FSN: Outsourcing – the need to get back to basics

Outsourcing – the need to get back to basics

18th June 2007
Despite mixed industry reports about the benefits and disadvantages of outsourcing, how it should and should not be executed, there are many businesses for which outsourcing provides immediate relief and strategic benefit. The news this month that Eversheds a major global law firm has agreed a £27 million IT managed services deal with Computacenter Services underlines the attractiveness of basic outsourcing. Gary Simon , FSN's managing editor looks at the issues.

Commenting on the deal, which will see Computacenter Services support the law firm's UK Service Desk, desk-side support, datacentre hosting and management, Bryan Hughes, UK managing partner for Eversheds LLP summed it up. “We are a law firm, not a specialist IT provider and this, coupled with the fact that we had finite internal resources, meant that we could never be at the cutting-edge of legal technology. However, working with an external provider will give us access to far greater resource and cutting-edge technology, which will help transform our service offering and, we believe, give us a real differentiator in the legal marketplace,” he said.

In a way Hughes' statement is glaringly obvious. It stands to reason that a law firm is unlikely ever to be as good at managing its IT capability as an organisation that is steeped in IT provision and skills. Managing IT on this scale in-house can be a massive burden and a drain on management skills. In the context of a law firm or other professional services organisation this often translates into senior fee earner time being frittered away on IT decisions around which the organisation has little expertise.

In these circumstances, handing the IT ‘problem' over to a third party is not an admission of failure but a sign that management has come to its senses – a realization that managing IT is a non-core activity. Hiving off IT provision in this way allows an organisation to re-focus on its strategy and the activities that will make it prosper.

Some commentators go even further. For example, benchmarking guru, Greg Hackett, founder of the Hackett group is in favour of more radical change. Whilst the last 15 years have witnessed a reduction in overall finance and administration costs (decision support, control & risk management and transaction processing) from around 2.2 percent of turnover in 1990 to 0.75 percent in 2004, the cost of transaction processing remains stubbornly high.

For most companies, transaction processing and operating infrastructures still comprises two thirds of typical finance and administration costs locking finance functions into their traditional roles and preventing them engaging more broadly as a ‘business partner' in the organisations that they serve. Benchmarking, re-engineering, ERP and shared services which were the fashionable business initiatives of the nineties have failed to liberate finance functions from the shackles of transaction processing. “Finance and IT is still largely thought of as an overhead –rather than a true partner,” says Hackett. So what is the solution?

“Get out of transaction processing,” says Hackett. “Finance and IT should not be in the business of transaction processing or management reporting in the 21 st Century. Outsource it to the experts because you can achieve lower costs, better service levels, offload technology risk and reduce capital investments.”

Hackett's message is based on a lifetime's work reviewing company profitability and performance. His most recent research reveals a steady decline in business profitability over forty years in the United State 's largest listed companies, which he attributes in large measure to a lack of innovation and failure to act on market changes. It seems that management is too internally focussed, bogged down and distracted by non value adding activities that could be outsourced.

It is an interesting thought that the outsourcing industry may be partly to blame. Perhaps it has drifted too far away from its roots in its quest to grow market share. The idea that outsourcing is about reducing overheads, fixing costs and agreeing service delivery has become very unfashionable. Today's outsourcing provider wants a ‘strategic partnership', a long term relationship rooted in leading edge developments designed to deliver competitive edge for its customers and handsome profits for itself.

The trouble is that there is a fundamental mismatch between what outsourcing providers want to sell and client companies need and want to purchase. All of the trends, illustrated by recent TPI Index surveys are pointing away from long term complex contracts to short, bursty contracts of limited scope. In fact the challenge for most companies is not how to manage a 10 year multi-million outsourcing deal but how to control multiple outsourcing contracts of 2 to 5 years duration.

The other issue which is bearing down on the market according to Duncan Aitchison, Managing Director of TPI, is the amount of oversupply in the outsourcing market. “There are too many outsourcing providers and consolidation of the market is overdue. There are also signs that the private equity industry is becoming interested in the sector and this could fuel a number of merger and acquisition deals,” he says.

Whether the uncertainty created by consolidation in the marketplace dampens demand remains to be seen, but perhaps a breathing space will allow the industry and its customers to reflect on what it wants. TPI's Aitchison agrees that there is a mis-match between supply and demand but the differences are being whittled away.

What business appears to need is an outsourcing industry that is geared up to deliver fiercely competitive and efficient services around the finance, administration and IT without all of the ‘froth'. As Hackett says, the new vision is to get out of transaction processing – outsourcers please note that doesn't mean sharing strategy!

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