A new outsourcing reality
by By Paul Johnson, Head of Development, First Clarity
In mid-April the TPI Global Quarterly Index for Q1 2012, which provides a snapshot of the sourcing industry, showed that the value of overseas outsourcing contracts fell compared to both this time last year and compared to the previous quarter. Looking at different disciplines, IT outsourcing contact values showed a decline of 30% on the same period of the previous year. Other research, for example from the Hackett Group, as well as narrative evidence backs up the TPI findings.
It seems that the offshoring boom of the past three years is over and we are facing a new outsourcing reality. Recession and related fears created that spike in demand. Now, I believe, ongoing economic uncertainty and a return to recession in the UK, coupled with some of the consequences of offshoring are leading to a new turn in the market.
A considerable proportion of the off-shoring of recent years was to cut costs. With many functions like IT services and development already stripped out, in many companies there is little left to offshore. Budgets remain tight, hence there is nothing new to outsource. At the same time, for some companies, the honeymoon period with their off-shore partner might be over and 1 or 2 year contracts may not be renewed.
As outsourcing costs have continued to rise in countries that experienced little or no recession, costs in the UK have fallen helping to make on-shoring much more competitive. The National Outsourcing Association echoes this view. In a recent article its chairman, Martyn Hart, explains the issue very succinctly: “nowadays, with rising inflation in popular offshore destinations like India and China, the cost of doing business abroad has skyrocketed. Not only that: the costs of supplier management are escalating too.”
Organisations’ understanding and use of outsourcing is maturing and price is no longer the biggest driver. Changing requirements are pushing organisations towards different sourcing models. For example in the field of software development, companies are increasingly outsourcing to take advantage of skills they do not have, and to learn new skills. This means they are looking for outsource partners that are also expert consultants. Unfortunately, many traditional software development companies are unable to offer this. In addition, there is a growing trend in software development towards much closer integration of teams, between the IT specialist and the business which seems to point away from long-distance outsourcing.
Further, the UK economy is not recovering as rapidly as many expected. This is resulting in both social and political pressure to keep jobs on-shore: off-shoring is an easy target for finger-pointing. Additionally, public perception of offshoring hasn’t changed much, despite improvements in service. Companies are not immune to these pressures and those that choose to do their development/ manufacturing/ customer service etc., onshore are able to turn this into a notable selling-point.
So how can companies use these changes in the outsourcing market to their advantage? The obvious place to start is a re-visit to your sourcing strategy. Is it delivering the objectives you want it to? Have your objectives or drivers changed? It is also worth reviewing the off-shore/ near-shore/on-shore options available to ensure you are still making the best decision.
If, as I believe, on-shore is in the ascendancy then is certainly is worth exploiting its strengths. While some functions like business process outsourcing are less time and distance-reliant, others like agile or scrum-based software development are proven to work much better when done on location.
As previously noted, closer integration of teams on both sides of sourcing is gaining in popularity. With shifting costs and evolving priorities, if you reconsider whether the work that you outsource, as well as the employees in charge of it, would benefit from being done geographically closer to your company, your organisation may find that the cost-benefit balance has shifted slightly.
The UK is particularly good at highly-skilled activities like specific software development or electronics. What’s more, its professionals hold a lot of specific industry knowledge which is unobtainable anywhere else. You are also able to find mid-tier companies that provide a mix of consultancy and ‘doing’ at a very reasonable price.
Additionally the UK remains a paragon of upholding intellectual property law and is still a top 10 destination in the Brown-Wilson rankings of secure outsourcing destinations. For high-skill areas of outsourcing, this respect for IP is important, as many organisations that have had to fight intellectual property cases in courts abroad will tell you.
For a whole range of reasons the overseas outsourcing industry is changing and, I believe, becoming less attractive. For many companies this should signal a re-assessment of their sourcing strategy. The question is can businesses turn the changes to their advantage, and what does that mean for UK onshore outsourcers.
How can we solve outsourcing and insourcing not working in the service supply chain
by Mike Heslop, founder of Centrex Service
Insourcing and outsourcing within the service supply chain are still not working, so how can the eternal problem be solved?
As official GDP figures show, the UK is once again in recession, businesses are looking to strip waste wherever possible to remain buoyant and profitable.
The insource versus outsource debate has long been discussed across all industries, but neither has become the defacto as both have continued to encounter problems. As a solution to this, a new proposition being brought to the market; leansource.
Mike Heslop, founder of Centrex Services and creator of the new concept, argues that combining sourcing principles and applying lean methodology provides the key to successful supply chain management.
Lean on me
When Toyota first brought lean principles to the manufacturing world they created a revolution in the way waste and value were approached. Essentially focussing resource only on goals which create value for the end customer, lean principles strip processes and expenditure which don’t work to achieve that value.
In all businesses, the stripping of waste is key to maximising profit margins and outsourcing has been a key bone of contention in the waste debate for many years. Outsourcing often seems like the logical option for business but the decision to outsource is too often based on short-term benefits such as cost reduction, with no assessment of the long-term impact of the decision.
The same principles apply to insourcing, which may seem like a quick fix in the short term, but ultimately ties up valuable staff resource which could be focused on other core business critical tasks, and is not scalable.
It is vital that a business considers the impact of decisions such as outsourcing on its customers and the business’s effectiveness. In my view, any change in the supply chain that doesn’t add value to the customer is a waste. Much like the traditional lean principles, the leansource methodology questions what, where, when and why sourcing decisions are made from this very simple but effective standpoint.
Changing times
Traditionally within the service supply chain, the two options available to businesses have been either to outsource to a third party or in-source to a standalone team. However, the rapidly changing world of technology has surpassed the traditional supply chain model, which is not designed to keep up with these rapid changes. Equally management structures and practices, and even the boardroom are often not equipped to react to these increasingly complex supply chains. The answer to this is an approach which takes the core principles of lean manufacturing and applies them to service supply chain solutions, to eliminate waste and improve service, simplifying the whole process.
Over a number of years, I have come to the firm conclusion that we should not outsource or insource – but leansource. It’s a methodology within the supply chain that delivers remarkable cost and service advantages, through a single touch supply chain solution. The issue with the traditional outsource supply chain model is that with multiple suppliers come multiple opportunities for disconnects within that supplier infrastructure.
For example if one outsourced supplier is waiting on parts delivery with which to repair an item, and the delivery is delayed, they will not only fail to meet their service level agreement (SLA), but the end customer’s business will also be impacted by equipment down-time.
The logical solution to this problem is to implement a simple end-to-end supply chain solution which incorporates initial call handling, stock management, field service, logistics, repair and close. By closely coordinating these elements of any service supply chain, (as this doesn’t only apply to the IT sector), not only is the potential for delays and disconnects removed, but the ‘blame culture’ which can often form part and parcel of these supplier infrastructures is eliminated. This is what we term as connected process thinking, essentially the antithesis of supply chain silos.
Lean mean machine
The sheer labyrinthine size of the traditional supply chain model has left the industry fragmented and confused with little or no accountability. By implementing a complete end-to-end solution which incorporates a single point of contact for service, repair and disposal, the time-span for this process is also reduced. As there is no multiple party liaison required between out-sourced providers there are no delays related to communication breakdown, or jobs being passed back and forth between those providers.
Perhaps most importantly of all from a business perspective, the leansource approach reduces costs associated with the service, maintenance and disposal of parts within the service supply chain. The multiple outsourced supplier model results in costs growing exponentially in parallel with the number of suppliers, and by reducing the number of suppliers the costs are in turn reduced.
The leansource approach increases the level of responsibility the supplier has for a client company and as they are responsible for all aspects of the service supply chain will provide the best solutions available rather than the cheapest or quickest. Advocation of replacement rather than repair when repair is an option so a complex or unprofitable job can be passed to another supplier, is also eradicated with leansource.
Leansource eliminates waste and improves service. It radically changes the mentality that is applied in the typical supply chain and allows manufacturers to reach customers in a different way. By identifying the inefficiencies in supply chain silos, leansource challenges each process, culminating in a chain that is valuable, capable, available, adequate and flexible. The leansource supply chain exceeds service level agreement and removes inefficiencies, placing the customer at the heart of the service. Using leansource enables companies to easily manage service supply chains by simplifying the complexities of hardware maintenance and add value to their service supply chains, enabling them to rise above the competition.
Don’t let your business lose out during the London 2012 Olympics
by David Sturges, CEO of WorkPlaceLive
The 100 day countdown to the London 2012 Olympics Games has started. With 10.8 million tickets on sale and an estimated population influx of up to three million people in London travelling at peak times – transport disruptions, public disorder, road closures or staff absences are likely to impact businesses this summer.
New research of 1200 organisations in the public and private sector by recruitment firm Badenoch & Clark highlighted that UK companies can expect high employee absences. One in six employees admitted they plan to take a ‘sickie’ to watch the Olympics and yet in spite of this, 30% of companies including FTSE 100 firms, public sector organisations and SMEs haven’t made any preparations to avoid the potential disruption. This is particularly surprising considering the fact two-thirds of organisations are expecting an increase in business during this three month period.
Currently, Transport for London (TfL) is campaigning to persuade individuals and businesses to change their commuting and working habits. TfL needs to reduce normal traffic by 50 – 60% at key hotspots such as London Bridge to accommodate the influx of spectators. Even then, there could be delays of up to half an hour. On peak days, there will be an extra 3 million people travelling on public transport in London. However, it seems that TfL’s campaign is having little impact on businesses – just 11% of companies have said they will allow staff to work from home.
It seems that UK businesses are underestimating the threat of Olympics’ disruption. However, there is still time for them to address these issues and put in place reliable contingency plans to safeguard business.
One way of ensuring ‘business as usual’ is by adopting Cloud Computing. Cloud has become a buzz word which represents many things; however, virtual hosted desktops in the cloud enable seamless remote working. Using Desktop as a Service (DaaS) technology, employees are able to access their company’s IT systems including emails, files and their own desktop securely from any location with an internet access. They don’t need to be in the office and they are not reliant on their organisation’s servers and technology to work. They can carry on as normal wherever they are based; they are not losing hours spent unproductively in transport delays and won’t have to battle in to the office on overcrowded trains.
From a corporate perspective, there are many additional benefits – including significant financial ones. Adopting cloud computing technology reduces the need for capital investment in IT and, all administration issues including software provisioning and updates, security, disaster/recovery are taken care of by the cloud computing provider. There is no longer any need for ‘energy draining’ servers in an office as everything is managed remotely.
Until now, one of the biggest barriers to cloud computing adoption has been fears about security. Understandably, companies have felt nervous about outsourcing their data and information to a third party supplier. However, serious DaaS providers will typically improve any company’s securities setting when compared to their existing situation.
If organisations want to move into the cloud, security considerations should of course be prioritised. For companies to have confidence in the security of their data, they should work with a trusted cloud computing provider that can manage and store their data in a secure UK data centre behind firewalls to ensure security is watertight.
Adopting DaaS is not only a good contingency plan for to minimise business disruption during the Olympics, it can help companies realise long term, strategic business benefits and cost savings. The cloud has the potential to enable companies to become efficient, responsive and innovative and gain a much needed competitive advantage in a difficult business climate.
Avoiding the hullabaloo surrounding cloud strategy
by Todd Barr, CMO at Alfresco, open source social ECM provider.
With all the hullabaloo about cloud floating around in the content management world, here’s a handy tool to help you evaluate your ECM vendor’s cloud strategy, to see if it fits what you are looking for. So, without further adieu, here are the results of our extensive (web surfing) research:
The Check-The-Cloud-Box Strategy: This strategy is simply virtualization by another name. The thinking behind this strategy goes like this: oh fiddlesticks! We need a cloud strategy, because Gartner said so. Let’s see if we can make this thing work on EC2. No way? Ok, how about a virtualized server or 16. Yes? Great… we’ll put it in a hosting center - heck, we’ll even host it ourselves for customers if they want us to. Shazam! Write the press release, Martha - We are in the cloud!
The DropBox-for-the-Enterprise Strategy: At first blush, this strategy seems rather useful and indeed generous. ECM vendor develops a tool - such as a desktop sync tool - that makes it super simple for people to get content into the on-premise ECM system. It turns your big ECM system into a corporate DropBox, because DropBox is evil and insecure and way too easy to use and must be banned. We can’t have that type of productivity around here! So here’s the rub: with open standards, you could do that like 7 years ago (WebDAV & CIFS). Another name for this strategy is: replace useful user tools that everyone uses and finds easy with “corporate approved” tools that keeps everyone locked-in to the ECM system. Now let me ask you - do you really want everyone’s My Documents and My Photos and My Music folders copied into your corporate document management system? How much is that going to cost you next year?
The Red-Pill-or-Blue-Pill Strategy: Think of this as the market segmentation approach. Here’s how the vendor thinks: so, we’ve been selling on-premise ECM to big enterprises for years, and we’re not growing as fast as we want (or at all, or shrinking, actually). So, let’s put a lightweight solution in the cloud, and sell it to SMBs! We’ll position on-premise as the secure, safe choice, and we’ll position cloud as the lightweight, SMB choice. We’ll get to market fast by buying someone or building completely new cloud technology, that has very little to do with the on-premise tech. And, for the over-achiever customers who want to use both cloud and on-premise together, we’ll wave our hands and shuffle forward a few partners who can develop connectors and migrators and syncher-magigs, but we secretly bet you won’t actually try this.
The Ignore-It-and-Hope-it-Goes-Away Strategy: Not much to say here. If your goal is to embrace the status quo with reckless abandon, then you should definitely find an ECM vendor with this strategy and have some high-level meetings in big leather chairs.
The Cloud-Extensions Strategy: Okay, I can’t make too much fun of this one, because it makes good sense. In this strategy, ECM vendor provides complementary cloud services that make owning their ECM platform better. Cloud back-up and archiving maybe? Cloud indexing? Cloud transformations? Some or all of these might make good sense. The problem is, nobody is actually doing this. This is the trick answer in this multiple choice quiz.
Here’s what you don’t see out there: choice and flexibility. The common theme here is: give the people a “cloud strategy”, so that we can buy time and continue to protect our on-premise power base. Now, to be fair, all companies want to attract and keep customers, and most of these strategies are born out of good intentions - but legacy technology and proprietary lock-in creates frankenstein-style innovation. If you want play a little game, check out Gartner’s 2011 ECM Magic Quadrant, and see if you can match the cloud strategy with the vendor.
There is a better ECM cloud strategy. At Alfresco, we have actually put our ECM platform in the cloud, so companies can have a choice about where they use it: on premise, in the cloud or both. For the 80% of content you want to keep behind your firewall, Alfresco’s enterprise platform fits the bill. For content you would like to use to collaborate with your business partners or agencies, Alfresco in the cloud is the perfect choice. And with Alfresco’s upcoming enterprise-to-cloud sync, you can push and pull content from the cloud into your enterprise based on policies you set up. Legacy, proprietary vendors either can’t (or won’t) deliver flexibility like that, because either their technology isn’t built for the cloud, or their business model is too threatened.
