Shareholder militancy puts IT outsourcing under microscope

Shareholder militancy is set to put large IT outsourcing deals under scrutiny as investors become more aware of the risks involved.

GlaxoSmithKline and, most recently, Alstom have both come under pressure from shareholders in recent weeks over 'fat cat' pay rises and golden parachutes and this increased militancy is likely to spread to other board decisions including outsourcing, according to industry experts.

While the threat of union action has started to rear its head again with recent outsourcing deals, specialist consultancy Morgan Chambers said shareholder groups hold more power and influence over the board.

Richard Morgan, CEO of Morgan Chambers, told silicon.com his company has been contacted by a number of institutional investors for advice on evaluating large IT deals and measures for mitigating risk.

"An outsourcing deal is a huge forward commitment for any company," he said. "The Rolls Royce deal with EDS was worth 45 per cent of its market capitalisation, while the Sainsbury's deal with Accenture was 17 per cent of its market captialisation, so we are not talking sum numbers here."

Morgan said investors are starting to realise that while IT outsourcing usually leads to cost savings, it is also predominantly an irreversible organisational and cultural change that cannot just be made in 'golf course' deals between CEOs.

"Outsourcing is effectively a one-way 'cultural' ticket and the investors believe that they have a right to be heard on the balance this strategically provides against short-term cost savings imperatives," he said.

Georgina O'Toole, analyst at Ovum Holway, said the move to more consortium-type deals, such as the one struck by the Royal Mail with CSC, BT and Xansa, is evidence that mitigating risk is increasingly important.

"This is where there is a shift from sole suppliers to a multitude of best-of-breed. It is easier to swap out one supplier than have to renegotiate a whole contract," she said.

IT service providers themselves are also already facing the same kind of shareholder pressure and scrutiny over the deals they take on and how they are accounted for, according to O'Toole.

"It has been happening for a while and when Xansa lost the HBOS contract [last year] that took people aback and started them thinking that while outsourcing is for the long-term, the contract may not run through to the end," she said.