Forrester gives transforming IT tips

The financial services sector in North America this year will spend US$22 billion on outsourcing, growing at 12 per cent compounded annually through 2007, predicts Forrester Research, Inc. In its report 2003: Financial Services Outsourcing Will Grow 10% released in February, the Cambridge, Mass. research firm forecasted applications and infrastructure outsourcing to reach US$36 billion by 2007.

Author Christine Ferrusi Ross, with Ron Shevlin and Liz Herbert, noted that even though deals such as J.P. Morgan Chase with Bank of America received a lot of press last year, smaller deals will bolster outsourcing growth in the financial services industry.

Forrester sees the following key trends in current deals:

VARIABLE PRICING. “As the industry continues to face tremendous pressure, firms are looking to outsourcers to convert their high fixed-IT costs to variable costs,” reads the report. “American Express signed a US$4 billion deal with IBM for its on-demand outsourcing, in which Amex would pay only for the computing power it used. With that move Amex reportedly expects to save more than US$400 million.”

OFFSHORE. “Seven of 17 financial services firms Forrester interviewed for a February 2003 report indicated they will use offshore resources this year.”

FINANCING. “Compared with other industries, financial services firms spend the largest percentage of their revenue on IT. To recoup some of that expense, outsourcing firms have sold their IT assets to the outsourcer.”

Forrester further predicts that as the market evolves, megadeals will give way to smaller, more narrowly scoped contracts, based on its findings that most firms plan to spend less than $20 million on outsourcing in 2003. Smaller deals will become the mainstay of outsourcing starting this year, a trend that will be most noticeable in the apps space as clients outsource apps one at a time.

The firm also sees industry expertise becoming a differentiator among providers. Outsourcers will win business by demonstrating knowledge of financial services specific security and privacy requirements and incorporating them into their infrastructures and service delivery methodologies.

In April, Forrester’s Ross authored with Bruce D.Temkin and Liz Herbert the report Can Outsourcers Really Transform IT? The authors evaluated the transformational capabilities of 13 outsourcers and found that while most had good skills that clients need to tap into, IT outsourcing lowers costs but often fails to provide additional value-added enhancements.

Referring to “the hunt for outsourcing nirvana,” the report notes that IT outsourcing represents the fastest-growing segment of the technology services market – expanding at a 14 per cent annual rate through 2007. Apps outsourcing is the most popular new initiative for next year while outsourcing networks and desktops are the two most popular new infrastructure initiatives being outsourced this year. Forrester claims large corporations report that two “enticing benefits” are driving the demand for these services:

Lower costs. “Outsourcers can provide better economies of scale for technology purchases, automated monitoring and management, and a reduction in the headcount needed to support the environment. Forrester’s research shows that clients typically save between 11 per cent and 25 per cent when they outsource their IT infrastructure.” Forrester notes that while the percentage of savings varied among clients who outsourced, the percentage of savings increased along with the scope and size of the deal.

Improved infrastructure. Companies often want outsourcers to provide more than just better costs – they expect to gain new technologies, improved architectures, and in some cases completely revamped infrastructures. American Express signed an outsourcing deal with IBM that included a migration of the financial giant’s static, dedicated servers to a pay-per-use, shared IT environment that more dynamically meets its business needs.”

Elusive transformation benefits

However, the authors noted that while many companies save money by outsourcing IT, few achieve their infrastructure enhancement goals. They cited three reasons why firms aren’t getting the benefits they expected.

Clients don’t push for transformation. “Firms often write RFPs with terms that hold the outsourcer accountable for improvements in the client’s core business. But outsourcers push back on these line items, complaining that these “softer” goals can’t be easily measured. The ensuing pain of negotiating for specific service level agreements (SLAs) causes many clients to just give up — yanking transformational requirements from their contracts.”

Short-term savings overshadow long-term gains. “Since outsourcing deals traditionally focus on cutting costs, the executives that sponsor these efforts often are pressured to demonstrate immediate savings. The impact: sponsors get jittery about making additional investments that might jeopardize upfront savings.”

Change ruins providers’ operational efficiency. “Since outsourcing is a low margin business, outsourcers balk at any activities that introduce inefficiencies, choosing instead to squeeze incremental improvements from existing environments. And since many IT upgrades, like consolidating servers, will actually reduce the outsourcer’s scope of effort, the vendors don’t often recommend these efforts.”

Transformational qualities

“Lacking any proactive recommendations from their outsourcers, companies end up with well run, but outdated, infrastructures,” the report continues. “To achieve longer-term benefits from the effort, firms must demand more than basic operational best practices when selecting a partner.”

The authors suggested what to look for in a transformational outsourcer.

Business value focus. “Outsourcers should help clients use the infrastructure in new ways to fuel the clients’ business success. Firms should look for vendors that sign up for metrics like an increase in inventory turns instead of just IT-based metrics like 99.99 per cent uptime for servers that support inventory management apps.”

Client management. “Buyers need to look for account teams that will proactively help internal employees become more effective with non-outsourced IT. A key element: get the provider to train a client’s organization on its best practices.”

Transformation skills. “Clients need outsourcers that can help with continuous change, not just one-time migrations. Look for vendors with existing deals that provide for ongoing technology upgrades.”

Outsourcers evaluated

Affiliated Computer Services

Cap Gemini Ernst & Young

CGI Group

Computer Sciences Corporation





Perot Systems

Siemens Business Services (USA)

Tata Consultancy Services



In evaluating the 13 outsourcing firms, Forrester asked each to complete a detailed survey regarding their current offerings, strategy, and market presence. They also interviewed client references for the providers under nondisclosure to validate providers’ answers and to hear how vendors put client management and innovation into practice. Forrester did not evaluate their cost structures or pricing models because “these items, while important, depend on the scope of work and other deal-specific factors.”

Achievinginfrastructure enhancements

Having made the point that outsourcers may possess transformational outsourcing capabilities that somehow don’t reach their clients, the authors of the Forrester report Can Outsourcers ReallyTransform IT? suggest three actions that buyers can take to gain the benefit of those capabilities.

Include road map milestone metrics in contracts.

“Clients that want enhanced infrastructures without big bang migrations should ensure that the outsourcer is compensated on meeting specific incremental milestones. For example, to achieve virtual storage over time, the provider should receive a bonus for moving the client from dedicated direct-attach storage to networked storage, then get another bonus when it implements storage virtualization tools. This type of innovation should be blended into agreements — not treated as ‘additional projects’ on top of existing contracts.”

Insist on an outsourcer training commitment.

“When writing the outsourcing contract, buyers should require the outsourcer to commit at least three to five days’ training on emerging technologies to the delivery team members. The specific technologies chosen should be determined jointly by the client and the outsourcer based on the client’s infrastructure road map.”

Reward individuals, not just the outsourcer as a company.

“To encourage outsourcer employees to suggest new ideas, firms should develop a bonus system for delivery team recommendations that are implemented.”