Re:Viewing 2004: Outsourcing and offshoring

Andy McCue
silicon.com
December 2004

India, IT strikes and multi-billion pound deals dominated the outsourcing news headlines in 2004, the year when sending IT work overseas made its mark and became a mainstream issue. Andy McCue remembers the highs and lows - and looks ahead to what's in store for 2005.

The year started with the prediction that the offshoring of IT and call centre work to cheap overseas locations such as India would cost the UK £5.7bn and 250,000 jobs by 2010. But the report also highlighted that this is not such a simple issue, claiming if UK firms did not offshore it would impact their competitiveness and cost the country's economy £34bn in slowing GDP growth.

It became clear early on that offshoring would be a big issue as a backlash to job losses started in the US, followed by UK trade unions warning of strike action if the big British firms started moving thousands of jobs overseas.

On the back of this, silicon.com undertook its own fact-finding trip to India in April to see first-hand what all the fuss was about by visiting the high-tech centres of Bangalore, Hyderabad and New Delhi. The highlights, including an evening in Bangalore's thriving pubs packed with young Indian IT and call centre workers, can be found in the India diary account of the trip.

The purpose of visiting India was to widen the debate on offshoring by looking at the real business issues and challenging some of the lazy clichés and hype peddled by those on both the pro- and anti-offshoring bandwagons. Among the issues we covered were the risks of offshoring, whether it really is a threat to UK jobs, which location to choose and whether to go with an Indian partner, one of the traditional Western IT services firms or do it yourself.

The topic rumbled on with some major UK financial services institutions, including Norwich Union, Royal & SunAlliance and Lloyds TSB, announcing they would be moving thousands of jobs overseas over the next year.

In September the UK's leading IT bosses debated the offshoring question at silicon.com's inaugural CIO Forum event in London, which revealed it is still a highly contentious and divisive issue. Then in October the US presidential candidates made at part of their election campaigns with eventual loser John Kerry advocating federal handouts for those displaced by offshoring.

Offshoring looks set to become a bigger business and IT issue during 2005, along with 'nearshoring', which was one of the emerging trends we saw in 2004 where businesses look to offshore services to locations in Eastern Europe such as the Czech Republic.

While the threat of strike action over offshore outsourcing receded somewhat this year, it did rear its head in several big traditional outsourcing deals this year, highlighting the need for open and early consultation with staff and trade unions to avoid become embroiled in what can be damaging public battles.

First up was Bradford Council where 135 IT staff threatened to strike over a £100m outsourcing deal unless workers were offered the option of secondment instead of permanent transfer to the private sector. The strike was eventually averted and the deal signed with IBM/ITNet in July, once terms were agreed with the council and staff.

Just as the Bradford row was fizzling out another local authority dispute emerged in Swansea. silicon.com warned of possible strike action at the city council in March over a £100m outsourcing deal. Staff there claimed they hadn't been consulted and that the in-house team hadn't been given a chance to compete with private sector bids.

The IT staff went on all-out indefinite strike and the row rumbled on publicly for months, becoming an increasingly bitter dispute with the trade union accusing the council of employing 'blackleg' labour to try and break the strike, and the council accusing the union of holding it to ransom.

Eventually ACAS was brought in to try and break the deadlock and finally this month the council signed a 10-year deal with Capgemini – although the union ominously warned that there may still be trouble ahead. Watch this space.

The other big dispute of 2004 centred on the controversial £2bn deal to outsource the BBC's technology operation. BBC IT staff threatened a blackout of the Beeb's Olympic coverage from Athens in protest but that was averted and Siemens eventually bagged the plum deal, winning formal government approval in October.

Plenty of other big outsourcing deals went ahead this year without such troubles. In February we exclusively revealed the Metropolitan Police's plans for an IT outsourcing 'megadeal' worth up to £750m. Barclays sealed its £400m Accenture outsourcing contract in April. In the public sector, there was hot competition for the Ministry of Defence's £4bn IT outsourcing contract and the race was narrowed to two rival consortiums bidding for the deal. Final offers are now in and the MoD is expected to announce the winner early next year.

EDS is one of those still with a chance at the MoD contract despite making the headlines in 2004 largely for the wrong reasons. The company lost or bought itself out of big outsourcing deals including the $1.4bn contract with Dow Chemical, which IBM later took over, slashed 20,000 jobs and struggled to turn itself around. The Texas-based firm will definitely be hoping for a better 2005.

Merger and acquisition talks in the outsourcing sector took place throughout the year but the only real one to catch the eye was Atos Origin's €1.3bn takeover of SchlumbergerSema back in January. A smaller, but potentially more significant deal, was IBM's purchase of Indian BPO company Daksh - which could signal further acquisitions in the space in 2005.

In 2004 we also said goodbye to Cap Gemini Ernst & Young and said hello to the newly rebranded Capgemini. It was also goodbye to one of the public sector's biggest outsourcers, when Inland Revenue IT chief John Yard revealed exclusively in an interview with silicon.com that he was leaving to set up his own outsourcing consultancy.

Looking at the bigger picture, European outsourcing continued to catch the US market, while business process outsourcing (BPO) continued to gain momentum.

One final note of caution for 2005, however. Analyst firm Gartner, in its annual end-of-year predictions, warned 2005 is likely to see several high-profile outsourcing failures on the back of badly made, rushed decisions done purely for cost-cutting over the last few years.

Whatever the year holds in store, it's likely to be a bumpy ride for both those on the buying and selling side of the outsourcing industry.