Is IT Outsourcing Losing Luster?

By John Moore  |  Print this article Print


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Opinion: UK company Sainsbury turns its back on outsourcing, fueling speculation about the value of the practice.

J. Sainsbury's recent decision to part company with Accenture has inspired mixed interpretations among industry watchers.

The UK food retailer late last month announced plans to take back in-house the IT services it outsourced to Accenture in November 2000.

Under the $3 billion deal, Accenture succeeded in improving Sainsbury's IT capability and "delivered improvements in systems stability and operational cost reductions," according to a joint statement.

But the statement said Sainsbury's IT focus has changed in light of its "Making Sainsbury's Great Again" plan. The program, which aims to boost the company's revenue growth, includes the marketing tag line, "Try Something New Today."

Some industry observers view the split as symptomatic of a broader re-evaluation of older and complex outsourcing projects.

Earlier this year, Sears, Roebuck & Co. terminated a $1 billion-plus outsourcing deal with Computer Sciences Corp. Last year, JP Morgan Chase ended its outsourcing pact with IBM.

"It's a function of where we are at in the market," said Stan Lepeak, managing director of research at EquaTerra Inc., an outsourcing advisory firm.

Disney delegates IT to outsourcers. Click here to read more.

"A number of larger deals are getting older now. We're getting to a point where there is going to be a renegotiation, with user organizations rethinking the original decision."

In April, nearly two thirds of the enterprise respondents to a Deloitte Consulting LLP survey said they have brought some outsourced services back in-house.

Another factor for this: companies that have come to view IT as more strategic want to reassert control. Sainsbury wants to control IT for competitive advantage, said Lepeak, who noted that JP Morgan had a similar motivation for ending the IBM deal.

But Douglas Hayward, an analyst at market researcher Ovum, cautioned against drawing too many conclusions from the Sainsbury split.

In a research brief, he disputed the notion that Sainsbury's action signals a trend toward "insourcing" among large corporations.

"We think that Sainsbury's insourcing comes from particular circumstances, rather than structural factors, but it certainly shows what can go wrong in any outsourcing deal," he wrote.

"We've discussed the Sainsbury case before, but the problems included poor decision-making by Sainsbury executives, weak outsourcing governance, political in-fighting at the retailer and a risky 'big-bang' approach that made too many assumptions and took too many risks."

At any rate, insourcing—or backsoursing as it has been called—is nothing to pursue lightly. Lepeak described the process of reabsorbing an IT operation as "very painful." Outsourcing buyers may face financial penalties for prematurely ended contracts, he noted.

But the key question is whether an outsourcing customer has the skills on hand to run an IT shop. Lepeak said some customers may inherit some of the contractor's employees.

But that may not be the case when it comes to management-level personnel. "Senior managers are not likely to come back in-house," Lepeak said.

The Sainsbury/Accenture statement said "a number of Accenture employees" will migrate to Sainsbury, but did not provide specifics.

Next Page: BearingPoint and EMC collaborate.

BearingPoint, EMC Roll Out Solutions

BearingPoint Inc. and EMC Corp. are collaborating on a solution for the paper-intensive mortgage loan origination process.

The companies' Mortgage Loan Origination offering combines EMC Documentum's enterprise content management software with BearingPoint's background in leasing/lending business processes.

The solution, announced this week, is slated for availability in the first quarter of 2006.

Derrell James, senior vice president of technology solutions at EMC, said his company will seek to replicate BearingPoint-like arrangements with other integrators in the future.

"We are looking for business processes that are very paper-intensive or very manual in structure or nature that have large content store requirements," he said.

To cultivate those areas, EMC plans to work with its integration partners to "create a joint go-to-market offer."

James said Documentum, which EMC acquired in late 2003, has made it easier for the company to partner with integrators. Documentum "is more of a product that is targeted at unstructured data and a product frequently targeted a business applications and business processes," he said.

The BearingPoint-EMC mortgage loan solution is intended to address such issues as loan application time and cost reduction and the risk management associated with integrating different loan acceptance processes, according to a BearingPoint spokeswoman.

The ability to close mortgage loans quickly is central to the success of financial institutions, she noted.

To read about how outsourcers should plan ahead, click here.

In addition to the loan offering, EMC and BearingPoint unveiled a Framework Integration Services solution that integrates storage alert monitoring and incident management into systems and network management software.

The integration framework includes Computer Associates International's Unicenter, EMC/BMC Patrol Storage Manager, Hewlett-Packard Co.'s OpenView, IBM's Tivoli NetView and Micromuse NetCool/OMNIbus.

The framework is available immediately and James said the companies have already worked on a number of customer engagements.

Next Page: Philippines becomes key outsourcing destination.

Philippines Emerges As Outsourcing Center

Add the Philippines to the list of offshore outsourcing destinations.

NeoIT, an offshore advisory firm, ranks the island nation second only to India as a global sourcing provider in the BPO (business process outsourcing) and call center space.

Neo IT on Monday published a whitepaper, "Outsourcing to the Philippines: Metro Manila and Beyond," that describes the level of maturity of Manila and other Filipino cities emerging as BPO and information technology outsourcing centers.

The cost of labor in the Philippines is about 10 to 15 percent above rates in India, noted Eugene Kublanov, vice president of corporate development at Neo IT.

But the total cost of doing business, in some instances, may be lower in the Philippines, he added. For example, the employee attrition rate in the Philippines is significantly lower than India's, Kublanov explained.

Click here to read about Accenture's recent Japanese outsourcing deal.

"Constantly having to recruit and hire and train — that whole process gets very expensive," he said.

IBM is among the top tier outsourcing vendors with operations in the Philippines. The company has made Manila a hub for business process outsourcing operations.

Accenture and Electronic Data Systems Corp. also have a presence in the Philippines, Kublanov said.

In addition, many India-based outsourcers—BPO and call center providers in particular—have set up shop in the Philippines as a diversification play, Kublanov said.

Those vendors are eager to tap the Philippine resources amid a tightening labor market in India.

But while human resources are available, physical infrastructure may not be.

While the Manila metropolitan area is fairly mature in that regard, other cities are playing catch-up as they build facilities with the appropriate IT and telecommunications resources, Kublanov said.

John writes the Contract Watch column and his own column for the Channel Insider.

John has covered the information-technology industry for 15 years, focusing on government issues, systems integrators, resellers and channel activities. Prior to working with Channel Insider, he was an editor at Smart Partner, and a department editor at Federal Computer Week, a newspaper covering federal information technology. At Federal Computer Week, John covered federal contractors and compiled the publication's annual ranking of the market's top 25 integrators. John also was a senior editor in the Washington, D.C., bureau of Computer Systems News.


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