In a major move to cut costs Royal Dutch Shell has announced plans to outsource the majority of its information technology division, but industry commentators have warned that if the oil company ignores the new trend to direct sourcing, the firm will not be make the most of its revamp.

Shell’s 4200 person IT department will be cut by around 3000 staff, industry sources have said. Of these positions, 1700 belong to Shell staff and the rest to contractors.

The news was leaked through an article published on royaldutchshellplc.com, an anti-Shell site often used by Shell staff to air discontent with the company. The web site cited a leaked email from the vice president of Shell’s IT infrastructure, Goh Swee Chen, who named the three outsourcing companies that Shell had selected: EDS, At&T and T-Systems.

However, sources close to the firm have said that commercial discussions are still underway and will be finalised in the first half of 2008.

Richard Sykes, chair of the outsourcing group at Intellect, said if Shell does go with the three outsourcing companies mentioned, it will be a “conservative deal” typical of heavy weight players that is unlikely to achieve maximum cost savings.

The new cutbacks are part of Shell’s initiative launched in 2005 to generate efficiency, simplify and seek cost savings. In 2007 the oil giant announced its aim to save half a billion pre-tax dollars a year.

“Shell could become more competitive by buying services straight off the internet,” Sykes said. For example Shell could opt for online email and CRM systems provided by Google and Salesforce.com.

Sykes said the outsourcing trend to watch in 2008 is a move from classic outsourcing to direct sourcing, and he pointed to the difference between “very high productivity server farms at work rather than thousands of IT professionals”. But “big boys like Shell have not entered down this learning curve yet”, Skyes said.

Skyes added that the trend by small and medium enterprises to direct sourcing contracts is resulting in less outsourcing contracts involving India, because the services are more automated and less people intensive.

Indian providers will still have a vital role in system integration, although there will be increasing movement by Indian providers to China because of the large demand in India for IT professionals that is increasing competition for skilled workers, Skyes explained.

The movement to locations for offshore services other than India is another outsourcing trend set to continue in 2008. Indian provider Cognizant has about 500 professionals in Shanghai and plans to double the headcount in the next 12 to 18 months, according to Henry Yang, head of Cognizant’s China Development Centre. “Our goal is to establish a mature workforce in 3-5 years that is equivalent to our Indian delivery workforce,” Yang said.

However recent Gartner research found that India remains the undisputed leader in offshore services, although China, Russia and Brazil are providing credible alternatives. Gartner also predicted that offshore spending in 2008 will grow 60 per cent in Europe, and 40 per cent in the US.

Meanwhile experts are playing down rumours that Indian offshoring giant Wipro is interested in acquiring Capgemini. On 23 December, a Hindustan Times story citing anonymous banking sources said that a bid is expected to take place in January.

However, Ovum analyst Phil Codling suspects a “silly season” story. “In terms of business strategy and logic it’s not good,” he said.

Codling also doesn’t expect large Indian firms to be targets for acquisition by western firms. “The top five Indian firms are probably a bit too expensive. We’re still not seeing M&A in IT services on a scale that has been predicted for so long," he added. "A lot of private-equity firms looked at services firms, did the sums and walked away.”