Here’s the bottom line: Don’t settle for Frankenstein innovation or a reactionary cloud strategy, when you can have choice & flexibility. Look for modern ECM platforms that work in the cloud or on premise, with business models that deliver consistent value to your organization.
No red tape please, we’re British.
by Stephen Allen FRSA, Public and Private Sector Advisor and Blogger
So an election pledge becomes policy! From 1st April, unless there is a “strong business case” or a “matter of National Security”, all Central Government IT contracts will be capped at £100m.
Not quite Big Society but certainly less big IT.
Whitehall, claim that the £100m limit can be complied with by:
• encouraging the reuse of existing assets;
• making changes to procurement such as the application of lean methodology to buying;
• greater competition among suppliers including through the increased use of SMEs; and
• creating contracts differently, for example, by reducing their length or separating out commodity hardware from a new project and purchasing it through an existing contract, or separating out telecoms needs and buying them through the PSN frameworks.
Nice words but will any of these really enable central government to deliver.
Will the £100m cap create a level playing field on which SMEs can compete?
Let’s get the ‘reuse of existing assets’ myth out the way first. Technology moves apace so quickly, that hardware and software once bought as a limited shelf life. Standard accounting practice depreciates its value from 100-0% over three years.
Consider also the level to which previous government procurement exercises have created bespoke solutions tailored for specific purposes. Simple reuse, other than for standard bought desktops, seems highly unlikely - when buying new generally costs less than reconfiguring old.
Making changes to procurement including lean methodology to buying. Ask any procure operating or supplier bidding under the OJEU regulations and they’ll say it does little more than add voluminous red tape, expense, delay and, ultimately, no better result.
The UK, it seems, stands alone in the EU in observing these regulations to the letter – think of instances such as that of Bombardier trains, British jobs being lost.
Whilst the intent of open and transparent procurement processes is entirely right – the application of scalpel (or preferably fire-axe) to the current EU regulations would minimize cost for buyer and supplier alike and would encourage more suppliers to pitch for such contracts. Ironically, doing away with these regulations could create more competition.
If the UK is to challenge any rule of the EU, it should challenge this first. Let’s see if this is Whitehall’s intention?
Greater competition among suppliers including through the increased use of SMEs. A cornerstone of Coalition policy is to help British business through enabling them to compete for both Central Government (as per this policy) and local government (the Localism Act) contracts. SMEs, small to medium enterprises, are normally considered to be companies with fewer than 250 employees and turnover not exceeding €50m, per annum.
If one of the aims of this policy is to provide SMEs with the opportunity to compete – then the limit of £100m per contract invalidates the policies efficacy as no SME could realistically compete at this level.
Even with a leaned out process of procurement, the cost for suppliers to go through such an exercise is prohibitive. Larger corporate organizations are able to absorb this by spreading the cost of failed procurement exercises across those they are able to secure. It will simply not be possible for SMEs to absorb this.
And, finally, creating contracts differently through making them shorter or separating out services. More contracts, means more procurement exercises, more bidders and more service providers. Even with ‘leaned out’ processes, the cost of procurement will rise through the increase in sheer volume of ‘moving parts’ in the system.
So, where are we?
Reuse, unlikely.
Lean processes, desirable but will the UK take Europe on?
More competition, and the encouragement of SMEs, the £100m limit makes this policy totally ineffectual.
Breaking contracts in to smaller, shorter or more discrete parts just adds volume and therefore increases the cost of procurement, Again, as the target is £100m per contract – this won’t help SMEs.
So, from a procurement perspective, this policy has some very real practical challenges.
There is also a massive oversight here. A failure to see the bigger picture. Even if these measures did reduce cost and increase SME engagement, in terms of the cost of procurement – the Government have considered the life and management of those contracts, post procurement.
One of the benefits of buying (properly) from big suppliers is that you can pass the management of the delivery of a number of services to the supplier. They can do this due to scale and infrastructure. Engage a larger number of smaller suppliers and who is going to take responsibility for and absorb the cost of ensuring that each of the procured services fit together?
All in all, whilst lean procurement and the challenge to Europe of the procurement rules is desirable, this doesn’t look like a piece of policy that has been that thoroughly thought out.
Stephen Allen FRSA, advises public and private sector organizations on creating efficient legal functions. He writes a daily blog http://www.lexfuturus.com which challenges the legal services market to innovate.
Shared services – do VAT exempt schemes provide real value?
by Sheila Bryant,
Outsourced services from dynamic, dedicated private sector providers still set the industry benchmark, argues Leading Services’ Sheila Bryant
On the face of it, cost sharing groups (CSGs) that provide shared services exempt of VAT look a good thing.
Dig beneath the surface a little, however, and the question of whether real value is being offered arises. In order to qualify for VAT exemption, a CSG has to be non-profit making by providing services at cost to the organisations within the group – all of which jointly own the CSG.
The types of organisation most likely to be attracted to the idea of CSGs are charities, non-government organisations (NGOs) and public sector bodies. It follows then, that members are unlikely to benefit from the level of commercialism and competition that exists across the private sector. If the CSG is owned on an equal basis by all its members, there would be no clear leader in the group and probably, no real incentive to drive change and seek ongoing service improvements.
And, as we’ve seen before, the merging of back office services in the public sector is invariably bedevilled by bureaucracy and characterised by a wholly different culture to that in commercial organisations. It is very difficult to change this and create the environment in which the imperative to drive quality up exists hand-in-hand with the need to keep costs down.
The private sector, on the other hand, has a great deal of experience in demanding market conditions where efficiencies have been achieved through outsourcing, co-sourcing, process change and policy enhancement. Nowhere are these skills more finely honed than at specialist private sector consultancies. That’s why I believe that, by introducing a private sector driver, a client will enjoy more efficiencies than are currently available within the public or third sectors.
However, if the private sector created its own consortium along the lines of the VAT exempt CSGs, Its clients would not benefit from the VAT exemption applicable to CSGs. This means that members would be paying 20% over cost, yet would have no mechanism for claiming that money back.
This in turn restricts opportunity for those private sector oursourcing providers who owe their very existence to their skills, knowledge, experience and expertise in services that make a huge contribution to the success of many businesses and charities. Quite simply those who are arguably best placed to drive most value for money are disadvantaged to the tune of 20% when compared to CSGs.
Dynamic outsourcing consultancies such as Leading Services can facilitate the setting up of amalgams by bringing together customers that would be eligible to benefit from the VAT exemption. However, under the current proposals, they would be actively discouraged from doing this. In this scenario, their best bet would be to join a CSG, where they become subordinate to the consortium members and lose their ability to drive and shape a successful and efficient operation.
For this reason many organisations without the resources of large commercial businesses – such as those in the third sector – find themselves with a dilemma: go down the CSG route or outsource to private organisations?
To win these clients over and show that their needs are fully understood, private sector providers need to demonstrate their commitment to a wide range of ethical and practical principles. High among these are sustainability and transparency: third sector clients demand that providers share their environmental values and that they are open and operate with the utmost integrity. Similarly, the provider should show clarity in everything it does and work within clear management consultancy codes and guidelines. Governance structures should be sufficiently robust to assure the client of its adherence to corporate responsibilities. Clients are also increasingly looking for assurance that outsource providers understand - and can adapt to - their unique organisational culture and that they have the client portfolio and range of services that engender complete confidence.
Sheila Bryant is an experienced Chartered Accountant and CEO of Leading Services where she provides strategic professional and outsourced finance director services to the company’s clients.
http://www.leadingservices.co.uk
We know where what you’re doing, but does the Government know what it’s doing?
by Rob Sheldon, DWF associate partner, commercial & IP
This week, the Government caused a stir when it announced plans to introduce legislation to allow authorities to monitor the online activity of everyone in the UK.
It has been no surprise to see intensive lobbying from MPs, civil rights agencies and individuals whose rights would be affected by such ‘Big Brother’ proposals – but what do these developments tell us about the Government, its reactions to developments in technology, the way in which technology is used by society and the domestic legal system in general?
When the proposed legislation was first announced, nobody had seen the detailed rights which the government was seeking to introduce - which in itself, led to a negative reaction. It appeared from initial reports that law enforcement agencies would have the unfettered right to review content held by social media sites, but following clarification from government officials, it seems that this would include, or constitute, the tracking of relationships between individuals by monitoring the flow, timing and location from which messages are sent and received through social media channels. This means that given the geo-location capability of smart phones and tablets, it could be determined where you are, when you’re there, who you are talking to and potentially (as this aspect is still unclear) what you’re saying.
While the Government’s hastily presented clarifications are helpful in understanding the potential scope of the proposed rights, in practice, individuals and civil liberties groups, in particular, will remain concerned about the ability of law enforcement agencies to track this type of information which has the potential to be extremely intrusive and prejudicial to the rights of individuals. This is compounded by the lack of clarity as to whether or not the proposed rights would be subject to obtaining a warrant - this has important implications as the warrant requirement provides a further safeguard to the rights of individuals.
Again, this lack of clarity has further fuelled the growing and almost unanimous negative response to the Government’s proposals. Similarly, the timing of such proposals in wake of the public outcry from the UK’s phone-hacking scandal (where private communications between individuals were intercepted and utilised by third parties) is regrettable.
For all of these reasons, it’s essential that the Government provides detailed proposals on the rights which it is seeking to enshrine into English law, as this will have a knock-on effect in terms of evaluating the adequacy of existing legislation which provides similar powers – such as the Regulation of Investigatory Powers Act – as well as those laws that are in place to protect individuals – for example, the Data Protection Act and the Human Rights Act.
Before any new legislation can be successfully implemented, relevant bodies, such as the Information Commissioners’ Office (ICO), would need to assess the potential impact of it on individuals and their statutory rights regarding the use of their personal data by third parties.
Similarly, those directly affected by the proposals will need to consider the implications of the proposals for their business and the commercial and technological challenges which they may present. Many of those businesses affected will be social media sites that do not charge for use of their services, but may be required to introduce new systems, processes and personnel in order to deal with these types of requests for information - adding further overheads to their business.
Despite the issues that the proposed legislation has raised, it does provide a good working example of how the checks and balances which are built into the Parliamentary system continue to work in the modern age. While the Government will be left frustrated at not being able to push through the proposals in the name of national security, it is right and proper that proposals which may have far-reaching implications for the rights of individuals, are clearly articulated and subject to scrutiny by all interested parties before they become law.
Generally, however, this debate highlights the way in which the Government and legislators are struggling to keep pace not only with digital developments, but also with the way in which people now use technology as part of their everyday lives and how laws should be developed to deal with such developments. What is clear from this episode is that attempts to rush through legislation in the name of national security will not go unnoticed or unopposed, particularly where the rights of individuals may be eroded as a result.
During the riots last year, much was made of the way in which social-media enabled the rioters to rapidly share information on both a local and national scale, and the Government’s proposals seem, in part, to be a reaction to this event.
Whilst not necessarily the most appropriate course of action, had the Government introduced the proposals in the immediate aftermath of the riots, they may have gained more immediate positive reactions from the public, or at least a slightly more sympathetic response. However, as we stand, it is likely that these proposals will take several years of drafting, reviews and consultation before they are enshrined into law – by which time, we will probably be looking at new uses of technology, in respect of which the current proposals may no longer be adequate.
IT security lessons that Australia can teach us
by Paul Kenyon, COO of Avecto, on how the Australian Defence Signals Directorate
The Australian economy - under the respected guidance of its 27th Prime Minister Julia Gillard and her federal team - is carving out a name for itself in the IT security arena.
Whilst this may sound surprising, it comes against the background of Australia’s (as a country) relative youth and the fact that the country has around 22 million citizens: big enough to make its weight felt in international terms, but small enough to be flexible in the modern world of IT matters.
A key example of this is the country’s Defence Signals Directorate (DSD) - Australia’s equivalent to the US Department of Homeland Security - which has analysed some of the attack techniques used by cybercriminals and come up with four main methods of blocking them.
And the Australian government - moving swiftly in response - has started rolling out these techniques across its government IT infrastructre, reportedly to great effect.
The 3rd and 4th techniques centre on the idea of whitelisting, that is, forcing public sector computer users to install only approved (whitelisted) applications and only allowing similarly approved - and risk analysed - emails to be viewed.
This means that, on their office computers, government employees can only access their corporate email and browse a limited number of Web sites, which, in turn – means they have a far less chance of infecting their PCs than `civilian’ Internet users.
Alongside its controlled software and Internet usage approach to IT, the Australian government has also been highly pro-active in quickly patching high-risk security vulnerabilities in both the operating systems and software that its many computers run.
Based on an analysis of its Internet usage during 2010, in fact, the Australian DSD concluded that at least 85 per cent of the targeted cyber intrusions that it responded to during the year could have been prevented by following these four main mitigation strategies.
These four strategies are just part of a 35-point strategy report - Strategies to Mitigate Targeted Cyber Intrusions (http://bit.ly/lvZn7K) - which found that, although resistance to the idea of patching operating systems and software was low, the costs involved on the financial and staff training side of things were still quite high.
That’s not to say that staff response to the report’s recommendations - which included the control over both portable and data devices - was entirely positive. The report’s authors found there was a high degree of staff resistance to the idea that their access to USB sticks and other forms of low-cost data storage were to be restricted.
Despite this, there are signs that staff are now realising that these data security requirements are a normal part of doing business in the public sector and will therefore be the normal IT methodology - both now and in the future.
If we contrast this IT security methodology to that seen in the government and public sector here in the UK - where the emphasis is very much on cost saving, rather than taking a draconian approach to effective security - it can be seen that there is considerable scope for security problems with many UK government departments being encouraged to go down the open source (freeware) route.
There is, of course, nothing wrong with using open software over commercial applications, but most experts agree that at least some of the cost savings accrued from going down the open source route should be re-invested in other aspects of computing security, not least in ensuring those applications are secure enough for general usage.
Unfortunately for computer users in the UK, there are signs that the audit requirements laid down by current governance rules can still be counter-productive in the longer term, as employees are still free to source – and use - just about any software application they wish.
Put simply, where Australian public sector workers are effectively told what operating system and software they will be using in the workplace – and IT governance/security staff can plan and accommodate accordingly – their UK counterparts are allowed carte blanche (within reason) to decide the software they wish to use.
IT purists might argue that this makes for a more efficient IT user base in the UK public sector when compared to their Australian colleagues, but there are real reasons behind the Australian mandate on what operating system and software you can - and cannot - use.
A clear example of this lies in the use of SCADA - Supervisory Control And Data Acquisition - computer control systems seen at the heart of many industrial automation and control systems.
First developed in the 1960s - and really coming into their own with the arrival of the first PCs in the 1980s - SCADA-driven systems are typically found in industrial systems such as energy power plants, electricity supply grids, chemical plans and many other industrial systems that require a high degree of computerised control - but also require total, 100 per cent, systems availability.
This is Mission Critical with a capital M and C. Many businesses claim their IT processes are mission critical, but SCADA control systems are often critical to national infrastructures.
