IBM moves to promote offshoring

IT managers may face increasing pressure to use packaged offshore services, following IBM's decision to restructure its European services organisation. Analysts said the savings that can be generated by such services mean that in some cases companies not following this model may become uncompetitive because they will have higher costs.

IBM announced earlier this month that it would cut 13,000 jobs, stripping out much of its European management layer and pushing more responsibility to client-facing teams. The changes will also lead to more emphasis on offshore delivery centres.

"Some work should be done close to the client, but other work can be done from any location," said IBM chief financial officer Mark Loughridge in a webcast. "We will consolidate operations where feasible, create standard approaches and repeatable processes, and enable skilled professionals to provide support across functions."

Jamie Snowdon of analyst firm IDC said IBM's move echoes similar changes made at other IT service providers such as HP and EDS, which have also increased investment in shared service centres. This month, Fujitsu Services also plans to extend its Triole system delivery model of packaging technology and services in a single deliverable unit.

"IBM's move consolidates a lot of different cost-saving ideas that have been around for several years," Snowdon said. "But by tying them together into a big-bang restructuring programme, IBM has really underlined that it is here to stay."

IBM and its rivals aim to protect their profit margins while passing on savings and a potential competitive advantage to customers.

"If you have two insurance firms and one moves work to an Indian shared service centre and the other doesn't, the company that sticks with the old customised services ends up with higher costs and will struggle to compete," said Snowdon.

IT service providers are likely to continue to offer some traditional customised services, however, because some companies still have concerns about the privacy and security of data sent offshore, said Jack Noble of Fujitsu Services.

But as the difference in price between bespoke systems and packaged services widens, IT directors will face mounting pressure to use more packaged options. Roger Fulton of analyst Gartner argued that there is growing realisation that the cost of customisation is too high, and that business managers are increasingly comfortable with "good enough" systems. He added, "There is nothing wrong with packaged systems you can afford that deliver a result quickly."

But Tim Jennings of analyst Butler Group said firms should resist the temptation to use packaged outsourced services where their internal IT department is still adding value. "If an area of IT gives the firm a competitive advantage you are better off ploughing your own furrow and keeping it in-house."