Friday, June 17, 2011

Outsourcing in BC

Every year, in a fit of morbid curiousity, I cruise the detailed schedule of payments in the BC Public Accounts as a way of keeping tabs on the local IT industry. Who is up? Who is down? Who is gone?

One of the certainties, year after year, is that IBM's take just keeps getting bigger. I thought it was pretty impressive when they were doing $30M / year, but last year they cracked $100M.

Another trend has been the slow squeeze of the market place from one with a mix of companies, ranging from 10-person consultancies to 100-person regional integrators to the big international firms, to a market dominated almost completely by the internationals. The mid-size companies were largely bought up, and the small ones squeezed out. Deal sizes have kept growing, making it hard for smaller companies to compete, while the migration of infrastructure roles to outsourcing companies has given those same companies an built-in edge in competing for systems work. Even long-time regional heavy-weight Sierra Systems is getting beaten down.

There are many big mistakes being made by government as this process goes on, but perhaps the biggest is the long-term sole-source outsourcing agreement. The fantasy that costs can be managed in a single vendor environment, that the contract just needs the right review clauses and penalties, continues to suck in government outsourcers. There's no true competition in a system where a vendor only needs to compete every 5-10 years (and even then, from the position of the incumbent). Expecting market efficiencies to work in your favour in such as situation is folly.

Postscript: In 2009/2010, HP and IBM combined to bill the BC government over $200M, mostly in services. IBM's 2010 annual report indicates 34.7% gross margin for IBM Global Services. The HP annual report shows a similar margin for services. The implication is, of the $200M we are spending with HP and IBM, $70M is going to profit, not to providing service. Put another way, if the government chose to provide those services internally, it could pay all the staff at HP/IBM salary rates and still afford to employ 50% more people to do the work.


ArcVancouver said...

Yeah, that's a lot of money for IBM. But in terms of flexibility (imagine trying to lay off all those "new employees") is worth it?

Paul Ramsey said...

Imagine cancelling IBM's contract. Oh wait, you can't. Outsourcing provides budget predictability not budget flexibility.

Chris Hodgson said...

You're assuming the government could manage all those employees with the same efficiency as IBM and HP. I know nothing of how they do business, but making a profit is a huge motivator for efficiency which is non-existent in government. And as much as I hate to admit it, it seems that the costs of integrating systems from multiple small organizations will balance if not outweigh the savings (and the smaller businesses still need to make a profit too). So we are left with the fact that the governments own (lack of) efficiency in setting up contracts drives them to outsource to big organizations. The market can only efficiently set prices if the marketplace is efficient - this is why you're seeing clouds take over, because they effectively commoditize IT, making an efficient market possible.

Paul Ramsey said...

Silo'ed profit motive is one of the great drivers of IT inefficiency. (My favourite example: in order to save money, central IT froze telecom spending, which meant that new employees couldn't get phones. Good for the IT budget, pretty hard on the effectiveness of the organization they were supposed to be serving.)

Remember that centralized government IT has the same "profit" motive as outsourced IT. Reduce costs. It's usually achieved through fiat (sorry buddy, your budget is 10% smaller this year) instead of incentive (reduce costs and your profit is higher) but the effect on service levels and the disempowerment of the people who are supposed to be served is the same.

More interesting than boldly stating that the private sector is de facto more efficient than the government due to the invisible hand magic of the "profit motive" (are IBM employees really all that motivated to increase IBM's bottom line? it's a huge multi-national with demonstrated zero loyalty to its workforce) is to think about structural changes that actually provide market choice and flexibility in the overall IT ecosystem, public and private alike.

Broken contracting models are just reflections of a broken culture, and that culture transcends both the public and private sectors.

Chris Hodgson said...

OK, I can accept your argument that profit motive doesn't intrinsically make the private sector more efficient than the public sector, though I think the distinction of fiat vs incentive is important at some level - incentives are usually more effective at creating the illusion of some control over one's success/happiness/profit.

The key to an efficient market is knowledge - everyone has to know exactly what it is they are buying and selling. IT has been too mysterious to be understood by enough people for the market to work efficiently. Clouds and SAAS define their service offerings more succinctly and are becoming more comparable.

If we're talking about IT in the context of Desktop support though (as I see after having read a few more of your recent posts) ... there needs to be some more direct way to connect the successfulness of the support (the happiness of the users) with the providers of the support (the happiness/profit of the providers). And so here we can agree, smaller and shorter term is better.

Etienne said...

What we observe in my province (Quebec) is that the outsourcing effect also drives competent people out of the governmental offices as project are done by the consulting firms.
At the end of the day, governments are forced to even outsource the redaction of the contract. In some (not so) remote town halls journalist discovered that sometimes the same firm was writing the specifications for the tenders and bidding on it, alone. No one with the ability to seriously review the offers inside the city. Is it the promised efficiency ? I seriously doubt citizens are well served by this situation.
But it seems people don't want to hear that public sector will grow, we like to see it shrink and loose all competent people so we are lead by (magically transformed) people driven by profit.

David said...

Very interesting figures. We would never release that sort of information as it would be classified as commercial in confidence.

It is also reassuring that a lot of that money which would have been spent locally will now be going off shore. As your local expertise shrinks you become more dependent on external providers. A good business model for some.

Mark Crawford said...

Hi Paul --Mark Crawford here . (I was a colleague of yours at UNBC and was also a Ministerial Assistant back in 1996-97. Now living in Edmonton, where I just got tenure at Athabasca University.)

Just so happens that I have been doing research on project management in the BC government over the past decade. One of my theses is that the general emphasis on bottom line, low-bid, on-spec on-time projects is undermining Project Management's potential for flexibility and management of complexity.

Mark Crawford said...

Wait. I just noticed that you are a different Paul Ramsey! No matter. My research complements your blog nicely.

Paul Ramsey said...

@Mark, looking forward to learning more. Not that I think BC is particularly unique in this regard, just that I think there must be a better way.

Mark Crawford said...

I am researching the experience with project management in British Columbia , which is associated with both outsourcing and with IT but of course is distinguishable from both.

I am looking at the Project Managem ent Centre of excellence 2007-2009, as well as at 5 case studies that the application of project management to 5 areas: the JUSTIN project, housing and social assistance, Employment and Income assistance, the Gateway Project, and the e-health strategy.

I am interviewing Bobbi Plecas (ADM-Logistics and Business Services), whenever that gets scheduled, probably next week. So if you have any information or perspective on these projects that you would like to share with me, or can suggest specific questions for Plecas relating to project management, I can certainly share my results with you.

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