Counting the cost of IT outsourcing

6 September 2000
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07 September 2000

Outsourcing information technology promises huge savings for companies. But, as David Arminas reports, the risks are just as large

Outsource your IT function on long-term contracts and save millions, even billions, of pounds. That appears to be the case with this summer's announcements of major strategic IT initiatives, including those of Sainsbury's, Rolls-Royce and BP.

Such agreements are the stuff that can make a purchaser's reputation. But they can also break it, and there are enough stories in the media of massive IT project failures to send the shivers down any procurement director's spine.

The latest example is the Camelot consortium, which has been running the National Lottery since its inception in 1994. Last month the Lottery Commission decided that Camelot's US lottery equipment IT supplier, GTech, was not up to the job, throwing into disarray Camelot's bid to run the lottery for another seven years from October 2001.

Camelot's downfall

In deciding against Camelot, the commission believed the operator could not manage GTech effectively. A technical problem had persisted from the start of the lottery until July 1998. The commission was not notified that there was ever a problem until a former GTech worker informed them this year. There was also an image problem, when Guy Snowden, former GTech chairman, lost a libel action against the other lottery bidder, Sir Richard Branson.

Dianne Thompson, Camelot's chief executive, said it wasn't aware that GTech was going to be a problem for it in retaining the lottery contract. Camelot has now come up with an innovative approach to its partnership concern. The operator intends to buy the lottery software from GTech and take over its UK division.

Camelot hopes that a judicial review of the commission's decision, due at the end of this month, will help its cause and keep at bay Branson's competing bid to run the lottery.

With the GTech problems out in the open, should Camelot have been more concerned about the liability of its relationship? This is the sort of question that procurement directors should be asking.

And this is all the more important as IT procurement increases. A recent survey from the Bourton Group showed that, for the first time, manufacturing companies last year spent as much on IT as on plant and equipment. Significantly, IT spending is expected to inch ahead next year, making it the number one area of purchasing spend.

Who is in charge of IT procurement and outsourcing can be a thorny question. IT and procurement departments share the knowledge to get the job done. But how well do they co-operate? More importantly, who leads the contract negotiations?

That is where the purchasers come in. "IT has the technical expertise, procurement the commercial," said Gerry Walsh, vice-president of global procurement at American Express. "Partnership choice is down to a rigorous process of selection and proper process of due diligence."

Lack of flexibility

Most IT managers are opposed to outsourcing deals, especially those with contracts of 10 years or more, according to a Computer Weekly/Harvey Nash poll in August. They are sceptical of long-term deals, and only15 per cent believe such agreements will be flexible enough to cope with rapidly changing IT requirements.

If IT departments are sceptical of contracts or outsourcing, then procurement staff have a harder job making their influence felt. Working well together becomes paramount, noted Walsh, whose IT procurement staff sit among the IT staff and not in the procurement department. "It almost needs joint leaders," he added.

But the National Audit Office (NAO) doesn't think so. In its August report on the effectiveness of the now-defunct swipe-card system for the Department of Social Security (DSS) and Post Office Counters, it lent its support to having a single leader for successful IT contract negotiations.

In a £1 billion contract signed in May 1996, ICL subsidiary Pathway was chosen to modernise the benefits system, including introducing a plastic card for it.

However, the project was abandoned after troubled system development, costing the DSS £127 million. Pathway and the DSS have said lessons were learned concerning contract negotiations.

These lessons, according to the NAO report, include risk identification and allocation of risk responsibility, and never leaving areas to be agreed later.

With stakes so high for IT procurement, little wonder that a survey last March by Purcon Consultants showed an average 8 per cent premium being paid to procurement professionals with IT purchasing skills. Salaries for IT procurement positions at American Express are a "notch" higher than for general purchasers, acknowledged Gerry Walsh.

SMsep2000

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