Cost reductions, updated processes, standardisation across multinational divisions and complex organisations — what IT director wouldn’t sign up to outsourcing if it could supply cures for such familiar organisational ills?

Sanjeev Ahuja, managing director of management consultancy Progressive Intelligence, says cost-cutting is the main reason companies want to outsource, but it is by no means the only motivation. “Firms looking for a way of determining that they have industry-level IT provision turn to outsourcing,” he says. Global outsourcing deals also remain an important way for multinationals to consolidate and improve on their IT.

IT analyst Gartner puts the market for IT outsourcing in the UK at £12 billion in 2008 and believes it will reach £14.8 billion in 2011.

According to TPI, a consultancy that tracks outsourcing deals, average contract values in Europe, the Middle East and Africa (EMEA) rose by 33% in 2007. Duncan Aitchison, a partner at TPI and president for EMEA, says Europe has seen particularly strong growth, with financial services and insurance firms leading the way.

Smaller companies and mid-market players are also increasingly looking towards outsourcing, says Simon Walsh, head of services at Computacenter, which provides such services. At the same time, the suppliers have grown more diverse; they range from all-rounders such as IBM to niche players such as Esteem Systems. Offshoring has also brought in Indian players such as Tata and Wipro Technologies. “The good news is that there’s plenty of choice,” says Aitchison. “But it’s a question of choosing the right horse. It’s certainly the most competitive market I’ve seen.”

Cost savings

Gartner research director Gianluca Tramacere says buyers negotiating second- and third-generation deals want cost reductions. They see providers delivering from low-cost locations abroad and want to adopt similiar money-saving practices.

Cost savings aren’t solely down to suppliers, however. Jonathan Cooper-Bagnall, responsible for global outsourcing and UK IT management practice at PA Consulting, says clients are becoming more pragmatic: “It’s no longer a case of, ‘take it over and run it’. It’s more a case of, ‘I want to get smarter about the IT I deploy’.”

Working out the value

Advisers argue that buyers don’t always do their homework on their in-house costs. Even an assessment of current costs won’t give a full picture, says Neville Howard, a partner at global business consultancy Deloitte. “Where people go wrong is they compare bids to current costs, but your costs are going to change. A company’s investment changes over time, as do technology costs. The best starting point is to model two or three different scenarios,” he says.

A recent report published by Deloitte found that 89% of outsourcing setups brought in a return on investment of 25%. But only 34% reported that they had benefited from their service provider’s expertise by introducing new ideas or transforming their business operations.

Different models

Customers are becoming more ambitious, says Gartner’s Tramacere. They are going for multiple providers to manage different aspects of their IT. That means a greater number of smaller deals, he says, but greater complexity, too. “They’re getting the optimum price, but it’s challenging to integrate those providers.”

Howard says multisourcing brings more complexity but “if you put all your services with one supplier who isn’t strong in all areas, I would argue that the risks are even greater”.

Hardware

“It’s not all about the software,” says Gina Citroni, commercial director of Amplicon, a Brighton-based firm that supplies “ruggedised” and industrial computers for specialised jobs and locations such as CCTV systems. “Most software providers consistently refuse to road-test hardware,” she claims, adding that the inappropriate choice of kit can be “hugely expensive in time and money”.

“Most people cannot build hardware platforms; the industrial PC is not a core competency,” says Citroni. “So why tie up expensive technicians?” She argues that seeking hardware expertise from specialists is just as important to business as outsourcing other IT services.

What can go wrong?

According to the Deloitte study, 70% of respondents were satisfied or very satisfied with their outsourced IT setup. However, 35% said they wished they had spent more time choosing their outsourcer.

Michael Sinclair, a partner with law firm Simmons & Simmons and head of its London IT group, says that buyers often put insufficient time into governance issues — the protocols and procedures designed to address the fact that the customer no longer owns the business unit.

Buyers, he argues, also need to pay more attention to the people who have to manage relationships and service from the suppliers. Malcolm Simms, chief information officer at law firm Eversheds, agrees. “Getting this right is critical, otherwise there is a risk that they’ll leave just when you need them to stay,” he says.

Haden Building Management

IF YOU don’t have a multi-million-pound deal to offer, it can be difficult to get the attention of some of the bigger outsourcing providers.

Gideon Kay IT and business transformation director at Haden Building Management, says that when he first looked into outsourcing IT infrastructure and managed services for Haden’s clients, bigger providers weren’t offering the flexibility he needed.

Haden Building Management is the facilities management division of Balfour Beatty. It maintains buildings for household names such as BT, Merrill Lynch and the BBC, as well as government departments and agencies, including the Department for Work and Pensions. The company employs a host of electricians and engineers to maintain premises, and its office services run to reception-desk staff, typing pools, cleaning and catering. Through a five-year, £5m deal with outsourcing supplier Esteem Systems, it also provides IT infrastructure and managed services for clients across 500 of its sites.

Part of the issue for Haden was that it needed a provider that would offer flexibility and match its own approach to clients. “We are the middleman,” says Kay. “If our clients aren’t fully detailed about the solutions they want from us, we have to be flexible enough to address that. We need to have a supplier who is willing to be a bit creative, take some risks and factor that into the agreement.”

Kay started to look for an outsourced IT service when in discussion with two new potential government clients. “Both were looking to have an IT solution with security and data-transfer standards well in excess of what we’d done so far for other clients,” he explains. “We quickly realised we were being asked for services at a level beyond existing arrangements and that it wouldn’t be economical for us to make the investment to provide that in-house.”

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