Editor's Blog

Why SaaS will challenge consultants and outsourcers
Thursday, December 04, 2008

The rise of software as a service (SaaS) companies, such as Salesforce.com, RightNow, NetSuite and SugarCRM has been much hyped over the past two years, and has led people to believe that SaaS is merely a low-cost, fashionable extension of CRM. Of little interest to the outsourcing market, you might think.

Much of the hype comes from such people as Salesforce.com CEO Marc Benioff, whose annual ‘Dreamforce’ conference in San Francisco attracts thousands of delegates with an almost rock-concert-like buzz.

Indeed, speakers at last month’s event included Neil Young, with evening entertainment provided by the Foo Fighters – a surreal moment, considering the highlight of most UK jamborees might be an Abba tribute act.

Other speakers have included such ‘outliers’ and original thinkers as Malcolm Gladwell, Google.org’s Larry Brilliant, Peter Gabriel, and, last year, a confused-sounding George Lucas. The Force was not quite with him, as I recall.

(Lucas’s educational foundation Edutopia uses Salesforce technology, and I did put up my hand to ask him if he considered calling it ‘Wookiepedia’. Mercifully, the mic was not handed out at that session.)

All this might persuade the naysayers that SaaS is another big tail wagging a small dog: lots of overvalued, overhyped companies promising to change the world on the back of an over-inflated stock price and the last dregs of the 60s dream. After all, we’ve been there before: the IT industry had its own localised recession as a result.

But you can tell a lot about the viability of a market by the enemies it makes, and the friends who set up shop in the exhibition hall. At present, those enemies include SAP and Oracle – Larry Ellison is an investor in both NetSuite and Salesforce.com, but anecdotally is “terrified” of the latter. (Unlikely, I think, but an amusing prospect.)

Friends of SaaS include IBM, Accenture and Capgemini, on the one hand, and Facebook and Google on the other: these companies are not even opposite sides of the same coin; they’re not even in the same pocket.

But why even mention Facebook and what does this have to do with outsourcing?

Well, the mistake many people make is in assuming that Facebook and its ilk are just amusing ways for employees to waste your money sharing their hangovers with the world.

All social networking sites are now powerful computing platforms that millions of people choose to use, and which thousands of developers write applications for. They are intuitive and easy, and companies such as Salesforce.com and NetSuite want to be ‘the Facebook for business’.

Ridiculous? Not at all: Facebook has partnered with Benioff’s company, with the intention of using both platforms to deploy business applications.

This century, IT has become integrated into our lives to a degree that seemed impossible even a decade ago. That means there is a groundswell of opinion against any technology that is heavy-handed, expensive, corporate, difficult to use, and which you have to rebuild the enterprise around – or write consultancy cheques to understand.

The eminence grise (or rather, blanc) behind all this is, of course, Google: that once-innocuous white page that many of us called home, and which now hides a vast network of applications and services.

IBM, Accenture and Capgemini now have SaaS practices, presumably with the intention of building lucrative consultancy services around baffling wealthy executives. Even the receptionist understands ‘Facebook for business’, but CEOs will reach for their chequebooks to have ‘cloud computing’ explained to them by a man in a big blue suit. At least, that’s the theory.

The fact is that SaaS is a threat to traditional outsourcing, particularly in such mainstream BPO areas such as HR. Ridiculous? No: the fastest growing software company in the world is HR SaaS provider SuccessFactors, and it is built on the promise of disintermediating your business.

The proof of all this is found in a recent announcement by that über old-school enterprise provider SAP. About a year ago SAP accidentally validated the SaaS market by announcing it was entering it. Last week the company effectively announced that it couldn’t afford to play in the market because the margins were too slim.

Exactly; but others certainly can, and that is why you should watch your backs.

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Time to decommission this wrong thinking
Wednesday, November 26, 2008

This week has seen public sector sourcing back in the spotlight. Prime Minister Gordon Brown’s speech to the CBI on Monday put global thinking about the world economy at the centre of a new financial order that will emerge as the financial crisis dissipates.

