Re:Viewing 2003: Outsourcing... and India

It was one of the most exciting and controversial areas in business and technology this past year but, asks Andy McCue, where does the future of outsourcing and IT services in general lie?

While the rest of the IT industry has still largely been in the doldrums for 2003, the continued need for businesses to look at ways of slashing IT costs has seen a relative boom in the demand for outsourcing services.

India has dominated the headlines with the massive shift towards low-cost offshore deals both for call centres and development work and, along with many of the big traditional IT outsourcing deals, it has attracted the attention of the unions and brought with it the threat of strikes by IT staff.

BT was the first to run into problems in February with the Communication Workers Union threatening strike action over plans to shift hundreds of directory enquiry jobs to India

In what turned out to be a much bigger dispute, Bank of Ireland IT staff faced off with bank bosses over a $600m outsourcing deal with Hewlett Packard that involved the transfer of 500 employees to the supplier. The bank announced the deal in April but then spent several months negotiating with the union, which warned that the firm faced "total war" with staff if they voted for a strike. Strike action was eventually averted and agreement reached in September.

It wasn't just the private sector coming under union pressure. The Department for Environment, Food and Rural Affairs (Defra) started tendering for a 10-year £850m IT contract to overhaul the way the department works but the union is bitterly opposed to the deal and is warning of another potential government IT disaster.

Possibly the success story of the year was the blossoming of India as a mainstream low-cost base for blue-chip companies to outsource both customer facing and back-office IT.

In April, analyst firm Gartner said the pace at which companies are transferring IT services to offshore contractors is speeding up with predicted growth rates of 40 per cent this year. India, it said, still dominates the offshore sector with 90 per cent of the market, although 2003 saw the tentative emergence of several other countries.

Along with more established alternatives such as South Africa and China, some analysts suggested Eastern Europe could provide the same services as India for lower costs and with fewer cultural differences. Pete Foster, analyst at Pierre Audoin Consultants, said in a report in September that Indian costs will rise as demand starts to outstrips supply.

Despite that many companies decided India was the place for them and 2003 saw major offshore outsourcing deals with Barclays close to signing a deal with Accenture that could see hundreds of software development jobs going to India, Norwich Union revealing plans to move 2,500 jobs abroad, and Xansa and Thames Water signing a business process outsourcing deal based in India.

As more deals were signed and stories emerged about Indian call centre agents drilled by former UK teachers on regional accents and the latest plotlines in Coronation Street the spectre of thousands of British jobs being moved to India inevitably attracted something of a backlash in certain quarters. In August, MPs revealed plans to examine the impact of offshore outsourcing on the UK technology industry while the unions pushed the EU for a more in-depth investigation. One analyst controversially suggested that firms who offshored UK jobs to places like India will face a customer backlash, with consumers choosing to buy from companies that make of point of being 'British and proud of it'.

The year also proved to be a year of mixed fortunes for the major vendors in the outsourcing market. While IBM started the year with a $5bn deal with JP Morgan Chase and a $1bn deal with insurance group Axa, it will probably be glad to see the back of 2003 after missing out on several major contracts in the UK. It missed out three times at Barclays in 2003, first to run the bank's own IT department, then to EDS in a $350m desktop services deal and finally in December to Accenture for a £450m application development contract.

IBM then had its £1.8bn deal with Cable & Wireless scrapped five years early as the telco battled to restructure and cut costs, while it missed out in the bidding for major public sector contracts at the Ministry of Defence and the NHS. That said, IBM still topped a brand perception study among 200 IT services buyers, supporting the old adage that "no-one ever got fired for buying IBM".

Major rival EDS has also had a year it would probably rather forget, culminating in the stunning, but not altogether surprising, decision by the Inland Revenue to ditch the firm for its 10-year £3bn IT services contract in favour of Cap Gemini Ernst & Young (CGEY).

2003 proved to be a rather better year for CSC, CGEY, Accenture and BT – which burst onto the services scene with renewed vigour with BT Retail CEO Pierre Danon boldly proclaiming: "It's not stupid for a customer to think we can run their infrastructure." And despite an early setback in losing out on the Inland Revenue contract, BT was part of the CSC consortium that bagged the Royal Mail's £1.5bn mega-deal, and it remains in the running for the MoD's £4bn IT contract that is due to be awarded next year. HP also made up some ground on the leading players with big contracts such as the Bank of Ireland.

The outlook for 2004 remains rosy for the outsourcing sector, relative to that of the rest of the IT industry, largely on the back of the public sector and, increasingly, the financial services sector. Analyst Ovum Holway predicts a £7bn public sector "bonanza" by 2006, with the government software and services market growing 30 times faster than the private sector. Meanwhile, analyst Datamonitor predicts European banks will spend over $12bn on IT outsourcing services by 2005 on the back of fast growth in business process outsourcing – a market that was worth £3.5bn in 2001 and is predicted to be worth over £10bn in 2005.

As for 2004, it looks like outsourcing will again be hitting the headlines. Vendors are reporting that average deal sizes are getting smaller but there's still plenty of contracts in the pipeline, from the MoD's £4bn tender or the Beeb's plans to flog its BBC Technology subsidiary in a potential £2bn deal. That aside the year has very much ended as it started, with the news that IT staff at Bradford council are to vote on strike action because they don't want to be transferred to the private sector. Which is why 14 years after Kodak Eastman made the groundbreaking move to outsource its entire IT department, the services sector continues to be one of the most exciting in the technology industry.