If the national electrical grid goes down, for example, it can cost industry many tens of millions of pounds per hour and - in the case of hospitals, air traffic control systems and the like - can actually place people’s lives in jeopardy.
Despite the fact that a growing number of PC users in the private and public sector are migrating – or have migrated onto – the Windows 7 platform, most SCADA-based systems use a robust and ruggedised version of Windows 98, a 16-bit version of Windows dating back to the late 1980s.
The reason for this apparent luddite approach is quite simple: by using a stable and unchanged operating system which has been fully updated and completed its lifecycle, SCADA-based systems can have their operating system loaded into firmware.
This means that, although there is no equivalent of Microsoft’s `Patch Tuesday’ update programme for Windows 98, cybercriminals cannot easily subvert the code of SCADA-based system, since the firmware-based operating system is fixed - and cannot be updated.
This fully-embedded firmware approach is fairly unique to SCADA-based operating systems, but helps one to understand that a highly controlled operating system and software environment – as mandated under the Australian DSD’s diktat - has a far lower risk of subversion than the free-for-all software approach see in the cost-cutting UK public sector.
Here at Avecto, whilst we understand the impetus behind moving to open source software that a growing number of UK government departments and allied public sector agencies are moving towards as part of their cost-cutting strategy, this does not mean that the Australian ideas enshrined in the DSD report cannot also be applied here in the UK.
This is because the principle on which our security offerings are built is Windows privilege management - namely the control over who has access to specific applications running on the corporate IT platform, as well as the underlying data.
This means, for example, that if the admin team only run their control and security software from within the network perimeter on known PCs, then access to those applications can be locked down to specific on-network computers.
Then, even if a set of admin account credentials are compromised by hackers, they cannot use those credentials from the Internet – they would still have to gain physical access to the terminals used by the admin staff.
This is a similar belt-and-braces approach being adopted by a growing number of banks for online account access. Not only must users present the right credentials, but they must also authenticate themselves using the appropriate hardware token.
Back in the land of securing Windows-based computers, meanwhile, and it is interesting to note that a second report from Australia’s DSD - Implementing the DSD’s Top Four for Windows environments (http://bit.ly/tfouuM ) - the conclusion is quite unequivocal:
“Minimising administrative privileges is an exercise in the principle of least privilege. In a properly designed, administered and maintained environment there is no requirement for any user to have administrative privileges on their day-to-day account. In addition there should be no account which has both administrative privileges and access to networks outside of the organisation, such as Internet or email services,” it says.
“When properly planned and executed, minimising administrative privileges can have significant flow on benefits to the stability and consistency of the computing environment, simplifying administration and support of that environment,” it adds.
Does this sound vaguely familiar? It should – it’s effectively a summary of the reasoning and principles surrounding the use of SCADA-based computer systems that run our critical infrastructures.
And whilst I’m clearly not advocating the use of the inflexible embedded operating system approach seen on SCADA-based platforms, I think there is considerable scope for the Australian DSD’s report recommendations to be deployed in UK corporate IT departments.
As well as reducing the risk profile of company IT systems, they would also greatly assist in the number of support calls need in a typical major corporate - which is something that will make the bean counters happy.
And that’s no bad thing when you think about it…
EU Data Protection Proposals: Outsourcing and Employee Data Issues
by Matthew Howse, Partner, and Celia Kendrick, Associate, at Morgan Lewis
Outsourcing arrangements often require the transfer of employees’ personal data from the customer to the supplier or vice versa. For example, an outsourcing of payroll functions will involve the transfer of employee data.
Particular issues arise if the data is to be transferred outside of the EU. In addition, notwithstanding that most data protection legislation within the EU derives from the EU Data Protection Directive, there are important differences between countries on how personal data can be processed. The UK rules are currently contained in the Data Protection Act 1998.
In January 2012, the European Commission published its proposal for a new General Data Protection Regulation. The extensive proposals would overhaul this area of law and significantly increase data protection across Europe.
The key proposals are:
• Harmonisation: A single set of rules will apply across Europe.
• Scope extends beyond Europe: The new rules will apply to EU businesses and businesses based outside the EU that process European citizens’ personal data for the sale of goods or services or the monitoring of behaviour.
• Fines: Penalties for non-compliance will be significant, with businesses facing proposed fines of up to €1 million or up to 2% of their annual worldwide turnover (depending on whether the organisation is an ‘enterprise’).
• Explicit consent: The new definition of “consent” will include a requirement that individuals’ consent must be explicitly obtained; it cannot be assumed.
• Notification requirements: Organisations will be required to notify their supervisory authority of a security breach without undue delay, meaning within 24 hours if that is feasible. If not, the notification must be accompanied by a reasoned justification.
• Right to be forgotten: Individuals will be able to ask to be forgotten and have their data deleted unless there is a legitimate ground for keeping it.
• Data protection officers: Organisations with over 250 employees will be required to have a designated data protection officer who will have specific duties in relation to monitoring and advising the organisation.
These changes are probably long overdue – the current law was drafted when recent technological advances could not have been contemplated. However, preparing for the changes and ensuring compliance will place a large administrative and financial burden on businesses with a European presence, including businesses involved in outsourcing.
The next step is for the proposed Regulation to be considered by the European Parliament and Council. It is expected there will be widespread debate on the proposals, and that the Regulation will be amended. Once the Regulation is approved, it is likely to be a further two years before it comes into force.
If the current drafting of the Regulation is approved, there will be a significant change in data protection obligations for both customers and suppliers. Under the current law, only data controllers – organisations that control the purposes and manner for which personal data is processed – are subject to the obligations and restrictions on personal data. Most suppliers are data processors as they process personal data on behalf of the customer (the data controllers). However, the proposal is to impose restrictions and obligations directly on data processors (i.e. suppliers) for the first time.
Currently, it is important for all parties to establish who the data controller is and for the data controller to impose contractual obligations on the other party to ensure compliance with data protection legislation. It is also key to ensure that, if personal data will be moved outside of the EU, this is done in compliance with the strict restrictions on exporting data. Arguably, by extending the scope of data protection legislation to cover data processors and organisations based outside the EU which process EU citizens’ data, these considerations will become less significant for EU-based data controllers (i.e. customers). However, the effect on data processors and international organisations will be much more significant. The more stringent rules will place a tougher administrative burden on suppliers, which could lead to an increase in the overall cost of outsourcing.
Organisations that are about to enter into new outsourcing arrangements should be aware that their data protection obligations may change during the course of the arrangements. Contractual provisions should be drafted accordingly, for example to make data protection provisions subject to amendment to comply with legislative changes.
The key message for customers and suppliers is: watch this space. It will be some time before the measures are implemented, but the scope and effect of data protection legislation is likely to change significantly.
Offshoring v Onshoring - Which Way is the Pendulum Swinging?
by Adrian Guttridge, EMEA Head of BPO, HP Enterprise Services.
In recent years, we have seen UK businesses moving away from the tendency to outsource business functions overseas and once again seeking delivery of these services within their borders. However, have national pride and political sentiment now become the drivers of the onshoring vs offshoring debate? Or do cost-consideration and expertise still determine where a business locates its services? Adrian Guttridge, EMEA Head of BPO, HP Enterprise Services investigates the importance of these factors and the role of vendors in this decision process.
Since late 2007, most of Western Europe has been in the shadow of economic uncertainty. Large numbers of reputable business institutions have struggled to survive and for some, the impact of the debt crisis has been overwhelming. The UK banking sector witnessed the nationalisation of Northern Rock and saw both the Royal Bank of Scotland and Lloyds TSB receive an injection of public funds to shore them up. One might think that such developments would, if anything, strengthen the allure of offshore cost-savings. However, cost was no longer the only consideration.
Alongside a renewed cost-cutting imperative, the economic downturn also ushered in the politics of protectionism. Sending business abroad to create jobs, infrastructure, and skills overseas when these are needed so desperately at home has a negative impact on companies and political goodwill, another valuable asset, already in extremely limited supply.
The past 12 months have also been characterised by social and political unrest, particularly in many developing markets. This has demonstrated the geopolitical risk of locating business services abroad and alerted corporate decision-makers to the fact that while offshoring delivered benefits to the balance sheet, it also brought with it the very real possibility of denial of service and the business challenges that come with this. Such cost-savings, it suddenly seemed, could have a significant cost in themselves.
These factors have indisputably shifted the context of a CFO’s thinking when grappling with the offshoring vs onshoring debate. In HP’s experience, what will ultimately remain the most pressing consideration, and the easiest sell internally, is cost. While the events of 2011 have demonstrated that the analysis cannot stop here, the essential savings to be made from offshoring through, for example, labour arbitrage, have not lost their allure.
As such, businesses have had to find the middle ground. At HP, we are finding that organisations are increasingly seeking to get the best of both worlds by adopting a hybrid model with the core business at home and selected services strategically outsourced overseas. HP’s Best Shore delivery strategy caters to this dual requirement by giving the customer the advantage of a global infrastructure and balanced global footprint. This enables the business to react quickly to any uncertainly, but capitalising on the cost benefits of offshoring.
Individual customers may have specific reasons for wishing to keep certain services onshore – such as data-protection and security – but it is more than likely that for other services, location choices will depend largely on the vendor’s judgment that conditions are suitable. Moreover, what will ultimately determine a market’s viability as a centre for, for example, the provision of BPO services is the expertise, the people, the processes, the tools and the infrastructure available. This is what a vendor will look for when deciding where to establish itself.
HP’s approach is to develop centres of excellence for specific services in broad based key global hubs supported by regional language centres. What delivers value to customers is our investment in people, technology and modern facilities; it means they get more time to spend on managing their core business and don’t need to worry about their location strategy.
As ever, advancing technology will continuously shift the goalposts of this debate. Connectivity has created a global village in which individuals and communities everywhere can contribute in the outsourcing market. As this trend moves towards its logical conclusion, the particular resources or characteristics of a specific market will lose their significance and a location-based outsourcing proposal will become less relevant.
For now, the pendulum on the “onshore vs offshore” debate will continue to swing back and forth, impelled by transitory political, social and economic exigencies. Cost is still what the CFO will have front of mind when tackling this dilemma, but the growing sophistication of technology may make it a headache of the past.
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Time to Look Again at Outsourcing
by Joanna Sedley-Burke, Business Development Director, Sovereign.
It is nearly four years since the banking crisis precipitated the recession and the majority of global businesses have cut costs to the bone. But as these organisations face up to the fact that the era of austerity is set to stay for several years to come, it is clear that business models need to be reviewed.
Following systemic under investment, internal resources are simply no longer good enough. Consolidation is rife; companies are looking at international expansion and building global business networks. Research carried out by TPI* in the third quarter of this year shows that there are many different models of outsourcing used throughout businesses around the world. However, with times tough and business competitive, it is key that each organisation chooses the best model of outsourcing to work for their business.
As Joanna Sedley-Burke, Business Development Director, Sovereign explains, in tough times, companies across the globe need to do far more with less and become far more savvy about leveraging external outsourced expertise to derive additional value.
One size fit all?
As Gartner describes**, the offshore IT outsourcing market is “big, and there’s no turning back. Everybody is either doing it, planning to do it, or should be doing it.” But with this comes various additional options of outsourcing choice, from staff augmentation, out-tasking, project based outsourcing, managed services or BOT (Build-Operate-Transfer). However, the right choice for each business can vary immensely based on a whole array of varying factors. There is far from a ‘one size fits all’ approach.
The right outsourcing choice must be assessed on the best model to fit each organisation and this will vary hugely around the globe. Different countries carry out business in so many different ways and can be at differing ends of the scale in terms of their development when it comes to infrastructure and economy. Even from business to business, the culture of an organisation must be fully understood by any external provider in order to ensure the correct IT choices are implemented to complement and support the organisation appropriately.
Skills and costs
The TPI research suggests there is a trend in global outsourcing from EMEA, down by 23%, to Asia Pacific, that experienced an all-round year on year increase. It is clear that the availability of highly talented and experienced workers in this region are able to carry out the same level of work as in EMEA but at a significantly lower cost.
With rising inflation and escalating fuel costs just two examples of how businesses are being hit, each year is bringing a new financial challenge for business. Over the past four years, these organisations have cut costs to the bone – not least across IT. But is this really a sustainable long term approach? Is the current internal skill set really capable of supporting the current business needs or any potential expansion into more buoyant global markets? Can it deliver the robust communications required to create international networks of collaboration or exploit innovative technologies to increase efficiency and the timeliness of service delivery?
Leverage Expertise
Successful organisations will know the value of external expertise when used appropriately. But continuing to rely on limited internal resources as they come under increasing pressure is increasing corporate risk and potentially constraining opportunities for business growth. Companies would do well to exploit the proven experience and skills of external providers and look globally when they do.
Turning to an outsource provider in any part of the world offers companies a real opportunity to drive down the risk associated with day to day operations; provides a chance to reduce costs and delivers access to the experience required to build a solid business case for on-going investment. The TPI research shows that BPO is strong and expected to increase further, with businesses having to consolidate and keep the chargeable heads whilst the back-office functions go elsewhere and thus reduce the overheads.
It is those organisations that accept the need for external professional services provided by a company with no vested interest in boosting CVs, and with the required depth of skills and experience, that will be best placed to adapt and respond to the continuing economic challenge.
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ITC Infotech : Journey from XP to Windows 7
by ITC Infotech
ITC Infotech, Heineken and Insight took part in a webinar on the 22nd September 2011 which discussed in detail the issues, risks and processes associated with migration to Windows 7, from each perspective
Although Windows 7 is rolling out quickly to favourable reviews from a consumer perspective, 75% corporate enterprises are yet to complete their migration to Windows 7 and many are in the early stages of planning. This is because, from the enterprise perspective, like any major update or operating system migration, migrating can be challenging, time consuming, and costly. In any case, all enterprises will need to set about migrating to Windows 7 because it promises the productivity, reliability, performance and security enhancements they need, and primarily because Microsoft has scheduled a tight April 2014 deadline to pull out enterprise support for Windows XP.
This webinar hosted by ITC Infotech in association with Heineken International and Insight addressed issues and risks associated with successful on-time migration to Windows 7.
Webinar Highlights
• Issues and risks associated with a federated and distributed enterprise- strategies that hold promise to manage the transformation- A case study of Heineken International
• Typical challenges of planning and migrating to Windows 7
• Challenges of full enterprise rollout-A case study of Insight Enterprises.
Issues and Risks Associated with a Federated and Distributed Enterprise
Heineken International– Windows 7 Migration Case Study
Heineken is one of the world’s leading brewers with a wide international presence through a global network of distributors and breweries. Heineken owns and manages one of the world’s leading portfolios of beer brands.
With a portfolio of globally distributed operating companies, Heineken has a very federated and distributed enterprise IT landscape. The organization has 48,000 workstations running over 2000 windows applications.
