The IT department: Keep your strategic decisions on IT in-house, say experts

The IT department: Keep your strategic decisions on IT in-house, say experts
By Stephen Pritchard
With a plethora of suppliers queueing to provide IT services – from hardware maintenance to running complex software applications – keeping any IT expertise in-house may appear to be an unnecessary luxury.

Some businesses, mostly start-ups or smaller firms, are reporting that they have achieved significant cost savings by outsourcing all their IT. But the fact that these companies lack an IT department does not mean there is no one looking after technology.

“In an SME that is not very technical, and doesn’t make great use of IT, there still needs to be someone ensuring that it is run effectively and who manages the third-party providers,” says Jonathan Cooper-Bagnall, head of PA Consulting’s shared services and outsourcing practice.

“In mid-sized firms, even if there is not a chief information officer, there is likely to be someone in a mid-management role or a higher IT manager role who looks after the portfolio of suppliers, provides some support to the business and sets the direction.

“Even if there is no IT department, someone still has to be accountable, even if that accountability sits with the chief financial officer, or an operations director.”

In larger businesses, the size and scope of the IT department will depend on company policy on outsourcing and will also be an important factor in whether or not it is a success.

Although some have been able to drive down the operational costs of IT through outsourcing, others have found that this has come at a price.

Unless it is managed well, outsourcing can result in less flexible services and business processes. Organisations that have slimmed down their internal capabilities to the bare minimum and have handed control to an outsourcer, may find that their technology is no longer as able to respond to change.

For example, many older-style outsourcing contracts made few provisions for moving to new technologies, and adding capabilities can be costly.

Although companies are able to outsource services, they obviously cannot outsource all responsibility for IT – or its strategic direction.

“A lot of discussions [about the role of IT] are triggered when the IT department has not delivered, or the business feels it is not getting the response it needs,” says André Christensen, a principal with McKinsey & Company, the consultancy.

“But there are things you need to keep in-house, such as managing demand, and shaping your requirements. You can’t outsource that.” Outsourcing the role of the CIO, he says, “is very seldom the right answer”.

The more a business relies on IT for its competitive advantage, the more important it is to keep a core of IT capability in-house, to set strategy and to translate business requirements into IT supply contracts. Companies now need CIOs to be far more business focused.

“There are different levers you can pull in a business and IT is one,” says McKinsey’s Mr Christensen. “You don’t just hand over your business requirements to an outsourcer, and expect them to deliver.”

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BAA: ‘A change in culture and a change in style’

By 2013 BAA, which owns six airports in the UK including London Heathrow, will have spent £400m ($657m) modernising that airport’s IT. A large part of that is being spent with outsourcers.

In March, BAA signed a £100m deal with Capgemini. The technology services firm will become the primary supplier of day-to-day IT for Heathrow; up to 200 BAA staff are expected to move to Capgemini during the contract.

Deals of this size and scope fell from favour during the recession, but according to Philip Langsdale, the chief information officer, it makes sense for BAA.

“There were three clear drivers for the outsourcing decision,” says Mr Langsdale. “We wanted to improve the quality and robustness of the service to IT users – we would not have contemplated it without better service quality. The second is a reduction in cost: we have achieved very significant reductions in operational costs and will continue to do that, as part of the outsourcing contract.

“And the third was a strong desire to transform our ability to improve Heathrow through the use of IT: we will provide more bandwidth and more capabilities.”

BAA has been reducing its own IT headcount for some time. The department employed 800 people not long ago, but with the Capgemini contract, this will drop to about 100.

Part of the reduction stems from the disposal of Gatwick – the UK’s second-largest airport – sold by BAA in 2009. Capgemini was involved in helping BAA to separate Gatwick and BAA’s IT systems – and the move to use smaller, more nimble technologies at BAA’s smaller UK sites.

But BAA says the reduction in staff numbers also reflects its view that the internal IT department should be about planning, sourcing and delivering, rather than building and running IT.

“Outsourcing is changing the skills profile of the internal IT organisation. We have to become a much more intelligent client, with much stronger strategic leadership,” Mr Langsdale notes.

Strategy is partly driven by BAA’s regulatory time frame, based on five-year plans.

Mr Langsdale’s team is currently working on the plan for 2013-18. In addition, the company has to work with the Civil Aviation Authority, air traffic control, the International Air Travel Authority, other airports and the airlines.

All this comes as BAA is trying to improve experiences for passengers at Heathrow, an airport designed during the second world war and now running very close to full capacity.

Although plans for a third runway have been shelved, a new terminal is being built – as a replacement for an existing terminal – and Heathrow is looking to technology to squeeze more out of the airport’s resources. IT for the new terminal will cost £200m.

“IT has an increasing part to play in delivering our results,” says Mr Langsdale. “What we build has to work in conjunction with the airlines and other stakeholders [but with outsourcing] we have to step back from micromanaging everything. It is a change in culture, and a change in style.”

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