Outsourcing

The world's leading technology companies have long entrusted third parties to handle key parts of their operations, writes John Collins

The thorny issue of outsourcing once again raised its head this week with the news that far from protecting Xerox employees, a deal struck by the printing giant with IBM will see hundreds of jobs move offshore during the next two years.

In the public imagination, outsourcing is still associated with the bitter Irish Ferries dispute in 2005 where the crew of the MV Normandy were replaced by foreign agency staff on lower rates of pay.

That model of outsourcing is purely about wage costs but the world's leading technology companies, the vast majority of whom have Irish operations, have long entrusted third parties to handle key parts of their operations.

Kate Hanaghan, a senior analyst with UK technology and telecoms advisory firm Ovum, monitors the outsourcing market and says there has been an increasing trend for IT jobs in Britain to move offshore.

Call-centre workers, the majority of those affected at Xerox, are not the only sector of the technology industry facing the fall-out from outsourcing.

Mobile operator O2 is outsourcing its network management and internal technology functions which will see up to 450 staff transfer to a third party.

Five shortlisted companies - Ericsson, Nokia Siemens Networks, Accenture, IBM and Fujitsu - recently made presentations to the company and the winning bidder or bidders are expected to be announced towards the end of the year. O2 is reported to be keen that whatever firm wins the contract will have a significant operation in the Republic.

In contrast, Hanaghan says that in Britain, companies that are outsourcing expect some offshore element to be part of the service they receive from the provider.

"They would be disappointed if it was not part of the contract, as they would feel there were additional savings to be made," says Hanaghan.

She says customers buying outsourcing services are much more confident now and are realistic that functions such as software development and remote monitoring and management of infrastructure will move offshore.

"The customer is much more in control than they have been in the past," says Hanaghan. The knock-on effect is that they expect even more significant savings by handing over part of their business to a third party, which in turn puts even more pressure on major outsourcing providers such as IBM, HP, Accenture and Fujitsu to use low-cost locations to fulfil the contract.

But low-cost staff is not the only way that providers can cut costs when taking on an IT contract. Advances in software mean that tasks which once required an engineer to physically touch a PC can now be done remotely.

The large providers also benefit from economies of scale by providing a similar service to a number of companies from a single location. They have built up process knowledge from previous contracts which enables them to do it more efficiently than companies that are not IT specialists.

"But you still can't underestimate the impact of offshoring and 'near-shoring'," says Hanaghan. "It's a more mature market in the UK. It went through the phase of people not liking it but now that has evolved."

IBM executives have been unusually quiet this week, forwarding all media queries to their customer Xerox.

But in recent times they have talked about the model of the "globally integrated enterprise" which is facilitated by the internet and other modern communications tools.

Put simply, the work flows to where the skills are, regardless of where those skilled people happen to be. It's largely on that basis that IBM, which employs just shy of 3,500 people around the country, has in the past decided to locate functions such as software development in north Co Dublin.

Just as the internet was becoming ubiquitous, free trade agreements, a shift to a services-based economy and the emergence of highly skilled work forces in places such as India and China coalesced to make it even easier to move work offshore.

The message coming through to Ireland Inc is that we have been net beneficiaries of globalisation in the past and shouldn't be complaining now that lower-cost economies can now compete with us.