A history of IT outsourcing

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A history of IT outsourcing
A history of IT outsourcing

Date: 16.03.2018

For the first half of Computer Weekly’s 50-year life, you would have scoured its pages in vain for a mention of IT outsourcing. For the second half, you would be hard put not to read an outsourcing-related story whichever page you turned to. The exact date of IT outsourcing’s inception is, however, difficult to pin down because the label means many different things to many different people. The industry provides a resource that is constantly changing. In fact, about the only thing you can be certain of in IT outsourcing is that it never stays the same for long. Some would say it was the late 1980s when IT outsourcing as we now know it first arrived. In the US that was when IBM designed, built and managed a datacentre for photography company Eastman Kodak that involved transferring hundreds of Kodak staff to IBM’s Integrated Systems Solution Corporation (ISSC) brand. Ilan Oshri, a professor at the Centre for Global Sourcing and Services at Loughborough University’s School of Business and Economics, says IBM’s deal with Kodak is a good starting point for modern IT outsourcing services. “Without doubt, Eastman Kodak’s 1989 landmark IT outsourcing deal with IBM was and still is the turning point for the service outsourcing industry, attracting the attention of corporates to the advantages it may bring,” he declares.

No longer a dirty word

John Keppel, president EMEA and Asia, at outsourcing research company ISG, says that IT outsourcing in the UK also came of age in the 1980s, when the Greater London Council outsourced to Hoskyns. “Initially, the prospect of using contractors to perform integral functions caused uproar,” Keppel recalls. “Many people didn’t understand what it meant and what the cost impact would be for the public purse. Yet by the 1990s, markets were increasingly testing the water, and under the government of John Major, outsourcing stopped being a dirty word and became something businesses saw the value of, and actually wanted to do.”

The pioneers

But you can go further back and find examples of early versions of IT outsourcing. Mark Lewis, outsourcing lawyer at Berwin Leighton Paisner, says that in the corporate and education worlds, outsourcing was happening way back in the 1960s and 70s, but in the form of time-sharing, service bureaux and facilities management. “These were the forerunners of modern IT outsourcing,” he says. IBM was unsurprisingly the pioneer of the modern form of outsourcing after its deal with Kodak in the US got the corporate world’s attention. “My experience in the UK, Asian and European markets from the mid-1980s was of IBM being a dominant IT services provider in those markets at least,” adds Lewis. “This was especially true in mission-critical IT projects.” It was the draw of the corporate that led to IBM being joined at the party by a company set up by American businessman Ross Perot in the 1960s. That company was Electronic Data Systems, better known as EDS. Sam Kingston, COO at Ukraine-based IT service provider Ciklum and a former UK head at EDS, says Perot realised his vision by building an independent IT outsourcing supplier, not linked to any hardware manufacturer, providing outsourcing skills as a tool to solve business problems. “It was to be one of the most successful companies in the computer industry in 1980s and 90s,” he adds. “It signed multiple long-term billion-dollar contracts with blue-chip clients.”

Legitimisation

Kingston says that EDS, and IBM before itlegitimised the adoption of IT outsourcing and got the business world’s attention. “These companies drove the outsourcing model onto the global market by pursuing distinctly different business strategies aligned to their respective core capabilities.” IBM grew from within while EDS combined organic growth with acquisitions, says Kingston. “EDS should be acknowledged for its role in the rapid industrial segmentation of the technology services sector. However, both EDS and IBM strategies succeeded for a long time. “In essence these players made far-reaching impacts into the business world rather than driving technology advancement per se. In essence, their innovative commercial models coupled with a willingness to service enormous scopes of work was impressive even when benchmarked by current deals.” While IBM’s outsourcing business is still going strong through its Global Services arm, EDS was acquired by HP in 2008 for $13.9bn and the brand disappeared.

Realignment

Another outsourcing name that disappeared is Andersen Consulting. It was part of accounting firm Arthur Andersen until it split off and became Accenture in 2001. Kingston says Andersen Consulting/Accenture took the outsourcing market to new heights. “And that is where Accenture seems to be today – at the top of the consultancy-operate outsourcing tree.” But the Andersen story also marks an important point in the IT outsourcing sector. In 2001 there was an accounting scandal at US energy giant Enron. It emerged that billions of dollars in debt from failed deals and projects had been hidden by means of accounting loopholes and poor financial reporting. Enron shareholders sued for billions of dollars and Arthur Andersen lost its licence to practise as a Certified Public Accountant in the US after being found guilty of criminal charges relating to its auditing of Enron. While the accounting scandal did not involve Accenture, Kingston says it fired a warning shot across the bows of the IT industry: “Arthur Andersen in addition to being the auditor had its business consultancy [Andersen Consulting] providing services to Enron. It was later claimed to be a conflict of interest for any audit firm to proactively seek and be rewarded for consultancy work with its clients.” Kingston says the “red-flag” of Enron launched a new era of service provision compliance processes. Following this, large accountancy companies sold or spun out their consultancy businesses.
http://www.computerweekly.com/feature/CW50-A-history-of-IT-outsourcing

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