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CW@50: A history of IT outsourcing
Computer Weekly looks at where and when IT outsourcing was invented and considers the changes the sector has gone through since
For the first half of Computer Weekly’s 50-year life, you would have scoured its pages in vain for a mention of IT outsourcing. For the second half, you would be hard put not to read an outsourcing-related story whichever page you turned to.
The exact date of IT outsourcing’s inception is, however, difficult to pin down because the label means many different things to many different people. The industry provides a resource that is constantly changing. In fact, about the only thing you can be certain of in IT outsourcing is that it never stays the same for long.
Some would say it was the late 1980s when IT outsourcing as we now know it first arrived. In the US that was when IBM designed, built and managed a datacentre for photography company Eastman Kodak that involved transferring hundreds of Kodak staff to IBM’s Integrated Systems Solution Corporation (ISSC) brand.
Ilan Oshri, a professor at the Centre for Global Sourcing and Services at Loughborough University’s School of Business and Economics, says IBM’s deal with Kodak is a good starting point for modern IT outsourcing services. “Without doubt, Eastman Kodak’s 1989 landmark IT outsourcing deal with IBM was and still is the turning point for the service outsourcing industry, attracting the attention of corporates to the advantages it may bring,” he declares.
No longer a dirty word
John Keppel, president EMEA and Asia, at outsourcing research company ISG, says that IT outsourcing in the UK also came of age in the 1980s, when the Greater London Council outsourced to Hoskyns.
“Initially, the prospect of using contractors to perform integral functions caused uproar,” Keppel recalls. “Many people didn’t understand what it meant and what the cost impact would be for the public purse. Yet by the 1990s, markets were increasingly testing the water, and under the government of John Major, outsourcing stopped being a dirty word and became something businesses saw the value of, and actually wanted to do.”
The pioneers
But you can go further back and find examples of early versions of IT outsourcing. Mark Lewis, outsourcing lawyer at Berwin Leighton Paisner, says that in the corporate and education worlds, outsourcing was happening way back in the 1960s and 70s, but in the form of time-sharing, service bureaux and facilities management. “These were the forerunners of modern IT outsourcing,” he says.
IBM was unsurprisingly the pioneer of the modern form of outsourcing after its deal with Kodak in the US got the corporate world’s attention. “My experience in the UK, Asian and European markets from the mid-1980s was of IBM being a dominant IT services provider in those markets at least,” adds Lewis. “This was especially true in mission-critical IT projects.”
It was the draw of the corporate that led to IBM being joined at the party by a company set up by American businessman Ross Perot in the 1960s. That company was Electronic Data Systems, better known as EDS.
Sam Kingston, COO at Ukraine-based IT service provider Ciklum and a former UK head at EDS, says Perot realised his vision by building an independent IT outsourcing supplier, not linked to any hardware manufacturer, providing outsourcing skills as a tool to solve business problems.
“It was to be one of the most successful companies in the computer industry in 1980s and 90s,” he adds. “It signed multiple long-term billion-dollar contracts with blue-chip clients.”
Legitimisation
Kingston says that EDS, and IBM before it, legitimised the adoption of IT outsourcing and got the business world’s attention. “These companies drove the outsourcing model onto the global market by pursuing distinctly different business strategies aligned to their respective core capabilities.”
IBM grew from within while EDS combined organic growth with acquisitions, says Kingston. “EDS should be acknowledged for its role in the rapid industrial segmentation of the technology services sector. However, both EDS and IBM strategies succeeded for a long time.
“In essence these players made far-reaching impacts into the business world rather than driving technology advancement per se. In essence, their innovative commercial models coupled with a willingness to service enormous scopes of work was impressive even when benchmarked by current deals.”
While IBM’s outsourcing business is still going strong through its Global Services arm, EDS was acquired by HP in 2008 for $13.9bn and the brand disappeared.
Realignment
Another outsourcing name that disappeared is Andersen Consulting. It was part of accounting firm Arthur Andersen until it split off and became Accenture in 2001.
Kingston says Andersen Consulting/Accenture took the outsourcing market to new heights. “And that is where Accenture seems to be today – at the top of the consultancy-operate outsourcing tree.”
But the Andersen story also marks an important point in the IT outsourcing sector. In 2001 there was an accounting scandal at US energy giant Enron. It emerged that billions of dollars in debt from failed deals and projects had been hidden by means of accounting loopholes and poor financial reporting. Enron shareholders sued for billions of dollars and Arthur Andersen lost its licence to practise as a Certified Public Accountant in the US after being found guilty of criminal charges relating to its auditing of Enron.
While the accounting scandal did not involve Accenture, Kingston says it fired a warning shot across the bows of the IT industry: “Arthur Andersen in addition to being the auditor had its business consultancy [Andersen Consulting] providing services to Enron. It was later claimed to be a conflict of interest for any audit firm to proactively seek and be rewarded for consultancy work with its clients.”
Kingston says the “red-flag” of Enron launched a new era of service provision compliance processes.
Following this, large accountancy companies sold or spun out their consultancy businesses.
Read more about Computer Weekly’s 50th anniversary
- As Computer Weekly prepares to celebrate the 50th anniversary of the first edition in 1966, we look back at 50 years of British innovation and development in mobile networking.
