IT outsourcing is a complex relationship

OUTSOURCING of IT services is one of the ways that a company can become more effective and competitive. Along with cost-savings, IT outsourcing enables companies to keep pace with the rapid changes in information technologies and to garner the experience of professional teams. But in spite of an increase in the level of IT outsourcing, Slovakia is still lagging behind trends in other countries.

OUTSOURCING of IT services is one of the ways that a company can become more effective and competitive. Along with cost-savings, IT outsourcing enables companies to keep pace with the rapid changes in information technologies and to garner the experience of professional teams. But in spite of an increase in the level of IT outsourcing, Slovakia is still lagging behind trends in other countries.

The Slovak Spectator spoke to Juraj Hupka, global technology services manager at IBM Slovakia, Pavol Németh, director for outsourcing at Soitron about IT outsourcing, and Marek Gešo, marketing and communications director at Accenture its benefits and drawbacks as well as the impact of the global economic downturn on this market segment.

The Slovak Spectator (TSS): How does the situation in IT outsourcing look in your company?
Juraj Hupka (JH): Our number of clients is moderately increasing right now. Most of our clients are production companies owned by foreign strategic investors and Slovak branches of foreign companies.
Pavol Németh (PN): During the current economic downturn I can describe the situation tense but stable. The IT outsourcing service which we particularly provide is ongoing maintenance of existing infrastructure, which cannot simply disappear from one day to another. But companies have changed their behaviour with regard to capital expenditures. They postpone the implementation of new technologies and extend the life cycle of their IT systems. In the longer term, this may lead to increased demands for administration of systems surpassing their life spans. This is the case in hardware as well as software applications.

On the other hand, the economic tension brings pressure from clients on the price of our services. Their expectations for an increase in effectiveness and simultaneously a reduction of prices for our services are much higher than in the past. We want to be straightforward and we base our services on the quantity of the administered infrastructure or applications and our price is not fixed. Thus, when the client optimises or reduces the amount of infrastructure to be administered, the price for IT outsourcing automatically decreases as well.

With regards to the number of clients, it is relatively stable and we even can speak about a moderate increase. During the time being, firms are searching for all the ways to make their operation more effective. Outsourcing is one of these ways.
Marek Gešo (MG): Accenture has been providing application outsourcing services for more than 15 years. Today we provide a wide range of application outsourcing services working with more than 400 AO engagements. We offer a spectrum of AO services, including capability services, break/fix support, enhancements, upgrades, testing and new development for a single application, a group of applications or an entire application portfolio.

Our strategy continues to focus on value and industrialization: value to maximize returns on spending and industrialization to gain control of IT execution and costs, secure service, and self-fund longer-term IT-enabled value creation.

Our global outsourcing revenues for fiscal 2008 were about 40 percent of the firm’s global revenues.

TSS: What is the current trend in outsourcing of IT services in Slovakia?
JH: Under the current global economic conditions IT outsourcing represents an interesting alternative for our clients to secure their IT needs while their main motivations and decisions for outsourcing are changing. While in the past their need to transform their own IT department by using the experience of a strong strategic partner as well as securing external financing of IT by such a strategic partner dominated, under the current economic conditions the interest of our clients is unambiguously motivated by cost-savings in the operation and development of IT. This is in line with the present trends in the IT market of developed European countries.

Presently we are registering a significantly higher interest in information about benefits as well as risks of the utilization of IT outsourcing from our clients.
PN: We see a gradual increase in the number of outsourcing contracts in Slovakia. Firms are gradually getting acquainted with the advantages of this form of cooperation. Seeing similar projects in other firms as well as starting ‘pilot projects’ are helping this process along. These companies are later more prone to further use of outsourcing.

However, compared with other countries, Slovakia has been lagging behind by some years and it is possible to say that we are also behind within the Visegrad Four (Hungary, Poland, the Czech Republic and Slovakia). I see a great opportunity in the sector of state administration. However, here we see only little activities, if even that, while governments of other countries offer a large range of examples, with Great Britain as an unambiguous leader.
MG: There are very few Global 2000 companies that haven’t outsourced or are considering outsourcing some aspect of their business.

