Analysis: Shape up or no shipping out

GartnerGroup?s prediction earlier this month that outsourcing will be the only practical way to reduce the skills shortage emphasises how the trend to divest IT to third parties is still growing.

Jyoti Banerjee, managing director at analysts Tate Bramald Consultancy, believes that recent announcements from applications vendors about novel licensing and leasing models is only the beginning of a movement towards the day when applications will be run by entities called application service providers (ASPs).

?In a few years, applications will be delivered by a handful of large organisations that specialise in managing transaction systems,? Banerjee said.

If these predictions are true, it raises a big question: can outsourcing can produce something better than the series of recently reported disasters? For instance, the war that raged between EDS and Wandsworth Council over EDS? inability to meet its service-level agreements for a benefits payment system. At present, EDS has been suspended from providing key services, and both sides are struggling to achieve a dignified settlement.

If Wandsworth is an obvious example of things going wrong, it is not always clear where the problems lie. In this case, both sides blamed each other, and EDS was as willing to cancel the contract as the council.

Gary Morris of consultants Morgan Chambers says that many organisations assume that once IT has been outsourced, they need no longer concern themselves with it.

Morris said: ?Companies can avoid problems by retaining some of their own IT management team. Around 7.5% of the total spend on successful outsourced contracts goes on management.?

Obstacles to outsourcing may dissipate when IT departments recognise that outsourcing can help them become the future service centres of their businesses, rather than just spend their time trying to reduce IT costs.

Gartner has predicted that by 2003, 75% of IT organisations will consider themselves resource brokers, ?encompassing a mix of service organisations, consultants, centres of excellence, resource pools and business liaisons?. This mirrors what services giant EDS characterises as ?value-based outsourcing?, which it says will be accompanied by the outsourcing of end-to-end clerical processes.

Before we reach these noble objectives, outsourcers must first shed their tawdry image, and businesses need to understand that a combative approach to driving out costs won?t get results unless both sides regard the deal as a partnership. In this context, the business knowledge is left with the company, while the technical work is given to the outsourcing specialist.

Finding examples of successful partnerships is not easy. In 1995, Swiss Bank Corporation and Perot Systems signed a 25-year $250 million (#147m) per annum outsourcing deal. The two companies swapped equity to ensure an interest in each other?s well-being. Last year, however, it emerged that the contract had been restructured and reduced to 10 years.

Wessex Water managed to get its infrastructure outsourcing contract with Computacenter to work ? but only after it came perilously close to failure and contract terms had been renegotiated.

Pointing to its eventual benefits, David Morris, former head of information services at Wessex Water, said: ?We didn?t save in terms of ongoing costs, but we did reduce our capital spending. From a management perspective, we clawed our IT into control.?

Not everyone agrees with the logic which underpins outsourcing. David Wolland, technology director at web consultancy Valtech, says it is better to keep IT in-house, have an IT director in the boardroom, and make IT a priority within the organisation, the place where the business processes which should dictate IT policy are more clearly understood.

All the rhetoric and big-win announcements will not change the perception that outsourcing is little better than a lottery. And with current National Lottery odds of 14 million to one of winning, it is hardly surprising the war stories continue.