As if in a Cold War spy film, the computer staff in the back-office at the Civil Aviation Authority (CAA) have been subtley substituted during the past three years. Outwardly, little has changed. The computer terminals remain in place, although the teams of technical experts manning them look rather smarter than before. The difference is that most of the staff work for an outside organisation. The same independent operator also owns the electronic number crunchers to which their terminals are connected.
But this is not an enemy infiltration. Indeed, it was the CAA's idea. For Richard Brett, the Authority's financial director, has embraced one of the biggest trends in computing since the development of the PC - he subcontracts computer operations to outside suppliers. "It's wonderful. All our IT needs are taken care of. If there are problems, I don't see or hear anything of them. They don't even cost me anything. As far as I'm concerned, I come in, switch on my desktop computer, and everything I need is there. The systems involved in making it happen are transparent."
The explosion in so-called "outsourcing" is based on the idea that computing, just like cleaning or running a canteen, is a service that can be provided more cheaply and efficiently by an independent specialist. It can also wipe millions of pounds off a company's overheads by removing expensive computer equipment and staff.
Faced with economic recession and tough market conditions, many companies are turning to outsourcing as a way to cut costs and focus on their core businesses.
The idea of subcontracting computer operations is not new. In the 1970s many companies used computer bureaux to run their payroll or accounts. During the 1980s the term facilities management (FM) was coined to describe the contracting out of computing operations. The in-phase is now outsourcing, which refers to an expanding range of subcontracting services from systems development and integration to consultancy.
Meanwhile its popularity has soared. A survey by the Yankee Group Europe found that in 1989 only 34% of managers were in favour of outsourcing. By 1991 this number had almost doubled to 65%. Electronic Data Systems (EDS), the world's largest outsourcing supplier, estimates the current market potential in the UK alone to be more than £3 billion and growing at 20% a year.
The CAA's outsourcing programme dates back to 1988 when its ageing mainframes had begun to creak. "While the rest of the world had moved on to PCs and minis, we were using machines five years behind. They had become expensive to maintain and impossible to develop. Users were getting a minimal service from IT and had lost all confidence in the systems department," says Brett. Meanwhile, Big Bang had created a voracious employment market for IT staff in the City and the CAA could not compete on salaries. "We were unable to recruit or maintain staff, and the future for the IT department looked bleak. There seemed only one way to accomplish the giant step needed to catch up - get someone else to do it."
But it is not necessary for your IT department to have plunged this low for outsourcing to be worthwhile. For Ciaran Bennett, business development manager of Municipal Mutual Insurance, the main attraction is reduced risk. "Large mainframe projects have a tendency to go awry. They can end up taking 10 times longer to develop than anticipated, and costing five times as much. Or they might have to be scrapped."
With outsourcing the risk is minimised, Bennett reckons, because there are other people with a vested interest in making the project work. "If I do it in-house and it goes wrong, the only person who gets fired is me. By going to a third party you end up with a contract and a penalty clause to compensate you for failure to deliver. That's got to improve its chances of success," Bennett says. As an example of what outsourcing can achieve, he cites the software installed by MMI to support a life assurance company it launched in 1991 called Prosperity. "We had the software up and running to support the new business in three months. Without outsourcing, it would have taken a minimum of 18 months."
The staff savings made possible by outsourcing are almost as valuable as reduced risk, according to Wendy Thomas, business systems manager at Prudential Portfolio Managers. Thomas is compiling a new set of property investment applications. Outsourcing enables her to buy in the skills when she needs them, at the development phase, then dispose of them when development is complete. "It is more cost-effective overall because we only pay for resources when we need them. We didn't want to introduce a large in-house development team and build up an empire because we were going to go for completion of the work in about two years. This approach has enabled us to import new skills en masse, supplement our knowledge and get started very quickly."
Staff savings emerged as one of the most valued advantages of outsourcing in a survey conducted during the annual City IT conference last November. As one delegate put it: "Contractors don't need the annual reports, personnel appraisals, nursing, counselling and career planning that your own staff need. And if they go off on a fortnight's course, that's good, because you don't pay them for two weeks."
The survey also found that managers value the access to new technology that outsourcing can provide without heavy capital expenditure. Not only is a wider range of equipment available, but independent suppliers are much more likely to know how to make the most of it, and how to integrate it with existing computer systems. But the survey also highlighted the overwhelming fear of any organisation embarking on outsourcing - loss of control. The City IT delegates were worried the supplier would become too powerful and able to impose high costs. The key message that comes across is: strong management from within the customer organisation is crucial.
"The main problem is senior managers seeing outsourcing as abdicating responsibility," says Graham Otter of CSC Index, the IT consultancy. "They see themselves as having got rid of a problem. This idea is fundamentally wrong." Companies with this attitude often find that their IT operations have lost all momentum within two or three years, he says. Left to themselves, suppliers will allow technology to lead development, rather than business needs. Brett admits that probably his biggest mistake was to think he had handed over the problem. "We tried to run the contract in a classic supplier-customer way, and found ourselves in permanent combat, constantly at each other's throats accusing each other of making promises and not fulfilling them." He admits this was largely the CAA's fault for not listening to its main supplier, EDS. The cramped conditions at the CAA's sites meant that Brett wanted EDS to operate as far as possible from its own premises and meet him once a quarter; EDS wanted to work on location alongside his staff and meet him once a week.
Brett thought weekly meetings were ridiculous; the arguments went on for a year. Then the CAA began to realise the importance of a close working relationship. "Gradually it dawned that their failure was our failure, and their success was ours. Then it worked. The turnaround was miraculous," says Brett. Now he has weekly meetings with EDS whose staff sit next to his throughout the systems development departments. "It works far better that way. As far as my people are concerned, they're our staff ... Now we have understood the secret of outsourcing."
