The jury is still out on the effect that America’s sub-prime mortgage crisis will have on the UK information technology industry. Computing magazine predicts that shaky UK business confidence will have a negative effect on IT spending in 2008, and Gartner concurs, estimating that growth in technology spending worldwide will be 5.5 per cent, down from about eight per cent in 2007. While most pundits agree that the financial services sector is unlikely to be splashing out on technology in 2008, however, projects such as the 2012 Olympics and the planned extension of the tube network will create significant opportunities for IT professionals. Recruitment companies have reported no slowdown in IT appointments towards the end of 2007, and a recent survey by recruitment agency The IT Job Board reported that more than half of respondents expected to increase their recruitment of IT graduates.
In the light of such uncertainty, the UK IT services industry finds itself in a potentially difficult position. Will large corporations drastically cut back their IT spending, causing a crisis for IT services companies, or will there be a rush to outsource staff and work in an effort to cut costs? Gartner has predicted a major growth in business process and IT outsourcing for 2008, but will this business go to home-grown IT services companies or to overseas outsourcers? The biggest challenge for the sector will be to find a business model that works in a climate that is essentially unpredictable.
The credit crunch may well serve as an excuse for some corporations to shed the excess IT staff they have acquired. In boom times, managers in large corporations often argue successfully for increased investment in IT staff to maintain or improve quality and service levels. Within a short period of time, however, it is not uncommon for the new workforce to be no longer working consistently to capacity, or for the range of IT skills to fall short of the demands of the business and of breaking technologies. It is therefore likely that we will see some staff reductions in corporate IT departments in the coming months.
It is also possible that we will see a return of more major outsourcing deals. IT services companies, hungry for additional work, can often offer a more cost effective solution for the development, maintenance and support provided by the in-house team. They may even be able to improve on the quality of service. Recent examples of such heavyweight outsourcing contracts include BNP Paribas’ signature of £50m outsourcing deal with Atos Origin, and Royal Dutch Shell’s announcement of its intention to outsource its entire IT function to EDS.
The obvious drawback with these expensive, long-term contracts is that they are likely to suffer from the same problems of inflexibility as an in-house team. The organisation is tied to a lengthy and unwieldy contract, while the problem of long-term over-staffing is not necessarily eradicated; the headache is simply transferred to the IT services company. Most IT services firms report only 60 to 70% utilisation rates of their staff, leaving an expensive 30+% surplus of unused skills.
As a result, we are seeing the adoption of new, innovative approaches. . Rather than entering into inflexible long term deals covering a wide range of requirements, many larger companies now want to outsource in a variety of ways on a case by case basis. There are many new players anxious to establish themselves – the Indian and other Far Eastern outsourcing communities being obvious examples. Due to these competitive and customer pressures, the UK IT services industry has been forced to respond by being more flexible. Of course, a long-term deal may sometimes be the best way to meet the requirements of the customer. In many other cases, however, the customer will opt for a more flexible solution that can be fine-tuned as circumstances - and the broader economic environment – evolve.
Such mix and match solutions may include outsourcing or offshoring agreements for some aspects of the customer’s IT requirements, such as hardware maintenance or legacy software support. Other areas of work are better suited by alternative options, such as “preferred supplier lists” of specialists who bid for work on a case by case basis, or the use of contractors to supplement the customer’s in-house teams.
Recently, the Internet has come into its own, enabling an even more flexible and innovative approach; flexible outsourcing. Organisations looking for particular skills, or work to be carried out, have their requirements listed on a web based platform. The platform provides access to hundreds of suppliers with a wide array of skills. Suppliers with the appropriate skills for a particular job and with the spare capacity available can submit bids for the work. The suppliers are vetted in advance, rated after each job and paid through the platform. While a different specialist supplier may be selected for each job, a single platform means that there is no need to negotiate multiple supplier agreements.
It will be interesting to watch how the leading multinational IT services firms navigate their way through the fallout of the credit crunch and use these different options to meet their own resourcing and outsourcing requirements. Such firms are arguably the real experts in the resourcing and management of IT projects, whether long or short-term. As they shift their approach to adopt a more flexible and entrepreneurial model, enabling them to stay lean and highly efficient, we may well see them rise above the negative economic climate to claim new opportunities for profit and growth.
