IT Outsourcing: An Irish Perspective Presentation by: Adrian Devitt Forfás Advisory board for Industrial and Enterprise Development and Science, Technology and Innovation: 03 December 2002

Two Key Aspects The Irish Outsourcing Market Ireland as a centre for Offshore IT Outsourcing

Irish Outsourcing Market Irish market worth $137m in 2000 (IDC) Information Systems Outsourcing- $98m Desktop and Network Outsourcing- $39m Small but real growth potential For Ireland to catch up to current UK levels of outsourcing activity, the Irish market will need to double in size to $270m

Irish Outsourcing Market Key Drivers The Existing Software Base Government Outsourcing General Business Outsourcing

The Existing Software Base Ireland: World’s largest exporter of software products 40% of Europe's PC packaged software market 60% of Europe's business application software Strong Indigenous and Overseas Base

Government Government are the largest purchasers of goods and materials in Ireland (€12BN) Slow down in economy – Lower Government Revenues – Need for Cost savings Irish Government Committed to eGovernment Major opportunities going forward – www.etenders.ie

General Business Outsourcing High level of awareness of outsourcing in Ireland Business Process outsourcing IT outsourcing Multinational companies more likely to outsource than indigenous companies Cultural issue? Ireland lags behind other European countries

General Business Outsourcing Poor take-up with the exception of web hosting Low level of awareness of the benefits of outsourcing Outsourcing perceived as more appropriate to large organisations rather than SMEs

IT Functions Currently Outsourced IT Services (hardware maintenance) 27% eBusiness Development/Hosting 11% Network Management 11% Software Development 9% Website Admin/Management 8% e-commerce 7% Helpdesk 4% Application Management 3% Security Services 2% ERP Implementation 1% Other 9% None 41% Source: Cap Gemini Ernst & Young - Irish Business Attitudes to Outsourcing

IT Functions Considered for Outsourced Web Development/Hosting 69% e-commerce 54% Website Admin/Management 53% IT Services (hardware maintenance) 44% Security Services 40% Network Management 37% Helpdesk 34% ERP Implementation 25% Application Management 22% No Plans to Outsource 9% Don’t Know 3% Source: Cap Gemini Ernst & Young - Irish Business Attitudes to Outsourcing

Decision Factors Money Saving 58% Lack of IT Staff 26% Lack of Expertise 23% Improved efficiency 22% Access to Broader skills base 18% Company requirements changed 12% If we feel the need 5% Other 6% Don’t Know 7% Source: Cap Gemini Ernst & Young - Irish Business Attitudes to Outsourcing

Benefits of Outsourcing Cost Reduction 50% Access to Broader Skill Base 42% Improvement in Overall Efficiency 23% Allow us to concentrate on our business 16% High quality of IT workforce 15% Access to advanced technology 13% More efficient IT Department 13% Better Service 7% No perceived benefit 4% Other 8% Don’t Know 6% Source: Cap Gemini Ernst & Young - Irish Business Attitudes to Outsourcing

Concerns on Outsourcing Security/Confidentiality 40% Loss of control 37% Choosing right partner 31% Reliance on supplier 28% Costs 13% Lack of successful examples 5% Other 8% No concerns 10% Don’t Know 12% Source: Cap Gemini Ernst & Young - Irish Business Attitudes to Outsourcing

A Snapshot of Irish Business in CEE and Russia - 2001 Ireland Annual Exports €1.3 billion Ireland Annual Imports €0.9 billion Irish Companies Active in the Region 650 Irish Investments ca. €1.5 billion Irish Companies with Local Operations 84 Employment in the Region by Irish Companies ca. 12,000 Irish Companies Outsourcing from CEE ca. 30 -40 CEE and CIS citizens working in Ireland 8,000 (work permits) Exports growing at 20% p.a. since 1989. Exports have grown from €135 in 1989 to €1.3 billion in 2001 The most heavily traded area in both directions are data processing and telecommunications equipment CEE (Central and Eastern Europe)