But however close the outsourcing partnership becomes, it is crucial to hang on to the reins. Thomas, whose supplier, Computer Management Group (CMG), is one of the biggest operators says: "CMG is quite surprised that we're managing it so heavily from our side. It is under much closer scrutinisation than it has been in other organisations.
The negotiation of outsourcing contracts also requires strong management skills. Many contracts last for about seven years. If you make a mistake, you are locked in. "Remember the outsourcing company is negotiating contracts every day and it gets smart. Users are being led up all sorts of blind alleys unknowingly, particularly over the financial structure of deals," says Otter. What is on offer today will certainly not be the best available by the end of the decade. You need to check what contractual provisions are there to accommodate flexibility and change. Where possible, sign up a lead contractor to take responsibility for the whole thing. Get legal advice from the beginning.
Fixed price contracts are preferable to time-and-materials because you have a clear idea of the financial commitment. But these contracts are harder to negotiate because of the need to get everything right at the beginning. The trickiest negotiations of all comes when changes are needed, as they inevitably are. This is a situation suppliers will tend to exploit all they can, especially if they find the contract less profitable than they had hoped. One factor is working in the customer's favour at the moment - the recession has cut rates for programmers down from about £1,000 per week a year ago, to £700.
The other major problem with outsourcing is the human one. It is an emotional subject. Otter recalls how his colleagues reacted with incredulity when he initiated an outsourcing programme while head of IT at paper packaging group Bunzl. "My colleagues and people in the business considered it a foolish risk because what did it leave me doing? There were three apparent options: I could go to the outsourcing company; I could leave and join another company; or I could stay with the organisation but in a new role."
Most IT staff feel under threat when outsourcing looms, especially as it tends to be imposed from above. The outsourcing suppliers are shrewd in selling directly to chief executives, so that by the time staff get to hear the news it is a fait accompli. But unless the in-house staff are behind the project, it is doomed.
Brett admits he had huge staff problems at the beginning. "We had lots of criticism from staff and unions about the way the transfer was done. I have come to the conclusion that there is no good way to tell your staff they don't work for you any more. If there was, I'd have found it."
CAA's IT administrative systems computer staff will ultimately be down from 200, to a maximum of about 35. But for most of his former technical employees, the operation has proved more of an opportunity than a threat, reckons Brett. The people who went to EDS have all since done rather better in their careers than they would have done had they stayed at the CAA, he says. Large outsourcing suppliers can generally offer IT professionals considerably more varied and advanced career prospects.
When choosing an outsourcing vendor do not decide on cost alone. Look for evidence that it has invested in a wide range of technology. Otherwise you could find yourself tied to an obsolete system. Nor should you give everything away on day one, or you could be dead, warns Brett. The CAA has had a carefully phased transition beginning with the mainframes. It then handed over operation of its linked network of 3,200 PCs to the Birmingham-based ACT Group. The organisation is currently entering the final phase with distributed minicomputers for area and departmental offices to handle specific applications. "It was a good approach that we hit on almost by accident. We gave away the mainframes first, and after about a year when users had begun to gain confidence, we moved on to other areas of IT," says Brett. But it is vital to maintain an in-house firefighting ability. "We have a 24-hour contract with EDS, but if the managing director's PC goes down that is not quick enough."
Users who have come to view IT as a key competitive weapon may still feel uneasy about handing it over to an outsider. Fear not, say the outsourcing enthusiasts, it is irrelevant who provides the service, so long as you maintain overall control. Nor need you worry about security. Indeed, independent operators are likely to have more watertight systems. They would not stay in business long if they were found to be penetrable by hackers. The same goes for reliability. Brett says: "If EDS's mainframe in Stockley Park breaks down, it can switch us through to one in Rotterdam without us realising anything has happened. I couldn't possibly provide back-up like that."
But although outsourcing can wipe huge costs off your balance sheets, it may not, in the long run, save you money. In theory an independent supplier ought to be able to run an IT operation for less because it can achieve economies of scale. But a study by Romtec, the UK market research company, found that although cost reduction was frequently the original target, operational and back-up facilities, and availability of value added services had often proved more important.
The wide range of outsourcing services provides organisations with ample opportunity to find an arrangement that suits their needs. The City IT survey found that small institutions were likely to use a bureau service as it was not sensible for them to carry a full range of computing expertise in-house. Larger companies chose to contract out specific operations, applications or systems development. Outsourcing can also be valuable in smoothing over a period of organisational change such as relocation or a move to new technology. Hoover handed over its systems department to an outsourcing supplier when the business moved from London to South Wales.
A frequent side-effect of outsourcing is that it creates more self evaluation by the IT department. In-house staff are keenly aware that they must justify their existence. If inefficient, they may themselves be outsourced. For organisations previously held to ransom by their computer departments, this offers liberation, and the opportunity to regain power. "You can achieve the solution to your business problem, not the solution that suits your computer department," as one manager put it.
This creates a further hazard. Users are not accustomed to getting what they want from the IT department. To some, it is such a heady sensation that they can get carried away. "Users begin to realise that, unlike in the old days, if they ask for something they get it. This is dangerous because, if they are undisciplined, they can run away with costs by constantly asking your outsourcing supplier to do more things," says Brett. The steely hand of management control must extend over users as well as suppliers. Otherwise you could find that a streamlined, innovative outsourced IT operation is far more expensive than an outdated, overmanned and inefficient in-house one.
Jane Bird is a freelance computer writer.