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.
Over the past few years there has been an increased acceptance of application outsourcing – and greater activity in that segment of the outsourcing market, according to Gartner. The research firm forecasts a five-year growth rate for enterprise application outsourcing of more than 6%.
The move toward global sourcing – a services model that includes a combination of onsite, onshore, near-shore and offshore resources – has helped accelerate application outsourcing adoption.
“If you can digitize your applications work, it no longer needs to be the work that is done by Tom, Joe, Mary and Sue, who sit next to each other in cubicles. It now goes to India or China or Russia or wherever you want it to go,” Young says. “The network becomes very, very significant to enable this new world of application outsourcing that can tap into global delivery models.”
The big issue for companies is deciding what work to keep in-house, what to divvy up among onshore and near-shore providers, and what is most suitable for offshore providers, IDC’s Rubenstein says.
Traditional IT infrastructure outsourcers, such as IBM, HP and Sun, have expanded into application outsourcing. Consultants and systems integrators with specialized application skills, such as Accenture and CSC, also offer outsourced application services. At the same time, offshore service providers traditionally associated with project work – such as Infosys and TCS – are evolving their businesses to include full-fledged application outsourcing.
According to Evans Data Corp., companies are most likely to outsource software development projects to save money. It’s the No. 1 driver for 28% of 390 respondents in the firm’s most recent enterprise development survey. Other top drivers include the need for specialized development expertise not available in-house (19%), the desire to avoid hiring extra personnel who may not be needed long term (14%) and to accelerate development (9%).
Even as more companies look to outsource strategic application work, not all choose to divvy up those services. Late last year Zurich Financial Services signed a seven-year, $1.3-billion outsourcing agreement with CSC to hand off new application development and support services for the insurance company’s more than 4,000 applications. Apps within the scope of the agreement support all insurance lines written by Zurich and all business processes, including new business and underwriting, customer service and claims.
Accenture, too, landed a major application outsourcing contract last year, signing a six-year, $740-million deal with Barclays. The U.K. financial services firm is outsourcing application development and management for a broad range of its commercial and retail banking systems.
What the deals have in common is the companies are ceding control over business applications to external parties. It’s a distinct change in attitude from the days of developing massive, highly customized business applications, Young says. “That led to a lot of ad hoc decision making, multiple instances of certain applications, huge integration efforts and extremely costly ongoing maintenance of applications that far exceeds the initial cost to even write them,” Young says. “That’s the situation many, many companies are in now. They’re looking at applications work that is incredibly labor based and are taking different roads to achieve new levels of efficiency.”
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