Heineken started the Windows 7 upgrade in January 2011 with the support of ITC Infotech at the 2nd and 3rd level to:
• Standardize and globalize the workplace environment
• Attain the flexibility to cope with local diversity
• Improve user experience and decrease TCO
Issues and risks Heineken faces as it migrates to Windows 7
Application compatibility, ensuring applications will install and run predictably on Windows 7, is at the heart of Heineken‘s Windows 7 migration issues. Simplifying the management and deployment of applications during Windows 7 migration poses the most time consuming challenge. Another key issue Heineken faces is managing the change in terms of the time it will really take individuals to adapt to the new features and functions and be able to operate with the same speed and efficiency as they do now. Heineken also battles with the risk of not being able to complete enterprise wide rollout by April 2014(when Microsoft plans to pull out enterprise support for Windows XP).
Issues and Risks Associated with a Full Enterprise Rollout
Insight Enterprises - Windows 7 Enterprise Rollout Case Study
Insight is a global provider of information technology (IT) hardware, software and service solutions to business and public sector organizations with Operations in 21 countries, serving clients in 191 countries worldwide. Evidently, Insight had a very distributed IT landscape with applications portfolio of over 200 applications. Insight was using Windows XP with the latest service place and was quite sceptical about the Windows rollout. Along with the upcoming expiration of enterprise support for Windows XP, the company was motivated by an opportunity to acquire new tools for tightening network security, accelerating PC performance, and improving employee productivity to move forward with a companywide upgrade to Windows7. Also, the company placed an emphasis on minimizing the impact of the upgrade on employees.
Challenges faced by Insight Enterprises in migrating to Windows 7
Ensuring application compatibility and deploying applications for optimal performance and functionality posed the most challenging and time-consuming challenges. The IT team spent months before the deployment performing readiness testing on more than 200 applications. Memory was surprisingly an issue with the OS running extremely slow on less than 2 Gb.
Typical Challenges of Planning and Migrating to Windows 7
• Application compatibility
• Hardware compatibility
• Assessment & remediation of applications and hardware
• Project planning
• Windows 7 deployment
Benefits of Migrating to Windows 7
Windows 7 offers desktop and server optimization, management flexibility faster PC performance, while strengthening its network security capabilities. Deploying Windows 7 offers gains in productivity across the organization as more employees take advantage of enhanced desktop tools and simplified access to network resources. A central benefit of Windows 7 is its extensive cost savings, which can be as much as 20% in direct costs and impressive IT cost savings with MDOP. So even though Windows 7 migration has key benefits for an organization, the risk of failure and the enormity of the project may be intimidating and can have significant impact on an IT organization in terms of time, budget and internal reputation.
The ITC Infotech Approach to Windows 7 Migration
ITC Infotech has a clearly defined process of helping organizations migrate to Windows 7. This involves determining client readiness by checking hardware and application compatibility, ensuring security from a policy and governance perspective, image engineering, migration and deployment, and finally operation of application - end-user acceptance and helpdesk support.
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Procurement BPO - Helping you Accelerate Value Realisation For Your Company
by Philip Allouche – Head of Solutions
Often BPO is used by Procurement as a means of applying labour arbitrage, exporting a bundle of processes and activities off-shore, for these processes then to be optimised overtime.
Some use BPO as a means to augment procurement resources and cover more spend. However few use BPO as a strategic lever to “drop in” a new best in class business process that will resolve current inefficiencies and secure Procurement is involved in the right places throughout the purchase cycle.
Procurement professionals can buy best practice processes for specific business activities (or spend categories), like Fleet, Travel, Resourcing, or FM. Proven solutions that have Procurement embedded in the right places of the business cycle, and with the visibility to manage the supply base for continuous improvements.
Take for example Resourcing Process Outsourcing (RPO), often offered by recruitment companies, followed by Outsourcers specialising in off-shoring. RPO often creates a “black box”, from which Procurement can only influence via audits. This puts procurement in a difficult position. After the honeymoon period is over. The better alternative is to have Procurement inserted at the right stages of the process, and make sure the suppliers are engaged in win-win solutions that incentivise them to offer best value. Xchanging offer a vendor neutral process, where we manage the supply chain from start of hiring to payment to the contractors. We ensure this is done efficiently to a high service standard. Along the way we manage compliance to policies and save our customers money by ensure accuracy in billing. We work with the supply base in a collaboratively to create win-win situation been the suppliers and our customers. We don’t focus on reducing the agencies mark-ups on candidates, but rather on incentivising them to find the best value candidate for the customer.
Another example of where BPO can solve procurement challenges is FM outsourcing. A full outsource of the FM portfolio also creates a “black box” which is difficult to un-tangle. It also creates a challenge around spend visibility, not allowing finance or procurement to understand the drivers. We manage the back-office financial processing for our clients in the FM market, covering transactional and administrational tasks from Vendor set-ups to Payment, including all the financial reporting. Our standard platform services are able to deliver clear tracking of budgets and spend across the portfolio. Most finance and procurement functions recognise the challenge in obtaining granular visibility of the spend across a real estate portfolio. “Drop-in” Xchanging’s platform services and achieves full visibility to track budgets and compliance to the procurement strategy.
Furthermore, we are seeing emerging interest for complete “drop-in” Procurement solutions, inclusive of people, processes, and technologies, across all categories of spend. These solutions enable our customers to drive procurement value across their businesses to an accelerated timetable, as opposed to building from scratch or adding to legacy business processes
Procurement professionals can apply BPO to act quicker in the value delivery, while becoming strategic contributors to their businesses.
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Don’t Let Clouded Thinking Make You Forget The Network
by Michel Robert, Managing Director, Claranet UK
All businesses that have outsourced, or intend to outsource, parts of their IT infrastructure should consider the vital importance of the network to the successful operation of their cloud service, according to Michel Robert, Managing Director, Claranet UK.
“In our experience, many haven’t, and the consequences of this include them paying over the odds for a networking solution that is often not suitable for taking advantage of the cloud, with businesses suffering from poor application performance as a result,” stated Michel Robert.
“Much has changed in the networking space over the past decade: incumbent carriers are no longer the only providers of high-quality connectivity. The market has greater competition than ever before, thanks to the rise of new network providers. In addition, a new breed of IT outsourcers has arisen - managed service providers - who can leverage the array of networks available and combine them with other technologies in one complementary service that suits the specific needs of each customer. All of this has had a positive effect on prices, choice and service quality,” he continued.
The broadband revolution has bought about faster connectivity and an increasing demand for next generation networks that can support greater voice and data traffic volumes at greater speeds.
Michel continued: “New networking technology gives businesses unprecedented freedom regarding the types of networks they use for cloud services. For example, instead of having to utilise fibre-based networking technologies, carriers can now combine multiple legacy copper lines – traditionally used for phone and broadband services - to create a lower cost, copper-based Ethernet connection with data transfer speeds, both up and down, of up to 20Mbits/s.
Speeds like this, whilst falling far short of those provided by fibre-based technologies, would be sufficient for a small business that wants to access some cloud services,”
“The drop in connectivity costs and the increase in the choice, reliability and sophistication of networking solutions mean that cloud services are potentially available to businesses of all sizes. They also mean that businesses should assess their network provision as part of a move to the cloud if they are going to ensure it is as cost-effective and seamless as possible. In some cases, it may be worthwhile to, for example, break a contract with a carrier and incur related penalties in order to get a new service that is much faster, cheaper and more reliable,” he added.
It goes without saying that you need the right network for the job, and if you are going to outsource business-critical IT functions to the cloud, then you need a connection with strict performance and availability guarantees. But who is responsible for the performance of the network and the overall cloud service?
“Whether a business is moving to the cloud, or just thinking about it, they must consider who is accountable for the performance and availability of whatever might be outsourced. If multiple providers are involved in an overall cloud service – e.g. a carrier, hosting company and application provider – there may be problems when it comes to identifying the root cause of service disruptions and fixing the problem. For example, a number of businesses that have come to us for combined cloud hosting, application management and networking services have done so because they were frustrated with the finger-pointing by providers of different elements of their outsourced service,” he added.
The most obvious solution to this is to secure a Service Level Agreement (SLA) for the overall service, not individual elements. However, this is only possible if the service provider controls both the cloud hosting and network services. If a business has multiple providers, it will need to ensure the company’s SLA with their network provider covers the cloud application, and consider what headaches may be caused if it doesn’t. Businesses need to weigh up whether they’re prepared to take this risk or whether it’s more worthwhile to place networking and cloud hosting with one provider.
Michel concluded: “It’s easy to get wrapped up in the wonders of the cloud and the business benefits available, and only consider the means of accessing and retrieving your data as an afterthought. The good news is that, with good due diligence, it’s relatively easy to have the right networking solution and cloud service provider for your business. This in turn will ensure cost-effective and reliable access to, and operation of, your cloud-based infrastructure.”
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Persuading Staff to “Pull in the Same Direction”
by Shirley Barnes, Client Relationship Director, Dinamiks Limited
Persuading staff to “pull in the same direction” can deliver hard business benefits, writes Shirley Barnes, Client Relationship Director, Dinamiks Limited
Today’s often tough economic environment makes it imperative that all aspects of business performance be studied to see if they offer prospects for optimisation.
Staff behaviour and attitudes are one area where the complexity of the subject might make change look daunting. Individual behaviour, attitude and motivation, team working and alignment to objectives and values - and compliance - may all need to be addressed.
However, new, online approaches to measuring and managing performance, as well as attitudes and behaviour, have brought costs down and improved ease of use very considerably.
Where reducing costs and improving productivity of employees are top of the agenda, the effort can be particularly rewarding and the means to get there relatively pain-free.
Traditional route
In large organisations, the traditional route to change has been to use external specialists and an array of tools and techniques to map what is going on in the company, and then roll out a programme of change. It often involved using modern variants of time and motion studies to highlight where individual improvement was required. Workshops and training were employed to make the changes required.
Smaller businesses relied on the MD or FD changing the company culture through group or face to face meetings, perhaps following informal or formal performance appraisals.
With the switch to web enabling applications, the traditional ways are being replaced by a simpler and more automated approach.
This analysis piece looks at how Medex Research, an SME, made the changes that have resulted in a more cohesive workforce; where staff now pull more strongly in the same direction. The lessons learned at Medex Research can be scaled up or down.
The company is a full service global market research agency, operating in the medical devices and diagnostics market, which outsources research to companies like Medex.
Traditionally, Medex used paper-based appraisals to track staff performance to
ensure its people were permanently focused on the essential business objectives and values. MD Sarina Masson recognised the drawbacks of that approach and decided to switch to a new generation of employee performance management.
Complete picture
The new generation is automated and web-based and gives management a complete picture, from the employee performance and behaviour perspective, of what is going on in an organisation
“Many people,” she says, “are now more familiar with web-based applications than paper ones, which makes the switch to web-based appraisals an increasingly painless one. There is the added advantage that they can be rolled out very easily at any time locally or globally. All that is needed is web access and computers.”
The appraisals at Medex Research are carried out with two objectives in mind – (i) staff development, including meeting training needs and how best to improve performance, if it needs improving. “The system will tell us if it does,” says Masson (ii) using the system to build and maintain quality across the business.
These objectives complement the business goal of always producing the highest quality research, in order to secure solid long-term client relationships.
Staff development and re-direction
“We’re different to a lot of other companies, but similar to market research companies, in that sales output can’t be objectively measured,” Masson cautions. “So, we focus on staff development in areas like analysis and report writing – generally, how to perfect the different stages of market research.
“Now in its third year here, the system is key to optimising our employees’ market research skills, as well as their knowledge of the medical industry, through highlighting any gaps in it, which we then address.”
Masson says the system “has helped us formalise and systemise employee appraisal and career progression. Paper-based systems can be run very informally and will take more time. A computerised, web-based system enforces good discipline by the managing director, or the head of HR or whoever manages its use.”
The introduction of a new approach to performance management “also gives the opportunity for staff ‘re-direction’ in their personal development. It’s not just useful for showing where training is required; it can pinpoint where change is required in attitudes, attention to detail and overall quality of work, in line with company goals.
“And it helps with fostering a better ‘connection’ with the company, in terms of individuals helping other staff; for example in generating more sales, being pleasant to work with, having ideas for the business and the workplace, being proactive in company support – including the way clients are serviced – and working better as a team.
“Where a company’s positioning is ‘quality’, the system supports the drive for excellence in every area that contributes to it,” she says.
Medex’s experience of the online approach is a good pointer for other SMEs and departments or divisions of large operations. It shows there is a new way for change and it’s one that challenges fear, cost of change and the assumption that managing employee performance is a complex and time consuming process. It’s not.
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How a Business Can Benefit From Employee Legislation
by Shirley Barnes, Client Relationship Director, Dinamiks Ltd
It’s not necessarily the burden it first appears to be, writes Shirley Barnes, Client Relationship Director, Dinamiks Ltd
Employee legislation has not made it any easier to do business in the UK. The latest significant piece of legislation was the abolition of the Default Retirement Age [DRA] which came into effect on April 1st 2011 in a phased manner. The completion date is October 1st this year.
It means that employers will no longer be able to use the DRA to compulsorily retire employees. Employers who fail to embrace this new legislation may face claims of unfair dismissal and discrimination
Preceding it with another challenge to employers is legislation that has increased the maximum limits on statutory unfair dismissal compensation, redundancy payments and other awards.
The increase in retirement age means that many companies will experience situations where age/experience/capability will be a challenge and where the companies will require evidence leading up to and beyond the legislation change to justify why people should retire from a role or even why they should stay.
Employee legislation can help employees but it also increases costs and adds to the many burdens that businesses face. Legislation changes also add a layer of complexity to HR and other aspects of the business.
Changes provide challenges around constructive dismissal, data protection, DRA, disciplinary procedure, equality, employment tribunals, fair and unfair/wrongful dismissal, grievance procedures, statutory rates, working time regulations, performance, training, coaching and productivity.
Key points about, and arising from, the abolition of the DRA
Guiding principles associated with the retirement age change are provided by ACAS. Below are key points to consider and take action on.
Until April 6th, the law set a DRA of 65 years. Provided an employer properly followed the prescribed statutory retirement procedures, a business could fairly dismiss an employee on the ground of retirement at or above the age of 65.
The DRA change means that in order to retire an employee, a company now needs to demonstrate just cause and follow due procedure.
“Just cause” and “due procedure” are viewed as problems but, as with other issues arising from employee legislation, can be managed to a satisfactory conclusion with an online system that…
(i) Aligns every employee’s objectives to those of the business
(ii) Provides the means to set development plans, track and record progress
(iii) Provides a record of capability for all employees, thereby supporting a common and consistent set of guidelines and principles that apply across all employee ages of the business.
(iv) Allows an employer to demonstrate just cause and follow due procedure
A variety of factors can determine at what stage an employee should step down. All these can be tracked, recorded and analysed by the system.
The DRA has long been viewed as a valued stake in the ground for employers, because it has been a focus for performance issues and succession planning. It has allowed poorly performing employees to retire gracefully and has enabled - in an orderly fashion - open discussion for succession planning. That has now changed. From October 1st, the door closes on it.
