Growing pressure on the government to cut its multibillion-pound IT spending bill means it is increasingly likely that major public sector contracts will be awarded to offshore IT service providers.

A new cross-party parliamentary group was launched last week to stimulate India-UK trade and investment opportunities ­ – and IT is an important part of the plan.

MPs met bosses of offshore firms such as Tata Consultancy Services (TCS), HCL and Infosys to discuss ways to overcome barriers to Indian service providers bidding for public sector IT contracts.

During the meeting, minister for trade and development Gareth Thomas accepted there are “mindset issues” around tendering for government IT, but highlighted the need to introduce more competition to reduce public spending.

“There is an issue with how we procure contracts in terms of market reach, which needs to be looked at. We want to allow Indian companies to win these contracts and get more value for money,” said Thomas.

To reduce public sector IT spending ­ – estimated at about £16bn per year – ­ the Treasury has already hired former Logica chief executive Martin Read, who plans to announce his efficiency scheme as part of the Budget in April.

But the government’s interest in taking advantage of offshore delivery models to lower costs will raise concerns about the economic, political and security impact of such arrangements.

With unemployment forecast to peak at more than three million in 2010, other industries are already experiencing protests over jobs going to overseas workers, such as the wildcat strikes at the Lindsey oil refinery last month.

“Government procurement needs to take the situation we are in into account. Many UK-based, skilled IT workers have already lost their jobs and we expect there is more to come,” said Peter Skyte, national officer at trade union Unite.

“It is important that there are safeguards for UK workers and that jobs are created onshore, not offshore.”

If Indian firms stand a better chance of winning public sector contracts, there is a risk that industrial unrest could be mirrored in the IT sector, according to Mark Kobayashi-Hillary, director of the National Outsourcing Association.

“The recent oil refinery issue could spill over into services and with the advent of well-organised single-issue campaigns using social networks, there is a much bigger danger to the government and companies employing outsourcing,” he said.

“In the short term, it may appear that the UK buys more from India than they buy from us, but the government is clearly thinking of the long term. But that does not help the British workers affected in the short term.”

Public sector organisations face particular pressures when it comes to offshoring, said Malcolm Stirling, head of public sector practice at supplier CSC.

“For example, the Department for Work & Pensions (DWP) is working hard to meet efficiency targets and reduce costs but it is also working hard to reduce unemployment. Taking jobs offshore would make them open to the criticism of being in conflict with their remit,” he said.

“At a macro-economic level, the public sector has broader responsibilities. The bigger cost equation includes increases in benefit payments, loss of tax revenues, and cashflow lost from the UK.”

Data security is another factor behind past resistance to offshoring government IT.
“As public records are becoming increasingly complex and may contain information such as biometrics, governments will tend to keep that data close to their chests and not manage it offshore,” said Stirling.

A McAfee survey presented at the World Economic Forum in Davos last month highlighted the dangers of offshoring sensitive data.

The research suggested that although countries such as India are spending more on security than the UK, such locations have poor reputations for investigating security incidents and may be negligent at enforcing regulations.

Despite the challenges, Indian IT firms are confident their public sector experience (see below) will help claim a share of the UK government spend. TCS, for example, said it expects “exponential” growth in business stemming from government projects and plans to bid for work at HM Revenue & Customs, DWP and the Ministry of Justice.

Cost reduction remains the main motivation for offshoring and that is increasing true for heavily indebted governments, said World Bank senior consultant Raja Mitra.

“If public sector bodies can get good-quality work from Indian firms at a lower cost, there is no alternative in the long run,” said Mitra.

“In the short term, there may be implications when trying to create jobs in the UK, but otherwise the strategic factors behind the outsourcing boom will prevail.”

But Indian firms should be aware of what they may be letting themselves in for, according to one well-placed IT industry source, who asked to remain anonymous.

“Firms that supply the public sector must understand it is hugely complex. An approach that says: ‘We can walk into a complex UK environment and do things better’ is horrendously naïve,” said the source.

“The UK government procurement process is among the most open in the world. If Indian suppliers have not been successful, it is because they have not been good enough. To say there has been a catalogue of blunders and then come and ‘solve’ the problems is ridiculous.”

Public sector IT offshoring around the globe

Indian IT firms are keen to stress that their experience in transformational government projects worldwide could bring much-needed expertise to the UK public sector. For example:

• A web-based disaster unemployment assistance application allowing online filing of claims to meet high-volume demands in the aftermath of hurricane Katrina in the US, with 60,000 requests processed in a month alone – deployed in five days by TCS.
  
• An identity and access management system at the market operator for the Australian National Electricity Market, covering 10,000 users of more than 20 applications across five states, implemented by Wipro.
  
• An online billing application for childcare providers on behalf of the Department of Health and Human Services at the US state of New Hampshire to speed up childcare provider enrolment and billing for services, rolled out by HCL.
  
• An e-government portal for the Indian state of Andhra Pradesh offering services including birth and marriage certificates, land and vehicle registration, pensions, tax information and bill payments. TCS worked on the project, which covers 75 million citizens.