Out of sight, out of mind

What happens when an enterprise end user’s internal IT service is taken over by a third party service provider? It is too easy to highlight such outsourcing deals as evidence that the Middle East IT services market is in rude health. If that’s what you think, well think again.

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By  Stuart Wilson Published  January 28, 2007

|~||~||~|What happens when an enterprise end user’s internal IT service is taken over by a third party service provider? It is too easy to highlight such outsourcing deals as evidence that the Middle East IT services market is in rude health. If that’s what you think, well think again.

The growth of outsourcing deals in the Middle East IT market remains a double-edged sword — and one that all enterprise IT managers and CIOs need to think carefully about.

Given the importance of the ICT sector in the economic development of the wider Middle East region, understanding the impact of outsourcing and managed services is something that more attention must be paid to. We need to boil this one down to basics though. When an internal IT service or process gets handed over to a third party specialist provider it becomes visible — and this is an important point.

We’ve spoken to analysts covering the Middle East IT sector in recent weeks and they have pointed out that some of the apparent growth in the regional IT services sector is in fact illusory — it is produced by an invisible internal service or process suddenly becoming measurable as it is outsourced and handed over to an external services provider. What had been an out of sight and out of mind internal IT service is suddenly made visible when it is handed over to the external party. Now that’s not growth — it is the reallocation of IT spending; nothing more and nothing less.

Illusory growth is something that the IT industry has struggled with for many years. Complex billing models involving various different stakeholders working on a project or service delivery model frequently result in double counting. The same pot of IT spending can pass from an IT consultancy to a near shore outsourcing partner and finally on to an offshore services provider doing the bulk of the work.

In this model, each company on the chain takes their cut but the bulk of the spending gets passed along. These models need to be understood better if the Middle East enterprise IT market is ever to get a serious grip on its size and true potential.

Outsourcing has itself become a horribly generic term in the market – with not all end-users truly understanding the vast difference between basic IT outsourcing of relatively simple tasks such as day-to-day helpdesk services and full business process outsourcing. There’s a world of difference.

Can the Middle East build up its own outsourcing industry? Now that’s a debate that looks set to run and run. Large organisations will typically claim that their decision to outsource is designed to free up their internal IT teams to concentrate on strategic projects and the pursuit of business improvements through the use of technology.

That’s the positive spin and it sometimes overshadows the reality of cost savings through reduced headcount. The outsourcers themselves will of course tell everyone that the fact that they are providing similar services to multiple clients allows them to benefit from economies of scale and build up a pool of highly talented experts — something that enterprises cannot replicate internally.

Take the outsourcing debate to its logical conclusion and it quickly becomes clear that this is a topic that enterprise end-users and governments need to look long and hard at. There needs to be a balance between the development of the regional ICT market and the ability of enterprise customers to source the best services at the lowest possible price.

The development of outsourcing models elsewhere in the world has been shaped by the provision of front-end client facing services and back-end delivery models. In many cases, outsourcers and consultancies will give the client the impression that the services are provided at a local level. The reality in many cases is that a small proportion of client management is handled locally and the vast bulk of the delivery (and the labour) is pushed to the cheapest location possible.

There is a real danger that the growth of this model could in fact make it harder for the Middle East markets to truly develop a skilled labour force of ICT professionals and create substantial employment opportunities within this sector.

Balancing the demands of enterprise end-users to pursue an aggressive outsourcing delivery model (that prioritises price and process quality) with the desire of many Middle East governments to build up a healthy indigenous ICT sector is far from easy. It will require careful management and clarity of vision.

Some would argue that outsourcing in all its forms represents the nirvana of globalisation — service provision determined purely by skills availability, labour costs and quality. I tend to go along with this train of thought and given the geographical proximity of the Middle East market to outsourcing hotspots such as India and Pakistan, the ability of this region to play a meaningful role in the sector’s development remains very much in the balance.

What impact will the increased pursuit of outsourcing models by enterprise end-users in the Middle East have on the development of the regional ICT sector? E-mail your thoughts and opinions to stuart.wilson@itp.com||**||

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