In today’s economic climate, the demand for outsourcing is surging as businesses respond to unprecedented market conditions and an imperative to change both quickly and dramatically. More than ever companies are looking for an outsourcing service provider that they can trust to provide a direct and immediate response to their business challenges. Some are also looking beyond immediate and sustained cost savings to solutions to improve cash flow and drive top line growth. According to recent research, now more than ever clients are looking for customer intimacy, scale, rapid savings, high quality and low risk.

On the demand side, two big trends are global sourcing and bundling. Our unique High Performance Business research shows that high-performing companies excel in global sourcing – they’ve developed the capability to perform critical IT functions anywhere in the world, not just in one or two places.

On the supply side of the equation – if clients need the capability to perform work anywhere and to bundle processes and IT solutions – providers need a stable, reliable, and repeatable set of offerings and consistent delivery methods to support them in doing that.

IT outsourcing has developed over the years and is far more than the outsourcing of a particular service to cut internal costs. Clients are increasingly demanding a measurable increase in business performance through IT outsourcing (ITO). And what’s very clear is that they are ‘bundling’ together outsourcing services they might previously have bought separately.

Recent research from Everest Group shows just how fast bundling is taking off – nearly 90 percent of HR outsourcing contracts now include technology components. Over half of large ITO contracts now include multiple processes such as data centres, desktop, telecom and helpdesk. And over 40 percent of ITO contracts today combine infrastructure and application development and maintenance, up from less than 30 percent just three years ago.

TSS: What are the benefits that IT outsourcing can bring to your clients?
JH: IBM has built a global infrastructure through its so-called global delivery centres, located in Bratislava and Brno (the Czech Republic), among other places. Via centralization and standardisation of services and the use of the shared knowledge of a team of technical specialists, these centres enable us to achieve the basic benefit which our clients expect from IT outsourcing, a reduction in their expenditures for IT operation and development. Along with this, IT outsourcing using the model of the on-demand services enables clients to transform their IT costs from fixed to variable and to increase their flexibility in responding to changing IT needs.

In addition to these abovementioned main benefits, IT outsourcing is a means for our clients to secure financing of the operating and development needs of their IT by using the financial resources of a strong strategic partner. IT outsourcing is also a way for our clients to get access to top technical knowledge from IBM’s expert teams because using their own technical specialists has been becoming too expensive for many of our clients. Moreover, in some regions of Slovakia interesting to foreign investors, such IT experts are not available at all in the numbers needed.
PN: IT outsourcing, or outsourcing in general, can help companies in many areas. It brings better flexibility in human resources required during expansion, slimming down or restructuring of a firm. It helps move capital expenditures into the segment of operating expenditures. Specifically and foremost, IT outsourcing brings a high level of professionalism in IT administration which companies themselves can only hardly achieve in this dynamically developing area. Moreover, outsourcing gives firms the possibility to effectively introduce the latest technologies into praxis, which brings higher cost effectiveness and a competitive advantage. Standardisation of IT and introduction of well-established processes and courses contributes to this, too. In the end, firms also benefit in areas which they were previously unable to secure: optimal usage of resources, high availability and disaster recovery.
MG: When the typical company tries outsourcing for the first time, the priorities tend to be pragmatic: fix the problems, cure the headaches, and cut the costs. From our experience, we can see that outsourcing executives are today showing a new maturity in the way they understand the outsourcing lifecycle and how to get the most from an outsourcing arrangement. They are looking at outsourcing end-to-end, emphasizing long-term relationships, change management and continuous innovation over time.

Outsourcing is a valuable strategy in a market where there is stress, disruption, merger and acquisition activity and other drivers for rapid change.

Application outsourcing has the potential to create new business value through optimization of application portfolios, improved return on investment and decreased total cost of ownership – all by improving quality and increasing productivity.

