Outsourcing -the industry speaks

April 01, 2005: Whatever your view is on it, most observers within the IT industry would agree that outsourcing - be it domestically or overseas (which is also known as offshoring)-is a contentious issue. Here, IDM talks to some of the figures at the centre of the outsourcing community in Australia to get their views on what has become one of hottest topics up for discussion within Australian ICT industry circles today.

Outsourcing-particularly offshoring- has been the focus of much heated debate amongst politicians and IT industry figures alike over the last few months. This is largely due to the fact that both critics and proponents of the practice have valid arguments to back their case, which inevitably leads to entrenchment on both sides and a lack of willingness to budge from their respective stances.

Offshore outsourcing, in which developed countries such as Australia, The United States and the U.K. export IT-related to countries such as India and China, where labour costs and/or taxation costs are lower.

Those opposed to this form of outsourcing are concerned that it will result in a drain of the IT talent pool at home, with undergraduates targeting other professions where more opportunities for employment exist, and skilled IT professionals drifting into other professions for similar reasons.

Meanwhile, those in favour of offshore outsourcing maintain that its application will help improve levels of productivity in all other areas of an organisation's IT operations, allowing companies to develop more nimble and responsive business models which will ultimately benefit domestic workers by enabling salary increases.

Like it or not though, offshore outsourcing is not going to go away. Quite the contrary, in fact, as according to a study released last month by research group IDC which said the worldwide market for offshore IT services will grow from US$7 billion (AU$9.6 billion) in revenues in 2003 to US$17 billion (AU$23.4 billion) by 2008, which translates into a compound annual growth rate (CAGR) of nearly 20 percent.

"Customers' continued need to look to offshore as a resource from which to procure IT services as part of their overall sourcing requirements is not only growing as a share of the total IT services market, but it is also expanding from traditional IT services, such as application development and maintenance, to areas traditionally limited to being delivered locally. These services range from application and infrastructure management to IT consulting," said David Tapper, director of IDC's Outsourcing, Utility and Offshore Services research at IDC, upon the release of the study.

Barry Mason, senior analyst for IDC's Application Outsourcing and Offshore Services research, added: "Due to the persistent need for customers to reduce costs coupled with the proven capabilities of offshore players, IDC believes there exists considerable market opportunities for these players in the onshore markets, as well as local players looking to leverage offshore as part of their service delivery capabilities."

While not considered so much a "market" as a "business or service delivery model", offshore is becoming an integral part of provisioning services from low-cost regions and a means for offshore players from a variety of regions to build market presence in the major "onshore" IT and business services markets, such as Australia, the U.S. and Western Europe.

In summarising its study, IDC said it believes that much short-term opportunity exists, but cautions that offshore players will need to adjust to the changing market in the longer term by incorporating key factors into their offshore capabilities and go-to-market models.

Australia at the crossroads

Australia is no different from other developed nations in that it must tackle the issue of outsourcing head on, as it is most definitely upon us. The urgency has been precipitated by the proliferation of high-speed Internet access, which has driven the concept of globalisation forward in dramatic fashion.

The Australian Information Industry Association (AIIA) has been representing the interests of the Australia ICT industry for the past 25 years.

Rob Durie, CEO of the AIIA, agrees that the Australian ICT industry is entering a period of profound change.

"As has occurred in other industry sectors such as textiles, clothing and footwear, ICT needs to make some significant structural adjustments to be in a position to take advantage of the offshoring phenomenon."

What it is most certainly not time for, according to Durie, is for the Australian Government and the country's ICT industry to stick their collective heads in the sand and hope the issue will disappear.

"In Australia, we are faced with two stark choices: we can take the "Chicken Little" approach and wait for the sky to fall in, or we can proactively assess the competitive threats and opportunities.

"Neither the industry nor the Australian Government can ignore the threat posed by offshoring to local ICT employment, whether it is from developers in India, Argentina or Latvia. The government, with its resources and influence, must take notice of this significant challenge to local employment and the future growth and well-being of the Australian ICT industry. Failure to act now will have long-term consequences for the future of the domestic ICT industry."

That's not to say the trend of global outsourcing could not be used to Australia's benefit rather than its detriment, with jobs being created through other countries choosing Australia as an outsourcing destination, as Durie explains.

