When Amsterdam-based ABN Amro Holding decided to outsource most of the information technology division that supports its retail banking business, it chose to spread the contract -- worth more than E1.8 billion ($2.2 billion) over the next five years -- among five vendors rather than just one. By choosing several vendors, the bank increased its flexibility, saved money and reduced risk. “The reason we chose multiple vendors is risk -- not to have all our eggs in too few baskets,” says Lars Gustavsson, group CIO of ABN Amro in London.
Only a year ago a bank of ABN Amro’s size -- roughly E600 billion in assets -- would have been much more likely to choose a single IT vendor. But outsourcing customers have become increasingly frustrated with megadeals, says Sanford C. Bernstein & Co. IT services analyst Rod Bourgeois. Although clients using multiple vendors bear a greater management burden, they receive best-of-breed service. Additionally, competition among vendors may cut costs for users. Says Bourgeois, “The monopoly structure ?is suboptimal.”
In a deal that takes effect this month, ABN Amro will pay E1.5 billion to IBM Corp. to run the bank’s IT infrastructure, encompassing servers, storage systems and desktops, for the next five years. ABN Amro plans to spend E116 million with Infosys Technologies and at least E250 million with Tata Consultancy Services, IT services firms based in Bangalore and Bombay, respectively, for application software support; it also named Bermuda-based Accenture and Bombay-based Patni Computer Systems as preferred application development suppliers. The bank will also consider IBM, Infosys and Tata for development work.
Roughly 2,000 of the bank’s employees will be transferred to the IT vendors; most will go to IBM. The bank estimates that it will cut staff by 1,500 employees in its IT division over the next 18 months. ABN Amro announced at the end of last year that job cuts were on the way because of falling operating profits, mainly in the U.S. In 2003 the bank outsourced the IT infrastructure for its wholesale business to Electronic Data Systems Corp. under a five-year contract worth E1.5 billion. It is selecting vendors for network management and firewall services and recently signed deals with Basking Ridge, New Jerseybased Avaya and Royal KPN, headquartered in the Hague, Netherlands, for telephone services.
ABN Amro expects to save about E600 million a year from the outsourcing initiative and other restructuring projects from 2007 onward. Keeping IT infrastructure in-house would have required a heavy investment. “It would be a dead investment that we could not leverage for our customers,” says CIO Gustavsson.
High-profile, unbundled outsourcing deals such as ABN Amro’s are driven by a growing sophistication among buyers and by the increasing number of outsourcing advisory firms, such as Dallas-based Everest Group, says Sanford C. Bernstein’s Bourgeois. Large multinational corporations are better positioned to benefit from unbundling because they are big enough to manage the multiple vendors in such a deal. “You need a certain critical mass of activity,” says Bourgeois. Just 20 big customers, including Bank of America Corp., Citigroup and General Electric Co., account for 25 percent of the offshore IT ser-vices market. “These power users are the drivers of offshore demand,” he says.
And while they want to save money, but they also want to tap the plentiful, well-trained, inexpensive software developers available in, for example, India. “An underrecognized driver of demand is finding adequate talent,” says Bourgeois. ABN Amro’s Gustavsson agrees: “Quality and cost are no longer a trade-off.” More and more financial services companies are catching on. For example, 40 percent of Tata’s revenue -- $2.24 billion last year -- comes from banking, financial and insurance clients, including BofA and Morgan Stanley, according to Natarajan Chandrasekaran, global head of sales and operations at Tata.
Industry experts believe the ABN Amro deal, with its multiple vendors and varied contractual obligations, is a sign of things to come. Says Bourgeois, “There will be people looking at ABN Amro, thinking, ‘Should I be doing that?’” If they do follow the bank’s example, life will get a lot more competitive for outsourcers.
