STRATEGY IT OUTSOURCING
15,000 users. The £100 million contract is for three years, with an option to extend it for a further two years. And in April 2011, HP (again) won a seven-
year contract with National Grid, which operates the entire electricity and gas infrastructure in the UK and is expanding overseas, to provide IT service management. As explained below, that deal is the first step by National Grid towards an entirely new operating model for IT, in which flexibility is one of the primary concerns. This seems like a burst of outsourcing
activity. However, the energy sector, alongside financial services and manufacturing, has long been one of the most voracious consumers of outsourced services. Outsourcing advisory firm TPI says the combined value of deals by energy companies has been stable for the past three years, and despite these high-profile deals it does not expect to see a marked uptick in the first quarter of 2011. Nevertheless, the details of these recent
deals reveal an industry that is attempting to plan for the unknown. With the future post- recession economy remaining uncertain, that is a discipline that businesses in all sectors would do well to perfect.
SCALABLE SUPPLY According to John Keppel, a partner at TPI, flexibility is one of the primary drivers of outsourcing contracts across all sectors these days. “Outsourcing is famous as a tool for cost savings, but the majority of the work that we do is focused just as much on variability and flexibility as it is on cost,” he says. For companies facing uncertain demand,
Keppel explains, the priority is to reduce the risk of making investments in IT that go to waste if it is not used. “They don’t want large pockets of trapped investment,” he says. “They want to be able to use their investments across the business, and change the direction of IT capacity if necessary. “With a lot of in-house IT operations, that
is extremely difficult to do,” he explains. Keppel argues that the best way to achieve this is to appoint a variety of
26 INFORMATIONAGE APRIL2011
outsourcing suppliers, and to make sure that the contracts contain mechanisms to scale service volumes up and down according to demand. “When you can start to look at your IT
operating model a little bit more holistically, and get different service partners for specific things, with contracting vehicles that allow to ramp up and down very quickly, that is when you get good cost variation,” he explains. “That is what allows you to make swift business decisions.” The deal between HP and E.ON, in which
TPI was involved, is a good example of this transformational outsourcing in action, Keppel says. “E.ON is moving into a much more balanced, multi-sourced supply environment, where they have a number of different parties providing services.” To a degree, Keppel says, virtualisation and cloud computing make it easier for providers to offer that variability of service volumes when it comes to hosting or data centre services. “Now, it’s much more possible for organisations to really get the on-demand notions that, although they
scaled up and down: they might also want to vary the level of that service (e.g. how many hours a day desktop support is available). According to Paul Dyson, an energy expert at management consultancy PA Consulting, making sure service levels can be flexed up and down is another effective way to reduce the risk of over-investment. “I have seen deals that have the scope for
four or five different levels of service, where the customer can drop down tiers of service if they need to save money” he explains. “There are limits, but that allows you to control how much service you are actually buying and you’re not stuck with a single service level for the life of the contract.” Dyson believes that cloud-based hosting engagements, like HP’s deals with Centrica and HP, have the potential to achieve the efficiencies that previous data centre outsourcing were supposed to deliver, but often did not. “Four or five years ago, everyone was
talking about outsourcing data centre operations,” he says. “But when you look back now and ask whether those kinds of
“Countries have opened their infrastructure up to competition, with unpredictable effects”
were marketed for a number of years, were difficult to get contractually.” That said, IT services providers are still
often reluctant to offer the ability to reduce the volume of services, Keppel explains, as obviously it means they get less revenue. “Is it easy to convince [suppliers] to have scalability on the downside, the same way they have scalability on the upside? No, it’s not,” he says. “But it is expected, and the vendors understand that that is the role they play. Because they service multiple clients, they are better able to balance the investment risk.” The volume of a service that a company
receives (e.g. the number of desktops supported) is not the only factor that can be
deals achieved what they set out to, the answer is probably not. In a lot of cases, the customers ended up hiring extra staff to do a lot of internal data centre management.” However, the IT services industry’s ability
to live up to that potential, and the buy-side’s ability to evolve their systems to a point where cloud-based hosting is appropriate, are still both unproven, he adds. “For the energy companies, it’s not just a case of lift and shift – there’s a huge amount of change that needs to be done around standardisation, and understanding exactly what it is they want their providers to deliver,” he says. “Meanwhile, the vendors have some great marketing material but they’ve got very little track record delivering
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