The “stake in the ground” concept does beg the question of why or how organisations don’t take action about poorly performing employees before they retire. Succession planning may have been months or even years in the making, to ensure a smooth transition and the engagement of a [hopefully!] more productive employee, but that does not excuse the inaction.
The opportunity for businesses
The reasons why unproductive employees are tolerated are not in the scope of this article, but the subject does lead us to the question “Is the change in retirement age actually an opportunity for employers to re-tune the business in an era of suppressed economic activity, squeezed margins and demands from investors to optimise performance?”
We can also ask if the legislation that increases the maximum limits on statutory unfair dismissal compensation, redundancy payments etc, helps a business in unintended ways? If the business uses a system that helps it conform to employment law while improving performance, then, yes. The system does this by providing an audit trail of performance, behaviour, attitude and the ability of individuals to meet set objectives.
A manager in the business can track an individual’s performance over a period of time and share the view he or she has of it with that individual and/or with another manager, such as the individual’s line manager.
There is the belief in some quarters that employees don’t like change, but in reality we find that if the CEO and board get behind change initiatives, staff are happy to learn and advance in order to help the business and themselves. In fact, many desire it and employees in outsourcing are no exception.
That desire can, if harnessed, help business benefit from new, or changes to, employee legislation, by re-scoping the business where it needs it.
More at http://www.ikdevelopments.com
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A Time of Change : From Print to Digital?
by Emmanuel Benoit, Jouve Group.
Despite the troubles in the global economy, the worldwide book market is continuing to grow. It was worth $ 75 Billion in 2010, and is expected by Outsell to hit $ 79.4 Billion in 2013.
Digital book sales are still dwarfed by print, but they are beginning to pick up at an increasing rate. Outsell predict that “the percentage of the worldwide book market attributed to e-books will rise from 3.2% in 2009 to 16.1% in 2013”. This rise in digital sales will be at the cost of print. So where in the market are these changes occurring, and what are the factors at play?
Regional differences
There are large disparities in eBook sales figures around the world, and this has much to do with the way that devices have launched at different times in different markets. The Amazon Kindle has been extremely successful in the US (while Amazon does not release specific figures for the Kindle, their overall sales for Q2 2011 grew to $9.91 billion, with much of this attributed to their Kindle store). However, the device been more slowly introduced in Europe (the UK received its first Kindles in August 2010, while the German Kindle only launched in April 2011). While both the UK and Germany have their own dedicated content stores online via Amazon, France is still to receive a Kindle store, or direct sales of the device via Amazon.fr, and thus the smaller French market is shared between Apple with their iBookstore and domestic retailers such as Fnac.
Expansion is therefore much stronger in the United States where the market grew by 76.2% in 2010. As Ronn Dunn, President & CEO of Cengage noted at the Jouve organised ‘April In Paris’ (an international digital publishing conference held in Paris earlier this year), the “digital content market is now worth over $ 1 billion”. It’s not just the so-called ‘e-tailers’ who are profiting. Barnes and Noble is one of the few bricks and mortar stores to succeed in the digital era, and their Nook ereader (especially the color version) has also proved extremely successful.
Apple must also be mentioned. Despite the fact that they had no history of work in publishing before the launch of the iPad, the device quickly became seen as the ideal platform for enriched ebooks. This is a market which will certainly expand.
However Europe is set to catch up. Joerg Pfuhl, CEO of Random House, observed that the projected 2011 growth curve for eBooks sales in Germany matched the American market one year beforehand.
Digital reading is well established in Japan, where large numbers of adults enjoy reading novels on their phones and other portable devices, and there is certainly plenty of potential for growth in markets like China. Dianli Yu, the president of the Commercial Press, one of China’s largest publishers, has spoken about the huge potential for digital content, saying that “the market is huge”, with over 800 million mobile phone users in China.
All previous experience seems to indicate that when there is a surge in adoption of ereading devices, which can be seen as a sort of digital ‘tipping point’, then there will be a major increase in eBook sales.
Market segment differences
Print markets are shrinking and digital markets are growing; as different market sectors contract and expand, there will be significant fluctuations, and new winners and losers will emerge over the next few years.
The majority of growth will be in the Consumer Book Market. Most digital reading platforms like the Kindle, Nook, and iPad, have been fairly exclusively targeted at mass consumers. It must also be remembered that for learning, neither ereaders nor the iPad will be the preferred platform for educational content – it will remain PC based. Initiatives like Mind Tap are electronic educational environments which use digital content to create personalized learning pathways.
Nonetheless, as a percentage of the total publishing market, sales of digital content are largest within the professional sector. Businesses have adopted digital formats due to their lower price points and economies of scale. This is another area where we will see major growth, as firms move more of their business data away from costly paper and into digital formats.
What is driving these changes?
Digital technologies can offer significant savings to publishers and wider businesses. There are none of the overheads relating to physical content, and the printing, storage and distribution it requires. However, as with the music industry, customers are demanding to see these savings reflected in retail prices.
This new generation of digital content means that books are available to download wirelessly - they never go out of print, and they can be accessed anywhere. Customers’ reading preferences can also be highly accurately tracked. Power is placed back into the hands of the author and the consumer, and publishers can build up a much clearer idea of what their customers enjoy.
Print on demand technologies also allow publishers to offer customers single copies of a book, without having to commit to costly reprints. These technologies will gain in importance, and will perhaps operate as a stepping stone between digital and paper formats. These sorts of new high quality technologies will bridge the gap between the print and digital worlds, allowing consumers to enjoy content like photographs, which might start life in digital form and end up in a traditionally bound photo album.
Print on demand offers new business perspectives with business models (cartoons, cultural heritage content, personalized books). It’s not just a question of optimizing the back office. Jouve has 30% growth in these areas, which have been opened up thanks to our investments in workflow systems (especially in optimizing the way we process single orders).
How content providers need to respond
Publishers need to move fast to make their titles available in digital formats. With new technologies, content providers will be able to meet unlimited demand with no time delays for popular titles. If you are not in a position to meet your customers’ requirements, and offer them a range of options, then you are likely to be left behind.
The solution is to offer the widest possible range of content via digital, print and print on demand to ensure that consumers can have their book as they want, where they want, and when they want.
The future is uncertain, but working in partnership with other companies can help to create the next wave of opportunities, and can also mean that risk is shared. There is no silver bullet solution, but it’s by offering customers a range of solutions for their content needs that publishers and businesses will succeed during this testing time.
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Making Global Delivery Work
by Andrew Brabban, CTO Applications, Fujitsu UK & Ireland
Five factors that determine the success or failure of a globally delivered applications project
Love it or hate it, for the past two decades the story of global delivery (or offshoring as it’s often considered), has been a mixed bag: for every success story put forward there has been a horror equivalent highlighted as well.
On one hand, more and more organisations are eagerly embracing the concept of global delivery for application projects in order to lower costs, increase efficiency and productivity. While on the other side, communication issues, management overhead and cultural incompatibility are forcing companies to re-think their global strategy. And even within organisations, some divisions will report successful project deliveries using global teams while others fail to take advantage of the same.
Application projects are no longer delivered by IT professionals all huddled up in a single office. Today, application projects and related activities make-up the bulk of IT business delivered by global teams. The breakdown of global delivery activity makes for interesting reading:
• By sector: While the private sector has led the way in embracing the Global delivery model with over 30% already doing some form of offshore, the public sector has stayed away from it with less than 1% usage, predominantly citing security and social reasons
• By geography: While USA and UK account for over 70% of global delivery business and have been in the forefront of using offshore and nearshore services, mainland Europe and Japan have been slow in adopting the same and account for less than 25%
• By domain: The largest vertical sectors using global delivery are financial services (32%), manufacturing (20%), telecom (12%) and energy (11%). However, retail (5%), health care (5%), media (3%) and supply chain are still warming up to the idea
But whether or not applications projects are delivered successfully on a global scale depends on a number of key factors. Below are the five areas organisations need to be considering if they want to implement successful applications projects globally:
1. Organisational maturity
Research4 indicates that many global projects are perceived to have failed because the benefits expected are far higher than the delivery maturity of the organisation. So, it is vital that the right expectations are set with all stakeholders. Organisational maturity is a key factor that defines the type, size and complexity of the work that can be delivered using the global delivery model. Maturity in this context also means the availability of the infrastructure (e.g. remote development centres, WAN etc.), having standard global project development practices, having staff with experience of the model and, of course, commitment from management to deal with issues. All of this will have a significant bearing on what can be delivered globally and what potential benefits can be gained.
2. The right project
Taking a blanket approach is a recipe for failure. Technically, all projects can be considered for global delivery, but, practically, not all lend themselves to offshore or nearshore development. Practical considerations likely to prevent work being carried out using global teams are often either security related (regulatory compliance, data protection and confidentiality), the business case itself not stacking up – where the cost of overheads outweigh benefits gained, or simply because the client is not comfortable with the model.
A recent report by ComputerEconomics5 confirmed that 51% of the organisations that engage with offshore use it for application development and the average amount of development work done offshore is 35%. With the evolution of cloud, there is a general expectation that the potential for using global resources on application projects will increase as the required infrastructure can easily be made available to remotely located staff.
3. The right location
Having identified a suitable project for global delivery, it is important to choose the best offshore/nearshore location that will meet the project objectives. The deciding factors for selecting your location will typically include cost effectiveness, the technical skills and numbers, the functional roles of the project and the cultural affinity, security and language requirements. The 30 Top regional locations for 2010-117 as identified by Gartner are listed below:
• Asia/Pacific: Bangladesh, China, India, Indonesia, Malaysia, the Philippines, Sri Lanka, Thailand and Vietnam.
• EMEA: Bulgaria, the Czech Republic, Egypt, Hungary, Mauritius, Morocco, Poland, Romania, Russia, Slovakia, South Africa, Turkey and Ukraine
• Americas: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and Peru.
4. The optimum blend
Perhaps the greatest challenge to successfully implementing global delivery is choosing the right blend to offshore. It depends on a number of factors – the platform, the project size, the project type, the development methodology, and the process maturity. There is no one size fits all solution here. Typically, there are activities such as application and product development that can see a high offshore blend. Assessing the right blend is crucial to your company’s needs.
5. Project Management Skills
As ever, the success of rolling-out a globally delivered project lies in its management. Whether done locally or globally, the basics of project management apply in both cases. But many project managers underestimate the skills required to build a blended team: indeed it is one of the biggest reasons responsible for projects failing. Training project managers is therefore vital so that they get the expertise and skills to deliver offshore/nearshore projects. Working remotely demands a greater degree of communication and collaboration to ensure that all involved are working in tandem and are aware of all the factors that might impact their delivery.
Global delivery is not about offshoring. It’s about “doing the right things from the right places”. Global delivery is not a ‘silver bullet’ for all IT issues and needs to be applied in specific circumstances according to the criteria listed above. As ever, it is down to experience and judgement in order to apply the right global delivery model to your business.
ENDS
[1] - NASSCOM, 2009
[2] - PMP research, 2008
[3] - BCG Group 2007 and Data Monitor 2009
[4] Tom Philip, Erik Wende, Gerhard Schwabe - Identifying Early Warning Signs of Failures in Offshore Software Development Projects, 2010
[5] - IT Outsourcing statistics 2010/11, Computer Economics
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Unrest puts Egypt’s outsourcing credentials at risk
by Ovum lead analyst Peter Ryan
As the crisis in Egypt continues, Ovum lead analyst Peter Ryan asks what the effect on the country’s outsourcing market will be:
As the global community watches in horror at the scenes unfolding in Cairo, many in the outsourcing community are pondering the demise of what appeared to be the next big thing, in terms of location, in offshore services delivery. The virtual state of martial law imposed by the Mubarak government not only impacts the ability of outsourcers to service their clients, but also counters the pro-business message of openness that has been the watchword for foreign investment for the past several years. The largest question remains whether this once-waking outsourcing giant can recover regardless of a change in government, and what the broader implications are for offshoring.
Curfews, restricted movement, and no Internet impact service delivery
It is clear that the expression “business as usual” has no practical application for outsourcing work currently slated for Egypt. Communications within, to, and from the country have been minimal, and staff are under government curfews restricting movements to and from work. These constraints are giving outsourcers on the ground a significant amount of pain from the strain of fulfilling tactical processes and ensuring that adequate labor and technology backups are in place.
Many service providers, as well as their clients, are re-evaluating whether Egypt is still the right location for outsourcing deployments.
This is especially disturbing considering the large number of global players that have set up in Egypt in the past several years – among them most recently, Sutherland Global Services in Alexandria. Other IT vendors that have been investing in Egypt for longer periods, just as large, home-grown providers (including Xceed and Raya), could be impacted severely in the coming months as clients are anxious to minimize offshore risk. Microsoft has already begun to move some of its work out of Egypt.
Can Egypt’s outsourcing sector recover?
Over the longer term, it will be crucial to see how Egypt’s global reputation as a leading destination for outsourcing services can recover from this wave of violence and civil and political unrest. Effective damage control among prospective and existing investors will be difficult for any future administration, and convincing many outside investors of ongoing Egyptian stability will be a tough task to say the least. For nearly ten years, executives, consultants, and site selection specialists have been fed a steady diet of positive rhetoric from Egypt’s government, quasi-government affiliates, and the Egyptian private sector touting the country’s political and economic stability in order to secure BPO and IT service investment. It is unlikely that these same investors will be quick to take such declarations at face value in the future.
However, Ovum believes that Egypt’s outsourcing space retains value in the form of a sizable talent pool with significant education and language skills. This, along with generous financial incentives, has been the backbone of the country’s growth in services. That said, after recent events the extent to which educated, multilingual Egyptians will choose to emigrate to more stable shores (at least in the short term) is questionable. This could erode the country’s competitiveness further.
What are the Egyptian crisis’s broader implications for offshoring?
What has recently occurred in Egypt is certain to have ramifications for offshore outsourcing destinations the world over.
“Following recent border violence in Mexico and the 2009 terror attacks in Mumbai, the events in Egypt are certain to make outsourcers and their clients much more risk averse than any time in recent memory, and are likely to push many companies to choose the more secure , albeit costlier, option of keeping third-party work onshore,” added Ryan.
According to respondents to Ovum’s 2010 CRM outsourcing Business Trends survey, this sentiment is already present among Western enterprises. Approximately two-thirds indicated no offshoring plans, and regardless of location, the Egyptian unrest will reduce the bar for enterprise risk tolerance for offshore delivery.
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Charities and outsourcing: bridging the final frontier
by Patrick Nash, Chief Executive, Connect Assist
With donations to charities falling – the 2010 Charity Market Monitor reports that voluntary income to the UK’s top 500 charities has dropped by £64 million - the time has come for charities to re-look at the method and effectiveness of their service delivery.
Traditionally third sector organisations have shied away from outsourcing services – languishing in the wake of both the public and private sectors. Fears regarding the loss of personal interaction, expertise and the integrity of the organisation have all been voiced.
Yet these entrenched attitudes are why I see the current economic climate as an opportunity as well as a challenge for the sector. I hope it will force organisations to reassess they way in which services are delivered and to look afresh at the benefits that carefully managed outsourced solutions can offer.
