Banking on IT

Last week, the Bank of Ireland announced it would be transferring the management of most of its computing to Hewlett-Packard, for around $600m (£380m) over seven years. This means that 500 staff - 350 in the Republic of Ireland and Northern Ireland, 150 in Great Britain - will stop working for the Bank of Ireland and instead start working for the US technology giant.

Announcements of this kind of "outsourcing" deal have become common. According to analysis firm Ovum Holway, IT outsourcing in the UK grew from £5bn a year in 1999 to an expected £8bn this year.

In fact, it has become unusual to hear of a company deciding against such a deal. When Barclays Bank said three weeks ago that it had decided against outsourcing 1,000 staff and technology to IBM Global Services, the trade paper Computing made this its front-page splash.

"In no way are we in a position where we dislike outsourcing," says Toby Broome, Barclays' chief operating officer for IT: the bank has outsourced several activities in the past few years. "But we don't think it's an end in itself."

Barclays Bank, along with Lloyds TSB and HSBC, passed its cheque management to Unisys. Broome says that customers are writing fewer cheques, so it makes sense to share investment in new facilities. He says that economies of scale are one of three reasons for outsourcing, the others being access to skills you don't have, and levels of investment you don't want to make.

The Bank of Ireland's reasons for going the other way fit Broome's guidelines. "What drove our initiative was a view that on the IT-infrastructure side, efficiency and cost-effectiveness were becoming a function of scale," says the group chief information officer, Cyril Dunne. "We don't have that scale, and we might suffer as we don't."

Enforced staff moves across the European Union take place under the transfer of undertakings (protection of employment) regulations, usually known as Tupe. These protect employees' terms and conditions, but are not comprehensive: for example, they do not cover pensions. "We have agreed with HP that, from a pension perspective, they are absolutely as well off in HP as in the Bank of Ireland," says Dunne.

Peter Skyte, national secretary of the IT Professionals Association, which is part of the union, Amicus, is negotiating for 2,000 Royal Mail Group IT staff. They are likely to transfer from Royal Mail Group to the US IT services firm CSC, Xansa (the UK equivalent) and BT, under a planned 10-year, £1.5bn outsourcing contract. Royal Mail staff currently enjoy a final salary pension scheme.

"In most outsourcing, employees are going to oppose it," says Skyte. "They joined a company of their own volition, and are being transferred against their will. The issues are job security and pensions, although there are lots of others."

These two worries are particularly strong in the public sector. The NHS's giant IT-outsourcing programme will be managed by a division of Halliburton, formerly run by US vice-president Dick Cheney - not known for his support for health care free at the point of delivery.

But this causes fewer problems than one might expect. "It may be slightly less pronounced in IT than in other areas, because people follow their skill as much as their employer," says Skyte. One reason is that computing staff may get better career opportunities. "IT departments are often seen as cost centres, under endless pressure to cut costs," says Roger Cox, a vice-president at analysis firm Gartner. "[This way] you move to being the core of the business."

At the same time, their old employer can reduce IT staffing levels as their former employees move internally to other clients of the services firm - without paying redundancy, although this matters more in continental Europe, where redundancy payments can be much higher than in the UK.

But this trick may not work for much longer, says Cox, as it needs a growing market, and Gartner's research shows outsourcing across Europe shrank last year. Furthermore, the research suggests that such actions rarely save money.

"This is partly because of problems managing these deals," he explains. "The customers will continually change, as will the service provider, and I see deals that are out of date before they are signed.

"The more you become dependent on outsourced firms, the more the corporate glue - how you knit it all together - becomes important," he says, adding that shareholders are passing a critical eye over outsourcing arrangements. "Companies are doing this for cost-reduction, often immediate, through financial engineering." Services firms invest in new systems up-front, while the customer pays steadily for usage. "It's a bit like having a mortgage," Cox points out.

And mortgaging something vital to the running of your business may not be wise. But rather like house-buyers, many firms feel they can't afford to do their computing any other way.