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.