As outsourcing and managed services evolve, industry insiders reckon that successful partnerships are based more on strategic relationships than cost savings. Ian Campbell explores a changing landscape.
In 2008, outsourcing and managed services will reach a tipping point and there will be accelerated change and innovation, as more providers step up their activity around new delivery models, according to analyst firm Gartner. Gartner believes this will occur around infrastructure, application and business process offerings, but there will also be a move towards software-as-a-service - driven by leading vendors such as Microsoft and SAP. Ireland is a country of small to medium enterprises (SMEs), where a full-blown outsourcing contract - like the HP and Bank of Ireland deal - was always going to be the exception rather than the rule.
The evolution of selective outsourcing could, however, shake up a fast-growing segment, where more and more players have come to market with a managed service proposition. For the customers - small and medium-sized organisations upwards - more competition and improved delivery will reinforce the growing confidence they have for entrusting the information and communication technology (ICT) parts of their business to a third-party. The model has evolved around classic functions, such as the service desk, remote monitoring and infrastructure and application management. These managed services have helped organisations tighten their control on in-house ICT resources, letting them concentrate on their core business, while leveraging best-of-breed technology skills and competencies from outside firms.
If Gartner's prediction holds fast, an ability to differentiate the managed service offering will become crucial for Irish providers. At Ergo, an IT services company that first dipped its toe in managed services a decade ago, the business is based around infrastructure, networks, applications and business process outsource development.
John Purdy, managing director, Ergo, acknowledges there is more competition, but points out that it isn't necessarily good for the customer. “The space has become more crowded with people driving the costs down and the value out of it,” he said. “The IT industry is its own worst enemy; everything is driven down to a commodity level, which is a dangerous place to be when you are trying to deliver service-centric solutions.”
Keen to distance his company from what he describes as “pure tin providers'‘ - who see managed services as an opportunity without necessarily having the skills to deliver what is required - Purdy was clear on how Ergo differentiates. “In order to deliver serious managed service and outsourcing benefits, there has to be a different business approach. It's not about providing kit; our people go in and they understand the business needs of the client. Business analysis and scoping is critical.” An engagement should be a partnership relationship, according to Purdy, established to change behavioural habits and the way processes work. ‘It's about taking the cost out, but it's also about moving the organisation from operational headaches and budget overruns to something that is at least tactical and maybe strategic.”
Kevin Reid, technical manager, SureSkills, agreed that the partnership approach is the way forward. “The cooperative delivery of solutions is a message that is gaining traction, but it will take a while for it to get through. It continually needs explanation,” Reid said. “Right now, when businesses are looking to cut costs, it's a hard message to get across.” Another obstacle is what he described as “a good deal of fear around the idea of outsourcing” brought on by restrictive contracts. “A lot of businesses are very nervous about entering into relationships and are only looking at limited managed service models. We like to work off a flexible agreement, on delivering a solution rather than hanging on to the granular details of an service level agreement (SLA).”
For SureSkills, it is about adding value through long-term partnerships that demonstrate how outsourcing can be mutually beneficial. “We have had key customer relationships over a period of eight years, where we have been able to improve technical skills and continually add value to the service,” Reid said. The problem is that, in such a competitive market, partnerships are hard to sustain if providers continually undercut each other. “Remote monitoring is a very aggressive part of the market,” said Reid. “The relationship between the internal IT department and the outside provider has to be strong, but when you drive the cost out of it, the partnership is inevitably going to suffer.”
Datapac is another indigenous company that has been growing its business in the managed service arena through evolving relationships. “Traditionally, maintenance contracts have been the first step towards outsource engagements of any size,” said sales manager John Casey. “In our experience, customers get a feel for it and then look to outsource more and more.” For such relationships to flourish, trust has to be established between client and provider. Joe Molloy, director of managed services at IT Force, said: “It is true that the barrier used to be trust, and it was a cultural thing - particularly in Ireland. But that has all changed and organisations are now more willing to let someone take over their IT.”
Like other providers, and true to the Gartner prediction, IT Force has become more innovative in what it delivers. “The new wave is al l about helping clients maximise efficiency. They have an IT system and probably only use about 20 per cent of what it can do.” Driving the market Improving efficiencies around business technology is an ongoing driver, but there are others. One of them is the state of the economy. “We're heading into a recession, so as chief executives get their budgets for 2008, you can bet they won't be as generous as they were in the last two years. At the same time, the demands of the business are going to be greater,” said Purdy. A longer running issue has been the skills shortage. As more companies find it hard to recruit the calibre of IT people they need, outsourcing becomes even more attractive. “It is the single biggest driver for outsourcing, because getting quality staff is nigh on impossible,” said Casey. “We know companies that have been looking for IT managers and when they can't find the right person to do the job, it's fallen back on the financial controller, who has then taken the decision to outsource.” This kind of arrangement is particularly true in the SME space, where firms such as IT Force have focused on a very specific service offering. It targets companies of between 50 and 150 employees, fulfilling the role of IT director. “At best, there will be an IT administrator, but most the work would have been done by the financial controller or general manager. They come to us wanting everything from desktop and server support to system administration and IT consultancy,” said Molloy.
Higher up the value chain, SureSkills has developed an interesting outsource model, where it provides organisations like AIB with skilled resources that supplement their internal teams. Because its consultants are exposed to more technology and multiple customer sites, they have a much greater breadth of knowledge than the client employees. “By bringing in external consultants, you get the delivery benefits. However, the big win is that we integrate with their team and mentor them through the process, so they gain the skills that we have. It's about working in partnership and passing on our knowledge,” said Reid. For another client, SureSkills provides a person onsite who acts as a part-time IT manager. It al lows the organisation to benefit from the range of expertise that SureSkills can deliver, without having to add to its own head-count. “I expect this kind of outsourcing to accelerate because definable cost-savings can be made; there is a good reason to be doing it,” said Reid.
