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Outward Bound

IT outsourcing is set to get cheaper and more popular. But as recent events show, hazards remain.

Few CIOs will be surprised to find their budgets slashed today. As Bill Floydd, CFO of IT group Logica UK, points out, finance chiefs are taking a much closer interest in their companies’ IT strategy during the downturn, pushing their CIOs “to deliver a savings plan and to do this quickly.” In fact, almost half of the global IT managers recently surveyed by consultancy TNS said they were working with less money than in 2008.

Expect outsourcing to play a central part in their plans. In late 2008, adviser EquaTerra studied more than 400 outsourcing contracts held by 125 of the top IT-spending companies in the UK. It found that 63% of respondents expected to increase the amount of activities they outsourced, compared with 54% in a similar study in 2007. Most respondents in 2008 said the main motivation was cost savings. Indeed, the downturn should mean companies face lower costs from outsourcing as vendors clamour for a share of companies’ dwindling budgets.

But companies looking to increase IT-outsourcing commitments were given a stark reminder of the risks earlier this year as news broke of the accounting scandal at Indian outsourcing company Satyam. Seen by many as an isolated incident, the news nonetheless cast a shadow over the outsourcing industry, right at a time when it should be booming.

Buying Some Options

The benefits of IT outsourcing should become even more pronounced during a downturn. During the current volatility, “everybody’s crystal ball is laid slightly smashed on the ground,” says Rob Thomson, a director at IT group SunGard. “So for any CFO trying to work out where his business is going to be in 12 months, it’s even more difficult than ever. By outsourcing some part of that lumpy IT infrastructure, they can buy themselves some scalability and some options—both up and down—as the business changes over the next 12 months.”

That benefit wasn’t lost on directors at De Agostini UK, a €600m publisher in Europe and Asia. Two years ago, the company—part of Italy’s De Agostini Group—decided to replace a range of 12-year-old bespoke legacy systems it was using for work such as sales forecasting and financial reporting.

Furthermore, the directors wanted to replace its IT outsourcing provider. The outsourcer “was quite a small company,” recalls Nick Mison, the publisher’s IT director. “Because of its size, it wasn’t scalable. In effect, it was like having a fixed-cost IT department. It was fine when we had work, but when we didn’t, because we represented such a high percentage of their revenue, [the outsourcer] was a big risk and an overhead for us.”

De Agostini UK signed a new contract with NIIT Technologies, an Indian IT outsourcer, which rewrote and now runs its applications. Mison points to several benefits, not only financial (he says the company saved about £2m, or around €2.2m, compared with the cost of using a UK outsourcing provider), but also flexibility, since the contract with NIIT allows the company to scale down the services it uses in quieter periods.

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