last October found that while 83pc of firms feel there is substantial value to be had in outsourcing only 59pc felt they were good at realising it. The survey provided mixed signals on the success of outsourcing projects. Satisfaction with service levels and quality of suppliers staff were over 80pc but 70pc of firms said that outsourcing had failed to increase the business value of the service and more than 60pc said that outsourcing had not allowed them to deliver new services or make more efficient use of their resources.

Despite these reservations the adoption of outsourcing and managed services is growing rapidly. In addition to the BoI contract, HP’s services team has also recently won significant outsourcing deals from Ericsson and Procter & Gamble. And it is not just multinationals adopting the model. One of HP’s oldest managed services customers is Glanbia — HP has been running its SAP applications as a 24/7 managed service for over five years.

Although HP has been selling managed services in Ireland for 13 years it scored a major coup when in January 2003 it took over the old MetroMedia Fibre Network’s data centre in Citywest Business Campus. According to Brian Hurley, managed services business manager with HP, the first 10,000sq ft is fully occupied and it is currently building out another 10,000sq ft of rack space that is nearly fully contracted to customers.

“In most new tenders, there are questions about outsourcing or a request of managed services,” says Hurley. “It’s almost selective outsourcing rather than a complete outsource of their total IT function. In the government space a lot of tenders are looking to provide a full-managed service for a particular platform.”

IBM is also a major local player in managed services. It hosts SAP-based human resource and financial applications for the Health Boards Executive at its Mulhuddart data centre, which is used by hospitals and health boards around the country. HP is also active in the health sector having recently won a €1.5m hosting contract from Eastern Health Shared Services. Fujitsu Services is another organisation picking up business from the public sector adoption of managed services. Last year it landed major contracts from the Courts Service and the Department of Environment and Local Government, both of which have handed over management of major parts of their infrastructure to Fujitsu.

IBM’s John Scully suggests that the size of Irish businesses has contributed to the relatively late adoption. “The size of Irish companies, which would all be considered small to medium-sized enterprises on the international scale, is such that they have fairly mean and lean IT organisations,” says Scully. “The initial uptake of outsourcing was the mega deals and besides BoI there are not that many of them here.”

Next week: Moving up the value chain — how to start outsourcing

By John Collins