"AIIA firmly believes in, and is committed to, promoting around the globe the world-class skills of our own industry. If the industry is correctly positioned, trends towards increased outsourcing of ICT could benefit the Australian ICT industry as a result of its demonstrated leadership in ICT services and the potential to expand those capabilities into new areas of technology and new applications."

Very good, but how should Australia go about looking for opportunities to turn offshoring to its advantage and improve the competitiveness of Australian software and services suppliers. Well, for a start, the AIIA believes we should be:

• Promoting Australia as an attractive destination for offshore outsourcing;
• Using global sourcing and other strategies to improve the competitive position of Australian-based suppliers;
• Adopting quality software development methodologies; and
• Partnering with offshoring companies to provide solutions to global customers."Australia possesses a highly skilled, culturally and linguistically diverse workforce capable of designing and developing leading edge technologies. We have a modern economic base, political stability, and cultural and legal compatibility with the key outsourcing economies. These are just some of the attributes prized by companies seeking a low risk offshore alternative," considers Durie.

Overcoming a legacy of failure

If Australia is to grasp the nettle and prosper under the new wave of outsourcing that has gripped the IT industry, it must first take heed of mistakes made in the past.

So says Paul Gleeson. And he should know, occupying the position of director of global outsourcing at Unisys, one of the largest providers of outsourced IT services and solutions in the world. Neither, he says, is the phenomenon of outsourcing strictly the preserve of the larger enterprise.

"We are entering into an exciting phase in IT outsourcing within Australia; a time when medium size companies from a wide range of industries start to consider outsourcing as part of their success strategy for the future. In the past, IT outsourcing was only considered a key strategy for large companies in a select number of industries, particularly finance, transportation and government. This is no longer the case.

"Failure in early outsourcing arrangements was largely due to a lack of detail and forward thinking during the contract negotiation stage. Many clients failed, in initial discussions with outsourcing providers, to identify the criteria that would be used to measure the success of the arrangement. This meant that neither party could objectively evaluate the success of the relationship. This has made it difficult to define metrics and performance indicators that can be built into future contracts to improve the outcome for both parties."Nevertheless, Gleeson considers that there has been a tendency for the press to dwell on the negative side of outsourcing, in turn helping to create something of an unbalanced view of outsourcing in the market.

"In the past, negative press associated with outsourcing deals has played a part in confining outsourcing as a business/IT strategy to large organisations. However, Unisys estimates that for every bad outsourcing story published, there are another ten good news stories that never make it to the public domain. Current proselytising of the benefits of outsourcing by both service providers and satisfied customers has recently contributed to the new interest by medium sized companies. As the collective wealth of experience disseminates across the market place, more companies realise the potential value that outsourcing could provide them. The CIOs of medium sized companies are able to discern between the posturing that frequently occurs in the press between the large outsource providers and their customers, and the actual benefits companies are realising from outsourcing."

The big bad wolf that is the media strikes again! But facetious remarks aside, whether or not there has been a trend towards portraying a mainly negative view of outsourcing in the press, there is plenty evidence out there to illustrate that outsourcing is not advantageous to everyone.

Trimming costs the Jenny Craig way

Jenny Craig is a name that is synonymous with getting in trim. The company, which was founded in 1983, is one of the largest weight management companies in the world, with around 650 centres worldwide, including Australia, New Zealand, and the home of the super size portion, the United States.

As well as offering weight loss programs, Jenny Craig operates a number of retail services, such as the sale of food products, DVDs and scales.

Aside from all this, the company is also one of the largest names in recent times to scale back its IT outsourcing and bring its data in-house.

Whether or not a customer makes a purchase during their visit, each Jenny Craig centre collects all data surrounding every customer visit. This information is used to compile a history on each customer, including their weight information, what products they purchased, the date of their last visit, when their next appointment is, their weight goals, active and inactive status, and so on. Consequently, there is a vast amount of data that needs to be managed.

But inefficiencies in the way customer data was collated led to Jenny Craig reassessing their processes. The fact that the data was shared with a third party vendor for compilation and creation of marketing campaigns only added to the complexity and expense.

