Features: March 11th, 2011

Budget cuts across the public sector are having a significant effect on IT companies and an increasing number are going to the wall. Ewen Anderson sounds a warning to organisations outsourcing any IT activities. He outlines the risks that have emerged from this fast evolving situation and the precautions that can be taken to make sure that standards are maintained and the service continues.

This year could well see the highest number of foreclosures in the IT sector since the turn of the century. Recent figures indicate the number of failed businesses in 2010 was up 12.5% on 2008’s figures, when the current downturn began. This does not take into account that 80,000 companies (over four times the number in 2009) were only kept out of failure by HMRC through their 12 month “time to pay” tax deferral scheme.

With the UK coalition government making extensive cutbacks across the public sector, things could get a lot worse before they get better with many resellers depending on a shrinking public sector spend for a substantial percentage of their income.

Liquidity risks

Liquidity becomes a major issue, as companies that have substantial borrowing, over-reliance on product sales or too much dependence on the public sector will be most at risk of running out of cash and credit in the first half of this year.

The shortages affect more than cash flow, however. Faced with a static or shrinking market and rising costs, many organisations will divest themselves of those expensive overheads otherwise known as their most experienced staff. Organisations considering a new (or renewed) service contract would do well to look at the prospects of liquidity in terms of its people assets. As a simple starter for ten, how many qualified consultants, engineers and support staff do they have as permanent employees and how has that number changed in the last 12 months?

Why does this two-fold liquidity matter to the client? Well from a cash-flow perspective exposure can lead organisations to scramble for business, making unprofitable bids which could come back to haunt the unwary in a few years time. The savings might appear attractive, but it’s a bit like buying a Rover after the Alchemy collapse. You’ll probably get an excellent price but discover there is a real scarcity of dealers available to provide after-sales care and servicing.

From a resources perspective the impact will vary. If you are happy to have a “white labelled” workforce drafted in at the last minute and delivered to your door wearing someone else’s branded company shirt then that is all well and good. If you want staff trained in a formal methodology, preparing documents to a common standard and able to hand over smoothly to colleagues (and to operations at the end of the project) that is going to take a trained and motivated team who share common purpose and standards.

Focusing on quality as well as cost

The simple fact is if a deal looks too good to be true, then it probably is. A philosophy that should have prevented almost every scam in history and all the problems in the finance sector.

As soon as a contract is solely about cost, then the service side is lost. There is no doubt that any supplier can knock up a quick proof of concept or a desktop virtualisation that looks the part. The issues come with that first major business continuity that puts full load on the system or when the first fault appears and there are no documented support procedures, operations guides or detailed design.
Customers may find that the perceived savings will cost them dear in the long-run. A smooth-running, reliable system can be the difference between success and failure in the coming year. With a lot of employees being forced to work longer hours without a pay rise, business continuity and efficacy will be seriously undermined without a speedy system. The day-to-day use of desktop applications matters a great deal to the morale of pressurised staff and the satisfaction of your own customers. The knock-on effect of sacrificing it may cost much more than money.

In times like these, companies need to source IT companies that are prepared to work for the long-term ambitions of their clients and will act as a partner that is going to deliver meaningful change, an extension of the internal team that will make good on promises with attention to detail and professionalism. Undertaking background checks and searches on potential partners to make sure that they can deliver the services they say they can should be standard practice. Don’t be drawn in by fancy case studies on websites or the words of clever PR agents. Insist on detailed references that outline previous contracts where they have delivered on time and on budget. Was there a methodology and documentation to back that up? Was there a fixed price? Did they interface and knowledge share with employees? Any credible supplier should be able to answer these questions.

If you are committed to strategic objectives, whether they be cost reductions, increased flexi-time, or lowering the office carbon footprint, your supplier must have the finance and service delivery liquidity to deliver the promised service – if the supplier becomes insolvent or has no qualified staff the contract has no worth and scarce budget (and time) will have been wasted.

With 2011’s precarious outlook, the temptation may be to slash the IT budget and grabbing the cheapest deal on the market to keep your systems running, but this comes with risks and the long term consequences may well prove much more costly than the original budget savings. After all, quality and reliability always come at a price.

Ewen Anderson is Managing Director, Centralis Ltd, one of the UK’s leading independent I.T. consultancies, specialising in delivering applications and desktops securely to their point of use. For further information go to Centralis Follow Centralis on Twitter