Shifting the burden

Even as IT struggles through one of its worst droughts in recent memory – leaving tech portfolios downgraded or completely shattered – organizations that provide out-sourcing services are still smiling.

The outsourcing providers might be asking themselves, “downturn, what downturn?” because contrary to the flat IT industry, outsourcing in Canada is relatively big business.

Outsourcing – where a third party enters into a contract with a company to provide services – has gone through some major transformations in the past five years. Although its genesis may date back to the 1960s, acceptance is only a decade old.

In the beginning, outsourcing was primarily about trimming costs, where organizations engaged in outsourcing deals to appease and convince the company CFO that bottom lines were being crunched. But outsourcing has evolved. While cost cutting is still a primary driving force, outsourcing is also becoming an accepted business strategy for reducing infrastructure headaches and staffing issues. And what is being outsourced by businesses also represents an important shift.

“When people started outsourcing, the main reason was cost reduction, and it’s still one of the foundations of outsourcing,” said Darren Saumur, vice-president at Cap Gemini Ernst & Young in Toronto. But companies are outsourcing more now than ever before, Saumur said. Traditionally, outsourcing arrangements centred on specific IT assets such as the server environment, mainframe, the network and the data centre. And while all the above are, and will continue to be, handed over to service providers, the list is growing – and fast.

Michael Roach, president and chief operating officer at services firm CGI Group Inc. in Toronto, said areas such as payroll, human resources and mission critical business processes such as IT systems and customer service are now being outsourced. Companies are embracing outsourcing because they have collectively realized that in the face of globalization and mounting competition, they need to focus on their core business and competencies, he said. Of CGI’s 15,000 worldwide employees, Roach estimated that 75 per cent are dedicated solely to its outsourcing practice, and those numbers are growing.

Still, it doesn’t end there. According to Ron Babin, while the recession in the late 1980s helped propel outsourcing deals, it is now seen as a legitimate way to conduct business. “Now it’s partly about the back office functions like accounting, payroll, insurance industry claims processing or customer service. (They) are now being considered, when a couple of years ago it wasn’t even thought about,” said Babin, the associate partner, of strategic IT effectiveness at Toronto-based Accenture.

Yet, as some businesses buy into outsourcing to offload non-core business functions, or to save money or because they don’t want to deal with their own technology requirements, a basic human emotion is still preventing others from taking the leap.

“This whole notion of loss of control is still a big worry for people, and it’s still the biggest thing that inhibits people from outsourcing,” said Dan McLean, a research analyst at IDC Canada Ltd. in Toronto. Some companies fear the notion of allowing a third-party vendor to walk in and have access to sensitive information, the kind of information that a company might have spent its entire existence protecting.

McLean, a long-time follower of the outsourcing market, added that companies are being more tactical in what they outsource, especially if they have any experience with outsourcing. They are more apt to keep the really sensitive and critical information under their own control.

from employee to service provider

For Ontario Power Generation (OPG), the decision to consider an outsourcing engagement coincided with the deregulation of the electricity market in Ontario. In 1999, it began searching for a company to take over its 700-person IT department. After an extensive elimination process, OPG selected Cap Gemini Ernst & Young to manage its infrastructure, application support, help desk, data centre and maintenance. Essentially, OPG spun off most of its IT department.

Originally, however, when Cap Gemini took over in February 2001, OPG decided to view the deal as a joint venture, and it wasn’t until March 2002, after OPG sold its remaining piece, that the deal more closely reflected a traditional outsourcing contract. Dietmar Reiner, the CIO at OPG in Toronto, said part of the reason for initially choosing the joint venture route was out of fear of handing over its IT keys and the cultural change that it would incur. Of OPG’s staff of 700 employees, Cap Gemini assumed responsibility for 500, and it wasn’t an easy transition for its staff to make.

“With the help desk there have been some bumps in the road and those bumps were because we took an in-house staff and made them a service provider. So they went from being your staff to your service provider, and we became their customer. It was a major shift to get into customer-service mode,” Reiner said.

On the whole, OPG has been satisfied with its outsourcing partner’s performance, and aside from profiting from the skills management that Cap Gemini brought in-house, OPG has also benefited from the IT cost savings. Yet, OPG retained roughly 120 IT employees that oversee its most critical information, and remain responsible for any investments in IT and in architectural decisions, Reiner added.

protecting yourself

One of the key elements to the OPG deal and all other outsourcing contracts is the service level agreement (SLA). As Reiner explained, there are provisions to protect OPG if service levels aren’t maintained, and sections that address the termination of the contract.

Within every SLA, certain headings are standard, such as service level credits, a credit cash payment made if performance levels aren’t met, or service level bonuses, a bonus given to the service provider if expected performance levels are exceeded. But for the most part, each SLA is tailored for each deal. What remains fixed, however, is that the “SLA has to protect the client,” said George Atis, chair of the outsourcing practice group at McMillan Binch LLP in Toronto. He added that while SLAs are tedious to draft and time consuming, they are the sure-fire way to protect a client.

Atis has been involved in drafting SLAs for both vendor and client alike for nearly a decade. In a data centre deal, for example, the measurements are so technical that a technology consultant drafts them; others, he said are filled with mathematical formulas. “The parameters are different, but what you’re trying to do in every SLA is define the levels of performance that your service provider is going to meet on the deal,” Atis said.

A fascinating trend that has evolved in outsourcing is partnerships. While the days of one outsourcer providing all services to a company will continue, customers are being more selective. An organization may choose to go with a niche provider of certain services such as HR, said John Kopeck, president of North American operations at Compass Consulting in Chicago. Accenture’s Babin said it has partnered with EDS in one deal and CGI in another engagement with Canada Post. At other times, IBM, CGI, EDS and Accenture may all be competing for the same contract. Still, vendors are learning to share the profit pie and co-exist because it simply makes good business sense to partner when necessary.

Outsourcing isn’t just about the nuts and bolts of IT any longer, and as such a few big-name consultancy houses have moved into the business. At one time, the only players in outsourcing were IBM and EDS. But Cap Gemini Ernst & Young, Deloitte Consulting and what was the consulting arm of PwC, now a part of IBM, are all consultant houses turned outsourcers – and competitors.

“As we see softness in our consulting side, the outsourcing side is growing like crazy. Clients want a slightly different relationship from their partners now. In the past, they would hire a consulting firm to find some savings, [but] the model has shifted,” Cap Gemini’s Saumur said.

and next…

So where does outsourcing go from here? After decades of fighting for the IT spotlight, it appears that over the next several years the market will continue to grow. But there clearly isn’t any accord as to which direction it will take.

IDC’s McLean predicted the future would centre around the provisioning of services in a utilities-like model. He speculated that companies would no longer want to be responsible for building their networks and, hence, a utility-type approach could make sense for some outfits.

Not so says CGI’s Roach. Outsourcing will move away from the utilities side because clients are looking for more choice in terms of how outsourcing services are delivered, he said.

Deloitte’s Held says the outsourcing market will remain relatively unchanged with the possible exception of more niche-type players continuing to provide services such as HR or payroll only.

While outsourcing has become a normal course for doing business, the public sector has yet to latch onto the concept, Accenture’s Babin said.

“Governments have not been strong or leading in this area, and in the next decade, with the [combination of] high retirements and a deficit of knowledge, that will force governments to work with outsourcers more than in the past,” Babin said.

Direction and the future aside, outsourcing providers are relishing the fact that outsourcing is one area of expected growth for 2003, according to IDC Canada. If IT is cyclical, then it’s definitely the outsourcing provider’s turn to shine.