The largest IT outsourcing deal in Canadian history came down to a fairly straightforward equation, says Grant Westcott, the head of technology infrastructure at the CIBC.
“”At its most basic level, it really allows a whole bunch of people who had been focused on managing IT to focus on banking
and customers,”” he says. “”And we are, after all, a bank and not a technology company.””
CIBC’s $2-billion deal with Hewlett-Packard Services, inked last November, handed over responsibility for managing a substantial portion of the bank’s IT operations — from the desktop to servers. It was a big deal, to be sure, but Westcott says these days it isn’t unusual. Although it would have been unthinkable a generation ago, even beasts as conservative as a Canadian bank have caught the outsourcing fever.
“”The truth is that 20 years ago, IT was core to a bank’s strategy and operations,”” Westcott says. “”Today, it’s more important for us to focus on customers.””
That desire to get back to basics and focus on core competency has turned up the heat on an IT outsourcing market that a recent EDS study said would grow from US$50 billion this year to US$60 billion in three years. The advantages can be enormous, reducing costs, granting an enterprise unprecedented flexibility and access to new technologies, while providing some protection against technological obsolescence.
IT outsourcing has become the rule rather than the exception in large enterprises.
“”It’s extremely unlikely any large company could get by without some outsourcing,”” says Allen Borak, chief information officer at CP Rail in Calgary. “”The IT world has become all about commodity services that simply can’t be duplicated at the same price in-house.””
Indeed, the bottom line for IT outsourcing is often the bottom line. The first and — for many enterprises — the most important consideration in an outsourcing deal is cost. If the cost savings aren’t there, says Borak, it probably isn’t worth considering.
“”We’ve gone into outsourcing strictly on a cost basis,”” he says. “”A lot of vendors try to sell services on the basis of value-added services, but we’re principally interested when the service is demonstrably cheaper than doing it in house, without a reduction in quality. We often find many vendors’ standard offering has a much higher level of features than we want, and they don’t want to dumb it down for us.””
The anticipated economies are not always associated with outsourcing all or part of an existing IT department to a leaner, more efficient, IT-focused service provider. For many enterprises, outsourcing provides the only avenue for keeping up with the technological Joneses. New technologies and capabilities that might be too expensive to develop in-house can often be purchased as a managed service from a specialist vendor.
At Centennial College, outsourcing was an essential part of a wide-ranging and necessary network upgrade. The Scarborough-based community college simply didn’t have the manpower or the resources to develop a new infrastructure on its own, so it went shopping.
“”The reason we made a specific decision to acquire a managed service for telecommunications and data networking was to address the lack of expertise and capacity to implement sate of the art networking across our campuses,”” says Lan Nguyen, Centennial’s vice-president of innovation and IT partnership. “”The pressure came because we were building a new campus and it was important to ensure a viable environment.””
For Nguyen, the choice came down to either leveraging Centennial’s existing telecommunications infrastructure and upgrading its decade-old PBX, or hiring network services provider Avaya Inc. to implement a whole new system from the ground up. Nguyen didn’t want to be the last person to buy a PBX.
“”We could have just replaced the PBX with a new one, but that wouldn’t have met our needs,”” she says. “”The agreement with Avaya allows us to bring in call centre technology and a whole lot of other functionality that we couldn’t have done the old way.””
For the next decade, Nguyen says, telecommunications and networking issues are Avaya’s, problem not Centennial College’s. The outsourcer’s employees share office digs with the college’s IT people, report to Nguyen and participate in staff meetings, but the inevitable network headaches are Avaya’s.
Shifting responsibility and risk to someone else is certainly one of the big advantages of outsourcing, and nowhere is this more apparent than in the endless pressure to keep up with new technology. Even a bank as big as CIBC might not have the resources or the inclination to keep a finger continually on the pulse of technological innovation. A big technology company such as HP Services, however, lives and breathes innovation.
“”We have an auto-refresh and systematic benchmarking and review built into our relationship with HP,”” Westcott says. “”A lot of the risk associated with IT is in their court rather than ours.””
That, says Joe Hogan, HP Services Canada’s vice-president of marketing for managed services, is one of the big draws his company brings to the table.
“”The truth is that if you look at traditional IT outsourcing companies, they typically did a lot of static, five-year mainframe management deals,”” he says. “”We don’t have a mainframe heritage; we’ve always had open technologies. And we have what we call an adapting infrastructure that allows us to manage over time and adapt to change.””
Even though outsourcing can present an ideal hedge against inevitable technological change and the dangers of obsolescence, some customers have to be made to think about the future.
“”We do outsourcing relationships for five or 10 years, so the key question is ‘have you thought about your road map of the future’ and have they thought about the key inflection points where they might have to change?”” Hogan observes. “”What a good outsourcer says is ‘let’s help you build a road map in this outsourcing relationship toward the future.’ That’s where you build a really strong relationship.””
But that takes trust, and trust can be hard to build. “”There’s no doubt it comes down to relationships,”” Borak says. “”You have to have a relationship with the outsourcer that comes down to trust and respect. That’s not always easy. In the post 9/11 world, we’ve really ramped up our security expectations.””
For CIBC and HP, that trust may have come a little easier because the two companies had already had a long-standing business relationship though their Intria joint venture.
“”That was one of the keys,”” Hogan says. “”Two or three years ago, we started a relationship with CIBC with Intria. They knew who we are because we had already worked pretty closely with them.””
Nevertheless, says Westcott, even with that prior relationship, the comprehensiveness of the bank’s outsourcing plans meant it had to consider the relationship very carefully. CIBC was not inclined to take anything for granted.
“”At the end of the day, you have to be able to trust the folks across the table, that’s a given,”” Westcott says, but he goes on to say that both the trust and the value proposition had to be carefully examined first.
The key, says Brian Cott, director of business development for Avaya Canada’s strategic solutions group, is to become one with your client. Avaya’s strategy with Centennial College involved a complete integration of its technical staff on the ground with Centennial’s IT department, and that required a deftly managed courtship.
“”It’s never a wholesale change, it never can be,”” Cott says. “”When we are engaged, there’s a strict process of transition that analyses process and infrastructure, finds how we’re going to fit in and then transitions our customer to the new direction. We become an integral part of their organization; we need to be them.””
Is it worth it? For now, the big outsourcing customers think so; Centennial College and CIBC sing their partner’s praises. Yet Borak points out that, for all of the advantages, the big disadvantage of IT outsourcing is your IT assets are never quite your own, that at the end of the day, you have to rely on someone else to do the job right.
“”You are giving something up,”” he says. “”It’s still a gamble. You have a certain flexibility when you do it in-house that you don’t have when you outsource. Think of it this way; if your business goes south and you have to get rid of 50 people in IT, you can do that when it’s your IT department. With a five-year outsourcing contract, you don’t have that option.””