The UK Perspective | Article

Man in GlobeAs Richard Lister, head of the IT Outsourcing Group at the London-based Berwin Leighton law firm, looks at the UK, he sees a maturing outsourcing market which he expects to be driven by three major trends in 1999. Contract renewals and extensions will be a significant factor in outsourcing, continuing a trend that saw renewals and extensions accounting for approximately 50 percent of the deals finalized in 1998 and 40 percent of the agreements in 1997.

Secondly, as UK. customers become more sophisticated, multisourcing will become more of the norm, rather than the exception, according to Lister. “I think in the UK. we’re seeing more smaller deals being let by corporate and managed by corporate, rather than the mega-deals of the past,” he says. “We tend to see them by sector, as opposed to several mega-deals being taken on. I think that is partly due to the supply response for taking on mega-deals, because the margins are so cheap and much more effective on the small transactions than they are on the bigger transactions.”

The third trend he sees is companies moving away from straight cost-cutting deals and toward partnerships that will improve their competitive position. By partnerships, Lister emphasizes, he means separate legal vehicles or companies. “People like retailers are looking for some more tactical way to use outsourcing,” says Lister. “They want closer relationships with their suppliers and allow them much further up the supply chain and into the heart of business process. I think that U.S. trend is definitely being exported here.”

Economic Ups and Downs

All of that activity will be taking place in a market that Lister describes as ‘awaiting a recession.’ “The outlook is very recessionary; it is very negative,” says Lister. “The UK and the rest of Europe are looking at a downward economic cycle, not an upward one, and the real fallout of the Russian default has not been felt yet. We are waiting nervously to see how that will affect the stock market and everything else. The continued strength of the pound internationally has meant that UK manufacturing has suffered significantly in the last 12 to 18 months.”

While that economic factor is negative in nature, another one seems to be more positive for the future of outsourcing. Traditionally, IT outsourcing in the UK was driven by the public sector. In recent years, however, Lister says the public sector began to “slow up” and the private sector began to grow. Now, the public sector is once again having a major impact on the market, he says, as the government changes the way capital infrastructure is procured. In the past, if a government department wanted to procure a new computer system, it would make the up-front capital expenditure for that system.

“Now,” says Lister, “if people need new systems, they are beginning to procure them under what is called the private financing initiative.. So we are seeing computer systems being purchased under 30-year contracts as services, as opposed to assets. So I think the formal enforcement of the private financing initiative by the Labor Party and the regeneration of it in the UK will lead to more large buyer IT projects and, therefore, to more long-term service contracts for those assets.”

Where the UK. is Headed …

The IT services is already growing ‘flat out,’ he says, although that growth is hindered by the lack of resources to meet the “massive demand for results.” While he sees the financial services sector as definitely peaking, he points to the retail, construction and chemicals industries as sectors he expects to grow. The Internet, however, he considers an immature sector. Companies, he says, are beginning to buy Internet services, “but we are still not really embracing electronic commerce to run our businesses.”

He predicts that the transaction norm mix is going to move away from the old data center transactions and toward business process reengineering. He sees multisourcing deals, application maintenance, network outsourcing and desktop as part of the future for UK outsourcing.

“The central government white collar outsourcing has traditionally been focused on IT,” says Lister. “I think that outsourcing will now move toward the many functions of processes where IT is only one element. He cites the outsourcing of mailroom services as an example.†

Opportunities will exist in the government sector, according to Lister, as contract renewals “undoubtedly” lead to changes in suppliers. He divides the government into three areas: central government, health and local government. The more mature central government is the area where contract renewals will be growing. While the health sector has potential for growth, he says acute social issues are an inhibitor. There is a reluctance within the national health system to have third parties delivering actual patient care, and the overlap between the clinical and non-clinical services is “enormous.”

“It is difficult to see how you can just be the maintainer of a particular piece of care,” says Lister. “Over half the people in the hospital are administering health clinical services to the patient.”

Local governments, however, are a growing market, according to Lister. “There are a number of areas,” he says. “For example, the collection of taxes locally and the payment of benefits locally is seen as a growing market.”

The International Marketplace

As he looks at the international marketplace, Lister says the UK government’s continued export of their “mantra” on the private financing initiative will lead to opportunities for outsourcing companies. He points to South Africa as a country where governmental changes are having a positive influence on the outsourcing of public infrastructure projects. Each territory has its own particular regulatory restraints, says Lister. One of those is strong labor union representation, a restraint that is felt keenly in both South Africa and Germany. The changing government has caused some of the union representation barriers to fall in the UK, which is one reason he expects to see greater growth in the UK. than across the rest of Europe.

He sees the biggest international players as being EDS, Capgemini, Logica, CMG, and IBM. He also mentions a number of “smaller suppliers in the U.K. market people wouldn’t have heard of.”

Opportunities for U.S. Companies

The cooling of the stock market in the UK., he predicts, will offer opportunities for ambitious U.S. suppliers wanting a foothold in the European market to acquire UK publicly listed and traded companies. Previously viewed by U.S. companies as over-valued, the U.K. companies will look more attractive as the “fluff” is taken out of the stock market, he says.

A Public Labor Supply

In addition to increased outsourcing opportunities, the emerging private sector in the UK has produced another interesting trend, according to Lister. “The public sector, because it has done so much outsourcing in the UK., has produced some very good, intelligent customers,” he says. “Now a number of those people are being headhunted into the private sector, which is ironical because traditionally the civil service is seen as being not for the commercial environment. The last 10 years has changed that quite radically.”

Post a Comment

Your email address will not be published.

( required )

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>