When outsourcing deals go bad

7 Aug 2003

The present industrial strife at Bank of Ireland is endemic of a global crisis hitting firms across the developed world. At first outsourcing, or as it is called by Gartner “business process outsourcing”, was viewed in a post-Enron business landscape as a strategic move to resolve business problems and smacked of sanity in a world gone mad – simply realise significant cost savings by outsourcing IT infrastructure and non-profit making functions to a skilled provider, leaving the firms’ brightest minds focused on growing the business.

For managers counting the beans, this does not seem like such an objectionable route, but for employees of firms looking to reduce costs and boost earnings, it presents a growing industrial relations nightmare that will make itself felt with a vengeance over the coming decade. Outsourcing in itself is not new, particularly in the IT world, but the growth in outsourcing in all areas of business in the past year has been phenomenal.

In the coming year, Gartner predicts that the market for business process outsourcing (BPO) will grow 38pc to reach $1.8bn this year. BPO refers to an outside company’s management of various business tasks such as IT, call-centre operations or finance and accounting. Moving work overseas has appealed to some corporations, partly because of low salaries in countries such as India, the Philippines and Mexico. US-based organisations that offer information technology services, such as EDS, Hewlett-Packard and Computer Sciences, have been eager to take on BPO work as IT spending has flagged. This factor has prompted fear amongst US workers that jobs will be lost to overseas economies as outsourcing becomes a more accepted strategy for businesses. By year-end 2004, Gartner predicts that one out of every 10 US IT jobs will move to emerging markets such as India.

Locally, Hewlett-Packard’s €650m deal with the Bank of Ireland has struck understandable fear into the hearts of the 350 workers and negotiations at the Labour Court last week failed to avert a one-day strike last Friday by the IT workers. The staff at ITSIS, the bank’s IT division, rejected terms offered by the bank in the run up to its seven-year contract with HP. The ITSIS employees rejected the offer on the grounds that they were only given job guarantees for two years. Another key sticking point for the workers was the bank’s failure to guarantee that staff would be re-employed by the bank if the outsourcing project failed.

This is a real and understandable fear in light of concerns in some of the world’s most successful economies that emerging markets like India will soon dominate 58pc of the global outsourcing market by 2007. For the ITSIS employees, failure to guarantee their jobs for more than two years smacks of potential betrayal.

The fallacy that outsourcing represents to the ITSIS workers is just one example out of many crises echoing around the world as a result of outsourcing. The same drama is being played out on the stage in Germany at Deutsche Bank where some 5,500 IT jobs hang in the balance as the company mulls whether to outsource its technology requirements. The company has already handed over its desktop operations to IBM to manage and is expected to appoint Accenture to run its procurement operations. The fear amongst the IT workers is that if jobs are transferred to India or Eastern Europe, the incumbent staff will be transferred to the dole queue.

But the question of outsourcing in itself as a strategy is beginning to fall under the spotlight. Not all outsourcing projects are successful and in the case of Bank of Ireland’s seven-year contract with HP, the margin of potential error was touched upon in the bank’s failure to guarantee employment for the workers if the contract failed.

Not all outsourcing projects come up roses. IT outsourcing giant EDS is under pressure to pay compensation to the UK’s Inland Revenue after systems failed to pay tax credits on time to more than 400,000 people. Estimates suggest that the compensation bill could top £50m sterling.

A source at one of the leading outsourcing players in the Irish market confirmed that outsourcing projects generally result in a headcount reduction. “Normally what happens is the outsourcing provider undertakes to take over a function and reduce the cost of that function by 10pc. This traditionally leads to a reduction in headcount. So the fears of the ITSIS workers are quite rational.

“However, the fears about India and the Far East as competitors for the jobs are not real at present. India presents serious competition in terms of software development and for mission-critical functions like banking, proximity to the local market is vital. Ireland has an incumbent’s advantage in terms of attractiveness for foreign direct investment, but in time India will present a serious threat,” the source added.

In a recent interview, Robert Morgan, CEO of London-based consultancy Morgan Chambers and author of “Outsourcing in the FTSE 100 – The Definitive Study” defended the trend towards outsourcing. “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 better service level agreements from their suppliers, in turn producing greater value for less cost. They have also been free to concentrate on core activities – those activities that generate the highest returns.”

By John Kennedy