IT outsourcing by government is a thing of the past

The days of government outsourcing contracts to private IT suppliers could be dying out after the failure of key projects for both the customer and the suppler.

For the last decade, councils and government departments have been under pressure to give huge outsourcing contracts to private suppliers under the impression that it saves money. However, the outsourcing business model is appearing to be coming unstuck with both suppliers and customers getting burnt.

The latest failure is with the IT outsourcing company CSC which has announced that that it has staunched more than eight years of loss-making from its Royal Mail project. CSC had a ten year outsourcing deal with Royal Mail during which Royal Mail transferred 1,713 IT staff and £72m of equipment assets.

However, according to eight years worth of accounting seen by Computer Weekly, the outsourcer lost money for eight out of the ten years that the contract was running.

It only managed to cut its losses through a combination of job cuts, tax breaks and relief payments. It slashed 1,082 jobs or 63 percent of the staff Royal Mail transferred as part of the outsourcing in 2003. This meant that CSC could halve the annual wage bill at CSC from £55 million to £25 million. Even so, this still means that CRC lost £12 million, on a total turnover of £1.5 billion.

It looks like the losses would have been even higher had the subsidiary not been eligible to claim £61.6 million of tax breaks.

CSC said it has delivered significant benefits to Royal Mail which had access to its next-generation solutions and services to manage unprecedented levels of technology change over the past decade. But the case is being cited as being proof of how IT outsourcing suppliers are not exactly cleaning up from government deals.

The Royal Mail deal should have been profitable each year but instead posted losses for the first five.

If the customer was happy then CSC could at least say it had done a good job, but Royal Mail has been complaining that its IT infrastructure was expensive and suffering years of underinvestment. It recently renegotiated the contract to push some of its computing to the cloud.

Royal Mail’s new CIO Catherine Doran has begun recruiting IT staff again to bring expertise back in-house, which is doing something which is against the outsourcing philosophy.

According to Computer Weekly she gave CSC a short-term contract extension while she decides what to do next. It appears that she is tossing up on whether to bring the IT back in house, or just try and find another supplier.

This was just the latest disaster for CSC. Last year long-simmering problems related to the UK NHS IT project boiled over, resulting in a massive loss to the outsourcer’s bottom line.   It is not the only IT outsourcing company to suffer. Recently Southwest One, a local government shared services operation 75 per cent owned by IBM, did not deliver the benefits it promised and needed a loan from Big Blue to prevent it going under.

One problem with negotiating public sector contracts is that the contract forbids taking some of the IT jobs overseas to save cash or making staff redundant. This means that they have to operate a sinking lid policy on the same terms and conditions as government departments. This means that it can take a long time before outsourcing companies have slimmed down enough to make a profit.

Analyst outfit Ovum released a report which pointed out that such traditional outsourcing deals are fast being called old hat.

The report’s author Ed Thomas said that the future of IT outsourcing had become a major topic of conversation throughout 2012. among IT services industry experts, with the consensus being that outsourcing in its current form is in terminal decline.

This is the opposite of what Ovum said in 2011 when it noted that cash-strapped utilities industry will increasingly turn to IT outsourcing as they realise they have no choice but to consider it because of the potential cost savings, according to Ovum.

It said that while the “end of outsourcing as we know it” rhetoric is a touch hyperbolic, it is clear that the industry is undergoing significant changes, which will continue into 2013, Thomas said.