Managing IT functions, extending the supply chain, improving communications and keeping pace with software and services has become such a drain for many organisations they're handing over infrastructure and application management to the experts. 

There's a growing trend to include critical business applications, network management and even IT department skills in outsourcing agreements.

According to research group IDC outsourcing is not only one of the largest services categories in New Zealand it is also the fastest growing in terms of end user spending in 2002. Outsourcing makes up 29 per cent of the total market, systems integration is 21 per cent and processing services comprise 17 per cent.

IS outsourcing is expected to have compound growth of 10 per cent through to 2005  - the biggest area is organisational or network infrastructure including enterprise resource planning (ERP) and customer relationship management (CRM).

"A lot of people are realising their infrastructure needs to be bought up to speed if they are going to leverage existing markets and do the exciting stuff like enhance relationships with existing customers and grow their client base using IT tools, says IDC New Zealand senior analyst Marc Cribbens. "Many have tried to run before they can walk and as a result are going back and focusing on their core competencies," he says.

While the application service provider (ASP) market was tipped to relieve some of the pressure of owning IT resources it wasn' t as readily adopted as some vendors hoped. After serious rethinking ASP has simply become one of a number of outsourcing offerings as companies partner with systems integrators, IT developers and vendors who're expanding their reach.

A lot of companies start with a selective approach, perhaps outsourcing their network, then as they become confident they're looking to carve off other aspects of their IT department. "In many case companies simply transfer their IT specialists off to an outsourcing company and put a service level agreement (SLA) in place," says Mr Cribbens.

"Infrastructure issues are really driving demand for outsourcing and integration services. The core spending is in the nitty gritty including hardware to make sure everything is up and running and able to take the company where it needs to go without having to worry about what's coming next," he says.

Mr Cribbens says more IT players are gearing up to provide application outsourcing and business process outsourcing. "This means the technology expert has the responsibility to ensure the client has the best infrastructure, application or process".

For example IBM has recently hired staff from WestpacTrust to outsource some services, Hewlett-Packard recently won a Vodafone outsourcing deal to supply PCs and a helpdesk, which will see it taking on a number of Vodafone employees. Unisys and Fujitsu are also ramping up their outsourcing activities. Now that Accenture has pulled out, much of its government outsourcing has gone to KPMG and PWC is likely to get more government business now that it has been taken over by IBM.

Smaller players including Axon, Intelligroup, Olympic Software and Conduit looking to ramp up their presence in the professional services market, often providing networks, servers, remote management, IT skills, integration, development and consulting 

Mr Cribbens says consulting revenue is getting harder to break out of the research figures because it's now part of the bundled package of design, implementation and management spend. "That's the way users like it and one of the reasons outsourcing is growing so rapidly."

He says IT is being driven by more of a business orientation with senior people placing greater demands on technology. "Everything needs to be simple and easy to use without the focus on the technicalities. They want to get from A to B with their solutions without worrying about the nitty gritty"

Mr Cribbens says the confused state of information systems became evident for many companies during Y2K audits and the move to CRM and outsourcing is a way to put that right. A major refocus on ERP by companies that are not happy with the information they're getting from their current systems is also helping to drive outsourcing. 

He says the advent of enterprise application integration has taken away some of the fear of organisations being locked into proprietary ERP technology.  Rather than outsourcing a new application and having to get rid of their existing one they can uses these sophisticated tools that can pull together existing applications and make them work together.

CRM applications are also being considered as an important part of the infrastructure. Often databases are scattered throughout the organisaton on various platforms and sites resulting in duplication and confusion when it comes to targeting their customers. "Many people want to consolidate their customer databases and sort out the mess their customer information is in using CRM applications to enhance infrastructure and increase efficiency."

However while it pays for companies with massive enterprise wide applications to outsource management of systems applications it is still relatively rare for medium to small organisaitons.

Meanwhile utility computing is increasing in popularity. You get your services on a pay-per-view basis, which is ideally suited to the mid-market. "This offers computing capacity and applications - you're not renting you're paying for what you use."

The next step is migrating to business process outsourcing, which EDS is now looking at. This is where you deliver capacity and applications such as payroll or accounting through a high capacity pipe as well as the skills involved in that business function so they become a virtual department to your organisation further freeing up the core business to do what its good at.

"That's going to take a lot of trust. It's very new and emerging area and a number of companies are putting together strategies to get into it," says Mr Cribbens.

By Keith Newman

August 2002