- Launched in 1966 as part of a modernising wave to change British society, Computer Weekly battled for the nation’s industry against the US, and saw IT as an entry ticket to the European Common Market.
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- As Computer Weekly prepares to celebrate its 50th anniversary this September, we take a look at how government IT has changed over the years.
They came from the east
But when it comes to new eras in IT outsourcing, few come bigger than the explosion in business growth experienced by India-based IT services companies.
Without realising it, in the 1990s the IT service providers of the Western world opened up a window of opportunity to the IT industry in India, which companies there grabbed with both hands.
In the early part of that decade Western IT companies didn’t really notice the Indian suppliers because they were focused on mainframe maintenance. Then client/server arrived and the IT giants thought Indian companies could not do it. But they did.
The millennium bug
Perhaps the biggest opening came with fears around Y2K, when big Western organisations needed people with the right skills to ensure they were not affected by what is also known as the millennium bug. Many feared that the flaws caused by the data storage practice of using only the last two digits of a year to represent the year would wreak havoc with the arrival of the year 2000. Program logic frequently assumes that the year number gets larger, not smaller, so representing 2000 as “00” was expected to lead to crashing systems and IT failures unless the bug was addressed by rewriting code.
Corporates needed programming resources to ensure they were not adversely affected. But they didn’t want to pay through their noses for programmers, so they looked at the skills available in India where wages were much lower. It gave Indian firms an entry into large Western businesses and they have never looked back since.
BG Srinivas, former European head at Indian IT services giant Infosys and currently managing director at Hong Kong-based ICT company PCCW, says the Indian IT firms had a very small presence during the 1990s.
“This had not changed until a few years prior to the year of 2000 when the Y2K problem threatened the whole world,” he says. “This problem had to fixed before the turn of the century. The enterprises recognised that they were short of talent pool to rewrite the programs. They desperately turned to external support and Indian technology companies with their sheer volume of labour, and they came to the rescue.”
Complacent
But Western IT companies also let their guard down because they never expected IT services to be done offshore because of the need for a quick turnaround. However, because Indian companies were in a different time zone, Western businesses could work around the clock. The arrival of the internet also reduced transaction costs; before the internet, only the big players had dedicated pipelines.
It was probably about 2004 when big Western suppliers started worrying about competition from India.
But Srinivas says the revenue gained from the Y2K projects was not that significant for Indian companies – it took more than Y2K projects alone to spur IT services growth in India. “But they had far-reaching implications in that it was a harbinger of more IT outsourcing of large enterprises. Enterprises started to see value from the Indian companies in terms of their capability, capacity and cost difference.”
Talent spot
Srinivas says what the Y2K projects did was to kickstart an acceptance that talent existed outside the US and was of good quality, and that work could be carried out remotely.
He says between 2000 and 2005, almost all the top Indian technology firms, at that time – Infosys, Wipro, Tata Consultancy Services and Satyam – scaled up their operations and service lines, hired more people and increased investment in training.
Today it is almost eccentric if a big business outsources certain IT services to an onshore location or keeps it in-house such is the maturity of offshore IT services, which were pioneered in India. Today, businesses can receive services from all corners of the world, all with different advantages.
Read more about IT outsourcing
- Outsourcing contracts worth billions are up for renewal in the next few years. In this special report, Computer Weekly examines how unprecedented change is complicating the CIO’s renewal decision.
- Technological development and a changing model for offshore business services and IT could threaten India’s dominance.
- Although Hewlett-Packard’s acquisition of EDS was expected, the premium that HP paid was unexpected, and potentially unwarranted, given EDS’s recent track-record and a depressed outsourcing market.
- IPsoft founder talks about the artificial intelligence platform that could be an example of IT developments that might transform the future of the human race.
Technology disrupting an industry
But the evolutionary nature of the IT outsourcing industry and the technology it supports was always going to force the offshore model to change. Today IT outsourcing is undergoing another transformation driven by technology advance. There are new technologies today that are forcing the industry to reshape.
Cloud computing and automation through artificial intelligence are two powerful examples.
You only have to look at a company such as Netsuite to understand how cloud computing is encroaching on the enterprise sector. The software as a service (SaaS) company, which is taking on the traditional enterprise resource planning (ERP) and customer relationship management (CRM) suppliers, has grown quickly and boasts an impressive customer list.
At its recent customer forum in London, the company announced new customers including WHSmith, Pret A Manger and Misys. Launched in 1998, Netsuite has 2,500 global staff and took over $400m in sales in 2014.
However, adoption is going beyond the SaaS models of the likes of Netsuite. Today a business doesn’t need an IT services supplier to source new servers when the CIO needs more computing power. If the CIO has a service from the likes of Amazon Web Services or Microsoft Azure, he or she will automatically receive what they need and pay only for what they use.
AI arrives
While cloud might be the biggest technology disruption in IT outsourcing, it might prove small beer compared with the changes happening now and what could happen in the future with automation and artificial intelligence. Software robots are being programmed to perform business processes, but artificial intelligence has already gone a step further and is offering business cognitive platforms that can complete a wide range of tasks and even learn as they go along.
So if you go back to the basic objective of outsourcing – getting your work done by a third party – IT outsourcing will always be a huge industry. But the way the industry works will continue to be transformed to meet new technological, economic and political challenges.
