Outsourcing returns to Irish agenda

8 Jan 2003

Despite the strategic advantages touted by large IT outsourcing firms, the Irish corporate sector, perhaps by virtue of the sheer predominance of small to medium-sized enterprises (SMEs) in its ranks, has been slow to outsource either technology or business processes.

Is this folly or is it a part of a deft ability on the part of Irish firms in recent years to sidestep many of the economic and corporate tsunamis that have shattered their counterparts in other European countries?

In a post-Enron business environment, firms could be forgiven for being suspicious about outsourcing core activities to outside specialists, particularly at a time when accountability and transparency now reign supreme, with strong US corporate laws on the way and corporate governance outlines such as the UK’s Turnbull Report influencing corporate law in Europe. Does this mean the outsourcing business is in for a tough time? Especially in Ireland, where despite the presence of global outsourcing leaders such as IBM Global Services and EDS, traditional SMEs have for some time been slow to adopt outsourcing in comparison with their UK or continental counterparts.

“Outsourcing: is it a knee-jerk reaction or a tactical move to resolve business problems? It’s more than that. It is a strategic weapon,” says Robert Morgan (pictured), CEO of London-based consultancy Morgan Chambers, who authored Outsourcing in the FTSE 100 – The Definitive Study and who spoke recently at an EDS-sponsored event on outsourcing in Dublin.

Morgan has advised numerous FTSE 100 firms about outsourcing and other key business strategies. “Companies leading the trend have opted for reduced overheads such as staffing, including the hidden costs of government taxes and pensions. They have successfully negotiated higher services level agreements from their suppliers, in turn producing greater value for less cost. They have also concentrated on core activities – those activities that generate the highest returns,” he continues.

Morgan believes that Irish business’s traditional indifference to outsourcing as a business enabler will have to change. Global business consultancy Aberdeen Group’s IT outlook for 2003 promises a good year for strategic outsourcing, expecting outsourcing in all forms, IT and business process outsourcing, to command a greater portion of corporate budgets.

“More and more corporations are realising significant cost savings by outsourcing their IT infrastructure and application lifecycle functions. Additionally, business process outsourcing is a key growth area, especially for suppliers that bring a strong value proposition to the table, not only around the issue of cost reduction, but process transformation. Look for outsourcing deals, measured in the billions of dollars, to continue in 2003,” the Aberdeen report reads.

Morgan is emphatic that outsourcing requires a shift in thinking at board levels in traditional companies. “There is a misunderstanding among business analysts as to the importance of outsourcing and they think of it as a symptom of bigger problems within the company. It is true that a lot of companies look at it as a means to reduce costs but it’s just one element. Outsourcing enables firms to transform their business to be agile and more flexible, especially if there is a downturn. Subcontracted services are flexible enough to withstand a downturn without costs being fixed. For example, if there is a downturn and you have to get rid of people, it’s a lot of expense and a loss of expertise and experience. If there is an upturn then you have to spend more money and re-embark on a learning curve.

“Sophisticated outsourcing is done with a strategy in mind. You shift the volume of workload to different sectors, at the same time keeping your brightest minds focused on the core of the business. Today’s outsourcers are aware of this and are prepared to underwrite the business risk themselves, instantly,” he says.

According to Aberdeen Group, the globalisation of outsourcing services will be another important trend in 2003. “Communications technologies gave companies the ability to deliver IT and business process functions based on client interaction requirements, availability of appropriate skills and labour costs. Suppliers will formulate offerings in ways that balance these factors, blurring the lines between on-site and offshore. Look at offshore outsourcing to continue to evolve into global service delivery throughout 2003 and beyond,” the report states.

According to Morgan, who has seen his share of competitors in the consultancy and service delivery business halve in the post-Enron climate, for strategic outsourcing to work in both Irish SMEs and large publicly-quoted companies, the strategy must be wholeheartedly backed at boardroom and executive level.

“It really depends on visible and continued commitment of executives to make it work. This involves trust. In order to motivate the supplier of the outsourced services, it is important to disclose and involve them in the business strategy. If you are the managing director of a firm and you are outsourcing a core function like IT, talk to the outsourcing firm and discuss where your strategy is going and how quickly you need to be able to change your business around. Aspirations can be transformed into service delivery mechanisms and measurements; get the service aligned with the business objective. All it takes is a different form of thinking,” he concludes.

By John Kennedy