Farming out apps: More eggs, more baskets

Dutch banking giant ABN Amro's huge new IT outsourcing deal illustrates the growing trend of companies farming out work to multiple providers instead of negotiating one large contract.

Announced last month, the deal has five vendors splitting $2.2 billion in IT work over five years. IBM won a $1.9-billion IT infrastructure outsourcing component, including servers, storage systems and desktops; Infosys and Tata Consultancy Services drew $125-million and $250-million contracts, respectively, for application support and enhancements; and Accenture, IBM, Infosys, Patni Computer Systems and TCS earned preferred-supplier status for an unspecified amount of development work.

The bank says its IT overhaul will save the company more than $600 million by 2007, including savings accumulated by cutting 1,500 jobs and transferring 2,000 jobs to the outsourcing vendors (leaving ABN Amro with about 1,800 in-house IT staff). In addition, the outsourcing arrangements will provide better and faster access to new technologies, which will lead to more sophisticated product development for ABN Amro's clients.

ABN Amro chose to divvy up the work among five outsourcers, based on the broad range of services its business requires. "There is simply no single vendor who can satisfy all the different needs of the bank," says Lars Gustavsson, ABN Amro's CIO. "We also believe that specialization in certain cases will prove much more business-aligned and agile over time."

Analysts predict more companies will pursue a multi-vendor approach. One of the most anticipated deals could come from GM, which has a multibillion dollar outsourcing contract with EDS set to expire next year. "All signs point to that going to a multisource deal when it expires," says Barry Mason Rubenstein, a senior analyst at IDC.

Others going the multisourcing route include French carmaker Renault, which in March awarded outsourcing contracts to Atos Origin, Computer Sciences Corp. and HP; Royal Dutch/Shell Group, which orchestrated an IT services agreement, reportedly in the $1 billion range, with IBM and Wipro Technologies; and Bank of America, which is outsourcing work to EDS and Hewitt Associates.

The trend toward multisourcing allows IT organizations to gain access to best-of-breed providers while reducing the risk of having a single vendor responsible for vast corporate IT resources, Rubenstein says.

"Users are more sophisticated about their sourcing strategies, they're more capable of managing multiple vendors, and they're looking for expertise to meet their very specific applications needs,"says Allie Young, a vice president at Gartner.

Even though the application-related contracts will require ABN Amro to manage multiple service providers, the company expects to gain efficiencies by sourcing projects judiciously. Infosys and TCS will maintain the bank's existing applications and - along with Accenture, IBM and Patni - develop new applications across all business units.

Industry experience is particularly critical for application outsourcing, which Young defines as a multiyear contract for managing, enhancing and maintaining custom or packaged application software. Short term, narrowly defined application maintenance projects don't fit the bill.

The distinction between discrete application maintenance work and strategic application development is significant, Young says. Application outsourcing calls for providers to take over ongoing management and operations of apps in an effort to yield business-process improvements.

"If companies make ad hoc outsourcing decisions, driven only by cost savings, chances are they will fall short of really delivering business objectives," Young says.