Prior to installing Ascential's Enterprise Integration Suite, which allows the company to extract data from multiple data sources and have the latest, non-duplicated data in a central location, Jenny Craig had a number of problems which meant it was not fully utilising the information it had on its clients, as Sophia Ruiz, manager of data warehousing at Jenny Craig, explains.

"Our client base, which is mostly women, was hard to track. If a client moved, married and changed her name or visited another location, we couldn't track her. Instead, due to multiple, disparate databases, we ended up with redundant data on the same client, giving us an incomplete picture of our client base."

The problem was largely down to the fact that each centre's database was siloed, so data was not being shared between locations. This meant that the third party vendor which analysed the information had to wade through multiple messages, making data gathering very inefficient and costly.

Now that the company has a sophisticated matching tool that analyses all the records throughout the organisation, Jenny Craig has no need to outsource all of its data to an external marketing vendor, which it expects will save it at least $1 million a year.

"Now we have the data necessary to make educated business decisions," says Ruiz."By creating our own marketing campaigns, conducting our own analysis and maintaining our own database, we can contribute further to that $1 million a year saving."

Chase-ing the almighty dollar With assets of $1.1 TRILLION, you could suggest that financial services firm JPMorgan Chase knows a thing or two about managing money, without fear of rebuke. Therefore, when it decided-upon merging with Bank One - to reintegrate much of its technology infrastructure which it had outsourced to IBM, it sent a clear message to the industry that outsourcing is not always the way to go in order to achieve savings.

When announcing the plan to reintegrate its data centres, help desks, distributed computing, data networks and voice networks, which will from January 2005 see the transfer to JPMorgan Chase of approximately 4,000 IBM employees and contractors currently supporting the JPMorgan Chase account, JPMorgan Chase said its recent merger with Bank One created a new firm with significantly greater capacity to manage its own technology and infrastructure, adding that after a rigorous review, the merged firm concluded it now has the significant scale, enhanced capabilities, tools and processes to build its own global infrastructure services organisation.

"We believe managing our own technology infrastructure is best for the long-term growth and success of our company as well as our shareholders. Our new capabilities will give us competitive advantages, accelerate innovation, and enable us to become more streamlined and efficient. In addition, there will be many career opportunities for returning employees," said Austin Adams, JPMorgan Chase's CIO.

So what should the industry make of these manoeuvres by such high profile organisations to bring their IT back in-house?

"Recent developments in the outsourcing market including contract reversals by Jenny Craig and J.P. Morgan Chase and announcements by SingTel/Optus in Australia suggest that there is a trend away from outsourcing. Senior managers in business should always be looking for ways to achieve greater efficiencies within business and IT processes.

Any company that fails to constantly reassess its IT strategy and incorporate the necessary changes will rapidly fall behind the competition," considers Unisys' Gleeson.While acknowledging that those well publicised shifts away from an outsourcing model are "probably based on sound business grounds for the respective companies and are designed to address immediate priorities," Gleeson says such cases are definitely the exception rather than the rule, with recent reports suggesting that the pendulum is swinging very firmly in the other direction.

"For many companies, outsourcing is emerging as the best strategy for their business. In fact, Gartner estimates that outsourcing market in Asia-Pacific to grow by more than 50 percent between now and 2007, with Australia representing a considerable portion of this total growth."

Where do we stand now?

While the outsourcing industry in Australia may not be as mature as in the United States, the AIIA's Rob Durie says the signs are already extremely positive for Australia in the global market.

"Australian ICT capabilities are already recognised internationally. According to Australian Government analysts, at least 27 offshore companies have invested more than $580 million in Australian ICT operations in the past year. This investment is forecast to generate approximately 1,750 jobs for Australian workers. In another report by Gartner, Indian services companies are developing long-term strategies to capitalise on Australian expertise in the provision of their global services.

"The challenge ahead of us is to think and act strategically at government and industry levels to ensure Australia retains its world-class software development skills and finds a niche in the global market."

In the Jan/Feb issue of IDM: Outsourcing Part 2-The future of outsourcing in Australia. Industry insiders and expert analysts deliver their verdicts on how Australia will fare in the great outsourcing shake up.

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