Companies are increasingly choosing to outsource their information technology not only as a cost reduction strategy, but to increase flexibility too. “When you consider the growth potential of Africa most companies are looking for cost reduction, business transformation, access to new technology, specialist expertise as well as service improvement and SA’s outsourcing sector is able to deliver on all of these.” says Norton Rose South Africa director, Rohan Isaacs.

International legal practice, Norton Rose Group conducted a survey of current outsourcing practice and trends in the ICT sector worldwide and found that, for nearly 90% of respondents, their motivation for outsourcing was cost reduction. About 69% also said that flexibility was important, up from 10% in 2008. 

“What we’re seeing is much tougher price negotiations between suppliers and their customers as many customers are avoiding committing to long term outsourcing contracts in the current uncertain economic environment,” says Isaacs.” Decisions to outsource aren’t being cancelled, but there are a lot more contractual issues which are finding their way into the procurement process.”

Isaacs believes countries such as South Africa can benefit from the changing trends in the global outsourcing market. 
But he says the single biggest risk that international customers associate with offshoring is data security breaches and the passing of information across borders. 

Interestingly, only transport, energy and infrastructure companies said political risk remained a concern for them when outsourcing to foreign countries. 

“The challenge for SA suppliers in particular is to reassure customers that the risks relating to cloud computing and offshoring can be effectively managed,” say Isaacs.

The global economic crisis has affected outsourcing strategy and deals, with the need to implement austerity measures encouraging both the public and private sectors to outsource. 

“However, customers also need to be careful not to push their suppliers too hard as this could lead to a decrease in service quality and potentially less competition in the market,” adds Isaacs. 

While there is an increasing trend to outsource generally, there remains a mismatch between customers’ and suppliers’ view of risk. 

“Suppliers are entering into deals thinking that customers are only worried about costs. But customers are also concerned about issues such as reputation management, regulatory risk, security breaches or data loss,” explains Isaacs.  “Contracts need to take into account the risks relevant to a particular sector.”

Norton Rose found that while 70% of suppliers said they kept a written risk register, only 43% had allocated a risk manager to their projects.  Less than half of customers allocated a risk manager to projects that were outsourced. 

“It’s important to make sure that major risks are included in the contract,” says Isaacs.  “But at the same time it is worth considering whether all risks really need to be shifted to the supplier because this can hike costs by as much as 6%.” He says if customers adopt a more sophisticated approach to risk, it can result in better pricing. 

One area where he believes customers need to focus on is conducting better due diligence on employees of the supplier. 

“If a company is hiring an internal IT expert to do the job, they would probably undertake a thorough risk management process and audit of the person’s credentials,” warns Isaacs.  “But because they are outsourcing, they tend to let this slip and the consequences can be dire.”

He points to the recent case involving IT supplier Electronic Data Systems (EDS) and BSkyB in the UK.  In January 2010, the UK High Court found that EDS had fraudulently misrepresented its ability to meet the timescale stated when it pitched for a £48 million to build and implement a customer relationship management system for BSkyB.  The contract had capped EDS’s liability at £30 million in stark contrast to BSkyB’s original claim for damages of more than £700 million and was finally settled for £ 318 million.  The case centred on an EDS project manager who had misrepresented his skills on his CV. 

But despite the significant risks involved in outsourcing, nearly 65% of customers in the survey said they do not conduct a detailed due diligence on the incoming key personnel of the supplier. Some suppliers reported that they thought that customers assumed suppliers would have done the necessary due diligence on their own staff so there was no need to repeat the exercise.

“Indeed, some suppliers actively sought to discourage this kind of investigation and were also unwilling to name key personnel in the contract,” says Isaacs.  “Customers should review their processes to ensure they are properly protected.”
Selecting the most appropriate supplier for a project can reduce the risk substantially and it is up to the customer to devise a due diligence process that will properly test and evaluate potential suppliers, he added. 

For further information please contact:
Anusha Mudhai, communications co-ordinator, Norton Rose South Africa
Tel +27 11 685 8550, Mob: +27 84 911 2535
anusha.mudhai@nortonrose.com

Candice Collins, communications specialist, Norton Rose South Africa
Tel +27 11 685 8630; Mob: +27 79 892 9369
candice.collins@nortonrose.com
 

Notes:
Norton Rose South Africa (incorporated as Deneys Reitz Inc) is a member of Norton Rose Group, a leading international legal practice offering a full business law service to many of the world’s pre-eminent financial institutions and corporations from offices in Europe, Asia Pacific, Canada, Africa and the Middle East.

The Group’s lawyers share industry knowledge and sector expertise across borders to support clients anywhere in the world. The Group is strong in financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and pharmaceuticals and life sciences.

Norton Rose Group has more than 2600 lawyers operating from 39 offices in Abu Dhabi, Amsterdam, Athens, Bahrain, Bangkok, Beijing, Brisbane, Brussels, Calgary, Canberra, Cape Town, Dubai, Durban, Frankfurt, Hamburg, Hong Kong, Johannesburg, London, Melbourne, Milan, Montréal, Moscow, Munich, Ottawa, Paris, Perth, Piraeus, Prague, Québec, Rome, Shanghai, Singapore, Sydney, Tokyo, Toronto and Warsaw; and from associate offices in Dar es Salaam, Ho Chi Minh City and Jakarta.

Norton Rose Group comprises Norton Rose LLP, Norton Rose Australia, Norton Rose OR LLP, Norton Rose South Africa (incorporated as Deneys Reitz Inc), and their respective affiliates.