High performing companies realize that outsourcing is not about what you can subtract from a business, but what you can add to it. It’s not just about saving money, but also about making money. These companies are looking beyond cost reduction for the growth opportunities that come from having access to critical skills and highly motivated talent anywhere in the world.

TSS: What is important for successful outsourcing of IT services? What drawbacks might this process mean for clients?
JH: Creation of a long-term strategic partnership is the cornerstone for successful IT outsourcing. Because the client is leaving a portion of its internal IT processes, human resources and assets to the provider of the service, IT outsourcing requires creation of a long-term commercial relationship based on ‘win-win’ principles. Apart from others, clearly formulated and mutually well-understood goals, expectations and expected benefits of IT outsourcing, a transparent and flexible price model for outsourced services, a mutually balanced and flexible enough contractual relationship as well as a smooth transmission and integration of human resources which the provider of outsourcing takes over from the client are the prerequisites for successful outsourcing.

IT outsourcing is not a risk-free process. It creates a certain form of mutual dependence between the client and the provider of outsourcing services. A failure in the take-over process can have serious consequences for the client and at worst it can mean a serious disruption of ordinary operations and processes of the client. Improper selection of a provider of outsourcing services may have equally serious impacts.
PN: I would mention two areas. One of them is a proper description of the current IT situation before an outsourcing contract is signed; this includes identification of the client’s needs and defining the required parameters of IT systems as well as calculation of the company’s current IT total cost of ownership (TCO. The second area is governance of the outsourcing relationship after the contract is sealed. This is a new discipline for all the firms, which they need learn. Mastering it is an inevitable condition for successful outsourcing. In both cases, it is very good when firms use experienced partners for such tasks.
MG: Our experience shows that it is vital to understand four key phases of the outsourcing lifecycle. Phase one is planning for business outcomes. Cost savings are useful for all companies, but are not a sufficient definition of success by themselves. Experienced executives aim ambitiously for business performance improvements and strategic capability building.

Phase two means partnering for performance. Effective outsourcers work to create mutually beneficial relationships with trusted providers who understand their industry, respect their corporate cultures, and put mutual interest before self-interest.

Strong governance for smooth transition represents phase three. Clear communication, skilful team building, strong change management, and governance are indispensable for a smooth transition.

And finally, phase four means execution with innovation. Experienced outsourcers capitalise on early success by looking for new levels of innovation.

It is clear that outsourcers must help clients drive true value into their business while simultaneously pushing costs out. In addition, outsourcers need to have an established global delivery capability and footprint now. It is also important to make sure the outsourcer has ability to develop new skills and build new assets, and capability to deliver multiple processes or services in one engagement. Another important success factor is a proven experience in working with complex organisations, providing bundled outsourcing services across multiple business functions – all of this in order to help organisations not only survive but thrive in this economic environment.

The most successful outsourcing relationships are those built around mutual trust and spirit of partnership. For example, we have more than 825 clients, many of whom have been Accenture clients for more than 10 years.

TSS: Is the current economic downturn influencing the IT outsourcing sector?
JH: The current economic situation has changed the motivational factors in the decision-making process of our clients with regards to outsourcing. Cost-savings in operation and development of IT has become the decisive factor.
PN: The current economic downturn brings high expectations in optimising the costs for IT. For existing clients, this is related to reduction of prices of outsourcing services or decreasing the service levels for less critical systems. For potential clients, there can be seen a greater inclination to outsource among those firms which have already considered this in the past as well as more direct steps by those companies which had not yet considered outsourcing.
MG: Much shorter-term thinking and time horizons prevail across all clients in all sectors and geographies. Clients demonstrate intense focus on operational improvement and much tighter management of spending. They also want more than just cost reduction – they’re looking for greater value from outsourcing to help them manage through the current crisis and restructure their business. Finally, they are looking for more innovative, creative deals with value-based or outcome-based contracting models.

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