In fact, historically outsourcing has been one of the Third Sectors biggest secrets. According to Paula Rickson of the Charities Aid Foundation, all charities outsource to some degree, “They don’t tend to shout about it too much. Charities are often worried about losing touch with their donors, and sometimes the donor perception is that outsourcing costs money, which isn’t the case. Research suggests that outsourcing back-office costs could save UK charities £136 million a year - only one aspect of charity work amongst many that could potentially, and profitably, be outsourced.”
And cost reduction is an increasingly pressing issue for many, as the impact of Government cuts to grant funding is felt. At Connect Assist we can typically find a 20 per cent reduction in costs when taking over a helpline from a charity’s inhouse team. While for organisations that are looking to extend into different areas, working with an outsourcing partner means there is no need to make a significant, upfront captial investment.
Despite this, many charities have still not considered the outsourcing option. According to Professor Cathy Pharaoh of Cass Business School, “The significant advantages offered by outsourcing in offering additional expertise, taking some burdens off charity shoulders and freeing them to pursue their mission, are also acknowledged, but a key finding was that many charities, however, have simply not considered outsourcing. Infrastructure bodies provide limited promotion of outsourcing to members, partly because of lack of understanding and information, but also because of factors such as risk-aversion.”
I would argue that charities should be looking at outsourcing when they lack the capacity to deliver a particular service. Or if a service already exists in-house, but needs to be delivered at a lower cost. A contact centre is equipped to provide a number of features that most in house services would not have. For example, access on a 24/7 basis rather than a 9am – 5pm Monday to Friday service. Levels of call abandonment are also likely to be significantly lower, while smart telephony such as call queue routing and automatic call-backs drive efficiency.
The benefits of such a move are highlighted by MDF The Biopolar Organisation. It received more calls in one week than in an entire year following an EastEnders storyline that included a character’s struggle with biopolar disorder. Having moved from a weekday, office-only helpline run by volunteers, to an outsourced 24/7 service it was able to cope with this demand. Interestingly 70% of calls were taken during the night – calls that would otherwise have been missed.
Suzanne Hudson MDF’s Chief Executive comments, “Awareness of bi-polar disorder has increased significantly in recent years and we were struggling to manage rising volumes of sometimes very detailed calls.
“By outsourcing some of our service provision to a specialist contact centre organisation, we were able to channel member calls to a dedicated helpline resourced externally, while continuing to deal with general enquiries in-house.
Suzanne acknowledges, “Initially we did have concerns regarding the loss of personal interaction, expertise and the integrity of the organisation. But our experience has been wholly positive and we have developed a close working relationship with Connect Assist our outsourcing partner.”
Risk aversion can appear tempting in a tough economic climate. However, where there are real savings to be made and the delivery benefits are apparent, refusing to consider change could potentially endanger any organisation, with the third sector remaining more vulnerable than most.
Patrick Nash, CEO Connect Assist
http://www.connectassist.co.uk
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Managing Outsource Providers
by Gordon Easden, practice head, FusionExperience.
Operating Model Strategy Webinar Series.
We held our second interactive webinar in November and the insights gained were fascinating. Although the webinar targeted the asset management sector, the issues raised were sector agnostic.
Outsourced service provision is central to the operation of almost all asset management firms. The basic rationale for outsourcing across all industries is that the benefits of scale outweigh the additional management costs of acquiring services from suppliers. Firms outsource all manner of services that would previously have been undertaken in-house from facilities services like office cleaning, through logistics, to call centres.
The task of managing outsource service providers is made easier through automated process management information and remote access to tracking systems. This makes the monitoring tasks far simpler, lessening the need for frequent site visits. At the same time, the ubiquitous use of email and mobile technology has further streamlined the process.
Thus, the outsourcer gains access to economies of scale. Significant sums can be invested in automation, with the cost recovered across an enlarged business. Global convergence of operating practices allows this scale to be leveraged even further. The enlarged global teams can then be rationalised to global centres of excellence, located in low cost areas delivering a 24 hour follow-the-sun capability.
The asset management industry is one of an increasing number of industries where the number of product providers continues to remain high. Distribution is increasingly concentrated through a small number of platforms. Operations are delivered by a small number of suppliers with global scale and reach. Consequently the industry’s structure makes it impossible to compete by building your own operations infrastructure. Outsourcing all major operations is therefore essential.
For example, most asset managers grudgingly admit that they get a good basic service from their suppliers. Nevertheless they feel there is an inability to implement change, and that the needs of the customer and business are disconnected from the operations. This causes a problem for firms. There are compelling reasons for using outsource providers, but in practice, firms are experiencing real problems accessing those benefits.
Hence, it is important to identify the reasons behind this and find a proven approach to ensure operations deliver brand and business objectives.
Firstly, it is important to clarify what we mean by Managing Outsource Operations. In this context, managing refers to establishing a control system. At the heart of this control system is a set of objectives, a sensing system to monitor if these objectives are being achieved, and a mechanism for taking action when objectives are not being achieved. Overlaid on this should be a mechanism for sensing changes in the environment which require the objectives to be recalibrated.
Managing operations is defined as “ensuring that operations are delivering to their stated objectives, and that these objectives are relevant to the brand and business strategy.” This can be difficult because because of their complexity and multiple potential points of failure. Without active management each area will operate to its own priorities and the overall objectives will not be met. This can occurs on multiple dimensions, personal agendas may undermine firm objectives and long term strategic objectives may be ignored in the face of short-term pressures.
If an outsource provider has conflicting objects to the asset management firm, this can pose specific challenges to managing outsource operations. An example of this is when the outsourcer wants a predictable and stable operation whilst the product provider wants complete flexibility to react to market requirements. The product provider requires the ability to easily change supplier, whilst the supplier wants to lock in the product provider. The product provider wishes to pay less and the outsource provider wishes to charge more.
A structured approach is required for significant conflicts to be managed appropriately and all aspects of this problem to be addressed. This approach involves specific key management processes and characteristics that will ensure that they deliver as expected.
The management process can be broken into four process areas:
• service specification
• service monitoring
• issue management and resolution
• change control.
The capability maturity model will guarantee processes deliver as expected by defining a series of generic practices that must be considered; establish policy, produce a plan, provide resources, assign responsibility, train people, manage documents, identify and involve stakeholders, monitor and control the process, objectively evaluate adherence, and review status with higher management. These generic practices are often overlooked in the four process areas mentioned above.
Most contracts contain some kind of Service Level Agreement (SLE), but very few organisations articulate a policy to justify one. A key objective of the Service Specification is to maintain a current understanding of the services being delivered. This is essential to ensure the service delivery is in line with evolving market requirements, to understand the impact of change, and to enable migration to an alternative supplier. If this objective is not even explicitly stated, it is not unsurprising that resources are not committed to ensuring it is achieved. As a direct result, change becomes hard to effect, and a gulf of understanding opens up between the business and the operations.
When considering the steps in the change control process these are usually well defined and understood. However, there is rarely an explicit statement of the objectives of the change control process or a clearly defined responsibility for ensuring these objectives are met. Consequently adherence to these objectives is not monitored. Frequently, when the product provider is unhappy with the performance of this process, they find they have no adequate means of rectifying the situation. By contrast, if an objective is clearly stated (e.g. the launch of a new product within 30 days) then controls can be built into the contract to ensure conformity.
Finally, issue management and resolution is often a poorly documented process, and is only as good as the manager operating it. There is rarely an explicit plan, and documents are not filed centrally. As a result the operation can be compromised in the event of staff changes.
This clearly shows how this simple framework is very powerful. Benchmarking your processes against the model can help in easily identify and address areas of weakness.
The CMMI for services framework provides for a staged approach. The steps described thus far can secure processes to perform as expected for an organisation operating at maturity level 2. Once at this level, firms can opt to further leverage their processes, by moving to level 3, 4 or 5.
Key to this is a structured implementation. For a defined process scope, we can make an initial assessment against the level 2 requirements of the CMMI for services model. This will highlight weaknesses in the important processes. These weaknesses can be assessed for importance against your business goals, and improvement plans agreed. Following implementation of these improvement plans, the operation can be certified at level 2. The process can then be repeated for level 3 of the model. An alternative approach is to identify those process areas that are of concern. Targeted assessments can be made, and improvements made to these areas.
In practice, these two approaches are not contradictory. It is reasonable to pilot this approach to address key areas of concern to demonstrate the benefits. This can then extended to make sure the process area is operating at maturity level 2.This can then be extended out to cover the whole of the selected business scope, in this case the oversight processes. Below are a couple of examples of how this approach deployed in practice.
FusionExperience recently helped a leading asset manager to consolidate its back office operations to a single supplier. As part of this process we benchmarked their oversight processes against the CMMI framework. We ensured that CMMI compliant processes were enshrined in the contract, verifying the appropriate monitoring and controls were available. The transparent oversight processes have built scalability into their processes; this will enable the client to grow further. A much improved change control process will deliver this client the agility it needs to compete in the market.
FusionExperience also helped an outsource provider with a problem of reliably delivering change. This was a key issue that was beginning to threaten an important relationship. We pinpointed the key process weaknesses by undertaking a very brief and focussed review. An improvement plan was agreed that delivered a predictable change process that was responsive to the client. This achieved the desired aim of improving customer satisfaction. A helpful side-effect was that it reduced costs by reducing project overruns. Importantly, the experience provided a baseline for further improvements.
To sum up, Operations are important because it is through them that one delivers a business strategy today and in the future.
There are compelling reasons for product providers to outsource many of their function, but many firms have difficulty fully realising the promised benefits. Furthermore, mature oversight processes are required to access these benefits, and a structured approach is needed to ensure these are in place. This approach can yield significant benefits if adopted by an asset management firm in its oversight processes, or by an outsource service provider in its delivery processes. However, the greatest benefit of this approach is achieved when both product provider and outsource supplier work together.
The results of the discussion in this webinar were fascinating. And we hope you can join us for the next one: ‘Managing operations’ on Tuesday 14th of December.
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Spending cuts to rely on will and luck
by David Milliken
The toughest public spending cuts in living memory will be achieved only with a mix of unprecedented political will and a dollop of economic good luck.
Chancellor George Osborne put flesh on Wednesday on the bones of some 80 billion pounds of cuts that he announced in an emergency budget in June.
Average spending by government departments will fall by 19 percent over the next four years—slightly less than the drop of a quarter expected for most departments.
But the cuts will come at a cost of almost half a million public sector jobs and a squeeze on welfare that is nearly two thirds bigger than what was promised in June.
Job cuts on this scale will go beyond efficiency savings and require scaled back or reduced quality services, piling pressure on the government to renege on its plans.
Welfare savings are even harder to bank with certainty as they hinge partly on the long-term unemployed finding jobs, and government growth forecasts for when the cuts start to bite next year are more upbeat than those of many other economists.
Osborne was clear that he believed Britain’s budget deficit of 11.1 percent of gross domestic product (GDP), the largest in the G7, left him no option to such drastic action if the country was to avoid a Greek-style fiscal meltdown.
JURY OUT
However, economists said the jury was still out on whether he would achieve this goal with his current plans, which rely overwhelmingly on spending cuts rather than tax rises.
“It depends on political will,” said Andrew Smith, chief economist at accountancy firm KPMG.
Such determination could not be taken for granted, despite the Conservatives campaigning in May’s election on the promise to reduce the budget deficit faster than the Labour government.
When a Conservative administration last had to make cuts in the early 1990s, they ended up balanced roughly equally between spending cuts and tax rises, Smith said.
“That was partly because when push came to shove, it became very difficult to make the spending cuts. Until you see it happening, it’s slightly questionable.”
The National Institute for Economic and Social Research expressed a similar view on Tuesday.
Cuts are not distributed equally across government. While health and schools spending is largely protected, day-to-day funding for the ministries in charge of police and prisons is due to fall by a quarter.
“It will be interesting to see how the Ministry of Justice will manage a 6 percent a year cut with upward pressure on prison populations,” said Jon Sibson, head of public sector at accountants PwC.
Ultimately there was too much political credibility at stake to avoid the 490,000 job cuts that Osborne forecast.
“If people are determined to get headcount down, the machine will do this,” Sibson said. “The extent and quality of some services will go down, there is no question.”
However, while the government has direct control of the 395 billion pounds of departmental spending this year, it has less influence on the more than 200 billion pounds it spends each year on debt interest and welfare payments.
Welfare costs in particular could balloon if official forecasts for growth of around 2.7 percent over the next four years prove too optimistic—whether due to an underestimate of the impact of the spending cuts or because of a global slowdown.
“The resumption of robust growth is crucial to the deficit reduction arithmetic. But the Chancellor is making some rather heroic assumptions,” said KPMG’s Smith.
“Households may continue to save and pay down debt rather than spend, businesses may remain reluctant to invest and export performance could suffer from a lacklustre global recovery.”
“PAPER CUT” OR “AMPUTATION?”
Economists polled by Reuters in September—when the scale of the fiscal tightening was clear if not its precise make up—forecast Britain’s economy will grow by 1.6 percent this year and by 1.9 percent in 2011.
The CBI and the British Chambers of Commerce said reductions in infrastructure investment were less severe than feared and that tackling the deficit was a top priority.
Others were much more pessimistic.
PwC forecast that a total of 943,000 jobs in the public and private sectors will go by 2014/15 because of the spending cuts, which will damage private sector suppliers too.
This is equivalent to 3.4 percent of jobs nationwide, but regions more reliant on government money such as Northern Ireland and Wales may suffer job losses of 5.2 percent and 4.3 percent respectively.
The worst hit sector is likely to be construction, where PwC forecasts a 5.1 percent loss of output due to a reduction in government capital spending. Business services will be the next biggest victim, with output taking a 3.9 percent knock.
Regardless of these figures, Osborne is likely to draw comfort from the most important audience for his spending review—the ratings agencies whose threats to downgrade Britain’s AAA credit grade is driving the rapid pace of deficit reduction.
“Today’s Spending Review ... enhances the credibility of the deficit reduction plan by detailing the spending priorities and measures necessary to stabilise UK public finances and debt, and secure the UK’s ‘AAA’ status,” concluded David Riley, head of sovereign ratings at Fitch.
Source: http://uk.reuters.com/article/idUKTRE69J54G20101020?pageNumber=1
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Of outsourcing and pensions…
by Francinia Protti-Alvarez
A couple of days ago, the Metropolitan Police Service (MPS) renewed its pay and pensions outsourcing contract with Logica, a £10m deal.
The extension will give the MPS the opportunity to introduce organisation-wide electronic payslips, overtime and expenses for the first time, as well as providing staff with greater use of self-service IT systems.
Similarly, reports suggest that UK-based Diligenta, the insurance and pension outsourcing unit of Tata Consultancy Services (TCS), has been approached by two prospective clients for outsourcing contracts worth more than £100 million each.
But it doesn’t stop there. A couple of days back Alliance Boots announced its decision to outsource part of its pension plan, which according to reports, could see the pharmaceutical retailer and wholesaler, offload about £300m of retirement fund liabilities to Pension Corporation, a specialist buyout vehicle.