Nationalism and protectionism were things of the past, he said, and global sourcing would be part of a more rigourously managed system.

You know something has changed when that most isolationist US president, George W Bush, has also spoken out against protectionism as he prepares to leave the world stage.

But the problems of home-grown government outsourcing have again been in the spotlight at home as the Information Commissioner wins stronger powers that will force organisations – such as government departments and their outsourcing partners – to tighten up data protection policies.

Information Commissioner Richard Thomas has won the support of justice secretary Jack Straw for tougher powers to investigate breaches of the Data Protection Act, fine organisations for data losses – and inspect government departments without prior consent.

Assistant Information Commissioner Jonathan Bamford hit the nail on the head when he told the Financial Times this week that recent public sector data losses were the concomitant of treating data security as an afterthought rather than as a central pillar of system design. “It was obviously a bit of an accident waiting to happen,” he said.

However, Mr Bamford then shot himself in the foot when he added that organisations should invest more in “privacy enhancing technologies”. No: technology evangelism is the root of the problem, not the solution.

Of course, systems must be secure and protected, but it is their management that is lacking, along with a duty of care to educate every tier of the organisation in data protection issues.

No amount of technology will prevent someone losing a storage device the size of a pack of chewing gum, or having a laptop stolen by an opportunistic thief. The blind faith in technology’s ability to secure government while also opening it up to the populace is misplaced.

Put people first, with all their human flaws and inconsistencies, then design management policies around that. Finally add technology.

The outsourcing industry should be well placed to educate government clients, but as we leaned last week at the NOA summit, all too often contracts are run by people who are passing through their departments and lack the expertise to run major projects. 

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The devil’s in the contract details…
Wednesday, November 19, 2008

On day two of the NOA Summit today in Westminster, I and other delegates were treated to an in-depth discussion of the challenges of outsourcing contracts.

Far from being documents to fling into the bottom drawer once deals are struck (and never look at again until litigation is imminent), contracts are the bedrock of any sourcing relationship’s success or failure – as evidenced by such high-profile fallings out as the Department of Health and Fujitsu earlier this year. 

Contract negotiations will become an increasingly contentious area for everyone in the industry as the downturn deepens and the temptation for either side to drag deals back to the table is strong.

Sanjay Kumar, general manager Banking and Financial Servuces Solutions for ITC Infotech India said that the reasons for contract failures are underperformance, outsourcer over-expectations, poor management, cost overruns and contract inflexibility.

With common drivers for outsourcing being cost, resource scarcity and the need to either survive or grow in the market, the customers often try to “outsource their troubles away”, he said – sometimes without discussing it with management sponsors and stakeholders.

Asked by sourcingfocus.com about the DoH’s and other public sector organisations’ sometimes fraught outsourcing relationships, he said: “The moment a contract is being scanned [for ways to catch out the supplier or customer] the relationship has broken.”

In a concise and upbeat presentation on next-generation contracts, NOA Award-winning advisor Rob Sumroy of lawyers Slaughter and May said that people often rush into contracts with little understanding of what they are for, devoting inadequate resources to them in the belief that “one size fits all”.

While admitting that standardisation is important, on their own boilerplate clauses cannot hope to reflect a complex relationship, he said.

Sumroy blamed poor tendering for being the root of failed contracts. “The RFP process does not link in to a good contracting process; but the output of RFP is the contract,” he said.

“Contracts are supposed to assign activities and responsibilities, and allocate risk for where things go wrong,” he continued, adding that a good contract should define operational tasks, telling you what’s going on (or should be going on) on an operational basis.

In other words, Sumroy was essentially saying that a good contract should be the operational manual for a working relationship, not the output of a tortuous legal process that’s then buried in the bottom drawer until trouble rears its head – as it inevitably will if the contract is misconceived at the outset.

Transport for London (TfL) CIO Phil Pavitt drew the morning session to an entertaining close with his insights into the workings of the public sector – that sector which has, so often in recent years, got outsourcing wrong, despite its fondness for buying in private expertise.

