In our private lives, outsourcing is something we do every day, according to Lorcan Burke, head of managed services at Siemens.
If the drains are blocked, we call a plumber. If we want to manage our finances we go to a bank. If we want our children educated we send them to school. And, he says, this is nothing new. “If you go back in history as far as you can go, when the first human being started to specialise, you had outsourcing. In other words, this is something we have been doing for a long, long time. But, while we seem to be able to make those decisions at home, when we move to the business world we lose sight of those fundamentals,” he says.
Burke is not the only one who believes that the level of IT outsourcing in Ireland is below that of our competitors. About a year ago, Cap Gemini Ernst & Young conducted a survey of 100 companies in the island of Ireland, speaking to both chief executive officers and chief information officers (CIOs) to determine the level of appreciation of outsourcing and companies’ intentions.
“The main findings were that while there was a high level of awareness, both take up and the appreciation of what could be achieved were low,” says Eamonn Doyle (pictured), managing director of Cap Gemini Ernst & Young, Ireland.
According to Doyle, companies did see benefits, the most common perceived benefit being reduction of costs. After that, other benefits were access to a broader base of skills and the ability to concentrate on core business. Doyle concludes that the main driver for outsourcing in Ireland is cost reduction. “That is the space people in Ireland see it as – tactical rather that strategic,” he said.
Brian Hurley, business manager for managed services Ireland at Hewlett-Packard (HP) agrees. “From a HP point of view, cost is always a driver in outsourcing. People are looking for cost advantages, then they look for innovation and then they look for best-of-breed solutions that they know they can’t deliver,” he says.
The Cap Gemini Ernst & Young survey also found that there was a high degree of fear among respondents. “Respondents were concerned about security issues and loss of control,” says Doyle. He does not believe these fears are justified, however. “Certainly loss of control can be handled through the right contract, service level agreements and so on and the same with security. This is not new ground. Outsourcing is well established in other countries in sensitive areas such as revenue and defence, so there are no real concerns. It is more of an emotional reaction. Based on that, our view is that the marketplace will go for selective outsourcing rather than wholesale strategic outsourcing,” he adds.
Hurley agrees that fear is a powerful inhibitor. “I think there is always a certain amount of fear when it comes to outsourcing. A lot of companies that are considering it have good reference points. They would have affiliations with companies in the UK, so they would have knowledge. Two years ago, fear would have been on people’s agenda. But, when you are dealing with a large player in the market, the fear tends to disappear somewhat. We would contend that companies looking at outsourcing would look at larger players rather than smaller ones. People would have got burned by the closure of a number of data centres around town. When they shut down, a number of people were hurt by their initial foray into outsourcing,” he says.
However, another view of IT outsourcing holds that while Ireland is somewhat behind the curve, our nearest competitor, and the market with which we are most often compared, is actually ahead of the curve.
“Outsourcing took off very quickly in the UK about 10 or 12 years ago,” says John Scully, director of global services IBM Ireland. “During the Thatcher era, whenever public enterprises went out to tender one of the options they had to include was whether they could outsource the service they were tendering. There was an enormous political drive,” he says.
William McAuliffe, client sales executive at EDS, agrees. “The key difference between us and the UK is political will,” he says, adding that, “in the UK, there is an incentive to change structures and take advantage of partnerships. The politicians were a lot more courageous and more open-minded about partnering with outside organisations to effect a wholesale change in service delivery and getting value for money. In contrast, in Ireland, the status quo prevails. The terms and conditions of the civil service mean that changes of that scale are unpalatable. Trades unions are more entrenched in the public sector here and there is more of a detente between government ministers and the union movement.”
In the commercial arena, says McAuliffe, IT departments have done a pretty good job and are still in a powerful position to dictate terms within a company, warning against ‘meddling’. However, he says, line of business executives are aware they have lost control and are seeking it back and if IT departments are not prepared to hand over control, those executives are prepared to look externally for a service provider.
So, does this mean that 2003 will be the year of IT outsourcing? It all depends who you ask.
Doyle thinks not. “There will be a lot more questions asked,” he says. “There will be selective outsourcing. I think there is going to be an inexorable shift and that it will take off in a few years as companies need to be flexible to address volatile marketplaces and cut their costs,” he adds.
HP, on the other hand, sees growth. “Compared to previous years, 2003 will be a good year,” says Hurley. “The number of tenders we are responding to indicates the market has a greater awareness of outsourcing and outsourcing principles. We have high expectations of larger growth. We have gone through a number of cycles in the IT industry: Y2K, euro changeover, the dotcom bubble and so on. We were in a buoyant economy, but that has changed dramatically. Cost savings are now on the agenda and CFOs [chief financial officers] are putting pressure on CIOs to reduce costs and one way of doing that is to outsource,” he says.
Nevertheless, Hurley agrees that selective outsourcing will dominate the market. “I think there are certain industries that have an outsourcing philosophy. It is only lately that people have considered IT as a non-core competence. They may see their business application as being core and will want to keep it under control, but most companies realise that IT infrastructure is non-core.
“From a business point of view, we are very buoyant about 2003 opportunities. Our pipeline is healthier than it has been for a long time. With our Compaq heritage, we are the strongest player in the Irish market and Dublin is a very important part of our new organisation in terms of managed services,” Hurley concludes.
McAuliffe concurs that application development and maintenance are second phase, but that desktop, helpdesk and data centres are all up for grabs. “Applications are still very sensitive and fear, uncertainty and doubt are still applicable. The other thing is that the public and private sectors in Ireland have not yet hit a crisis in terms of volumes of its assets, end-user activity and the costs associated with those. Costs may seem high, but there hasn’t been a crisis that has forced them to move in a radically different direction; they have been able to move within the comfort zone,” he says.
However, McAuliffe sees signs that the private sector may be facing just such a crisis. He says: “We are seeing requests for information and proposals, the scope of which indicates to us the depth of feeling and ambition that organisations have to examine their cost structures and examine new models of service delivery. There are no more sacred cows!”
McAuliffe expects to see a growth of 50pc in terms of contracts value over the year. “Overall, I would see a move in this direction as having a dramatic impact on the IT marketplace. The service provider, particularly with larger contracts, will move into a hugely influential position in purchasing and this will change market dynamics. I think we will probably see a move away from purely transactional-based relationships with vendors to a more holistic view,” he concludes.
By David Stewart
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