As part of the plan, Boots has closed its UK defined-benefit pension schemes to future accrual for active members. Whether this is a cost cutting measure or not, Boots is not the first – and it’s unlikely it will be the last – to decide to reassess and reorganise its liabilities.
Last year, Barclays Bank decided, despite initial opposition from its staff, to axe the final-salary pension schemes for existing members.
Pension consultancy Mercer suggests that deals like that closed by Boots are part of a trend that has been increasing over the last 12 months.
It seems that after three years of living in a difficult financial environment, the City folk are trying to come up with new ways to keep their jobs resulting in innovative products. Which is good, as long as we don’t see another mess like the one that ensued from the sub-prime and CLO market crisis…
Concerns from the outsourcing industry may stem from the Government’s decision to apply the consumer prices index (CPI) instead of the retail prices index (RPI) for the price indexing of public sector pensions. The result of this has been an uncertain environment for public-to-private outsourcing exercises although the implications for outsourcing projects will depend to an extent on whether bulk transfers have been agreed or not.
What is certain is the emphasis on pensions in relation to outsourcing will likely become more prominent as the Government’s cost cutting measures begin to be rolled out. It will be a bumpy ride ahead.
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Cloud Services find silver lining
by Francinia Protti-Alvarez
Earlier this year, advisory firm Gartner released figures which projected that 2010 would see global cloud services revenue reaching $68.3bn; a 16.6% increase from the $58.6bn recorded in 2009.
But that is not all; the industry is poised for strong growth through 2014, when worldwide cloud services revenue is expected to reach $148.8bn.
Indeed, according to Gartner estimates, enterprises will spend $112bn cumulatively on software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS), combined over the course of the next five years.
With such forecast and figures on the line it is no wonder HP and Dell are both keen to increase their share of the cloud computing pie as the bidding for data storage firm 3Par over the last week has illustrated.
However, raising the stakes on 3Par is not the only thing HP is doing as it looks to position itself in the cloud computing segment.
The company has also announced the launch of HP CloudStart, the industry’s first all-in-one solution for deploying an open and flexible private cloud environment within 30 days.
Built on HP Converged Infrastructure, HP CloudStart simplifies and speeds private cloud deployments. Consisting of hardware, software and services, HP CloudStart empowers businesses to deliver pay-per-use services reliably and securely from a common portal, and offers the ability to scale and deploy new services automatically. Furthermore, real-time access to consumption and chargeback reports allows clients to operate their private clouds in the same fashion as a public cloud.
Currently, North American and European markets represent the largest markets from a geographic perspective, and all have seen an increased adoption of cloud computing and cloud services among enterprises.
However, emerging markets – like Asia – are likely to see an increase in growth over the medium term.
Indeed, according to Gartner, the US share of the worldwide cloud services market is likely to be diluted to 50% by 2014 (down from 60% in 2009), as other countries and regions begin to adopt cloud services in more-significant volumes.
Perhaps anticipating the rise of commercial opportunities in other regions and markets, Japanese electronics company NEC decided to set up a joint venture with Neusoft, China’s largest IT outsourcing provider, to offer cloud computing services in the country; NEC’s first move to offer such services outside its home market.
According to NEC’s projections, the cloud computing market in China to grow to $2.3bn by 2012, expanding at an average pace of 30% each year.
In meantime, cloud computing still raises strong concerns to issues such as security, availability of service, vendor viability and maturity. But this may not be deterrent enough in the war over 3Par, which according to analyst may see HP victorious.
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State of mind: a bipolar affair
by Francinia Protti-Alvarez
In the midst of the budget adjustments, the re-shaping of the NHS model, talks on immigration and the PM’s visit to India it has been an interesting few weeks for the outsourcing community.
So what do we (think we) know? The government will make the necessary cuts and suppliers will take them onboard. As it is unlikely either side wants to spend time and resources on costly legal battles suppliers are likely to get concessions from the government.
And while some suppliers like Connaugh seem to be suffering from price-pressure, most are looking at these budget cuts as an opportunity. This was certainly the position Steria’s chairman and CEO, François Enaud, expressed during a recent interview.
Enaud has good reason to be optimistic. As July turns to August, and financial results are published, many vendors are reporting encouraging figures for the first half of the year.
Indeed, Steria’s half year figures seem to have been positive across most European geographies – Spain was perhaps the exception as their results were ‘close to flat’ but given the difficulties the Spanish economies has faced in recent months, this is still good news.
While results for HCL, Wipro and Patni also showed a positive trend.
Curiously enough vendor outlook seems to be fairly optimistic while data recently published by TPI in its Q210 Index indicates a preference for a more cautious approach as there are still too many variables out there for there to be any certainty. I wonder who has got it, right?
In the meantime during his first visit to India as PM, David Cameron had his work cut out as he tried to dispel fears of curbs on IT outsourcing by the country’s government departments.
This is far from an obvious task as the question of immigration crept on to the agenda, adding to already existing unemployment concerns. A tough act: to balance public expectations, trade and international relations, and a public purse strained by a 3 year old financial crisis.
My guess is the PM’s rich brown hair won’t stay that colour for long!
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Growth or recession? That is the question
by Francinia Protti-Alvarez
Figures: we are inundated by them. Constantly bombarded with interpretations and statistics, sometimes it can be hard to make sense of it all.
For example, figures from the US point to a very plausible double dip recession, whereas the messages from the UK have been mixed, to say the least.
Certainly, there is the issue of exams and results and between incredible (I would stress the ‘in-’ prefix) A-Level and GCSE results, and talk of an exam-driven culture, the concern many have is how well prepared for the future are pupils leaving school – especially where IT is concerned.
But this is just the tip of the iceberg. The education question leads us down an equally troubling (from the UK public/government perspective) path.
Indeed, the diminishing number of pupils taking IT means that while the demand for IT-related skills is on the up, the domestic offer is on the decline. As IT companies try to fill the 500,000 new IT jobs that, according to experts, will be required over the next five years, they are much more likely to look into sponsoring skilled foreign workers.
This brings us to immigration. The coalition government promised to cut net immigration by over 150,000 each year to l00,000 or less. Non-EU work visas have already been capped.
So what is it going to be: satisfying the domestic demand for IT jobs which may see immigration cuts be revised or reverted? Or sitting back while discouraged IT firms move elsewhere – and I don’t know how well that would fair for the economy long term.
Certainly, the Office for National Statistics may have put out figures indicating a 1.2% quarterly rise in GDP between April and June; apparently demonstrating the fastest growth in nearly a decade. But, is the growth indicative of an improving trend? Is it sustainable or is it misinformed optimism?
It’s funny how although economics is a science many of the factors that contribute to it and its indicators are subject to ‘confidence’ and its presence or lack thereof.
And while GDP figures show a recovery gathering speed, economic commentators have surprisingly discovered that the less privileged in society are likely to be hit the hardest by the budget cuts.
Talk about mixed messages?!
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Exam results keep rising but pupils taking relevant subjects continue dropping
by Francinia Protti-Alvarez
Exam results keep rising but pupils taking relevant subjects continue dropping
Hot on the heels of the recently announced A-level results, this week’s release of GCSE results indicated a rise in the pass rate – for the 23rd year in a row.
But if students are getting smarter, why is it that options/subjects such as languages and ICT have seen a drop in the number of pupils taking them?
In today’s multicultural/multilingual world, technology filters into all aspects of life; so does it make sense to opt of the subjects which could very well determine (or at least significantly influence) future job prospects?
“The IT industry may well value qualifications in areas other than IT, such as. Science, Mathematics etc, above pure IT subjects in the future,” observed Roger Newman, senior vice president at IT solutions provider Mahindra Satyam. “The next generation of knowledge workers, which are now entering higher education, have grown up with, and already have a good understanding of, the fundamentals of IT and so can develop into the type of person who can drive more business benefits from IT regardless of having a formal IT qualification.”
As the economy slowly recovers, demand for skilled labour will also increase. In this instance, the markets and industry knows what they need and know what they want. It needs skilled labour and it is ready to import or export it depending on the situation.
“The recent A-level and GCSE results suggest that there has been a general decline in the number of students taking IT subjects,” noted Newman “I believe it may be symptomatic of a shift in the types of skills that will be required in tomorrow’s IT workers. IT is now highly embedded in most business processes and businesses are increasingly using off the shelf applications and Open Source Solutions. It therefore follows that businesses rely on a higher degree of skill in understanding business processes and the application of technology to operations than the past.”
Newman stressed: “Somebody has to build the off-the-shelf applications and Open Source Solutions and, to do this; formal training in IT is required. In summary the decline in the number of people studying IT subjects will probably not affect outsourcing trends in the short or even medium term but will have a profound effect on the IT industry in the long term, unless a sensible balance is maintained.
In its August 2010 Labour Market Outlook survey, the Chartered Institute of Personnel and Development found that the demand for migrant workers has increased in line with improvements in the UK labour market during the past year.
The study surveyed 600 organisations of which 45% indicated that they had vacancies that were proving difficult to fill from the domestic labour market and were now looking overseas in a bid to fill the positions.
According to their figures about one in six (17%) employers intend to recruit migrant workers in the third quarter of 2010, which is above the previous peak of 15% recorded three months ago. Employers in the education and healthcare sectors are most likely to hire migrant labour (27% in each sector).
In a technology-based world, the budget cuts will continue affect the quality of education – among other public and social programmes – the outlook for Britain just keeps getting rosier…
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Suppliers: going, going, gone?
by Francinia Protti-Alvarez
Recent media reports have been insisting that a number of suppliers have been ‘going bust’ this year. But how accurate is this?
Yesterday’s online editions of The Guardian, The Telegraph and the FT – amongst others - reported a 47% increase in the number of public sector suppliers affected by the degraded economic environment.
The figures derive from research attributed to accountancy firm Wilkins Kennedy, which claims that H1 2010 saw an increase to 168 insolvent companies, up from 114 in the same period last year.
However, it would be interesting to put that 47% increase into context.
A few figures:
According to statistics reported in February’s HM Treasury speech on government procurement:
• There are 4.7 million small and medium sized enterprises (SMEs) in the UK, representing 99.9% of UK business
• At the time the government was spending 95% of £220bn of public sector procurement in UK-based firms.
Needless to say, that by its size the well-being of SME space is fundamental to economic recovery, which is perhaps why the news of a near 50% increase in the insolvency rate made such news.
I do not mean to down play the meaning this increase has for individuals whose livelihoods depend on the jobs created by insolvent companies. However, it’s clear that £209bn (95% of £220bn) has been spent in UK-based procurement suppliers, which begs the question - how much of this percentage actually goes to SMEs?
“There’s no doubt that public sector work is of major importance to small businesses” said Chris Gorman, Private Business Forum (PBF) spokesman.
“Countless small firms up and down the country rely on bodies like local authorities, health trusts, police forces, schools and colleges for business. If these important contracts suddenly start disappearing, I think it’s safe to say many smaller businesses are going to suffer and may even go to the wall.”
It is probably not much although according to the Government, in 2004/2005, SMEs won 59% of the total value of local-authority contracts and 22% of central-government contracts.
Similarly, around 10% of members consistently report concerns about public procurement-related issues, according to proprietary research conducted by the Forum of Private Business.
It is something the coalition government has promised to address and the ‘supply2gov’ website is supposed to be part of the answer. The website, designed to make it easier for micro-business to tap into public contracts, originally launched in 2006 it is expected to re-launch later this year.
The portal in theory, allows SMEs to gain free access to contracts worth £10,000. Higher value deals, with tender documents worth more than £25,000, would follow, in order to meet the target of allocating 25% of all state contracts to small businesses..
The current ‘supply2gov’ portal does not seem to delivery. Let’s hope the portal re-launch changes that.
The stats presented may have been a bit misleading, having omitted the size of the business community – however, they do depict the reality.
While many will say that any economic downturns serves to ‘cleanse the system’ and rid it of inefficient players, the fact remains that some competitors are too small to absorb the shock caused by unfavourable trading conditions which makes them more likely to go bust than larger players.
“Although small business owners traditionally favour low taxes and low spending, many are very wary of calling for ‘slash and burn’ public spending policies from the new government,” noted Gorman.
The question in everyone’s mind is: will the measures taken by the government succeed in rebooting the economy as well as boosting investor confidence?
It would seem that uncertainty remains close to the only certainty – aside from taxes and death!
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Failing out of the future?
by Francinia Protti-Alvarez
A-level results are out - rising to another record high of 97.6% while an unprecedented 27% of entries achieved an A.
I don’t want to burst the celebratory bubble but…
Notwithstanding how indicative the rise in A-marks is of the quality of the graduating classes or how students will be able to afford university if indeed they get a place, what worries IT firms is the low marks received on technology related subjects.
Compared to 2009, there was a 2.4% drop in the number of pupils taking IT related A-levels. The UK is not producing the new IT talent for which the industry is so thirsty.
If we compare the figures to five years ago the decrease is even more significant, with the number of students falling by a fourth. This year 16,251 gained computing and ICT A-levels, compared with 21,450 students in 2005.
What is going on with Generation Y in the UK? What is certain is that with growth forecast for the IT sector set at four times the average for the UK, the industry is likely to import talent in the not so distant future if it is to meet its needs.
The UK may have led the Industrial Revolution but it sure isn’t leading very much right now…
Companies like IBM are trying to attract young people by offering an alternative for school leavers or those whose marks would not suffice for a university education.
The IBM apprenticeship scheme, developed in collaboration with sector skills council E-Skills UK, offers 20 apprenticeships for students looking to go straight into work rather than go to university.
Twenty is better than nothing but it is still unlikely that the number will make a dent in the 500,000 new IT jobs that will be required over the next five years.
The increasing need for innovation in IT, generally speaking, is not likely to slow down. Intel has paid a hefty close to $8bn price tag for McAfee in a bid to improve its data security development capabilities. It’s a big bet Intel is placing and analysts don’t quite understand the reasons behind the merger. But then again it wouldn’t be the first time an M&A deal goes through that does not result in the ‘foreseen’ synergies.
In the meantime, we had better get better at jumping on the band wagon as the world continues to go round not waiting for anyone.
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Outsourcing away
by Francinia Protti-Alvarez
India already holds at least 50% of the global outsourcing market, and has become the world’s back office where Western firms set up call centres, number-crunching and software development outlets to cut costs.
It is, therefore, not without good reason that the visa bill which, if passed, would double the cost of visa application fees and add $200m in visa costs to Indian companies, has had such an unsettling effect in India.
Compared to the US, David Cameron’s statements during his visit to the Indian sub-continent a few weeks back was quite the positive one – comments about Pakistan notwithstanding. Maybe if chicken tikka were also a national dish in the US things would be different…
Indeed, HM Revenue and Customs is considering outsourcing sensitive tax processing work to India, a move that would save tax payers as much as £205m a year. Meanwhile, the British Council could outsource 100 IT and finance jobs also to India; the Foreign and Commonwealth Office as well as the Treasury could all have similar plans.