Pavitt put up his hands and said that, in the not so distant past, TfL and other public sector organisations had got it wrong – not the outsourced service providers – because there was often no in-house expertise to help manage outsourced relationships.

In other words, contracts break down because they have been poorly understood and drawn up by the client, the government – which has come to rely so heavily on third parties working in partnership on large public projects.

Pavitt’s transformative zeal has, in just 18 months, brought TfL almost to the point of being an outsourcing provider itself – he revealed that The Greater London Authority, the London Development Agency and the Metropolitan Police are among five London organisations being brought under his wing in an effort to make IT management processes more efficient.

All this is good news, but I can think of at least one other public sector outsourcing grandee who came into office trailing clouds of transformative glory just a few years ago – and he ended up bailing out of the National Health’s IT programme in high dudgeon having offended just about everyone involved.

Fortunately, however, Phil Pavitt seems much more pragmatic, amusing and good with people than a certain Mr Granger – who is now on the other side of the planet.

We wish Mr. Pavitt well: a promising future beckons, methinks.

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NOA launches UK’s first outsourcing qualifications

For those of you who haven’t seen the story – perhaps because you were at the NOA summit In London yesterday and today – The National Outsourcing Association has today launched the UK’s first accredited professional outsourcing qualifications and training programmes.

Available immediately and delivered through its newly formed professional development arm, NOA Pathway, the qualifications are accredited by Middlesex University.

The programmes range from the entry-level NOA Gateway, which offers learners a solid foundation in outsourcing, through to the masters level NOA Diploma.

A range of training programmes covering all aspects of the outsourcing lifecycle are also being launched.

Martyn Hart, chairman of the NOA commented: “Globalisation has accelerated the rise of outsourcing. While this brings opportunities, it also brings some challenges. Until now, there has been no common best practice standard or benchmark for outsourcing and there is no way of recognising whether staff involved know their subject or not.

”NOA Pathways helps organisations evaluate suppliers/vendors and enables them to trust the supplier’s outsourcing knowledge, commitment and ability.”

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BT joins the jobs slide
Friday, November 14, 2008

With the UK halfway into a financial crisis, in the view of many analysts, we are also halfway into job cuts and cost reductions. BT has announced it plans to slash 10,000 jobs worldwide: six percent of its workforce.

As reported previously on this blog, the telco announced an 11% fall in Q2 profits, blaming poor performance by its Global Services division.

With 6,000 BT jobs due to go by April, principally among the company’s UK direct workforce, many will point the finger at the Services unit. CEO Ian Livingston has denied any blame lies with Global Services and maintains that, wherever possible, the cuts will be made by not filling vacated posts.

That said, turning around Global services will doubtless involve a mixture of building a more efficient, targeted business – and cutting costs and jobs.

Meanwhile, the eurozone has entered recession for the first time in its history, with Germany – one of the twin engines of the European economy – joining the downward slide.

The strength of Indian offshoring, however, stands as a useful sounding board for the weakness of the home economy, with Genpact (among other providers) reporting strong financial results.

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Government outsourcing futures
Tuesday, November 11, 2008

As the US economy and political system dusts itself down in the wake of Barack Obama’s historic win in the US – bolstered by the speed and organisation of his first week as President Elect – the economy on this side of the Atlantic shows signs of strong outsourcing demand, particularly in government.

British support services group Babcock has reported a 40 percent increase in first-half profit, with gross profits standing at nearly £51 million. It forecasts more growth, in the belief that businesses will turn to outsourcing to cut costs.

CEO Peter Rogers told the Reuters news agency that government bodies in particular will turn to people like his company for strategic support and spend reduction.

The company has fingers in the shipbuilding, defence, rail and nuclear sectors, and is the biggest third-party supplier to the Royal Navy.

But as we’ve explored in this blog before, is government services outsourcing really a sector that companies should feel confident about, given the high-profile trashing of many suppliers’ names by association with troubled Whitehall projects?

There are some worrying signs, looking ahead: Home Secretary Jacqui Smith recently made the unlikely claim that most people are excited about, and supportive of, the ID card scheme, despite the ever-escalating cost to the same people who are allegedly so keen on it.

