Foreign Nations Outpace U.S. in Outsourcing

Foreign Nations Outpace U.S. in Outsourcing

Alan Stevens

By Nick Wakeman, Staff Writer

A $3 billion outsourcing contract recently awarded by the United Kingdom is just the latest sign that the U.K. and a handful of other countries are outrunning the U.S. government when it comes to outsourcing.

The U.K. Department of Social Services has tapped a team led by Electronic Data Systems Corp. of Plano, Texas, to provide software application development services. As part of the 10-year contract, awarded Aug. 8, the team also will build an application suite for the United Kingdom's new child support system.

About 1,550 employees will leave government employment and become employees of the EDS team, which includes IBM Corp., Armonk, N.Y., and PricewaterhouseCoopers, New York.

"It's strange. The U.K. usually trails the U.S. in technology, but this style of business has taken root more deeply here," said Alan Stevens, managing director of government accounts at EDS U.K.

Other countries, including Australia and Canada, also are seen by many in the IT industry as aggressively using outsourcing as a way to improve government services, gain efficiencies and deal with a shortage of IT workers.

"There is much more of a move to [outsourcing] outside the U.S.," said David Carr, global leader for services for PricewaterhouseCoopers.

In Europe, for example, spending on outsourcing by central governments is growing at 17 percent and is expected to grow from $2.6 billion in 1998 to $5.6 billion by 2004, according to the market research firm Input Inc. of Chantilly, Va.

In contrast, Input estimates that spending on outsourcing by the U.S. federal government is growing at 7 percent annually, with a total of $2.5 billion expected to be spent in 2000.

But that is not to say that the U.S. federal government is ignoring the trend. The Department of Education, the Internal Revenue Service, NASA and the Army have awarded major outsourcing contracts.

The Navy is on the verge of awarding its intranet contract to outsource all of its desktop, networking and communication services.

The National Security Agency also is developing a contract to outsource its IT infrastructure. Both of those contracts will involve hundreds of employees transferring from the government to the private sector.

But while this phenomenon is just getting under way in the United States, the process in the United Kingdom began in 1989 when the Department of Social Services outsourced a data center to EDS, Stevens said. Other contracts of increasing complexity have followed.

"I think it was quite farsighted," Stevens said. "The government really started to look at how to deliver better services."

While the push for outsourcing began during the Margaret Thatcher era, it has not slowed under the Labor Party and Prime Minister Tony Blair, Stevens said.

"It has in-creased momentum since then, and that shows that it has less to do with political dogma and more to do with good business," he said.

The United Kingdom has gone further with outsourcing than any other country, said Jack Winters, a vice president for IBM's Global Government Services.

"It is starting to pick up in the rest of Europe, but not on the scale of the U.K.," he said.

EDS has been the major beneficiary of the United Kingdom's turn toward outsourcing and has captured between 70 percent and 80 percent of the government outsourcing business there, said Albert Nekimken, vice president and director of research for Input.

Stevens estimated that 40 percent of EDS U.K.'s 15,000 employees are former government employees who have come to EDS through an outsourcing contract.

Even if the United States is not as far along as some other countries, the drivers behind the growth of outsourcing are nearly universal, industry officials said.

The desire to save money, reduce head count, increase productivity, enhance online services and keep up with technology are pushing many governments to consider outsourcing, according to a 1999 study by Andersen Consulting of Chicago and the Economist Intelligence Unit of London.

The study examined outsourcing trends in 12 counties, including the United States, the United Kingdom, Australia, France and Germany.

Another major driver is the difficulty many government agencies have in hiring and keeping IT workers, said Martin Cole, managing partner for joint ventures and new business models for Andersen Consulting's government practice.

Other countries "may be moving down the outsourcing path more quickly than the United States because they felt the recruitment and retention pinch sooner," he said.

Many governments are looking to outsource more than just a data center now, said Joe Walkush, executive vice president of strategic initiatives for Science Applications International Corp. of San Diego.

Walkush and other company officials see outsourcing on the rise in areas such as human resources, accounting, procurement, telecommunications, IT infrastructures and electronic government.

As governments look to outsource these functions, the relationship between a government and its contractor needs to be much closer, he said.

For example, in Venezuela, SAIC has formed a joint venture with the government to operate all information technology related functions for the national oil company, Petroleos de Venezuela S.A. The joint venture, called Intesa, is pursuing other outsourcing work throughout Latin America, Walkush said.

"You have to take it on a case-by-case basis when deciding whether it is good to form a joint venture or just a deep partnership," he said.

Many of the executives talk about outsourcing projects in terms of being partnerships, and part of a partnership means structuring the contract so the company is paid based on the results of a project.

In the U.K. project, EDS is putting up the money to develop the new software and install new systems.

The company will get paid as savings and other efficiencies are realized, Stevens said.

"The government doesn't want to buy capital assets, it wants to buy a service," he said.

By tying results to compensation, "a real partnership is formed; that is the kind of opportunities we are looking for," said Andersen's Cole.

While issues such as demand for online services, a shortage of workers and budget constraints may be working in favor of outsourcing, there are still cultural issues to overcome, company officials said.

"It is a different way of thinking about buying things, and it takes time to make that change in thinking," said IBM's Winters.

A country as technologically advanced as Germany lags behind the United States, the United Kingdom and France in outsourcing largely because of cultural issues, Cole said.

"Wherever you have a government that plays a strong central role in the economy and the overall work force, you have resistance to outsourcing," he said.

In Germany, workers traditionally do not move from job to job, so the idea of moving employees from the government to the private sector is controversial, Input's Nekimken said.

In the United States, the idea of moving workers from the public sector to the private sector has had mixed results. Union opposition helped nix Connecticut's outsourcing plans. But the city of San Diego has outsourced its IT to Computer Sciences Corp. of El Segundo, Calif., including the transfer of 290 employees.

"It's been a mixed bag," Nekimken said.

But momentum is building in the United States.

Company officials said that as each project is fielded and succeeds, it makes government officials less reluctant to consider outsourcing.

"I think two years ago, if you tried to talk seriously about outsourcing [to the government], they would have thrown you right out of the office," said Carr of PricewaterhouseCoopers.

"But not now. We see it as a growing market."

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