“The current situation is prompting people to rethink and to ask themselves if someone else can run their IT operations more rationally and at a lower cost,” says Olle Högblom, Vice President, Customer Relations and Sales, Volvo IT.
The agreement signed with the City of Stockholm in June 2009 is the clearest example so far of a substantial external order for Volvo IT. It is valued at 2.5 billion Swedish kronor over a five-year period, and Stockholm is giving Volvo the task of supplying the Swedish capital city’s administrative functions and companies with an all-new, standardised IT platform.
With this deal, the City of Stockholm expects to save 60 million kronor a year and it is the financial benefits that Olle Högblom highlights as the most important reason why the outsourcing market is expanding. Building large data processing centres is expensive, and it is extremely costly for individual companies to provide and maintain the necessary expertise.
¬Moreover, IT is becoming increasingly complex, at the same time as organisations everywhere are increasing their dependence on IT as a fundamental tool for their survival. This requires IT competence and resources that very few organisations have the ability to establish and retain, according to Olle Högblom.
According to Olle Högblom, Volvo IT has two main benefits in the tough competition from companies such as IBM, HP, Tieto, Logica and CSC.
“For one thing, we are very deeply rooted in an industrial environment that has given us considerable insight into just how dependent the operation is on smoothly functioning IT systems, as well as insight into the need for continuously working to reduce costs,” he says.
Secondly, Volvo IT has a different set of driving forces and a different business model compared with its competitors.
“The aim of our external operations is not primarily to increase the Group’s turnover, but rather to use a broader customer base and larger volumes as a means of offering even more competitive prices, both to Volvo and to our other customers.
“As a result, we work far more actively on continuously reducing our customers’ costs than conventional suppliers do.”
Frank Ridder is an analyst and research manager specialising in IT services and outsourcing at research and advisory company Gartner. He too sees how the market for IT operations is increasing, but feels that the market is complex and faces several major changes.
“The economic downturn is part of the reason. Outsourcing is a traditional way of cutting costs and a good tool for handling a crisis,” he explains.
He predicts that the economic crisis will serve as a catalyst that drives the trend towards more external IT suppliers. He draws a comparison to the bursting of the IT bubble around the turn of the century that led to the explosive growth of India’s cost-effective IT industry.
“There’s change on the way, and the economic downswing will hasten that process,” he says.
At the same time, says Frank Ridder, suppliers like Volvo IT are facing entirely new challenges as more companies start looking for external IT suppliers.
“What’s important is to create flexible solutions for customers, at the same time as these solutions have to be cost-effective by being standardised for as many customers as possible,” says Frank Ridder, who feels that suppliers must evaluate how they can utilise what is known as ‘cloud solutions’, that is to say solutions that are offered as a service over the Internet by suppliers such as Google and Amazon.
“There already exist extremely cheap web-based systems for document processing and email, for instance. I know that there are IT suppliers who are trying to place such solutions with customers,” reveals Frank Ridder.
“The big challenge for IT suppliers is how the operation should move from building one’s own solutions to gathering together solutions in functional, value-packed offers for customers. Integration of ‘cloud solutions’ will not be easy, but having said that they do represent a major opportunity for the market. Ultimately the only thing that matters is business value for the customers.”
Volvo IT already supplies many services according to the ‘cloud’ computing model.
“This is primarily a business model whereby the customer gains access to IT services, mainly operating services, at short notice and only pays for them when they are utilised,” explains Olle Högblom.
“In the future, we expect to considerably increase this new type of service and in the longer-term perspective also use more and more externally produced services as part of what we offer.”
Outside Volvo, Volvo IT sells the very same solutions that are used within the Volvo Group.
“We decline unusual assignments that do not at the same time help us develop into a better and more efficient supplier to the Volvo Group,” says Olle Högblom.
The agreement with the City of Stockholm was signed in the second quarter of 2009, and since then Volvo IT has signed a second similar agreement in Sweden, this time with the City of Göteborg concerning mainframe operation, as well as a similar agreement with Banque Accord in France.
“There are long lead times for this type of sale. The agreement we signed with Stockholm was the result of a long process that was launched two years ago. The procurement process now being launched as a result of the recession won’t produce results for another year or two,” concludes Olle Högblom.
Image text: Olle Högblom, Vice President, Customer Relations and Sales, Volvo IT.