At the same time, talk of the possibility of supermarkets being among companies in the frame for managing key outsourced elements of the service is alarming – creating the intriguing possibility of a future where people’s shopping habits are monitored at the till: obese? No chance of buying that cake, sir! Liver disease? Stand away from that four-pack, ma’am!

I jest, of course… or do I? One tabloid headline today shouted: ‘Pay the Obese to Take a Walk’!, referring to some new DoH scheme to encourage the larger parents among us to walk their children to school.... for cash.

Whatever the reality versus the fiction, the ID card scheme remains highly controversial, and it has little to do with security (at least, no one has explained how it will make us more secure). It is almost certainly a bridge to a data-gathering/service matching economy of the future, linking in with citizen relationship management schemes at local level, and who knows what else nationally.

Suppliers may not wish to be associated with such a scheme, given the security risks and political sensitivities. Just ask PA Consulting how its reputation is in the wake of its association with a mismanaged government outsourcing deal.

But there are other, less Big Brother-style signs to be encouraged by: none other than Peter Mandelson has the found the perfect way to restore his reputation: by being the supporter in chief of local Post Offices to provide outsourced services direct to the public. Watch this space for more.

As long as the government returns to seeing the Post Office as being an essential public service rather than a poorly functioning profit-making machine in a deregulated market, it will be a national asset.

Elsewhere, two stories from the Philippines show the strength of the BPO market there: first, there is now a reported skills shortage there, and second, Philippines BPO companies may themselves outsource their staffing and HR needs.

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We’ll be right back after this break…
Sunday, November 02, 2008

In the US, where I am for a few days, business and financial stories have been shunted out of the limelight as senators McCain and Obama vie for the popular vote. Channel after channel devotes almost twenty-four hours of coverage to every grandstanding speech, broken only by adverts – mainly from the candidates, but occasionally for headache pills – and, on the West Coast where I am, by competing messages about local policy amendments.

On the one hand, it’s inspiring that American politics speaks so directly to American people and seeks to engage and motivate them about every policy nuance, but as the presidential campaign nears its conclusion, the two hopefuls’ messages have merged into one: “American companies, American jobs, American people”. The rest of the world… who are they?

One candidate (I forget which) even went so far as to say that outsourcing was part of the impetus for the Wall Street collapse – neglecting to mention that both candidates have outsourced their campaigns for voter registration. Each candidate, of course, has wasted no time accusing the other’s outsourcing partner of corruption.

The insularity of the US is something to behold at first hand: I was in the US a month ago, in the eye of the Wall Street storm, and even then the election was the only show in town, as the Down Jones tanked 800 points one day, and 500 on another.

Perhaps the side effects of a decade of living on credit are simply accepted in America: like those painkiller TV ads I mentioned, which, by law, have to list all of the possible side effects of swallowing one: may induce nausea, dizzy spells, dementia, memory loss and liver damage. Just like buying a house, or a shopping spree on your store card.

In the UK, the financial crisis has been a bigger story than in the US where it originated, while government is usually in the spotlight only to demonstrate its incompetence.

Yes, another day, another memory stick lost: this time outsourcing provider Atos Origin is being blamed by the Department of Work and Pensions after a memory stick containing passwords and security details for the Gateway website was found in a pub car park. As I write, the website is down for security testing, so people are unable to submit tax information online.

The Prime Minister has finally admitted the obvious – the Government cannot guarantee data security – but still has trouble with the underlying message: it’s not about technology, it’s about policy and good management.

Also in the UK there is further unease in the services sector, as BT announces that its Global Services division is underperforming and dragging down the group’s overall profits.

This is a worry: unlike the US, whose economy relies on Main Street shoppers, the post-Thatcherite UK is built on services: that sector the Government is so keen to blame for its own ills.

In the US, if you can inspire the people you can rebuild the economy. In the UK, if we talk down the services sector we are talking ourselves into a slump.

But we’ll be right back after this break....

