Information Technology Outsourcing at BBC

Examine the factors that prompted BBC to sell its technology division, BBCTL. Comment on the
evaluation criteria and the process adopted to select the buyer / supplier.

Factors that prompted BBC to sell its technology division, BBCTL.

It could well be said that BBC outsourced for one reason – pressures from the UK government to
reduce costs. BBC was essentially instructed to increase their revenue by 1B £ while also
reducing their operating costs, within a period of seven years. The management of BBC therefore
felt that outsourcing their IT infrastructure and management would be a sure-fire way of
achieving this otherwise impossible target as they realised that this move could actually save
them about £20 to £30 million every year.
(Ironically, the purpose of starting BBCTL was in fact to increase revenues for the parent
company by providing technology services to the third party media enterprises. Still, when faced
with the gargantum revenue target, CTO John Varney was forced to consider outsourcing their
IT).
Another reason that John Varney decided in favour of outsourcing was that he felt that BBCTL
deserved to belong to a ‘technology parent’ rather than a ‘content parent’. An increasing number
of observers were of the view that BBC should not be investing in speculative technology, as
BBC was a media company.
BBC was also seeking to reduce its operating costs in order to plough more money into
programme making. Outsourcing IT meant that more money could be spent on the programmes
and less on duplicating what someone else was already doing more cheaply. John Smith, COO at
the BBC, had said in a statement: "The value and substantial savings created from the sale of
BBC Technology and this procurement of our technology services is a significant step for us in
ensuring the BBC is fit for the future and continues to create innovative programmes.”1
The sale of BBCTL to Siemens Business Services (SBS) also meant that new technologies would
be available to the company at a lower price. SBS will spend their own money to research and
develop innovative IT products and services which will then be made available to BBC. This was
important to the BBC as it was essential that the company gained competitive advantage in such
matters in order to maintain their position as major players in both television and radio
broadcasting.
While BBC had managed to successfully establish its own technology unit, there was a danger
that the management would be over-stretched with too many operations to run. Thus the
separation would allow managers to focus on BBC’s core mission.
It was also a fact that BBC Technology, as a standalone commercial unit, had been hampered by
the limitations of its size. What the company needed was economies of scale which could only be
best achieved through outsourcing.
According to John Varney, "….no one should look after their own IT unless they happen to be an
IT company. The concentration on core business is a very, very important thing. The market that
we’re now in is fiercely competitive and hugely reactive to consumer pressure and consumer
change as it never has been before. The logical thing to do is to lose that distraction of managing
your technology.
1
Andy McCue: www.silicon.com
 Information Technology Outsourcing at BBC

I don’t worry about the servers anymore. That’s the way all media organisations should be going,
particularly the large ones, because if they stay fragmented in the way they look at their
operations, they’ll miss the market changes, and, quite simply, die,"2.
On another occasion he said, “…we realised we needed to achieve economies of scale and the
ability to invest heavily in technology over five or six years. It was a hard decision, but that is
why we outsourced”3.
Despite BBC’s history of innovation, there was a growing recognition within the company that it
was ill equipped to thrive in the ‘new media world’. Media companies were struggling to keep
up as consumers demanded increasingly personalised content delivered over a range of platforms
like digital cable, internet and mobile phones. Content distribution was getting more complex
and increasingly dependent on IT. It was therefore becoming increasingly apparent that the
organisation needed economies of scale to invest in new technology.
There was also the issue of saving jobs. If the BBC had decided against outsourcing, the pressure
it was under from the government may have led it to cut up to 300 jobs in a project named
Project Leo.
There have also been a number of other outsourcing deals in the industry, as broadcasters look to
shed overheads. Vodafone has outsourced European content distribution to Accenture, 3G mobile
operator 3 uses SBS to provide its football goals coverage, and the Discovery Channel has
awarded transmission services to Ascent Media.

2
Reshaping the media World – Jonathan Hopfner; www.theage.com.au
3
BBC's IT outsourcing may be start of trend - Daniel Thomas; www.computing.co.uk
 Information Technology Outsourcing at BBC

Do you agree with BBC’s strategy of outsourcing its IT requirements to the same company for a
period of ten years? Why?