IRELAND - LITHUANIA IRISH EXPORTS TO LITHUANIA (EUR (000) 2000 2001 2000 2001 Total 12,045 20,324 Of which ICT Sector Data processing machines 3,241 2,733 Telecommunication apparatus 228 2,928 Electrical apparatus 131 99 % in ICT 30% 28% IRISH IMPORTS FROM LITHUANIA EUR (000) Total 14,389 23,648 Animal feed 0 296 Mineral fuels 0 8,469 Fertilisers 8,524 5,216 Textiles 67 108 Electric machinery 90 1,017 Clothing 5,232 8,127 Scientific instruments 7 12

National Irish Policy is Promoting Outsourcing Competitive outsourcing can be a key to: cost positioning; retention of existing business; flexibly increasing production capacity; expansion of existing customer bases; managing skills shortages. The above advantages accrue where there are suitable products and volumes to outsource. However, the disadvantages of outsourcing include: the requirement of significant management input and time; cost advantages may be difficult to achieve due to transport costs, market based pricing, lower productivities, higher inventory carrying costs and other miscellaneous items; intellectual property risks.

Ireland as a Centre of Offshore IT Outsourcing Largest exporter of Software in the World; Strong: 40% of Europe's PC packaged software market 60% of Europe's business application software Sales of US$7.2 billion 20% growth since 1990 800 companies – over 100 with ISO 9000 or CMM (level 2 or higher) Major Emphasis is on Product rather than Process Development

Ireland’s Advantages Strong Government Support Strong Legal and Regulatory framework Political and Economic Stability Highly Skilled Work Force English Language Fluency World Class Communications

Major Global Trends Shift from Traditional Outsourcing Globalization of Corporate Functions

Shift from traditional outsourcing Strategic Value Business Transformation Outsourcing Business Processes Business Process Outsourcing Business Service Provider Business Applications Application Management Application Service Provider Technology Infrastructure Information Technology Outsourcing Managed Hosting Tactical Value Conventional Delivery 1:1 Netsourcing Delivery 1:N Source: Accenture

Options 1. Conventional Outsourcing Conventional IT outsourcing will remain a very competitive market as firms outsource support functions to specialist providers to cut cost and to focus on core issues. Competition is high due to: Standardised nature of services; Transaction based fee for service pricing; Narrow scope and scale of services; The economic and technology slowdown; Wide range of companies and countries focusing on these markets.

Options 2. Collaborative Outsourcing Collaborative (Net Sourcing) Outsourcing involves re-engineering and running non-core processes to cut costs and to provide flexibility to respond to changes in business needs Key features Flexible Traded Services Pricing based on value realized Services scaled to meet changing business needs

Options 2. Collaborative Outsourcing Use partnerships / equity to build trust and a greater understanding of needs. Look at your company to see what may be of interest to potential clients. Use outsourcing experience to drive potential clients business forward by offering differentiated product based on your technologies, skills, patents, etc. - Not just what a potential client may wish to spin off.

Globalization of Corporate Functions Ireland World’s Most Global Economy Exports are 88% of GDP UK still our primary trade partner More US imports than elsewhere in EU 20 Years Ago - High Quality, Low Cost, Medium Technical Competence Now - High Quality, Medium Cost, High Technical Competence - and High Reputation

Globalization of corporate functions Ireland’s competence in IT manufacturing The trust and respect built up with overseas MNC’s Our world class engineers Our good education system The (likely) emergence of High Quality, Low Cost, Medium Technical Competence centers elsewhere Enterprise Ireland’s encouragement and active assistance to the indigenous sector to outsource to lower cost centers overseas Ireland continues to develop as an eCommerce Command centre (eSCM, eLogistics, eFinancial Services…)

Source: Digital 1980s

Conclusions The Irish Outsourcing markets is small but is growing and opportunities exist; Given Ireland’s Software base and growth as a more strategic centre for MNC activity, Ireland is growing as a buyer rather than a supplier of outsourcing; Outsourcing – competition is growing – need to develop more strategic activities and to move towards R&D and final customers.