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Celebrate innovation, not opportunity
Tuesday, October 28, 2008

The NOA Awards last week (not attended by yours truly, owing to a bout of lurgy) were by all accounts a glittering success, Congratulations to all of the winners (such as destination of the year Egypt), and also to the nominees. There is clearly a great deal of innovation and good work out there, and that is indeed cause for celebration.

The big question, though, is how will we look back on 2009 at next year’s event?

As 2008 draws to a downbeat close, with the UK economy in Q1 of a likely recession, we’re facing a year to 18 months of rising unemployment, falling property prices, scarce credit, and business collapses – especially among smaller enterprises and manufacturers.

Some economists believe the worst is yet to come, and few would bet against further banking collapses. At least one international bank, which owns some UK finance names, has been quietly selling off its assets.

It’s sometimes said that a recession is an opportunity for the outsourcing industry, in that companies looking to slash costs or source external, non-core expertise will turn to outsourced service providers. But I’d argue that’s a challenge, not a cause for backslapping and glee.

Of course, there is good news… on the face of it. Despite the fact organisations worldwide are deferring capital expenditures, outsourcing continues to be the number one tool chosen to drive organisational change, according to EquaTerra’s quarterly Advisor and BPO/ITO Service Provider Pulse Survey.

The findings of the Q3 2008 edition show that demand for outsourcing is outpacing business investments in areas such as hardware, software and other types of more discretionary service.

Growth in outsourcing was positive in Q3, it said, with the focus shifting away from “longer-term initiatives and towards efforts that deliver a quick return on investment (RoI)… help align operating costs to reduced circumstances, and minimise short-term capital outlays”. In other words, projects that slash costs.

Despite this, the economy’s losses are not our gains, and we must guard against celebrating.

Face it: most people still see outsourcing as about job losses, not expertise or innovation. In a recession – perhaps even a slump – that means storing up a huge amount of negative equity, if you like, in terms of people’s attitude to our industry and we should take a careful step back from celebrating an apparent upturn in our fortunes. Otherwise we will be seen as part of the problem, and not as a long-term solution.

Celebrate innovation, as the NOA Awards did, and not an opportunity to trouser cash as unemployment soars, people default on payments, and businesses can’t find the credit they need to survive.

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Of shadows, oiks, and generational change
Wednesday, October 22, 2008

The older you get, the more likely it is you’ll wake up one day and find the world turned upside down. And so it was this morning.

While the world burns, the shadow chancellor hobnobs with a Russian oligarch, and thereby falls out with fellow Bullingdon Club* carouser Nat Rothschild for – sin or sins – being indiscreet (well he did go to St Paul’s rather than Eton: what more do you expect from an oik?); the Republicans accuse Obama’s ascendant Democrats of rigging the election (does no one remember dimpled chads?); the pound plunges to a five-year low against the dollar, which is now underwritten by Beijing; Mervyn King has used the ‘r word’ in public, as has the Prime Minister – whose popularity grows by the second; a small group of tribesmen in the hills runs rings around the US war machine; and China is in a space race with India, which has this morning launched an unmanned mission to the moon… to size it up for nuclear fuel.

Just an average day, in other words, in a world where the US has more nationalised institutions than China, and no one can afford to drive to the office.

Anyone harking back to the summer, when one non-forged English pound bought you two faded, crispy dollars, or to 18 months ago, when the US seemed set to rule the world for a second century, would think that generational change has sneaked up and tapped us on the shoulder while we were facing, hand outstretched, in the opposite direction.

But the lesson of all this, of course, is that real change, like real power, is always behind the scenes; it moves unnoticed by all but the few in the know. When it reveals itself, it is because the last edifice to fall is simply the old facade – like the Berlin Wall.

So the question we should all be asking ourselves is: how prepared are we for the real 21st century, which is not going to be a high-speed, broadband re-run of the 20th after all. No, it is going to be the Eastern century, bankrolled and powered by Asia and Eastern Europe, against which the 19th and 20th century Western guard seem woefully ill-prepared (apart from the upper classes, whose blood ties and loyalties have always made geography irrelevant).

Answers on a monogrammed napkin, please.