Ergo has been ploughing a similarly successful furrow around human resources, albeit with a very original model. Fed up with recruitment agencies serving up lacklustre candidates to it its own business, the company took the decision to hire its own resource specialist, who was charged with meeting the internal IT requirements.
“Internally, we reduced our own dependency on recruitment agencies from 100 per cent to 40 per cent - and it's still dropping,” said Purdy. The move proved so successful that a second person was brought in, and the company can now go out and recruit contract and fulltime IT staff on behalf of clients. “We are not a recruitment agency, but we know how to recruit technology people,” said Purdy. A lot of outsourcing activity is expected to develop around the data centre in the future. Clients are already using companies such as Interxion Ireland to manage infrastructure, and it's a relationship that is only likely to grow, according to general manager Tanya Duncan. “Software as a service and virtualisation are definitely gathering pace with our customer base, which includes SMEs, corporates and financial institutions. All of them, regardless of sector, are talking about efficiency, trying to get the most out of their hardware,” Duncan said. Like other providers, the same rules apply, in terms of building customer confidence, but it's a business that is getting easier. “It's definitely still a trust sell, but people now understand the value of a good data centre,” she said. “These days, we have strong client references, so there is less of a leap of faith.” Irish providers, in general, are very upbeat about the prospects for outsourcing in Ireland. Purdy summed up the mood: “Most organisations have headcount freezes and even if they haven't, they are going to have a problem finding the staff. “In such a climate, outsourcing gives them the ability to scale without the headaches of scaling. “The customer can't afford to do it al l internally, so they go to a specialist provider.”
The global Perspective The ways companies differentiate themselves in a crowded sector are becoming increasingly important. Multinational IT companies such as HP, IBM and Siemens have pioneered the outsourcing model, helping shape the way the market has evolved. In Ire land, Siemens IT Solutions and Services works with its global customers, as well as Irish companies, through its Cork-based data centre and a customer interaction centre. The company offers the full-range of outsourced and managed service roles, from the service desk and remote monitoring to hosted infrastructure and application management. There is still a lot of untapped potential in the Irish market, according to Malte Gloth, divisional manager. “Customers are more willing to discuss opportunities - particularly in the data centre environment and around desktop support. We are getting a lot of business from taking over internal IT helpdesks.”
One of the local trends has seen companies like Siemens move into space previously dominated by indigenous service providers. John Casey, of Datapac, has seen the change. “The bigger firms are definitely not as expensive as they would have been and they are coming down the value chain. We're meeting them around the upper-level opportunities where we wouldn't have seen them before,” he said. In a country where Bank of Ireland/HP deals are few and far between, there is no mystery as to why this has occurred. “Basically, the Irish market isn't that big and we're chasing the same pieces of business,” he said.
While Gloth acknowledged that Siemens would now be more likely to pursue mid-marked sized companies, he refuted the idea that it was reducing its costs. “We have never set out to be the cheapest and we're sticking to our strategy. That said, the delivery model around commodity IT services is based on our global capabilities, which lets us deliver cost-sensitive services to customers. “There will always be a cost component to the outsourcing environment, but when you are providing services that support customers in their core business development, it's more about industry-specific know-how and ensuring quality of service. It's about strong partnerships.” A big part of the Siemens pitch is built around its global prowess and the ability to draw on internal expertise that extends across most industry sectors, from financial and media to construction and manufacturing. “Competition for IT experts with specific industry knowledge is becoming greater. It is becoming more difficult for companies to build up the expertise in their own environment and, therefore, they need the support of companies like Siemens, who have a pool of experts addressing whatever topic they are focusing on,” Gloth said. The strategic benefit of being able to access experts is more important than issues around cost, according to Lorcan Burke, infrastructure service manager at Siemens. “Price occupies a smaller percentage in the selection criteria that people use. Organisations are looking for value and skills and industry-specific knowledge, so the decision to outsource becomes more strategic than tactical,” Burke said.
He argued that one of the most compelling reasons to outsource was the sheer ubiquity of technology. “As IT becomes increasingly integral to products and services across a wide spectrum of industries, we find it's increasingly important that providers like ourselves have the industry-specific knowledge as well as the IT expertise. You can't have one without the other.”
Despite its global reach and ability to call on international resources, Siemens stops short of promising its clients the opportunity to divest themselves of all IT responsibility. In fact, one of the biggest changes in the sector has been the hard-earned view that it is better for clients to retain some knowledge in-house if the outsourcing partnership is to run smoothly. “We seek partnership, which, by definition, needs partners on both sides,” said Burke. “If you outsource everything, you abdicate responsibility. It's massively important that the customer retains knowledge in order to be a good partner on the same level. It's about governing the outsourcing business model, and you can only do it from the customer perspective if you have the necessary capabilities.” For Siemens, this element has to be costed in to a partnership agreement. “Governance is important and it's a cost that the customer has to consider. The cost of governing the model usually adds up to around 10 per cent of the overall value of the deal,” said Burke.
When it comes to placing bets on the next big thing for outsourcing in Ireland, Gloth agreed with the Gartner view, that software as a service will start to take off. “One of the main areas we are looking at is bespoke software development, customising off-the-shelf applications and managing applications across the bandwidth,” he said. “Customers increasingly come to us to host their infrastructure and manage their applications.”
As for business process outsourcing, it's still early days in Ireland. “It's growing globally, but we're a little behind,” said Gloth. “We were out of the block a lot later than some other countries on outsourcing in general, but now we're not too far behind and in some areas, we may even have caught up.”