Re:Viewing 2005: The year in outsourcing

Is 'in-sourcing' the new outsourcing?
Written by Andy McCue, Contributor

Is 'in-sourcing' the new outsourcing?

As ever, 2005 was full of controversy in the outsourcing world with collapsing deals, companies bringing outsourced operations back in-house and security breaches at offshore call centres. But despite these troubles, says Andy McCue, IT outsourcing remained a key priority for companies.

The continued pressure to cut costs means IT outsourcing was destined to remain high on the corporate agenda in 2005 and, indeed, at the turn of the year the outsourcing market hit a record high with the total value of major deals topping €58bn worldwide.

Despite record profits, the pressures of market consolidation, fierce competition and the need to cut costs, the financial services sector was one of the most ripe for outsourcing IT services and provided some of the bigger deals of the year.

Most notable was the €1.8bn outsourcing bonanza by Dutch bank ABN Amro, which handed over its infrastructure and application development in a series of deals not only with the usual suspects Accenture and IBM but also with key Indian offshore IT providers Infosys, Patni and Tata Consultancy Services (TCS).

Industry analysts called the landmark deal a tipping point for Indian IT outsourcers in terms of their credibility in the UK and European market.

Elsewhere the trend towards numerous, smaller outsourcing contracts meant a continued decline in the so-called 'megadeal' but other notable contract wins in the UK included the EDS-led Atlas consortium beating stiff competition for the £4bn Ministry of Defence DII contract and BT bagging a £3bn deal with Reuters to provide secure networking services.

But the value of outsourcing altogether was more loudly called into question this year on the back of collapsed deals, some major 'in-sourcing' moves and damning research.

Sainsbury's and the Prudential were two of the most high-profile companies to bring outsourcing deals back in-house in 2005. Sainsbury's ended its 10-year contract with Accenture three years early, as part of plans to turn the supermarket chain's fortunes around, while Prudential decided to take its data centre services back from Capgemini.

One contract that came to a messy end was Bedfordshire County Council's £250m outsourcing deal with Hyder Business Services. The council threatened legal action after claiming HBS repeatedly failed to hit performance targets but the deal was finally scrapped before costly litigation became necessary after both parties came to a mutual agreement to end the contract.

Over at electronics retailer Dixons a mooted outsourcing deal with LogicaCMG was canned before it even got signed after directors got "cold feet" about the cost and complexity of the deal at the last minute.

CIOs on silicon.com's CIO Jury maintained that outsourcing is effective despite all the negative press it gets but several reports begged to differ. Local government IT body Socitm claimed councils that have outsourced their IT don't perform as well as those running an in-house service, while figures from consultancy Compass said two-thirds of outsourcing deals are failing due to a lack of governance.

Offshoring also continued to put pressure on the traditional outsourcing model yet, despite soaring profit margins, 2005 proved to be something of a difficult year for the Indian outsourcing industry.

No sooner had the UK's banking regulator the Financial Services Authority declared that customer data was safe offshore in India than a series of data security breaches occurred.

First was the theft of $350,000 from the accounts of US Citibank customers by Indian call centre staff, followed by two stings by undercover reporters. UK newspaper The Sun managed to buy the bank account details of 1,000 UK customers from a call centre worker in India for just £4.25 each while the Australian Broadcasting Corporation also managed to get hold of sensitive customer data.

While undoubtedly damaging to the reputation of the Indian IT and call centre industry the breaches appear to be isolated incidents that could happen anywhere in the world. A more worrying underlying trend for the Indian companies in 2005 was the high staff turnover rates and repeated warnings about future skills shortages.

Bangalore-based Wipro, for example, said high staff churn forced it to replace 90 per cent of the 14,000 or so employees in its business process outsourcing (BPO) operations over the last year. Independent consultants put the attrition rates in some call centres at 40 per cent and said disaffected Indian workers see it as a dead-end job, despite the relatively high salaries.

Back in the UK, 2005 has seen less of the public backlash against services offshored to lower-cost countries such as India. Labour market figures from the Office for National Statistics also suggested that offshoring has had a minimal effect on the employment prospects of IT-enabled occupations across the UK.

In terms of the prospects for the year ahead, 2006 looks very much like 'more of the same' when it comes to outsourcing and offshoring. silicon.com's second annual CIO Agenda highlighted ongoing cost pressures and greater priority being given to outsourcing among UK IT chiefs over the next 12 months.

Deals signed in 2006 will be shorter and for less value, and usually split between a consortia of IT providers with users and vendors both getting smarter about how to get it right.

There are likely to be some limited moves towards in-sourcing of bad outsourcing deals signed in the 1990s that are now coming to an end. But otherwise, in the new year, IT outsourcing will very much remain a fact of life on the corporate landscape, along with an increasing move towards BPO services.

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