On the subject of which, I shall be at the NOA Awards tomorrow night, replete with black tie and tux, presenting the award for Outsourcing User of the Year. Gossip, I dare say, will follow.

Toodle pip!

* Previous members include such infamous reprobates as John Profumo, Gottfried von Bismarck, Boris Johnson, Prince Felix Yussopov (co-murderer of Rasputin), and, er Davids Cameron and Dimbleby. Lock up your daughters! 

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No big blues for resilient IBM, says CFO
Monday, October 20, 2008

Last week IBM announced a strong set of Q3 results, with no apparent big blues from the combined chill of the credit crunch and the downturn – despite the company’s exposure to the financial services sector.

Net income was up 20% to $2.8 billion, and revenues by five percent to $25.3 billion. The services and outsourcing sectors of its business seem strong, but the key lessons are the diversification, spread, and visibility of its business.

“This is a tough environment, but we were ready for it,” said IBM’s chief finance officer (CFO) Mark Loughidge. “We are executing a play that we called some time ago. It has two major elements. First, we have been investing to capture opportunities in the emerging markets. You can see the benefit in our results again this quarter with double-digit revenue growth and good returns.

“Second, in the more established markets our goal has been to drive productivity. We’ve been systematically attacking our spending base, taking out infrastructure costs, reducing our cost and expense levels, and improving our efficiency.”

Because of this, IBM claims to have a more efficient structure than many of its competitors, and than it had before. “In the third quarter, when the revenue growth in the major markets slowed, we had great margin performance and hit our profit objectives,” confirmed Loughridge.

As many analysts have pointed out, IBM has also struck a balance between annuity and transaction-type businesses, with the former including its outsourcing, maintenance, and most of its software deals. As a result, the company has the two ingredients missing from many companies’ balance sheets as the credit markets have dried up: long-term visibility and liquidity.

Its geographic spread has also inured it to the westerly depression of the past 12-18 months. Europe had the strongest performance, up four percent at constant currency, while the Americas was up two percent, and Asia Pacific up one percent.

“In the more established markets that we address through our major markets organization we are uniquely positioned to assist enterprise clients with high value transformational projects as they retool for efficiency and cost savings,” continued Loughridge.

“Now in the emerging markets, we’ve been investing heavily to capture opportunities to build out public and private infrastructures. Our growth markets organization grew 13% as reported and 10% at constant currency, representing 19% of IBM’s geographic revenue in the quarter.

“The BRIC countries, a subset of our growth markets, grew 19% as reported and 12% at constant currency with strong double-digit growth in Brazil, Russia and India. However, our results in China slowed to three percent growth, down four percent at constant currency.”

With the public sector and industrial components of its business doing well, Loughridge turned his attention to financial services, which just a fortnight before had seen many analysts forecasting doom and gloom for IBM’s Q3 figures – the result of the short-term, muddy and alarmist thinking that stalks many a downturn and contributes to hysteria.

“I’ll remind you that about 60% of our financial services revenue is in annuity businesses,” said Loughridge. “US revenue was down one percent, slightly better than our second quarter performance. However, outside the US, where we generate over 75% of our business, revenue was up 10%, or four percent at constant currency. Globally, we had growth in banking and insurance but financial markets revenue was down at constant currency.”

Loughridge then pointed to a New York Times (Bloomberg informed) timeline of buyout and takeover activities of major financial institutions in the US and Europe since the middle of last year. The amount of revenue IBM generates from the 21 institutions listed, he said, represents only about one percent of IBM’s total revenue.

“Let me tell you what we’re seeing in the marketplace,” said a bullish Loughridge. “There are a lot of enterprises dealing with a tough environment, looking for ways to reduce costs, conserve capital, and in some cases just to survive so there’s a lot of good services opportunity out there. But frankly, there are also many deals that have very unattractive economics, and while these may be interesting to some of our competitors, they’re not to us.

“It’s not hard to drive revenue in a services business on a weak book of business. But we’ve built a strong and profitable business and we’re not going to put that at risk just to show a higher level of signings.”

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