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By Martin Brampton, 12 October 2004 07:55

COMMENT Outsourcing has become an established practice in IT. But are companies doing it for the right reasons? Martin Brampton looks at whether sending IT out-of-house lives up to its supposed benefits.

The outsourcing of railway maintenance is widely believed to have been responsible for avoidable loss of life. Fortunately, most IT failures do not have such obviously damaging consequences. But it is interesting to hear that Network Rail regarded in-house IT as a critical element for taking direct responsibility for railway track maintenance.

While a number of well-known service providers were involved in the project, it was led and largely implemented by the organisation's own IT staff. Management regarded the IT behind rail maintenance as a core business process. These moves are now believed to have improved train services, an issue close to my heart as a regular traveller.

Is this a sign that the trend to outsourcing has gone into reverse? Probably not, but it does suggest it is worth critically examining the issues around the whole outsourcing principle. When we look carefully, it may be that the trends are much more a question of fashion rather than anything else.

There are three factors that have been the main drivers for outsourcing and fashion is one of them. The others are the need to shake up under-performing operations and the possibility of achieving reduced costs. Of course, fashion is never cited in business cases for outsourcing but it has an important influence all the same.

One of the few management principles to hold up for long is the idea that it's good to provoke change from time to time. Leaving things alone for too long usually results in people becoming complacent. Do it too often, however, and people become unsettled and do not produce good results. On this basis, it is best to outsource for a while then, like Network Rail, bring it all back in again.

Of the three factors saving money is always favourably regarded in a business case. Almost all the early attention on outsourcing came from claims that it would allow a substantial reduction in costs. How to achieve this? One way is to worsen the terms of employment of the staff and another is to be more efficient. Shortage of IT skills has limited the first and arguments for the second have always been tenuous.

In fact, it was quickly realised that the early outsourcing deals relied on a third technique for cost reduction: financial engineering. Over time, operating the same IT service gets cheaper because hardware is forever getting more powerful and managing familiar products gets easier. So the typical outsourcing contract made losses at the beginning and more than compensated with profits towards the end.

But the real gravy for the outsourcing companies came from the fact that hardly anybody is satisfied with the same IT service for very long. With an incumbent outsourcer firmly entrenched, the provision of new or altered services could be highly profitable. Now buyers quickly realised this and subsequent negotiations for large deals have steadily become more and more complex.

The latest twist is to stand the original mechanism on its head and demand outsourcing with innovation. Yet the argument has never really been concluded to demonstrate that outsourcing actually delivers lower costs, and it is much too soon to have confidence that it can deliver innovation.

And innovation is important. For too long, people were hung up on the idea that novel uses of IT could yield dramatic competitive advantage. Scarcely a single example of this has actually held up. Yet appropriate use of IT is surely a core skill for any successful organisation, and innovation will sometimes be part of what is meant by appropriate. The result will not be a 'killer application' but a general competence that is critical to the health of the organisation.

Certainly, a source of innovation is keen awareness of what is going on elsewhere. Talented people are another factor. Yet there is no evidence that outsourcing is the only way to secure those things. Perhaps it is all a matter of fashion.