Outsourcing involves the transfer of management and/ or the day to day execution of an entire
business function to an external service provider.

In terms of the contractual agreement between the BBC and SBS, the BBC transferred 1,400
staff and access to £20 million worth of contracts with the agreement that SBS would provide
technology support and services.

The real benefit of outsourcing comes from specialist nature of the outsourcing company. This
company will often do a lot of research and development to either save costs or to innovate.
Although innovation was being continuously carried out by the BBC, Siemens will potentially
have many more customers of BBC’s type in the future. This pooling of multiple companies
resources would allow innovation to be accelerated.

Innovations in other areas by Siemens may also benefit the BBC. For example Siemens may
indirectly develop a new technology in another area of the business that was useful for the BBC.

Managing risk is critical to the success of any organisation and outsourcing provides a very
effective way to transfer these risks. (Risks could include labour strikes, litigation, supply issues
etc.). BBC’s technology requirements are increasingly complex. This coupled with the fact that
BBC needs to go completely digital by 2012, means that there was a good reason to have a risk
mitigation process in place. Since the contract with Siemens is largely fixed, most of the risks
and potential problems would now be absorbed by Siemens.

It’s important to note that this was an outsourcing deal not an offshoring one – SBS had ruled out
job cuts and the use of low-cost overseas IT resources.

The reason why BBC went in for a long term contract was obviously to tie in SBS to a specific
price contract and make its own future costs predictable. (The main problem for outsourcing
contracts is the potential for the supplier to charge anything it pleases once the contract is due for
renewal.)

The downside of outsourcing of-course is that there is the danger of handing over some of the
intellectual property (IP) that has given the company a competitive edge in the past.

In the case of BBC’s contract with SBS, the length of the contract has the potential to create
issues for BBC at some stage. Ten years is a relatively large period for a contract that has
essentially never been tested. If it were to fail, the BBC would be locked into the contract for a
huge length of time.

(The first issue already occurred when it was discovered that mistakes were made when
estimating cost reduction with the BBC Governors being briefed on yearly savings of £35.2
 Information Technology Outsourcing at BBC

million. In the first year of the contract there were savings of £22 million, £13.4 million lower
than the guaranteed level4.)

A long contract prevents BBC from correcting any initial mistakes. The BBC, for example, is
aiming for cost savings of £20m a year through its £2bn technology outsourcing deal with SBS.
The £20m a year savings only represent a 10 per cent return for the BBC compared to typical
outsourcing deals that would aim for something closer to 20 per cent.

Despite the £2n framework agreement, BBC is still spending substantial amounts of money on
other IT suppliers for services. In the financial deal year 2005/2006 £190m was spent by the
BBC through the SBS contract, but a further £260m was spent on technology services from other
suppliers. Around £50m of this was spent by BBC units procuring their own technology services
that could have been bought through the SBS contract.5

For SBS, a 10 year outsourcing deal with BBC makes a lot of strategic sense. It gives SBS an
opportunity to expand into a completely new vertical while providing the luxury of having a
major client on the books for an extended period of time.

Since the outsourcing contract requires that SBS will provide the BBC with technology and
services support for the next ten years, the BBC had to ensure that they were picking a company
that they were completely satisfied with. If BBC picked a supplier that provided poor service
then this would be permanent for the next ten years. (It would probably have been wise for the
BBC to include a clause exempting them from the contract for reasons such as poor service).

BBC did not include any mechanism to safeguard value for money over the life of a deal. For
example, it could have introduced a contractual provision to share profits if the rate of return
exceeds a specified level.

In conclusion therefore, it seems that while the outsourcing itself was a step in the right direction
for BBC, the length of the contract, without any recourse to intervention or reevaluation, did
severely curtail BBC’s ability to derive the full financial advantage from the contract.

4
House of Commons, Committee of Public Accounts, 2007
5
BBC's £1.5bn outsourcing costs under fire, Andy McCue; www.silicon.com