IT outsourcers aren’t sweating stock market crisis

TORONTO – The financial industry crisis that brought down Lehman Brothers and nearly toppled AIG hasn’t fazed IT outsourcing firms, who expect to see their business pick up rather than slow down as the economy shakes out.

As part of Toronto Tech Week, consulting firm KPMG hosted a panel discussion that included representatives from Bell Canada and others who said last week’s stock market turmoil will likely increase the focus on corporate cost-cutting. That means many of them will likely turn to offshore outsourcing, which is often seen as a way of reducing overall expenditures on areas like application development and managing IT infrastructure.

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“Cost pressures intensify at a time like this, but competition seems to intensify at the same time,” said Richard Caruso, head of the telecom business at Tata Consulting Services, or TCS, in New Jersey. “We’re going to see some bigger deals as a result of this.”

Those deals, however, may be renegotiated or have contracts with more stringent terms and conditions, said Joe Cooper, a former outsourcing exec with IBM and now CIO of Manulife Financial. The big risk companies could run is crafting a deal that is overly complex, or that doesn’t adequately address the enterprise environment of the customer.

“You’re going to want to see 30, 40 or 50 per cent off the costs of your onshore environment,” Cooper said, adding that it’s a mistake to believe that outsourcers can only handle the most rote IT tasks. “Application development is just as good being done in Asia as anywhere else.”

That being said, some precarious financial situations in emerging economies such as China could bring more scrutiny over where some IT work is being farmed out, the panellists said. That’s why some future contracts may have to include provisions that address major fluctuations in local inflation, for example.

“I would suggest you not put the bulk or the majority of what you want to do in a single location,” said Cooper, though it’s important that the outsourcer and customer are clear on where contracts are fulfilled. “A vendor shouldn’t have any rights to move things offshore without you knowing about it.”

Don Hicks, a director with Bell Canada’s outsourcing division, said that kind of communication is all-important, especially considering Canadian privacy laws and the potential security issues that arise. Instead, outsourcing deals should have a blueprint in place for making a move. “You could have an embedded disaster recovery plan, or one where you move over with fewer transition costs,” he said.

Although Caruso talked at length about the role of outsourcers in “transforming” an organization’s processes as well as its IT, Hicks suggested that companies might be better to adopt ITIL or other best practice frameworks prior to finding an outsourcer. “If you hand (the operation) over as-is, there’s a lot of gain for the supplier,” he said.

Similarly, the shaky economy could cause companies to change the length of outsourcing deals, but Cooper said it depends on how you define a “long” contract.

“Right now ‘long’ for us is five years,” he said. “It really depends on how fast your business is changing. I expect some aspects of our business to change within the next six to 12 months.”

Hicks said with the right price-adjustment benchmarking clauses, enterprises shouldn’t be scared of committing to a supplier. “For a deal of any appreciable size, anything less than three years is probably not practical,” he said. Toronto Tech Week continues on Wednesday.

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