Outsourcing may be what Cameron had in mind when he devised his ‘Big Society, Not Big Government’ election campaign.
Thus the UK remains open to outsourcers provided there is increased inward investment in the UK.
But while this provision may have been intended to appease the public in general, that jobs are not off-shored does not mean that they won’t disappear; after all, efficiency often comes at the price of redundancies.
Certainly the government probably expects that the private sector will absorb some of the jobs lost in the public sector. But what happens when budget cuts also mean that private sector companies (working with the government) have less money with which to work, grow and create jobs?
Quite a tough decision to make: on one side cost-saving measures supported by efficiencies resulting from outsourcing. On the other increased unemployment, the problem of redundancies and increased cost of benefits.
Ah, the bitter-sweet taste of the path to economic recovery!
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Double Dips: not as exciting as you may think
by Francinia Protti-Alvarez
All things considered, this has been a successful week for the outsourcing community, with a spate of newly signed projects and announcements arriving in all of our inboxes on a daily basis to warm the cockles of even the most hardened doom-and-gloom monger.
Don’t believe us? Well, take the announcement by BT that it had been awarded a contract by Nationwide to provide managed security services as an example.
Or even the engineering management contract signed this week by Meggitt with HCL or, come to think of it, the record 2nd quarter results announced by leading provider of information technology, consulting and business process outsourcing, Cognizant.
But before you start putting up the bunting, balloons and flags to celebrate the end of all your financial woes, it’s worth sparing a thought for those less fortunate. This week, the Co-operative announced that it was bringing 36 IT roles back in-house following its acquisition last year of supermarket chain Somerfield.
The roles relate to helpdesk and store systems support, with the company opting to re-create jobs previously outsourced by Somerfield.
Further proof, were it needed, that our economic woes are not yet at an end, came with the news that cancelled public sector contracts could precipitate a Double Dip Recession.
Although that may sound like an exciting new ride at Alton Towers, we’re fairly sure that it’s much, much longer, and far less exciting, so perhaps a little perspective is no bad thing.
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Of expectations and legal battles in outsourcing
by Francinia Protti-Alvarez
In recent weeks, IBM has been in the news the other side of the Atlantic as it tries to respond to two legal cases brought against it.
It is interesting to note how, despite the maturity of the outsourcing sector – particularly in the US - it seems as though the issue of managing relationships and expectations is a skill that has not yet been perfected by the industry.
Although legal action is always considered a ‘last resort’ option, the public sector is under pressure to deliver savings and efficiencies. When multi-million contracts have ‘gone wrong’ or are ‘significantly delayed’ somebody – usually, it seems, the vendor – has to be responsible.
But it’s much more complicated than that. More often than not, vendors and suppliers deliver what they were asked to deliver. Where they seem to fail is to meet the untold or unclarified expectations that buyers and end-users have in mind for the venture.
A recent example is IBM, who has been facing two recent legal disputes in the US.
The first of these relates to the state of Texas and a seven-page letter the Texas Department of Information Resources sent detailing what it calls “chronic failures” of agreed service levels.
In the letter Texas expresses to IBM it remains discontented with services provided, indicating that IBM is in breach of its contract.
This is not a new problem. Indeed, it has been ongoing since 2008, when the state first suspended the $863m, seven-year outsourcing contract.
IBM obviously contests the claims. Meanwhile, Texas IT officials are hoping for the best and preparing for the worst after giving IBM 30 days to fix alleged problems with the state’s $863 million data centre outsourcing contract.
The second incident involves the state of Indiana and sees both parties suing each other since May. The heart of the problem: Indiana’s 10-year, $1.6bn outsourcing contract with IBM to streamline welfare eligibility in the state, which the state governor cancelled in October last year.
According to reports, the Indiana Family and Social Services Administration (FSSA) is trying to recover $437.6m it paid IBM until 31 January. The lawsuit also includes costs incurred for any third-party lawsuits, federal penalties and employee overtime, plus triple damages worth more than $1.3bn.
As for IBM, it has counter-sued Indiana for $52.8m reportedly for hardware, software and automated processes Indiana IBM left there and is still using.
In both cases, each side disputes the other’s claims. We’ll just have to stay tuned to see how the saga unfolds; only then will we get sight of what the possible repercussions for the outsourcing industry will be.
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Public Sector Sourcing Success
by Morgan F
Public sector outsourcing has been a much spoken about issue of late. It has been widely reported that 2010 will see government agencies needing to follow the private sector’s example and use outsourcing to both cut costs and better deliver the services the public expects. However, a report this week from Deloitte has questioned local councils’ ability to manage IT outsourcing contracts effectively. The research also claims that councils’ mega-outsourcing days are numbered. So where are councils’ going wrong and why does this mean the demise of large IT outsourcing deals?
Interest in public sector outsourcing has piqued recently for numerous reasons. A perfect budget-squeezing storm seems to be encircling the sector and outsourcing and even offshoring look to be vital solutions. One of the biggest drivers has been the recession which has sparked a wave of prudency in the sector. The government’s huge debts from the banking bailout mean there are harsh budget cuts to come, whether Tory or Labour. Increasingly it seems, government agencies will be looking towards outsourcing as a method of maintaining services whilst cutting costs. Bringing in outside skills will also be an important factor in increased adoption. But it is lack of skill in outsourcing itself that Deloitte is looking at.
The Deloitte report, ‘Taking Control of IT’, which is based on Deloitte’s experience of advising local councils, explains that local council IT departments’ have a tendency to outsource problematic technical functions which results in their outsourcing projects rarely being successful. Costi Perricos, author of the report, observes that councils have for “too long” viewed IT as a “black art that is better performed by external contractors”. The report emphasises that local councils need to change their overall approach to IT rather than hoping outsourcers can step in and solve all their technical problems. To those of us in the outsourcing industry this appears commonsensical in its essence.
Greg Jones, Senior IT Sourcing Advsior, PA Consulting Group agrees that the report highlights an “oft-repeated mantra in the sourcing industry” which is that a company, public or private, should never outsource a problem. Jones explains that this is one of the most fundamental pieces of guidance that can be given. More accurately, he says, it should perhaps be read as “don’t outsource a problem you don’t understand.”
However, Jones does not think this will spell the end for large ITO deals. He says all that is required is “a change of attitude and renewed emphasis on the business leading the transformation, and appreciating precisely why the deal is being pursued and what deliverables are being looked for.” This is not, however, a belief held by all in the outsourcing industry.
Alistair Maughan, Partner at Morrison Foerster LLP, on the other hand anticipates that megadeals are generally coming to an end. He explains that there has been “much more focus on multisourcing and best-of-breed outsourcing projects.” He describes that outsourcing is a casualty of the recession with the typical outsourcing deal being “more about cost saving and surviving the recession than about strategic positioning.”
Controversially Anwen Robinson, managing director of ERP software firm Agresso, thinks that local councils have been duped buy some outsourcing providers. He laments; “unfortunately many external consultants have seen local government as a bit of a cash cow and have delivered unwieldy, often unsuitable systems which subsequently demanded expensive support contracts to make necessary changes. You have to question whether or not they had the best interests of the customer at heart.”
Although the Deloitte research has opened a can of worms when considering local councils and IT outsourcing, it by no means predicts the end of public sector outsourcing. It outlines that outsourcing still has the potential to “lower operational costs” and bring in much-needed “expertise and capacity to transform”. Local councils’ must remember that building an effective corporate IT capability is not the job of the outsourcer. Outsourcers provide a skill but the management of that contract needs to be kept within the council. Local authorities need to provide “vital input from its service areas into defining, training and testing systems” insists the report.
The report has highlighted an important bugbear in public sector outsourcing. Outsourcing can be effective but only if it is not seen as the answer to all problems. Public sector bodies clearly need a new approach to outsourcing for 2010 and beyond. Only by acknowledging the mistakes of the past and working to understand how outsourcing can be, and has to be, a big part of the public sector going forward.
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Source Aid?
by Morgan F
This week Time Magazine online published an article that asked ‘Could the information economy help narrow the gap between the rich and the poor?’ Apparently this is the implication of a new study which appeared in the journal Science. The research is a collection of data from 21 populations in order to look at how wealth gets trapped within certain families.
An interesting conclusion resulted from this study. As wealth shifts from material goods like factories to intangibles like social networks and the ability to innovate, there’s more of an opportunity for a person who is born poor to work their way up and penetrate the once elite word of the rich. Similarly, someone who is born rich can just as easily lose their place in the economic food chain.
For me, this study has a clear tie with the outsourcing industry, in particular offshoring. After all, the very nature of offshoring is the participation in the global economy by less developed countries. Information technology has resulted in gloabalisation which has facilitated the redundancy of time and space barriers. As such, relatively undeveloped counties are not as marginalized as they once where and can, sorry excuse me, and are supplying services to the once infallible developed nations.
Farhan Mirza, Partner, AT Kearney, the global management consulting firm, agrees explaining: ‘the IT industry has in many ways been a great leveler to put many emerging economies on the map and give them a leg-up.’ He continues ‘the intangible nature of most IT services has enabled ‘location’ to be less of an issue, opening up this potential.’
Miraz says that by looking at foreign direct investment as well as IT exports from low cost countries, you can see significant growth over the last decade; ‘the availability of skilled IT labour, and attractive IT services from these geographies has qualified them on to the buyers shortlist.’
In essence IT has had a major role to play in making equality a reality. However, this news analysis is in no way claiming that global equality will ever be a reality. This an extreamly complex issue that one can not claim to know the answer to. There is also an insurmountable sum of arguments that support the notion that outsourcing/offshoring works to keep the economically stable countries in their authoritative position and the less developed counties in there place, dragging behind, never able to fully compete. This argument is formed through the actuality of offshoring being the consumption of cheap labour from poorer countries. Nonetheless, this argument is highlighting a problem without a solution.
One can pontificate for generations about the exploitation of poor counties and how to bring them on par with the developed world. This pontification has been, I believe, a crime the developing world has been guilty of for far too long. Studies have proven that charity does not necessarily work. On the other hand India, which is famously one of the most prolific outsource providers in the world, has experienced robust economic growth. Countless studies have attributed this to globalization and liberalization of the Indian economy. This denotes that India’s participation in the global economy has had a positive impact on the country. Where charity has failed, economic participation seems to have prevailed.
Outsourcing is not infallible in its approach nor is it the answer to social inequalities. It does however seem that it may be a step in the right direction when looking at global inequalities. A brave statement to make, I hear you gasp. A writer can only comment on the evidence that has been put before them.
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The Wipro Effect
by Morgan F
Wipro released its revenue results for the second quarter last week. Perhaps not surprisingly it reported that its IT services revenue in U.S. dollar terms had declined by four percent to US$1.1 billion in the quarter against the same quarter last year.
It also revealed that the company’s IT services revenue in Indian Rupees for the quarter was higher by five percent from revenue in the same quarter a year ago, because of exchange rate gains. These gains will have an obvious negative effect on offshoring contracts to the country. If one of India’s largest outsourcing providers is experiencing a plunge in revenues, what indication does this have for the omnipotent Indian outsourcing industry as a whole?
It is not only the fate of Wipro that has experienced ramifications from the all-consuming economic depression. Tata Consultancy Services, India’s largest outsourcer reported earlier this month a fall in revenue. Similarly, Infosys Technologies, India’s second largest outsourcer, reported a decline in revenue. It seems it is a fruitless pursuit when trying to avoid the recession’s unavoidable hold, even in an industry that’s primary focus is to cut costs and increase efficiency.
Ironically it was the spectacular end of the dotcom boom which resulted in the rise of offshoring IT services to lower-cost destinations. Dr Roger Newman, European vice president, Mahindra Satayam concurred; ‘This gave real impetus to the Offshoring boom’. This recession, however, is not treating the offshoring industry so kindly.
David Skinner, a London partner at Morrison & Foerster’s Global Sourcing group explained that ‘Indian providers have suffered an offshoring backlash from the USA and UK because some companies do not want to be seen to be exporting US/UK jobs to India’. He also highlighted the Satyam scandal as contributing to the negative view held by the West about offshoring.
The apparent decline in offshoring processes to India has also resulted in the emergence of new sourcing trends. Converged solutions specialist, Intrinsic Technology Ltd (ITL), has seen a 40 percent increase in companies choosing to implement permanent home-working for employees.
Dave Griffiths, head of the ITL Unified Communications Business Unit, commented on this trend: “Many businesses looking to avoid large overheads and promote green credentials are turning to homeshoring instead of offshore outsourcing as it offers improved manageability.”
All though it seems that all of this doom and gloom is contributing to similar negative predictions about Indian outsourcing circulating the press, there is still a glimmer of hope. Technology Partners International (TPI), an outsourcing consultancy, reported earlier this month that there is pent-up demand in the global outsourcing market that has been deferring decisions in the economic recession. Providentially, TPI expects that the market will begin to improve over the next six to nine months.
Skinner agreed with positive predictions explaining that ‘in ITO, India remains very highly skilled and well priced and so deals continue to be won there’. He continued, ‘Indian companies are also winning more Indian local work and trying to expand their operations in other countries such as China’.
It does look as though the economic downturn has had an unavoidable negative effect on the Indian outsourcing industry. It has also resulted in the diversification of the industry and its offshorings. However, although change is inevitable, the pessimism that has plagued the giants of Indian outsourcing’s revenues will be short lived. The Wipro effect is just a spot in a vast ocean, an ocean that is gaining scope and depth.
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Where did all the grads go?
by Morgan F
Businesses across the world have been using outsourcing as a strategy to reduce costs, streamline workforces and improve quality. On the whole, this strategy has been effective and has resulted in management teams across all industries turning to outsourcing more frequently.
Now, if businesses outsource to UK based suppliers then jobs remain onshore, graduates have a chance to learn the vital basics and the UK moves into the future happy in the knowledge that it has a well skilled workforce. The problem is, many of the biggest businesses are not using UK suppliers, instead they are opting to offshore, leaving the UK with a growing skills gap. In fact it is safe to say that the gap is quickly becoming a void.
Over the past few months there have been a host of businesses receiving less than favorable reports about their offshoring practices. Most recently, Lloyds Banking Group has been under fire from the media as a result of a Daily Mail report that said Indian IT contractors were being brought into the UK to work in place of UK counterparts. The article was supplemented with internal documents that revealed the concerns Lloyds managers have about knowledge gaps within their IT department, hence they were possibly looking to their Indian partners to provide them with the necessary skilled workers.
What this means for Lloyds is that they lack the necessary skills to do basic IT processes without calling in the offshore cavalry. This is worrying; a large financial organisation should have the capacity and the business sense to keep a retained team of workers on-shore. It is probable that Lloyds became a little too focused on cost cutting and rapid ROI whilst losing sight of the future security of their organisation.
Mass offshoring is not just having an effect on the capabilities of UK businesses, it is also having a distinct effect on those yet to begin their business life, the graduates. Firms excessively offshoring work and not investing in their own staff has resulted in fewer graduate opportunities and in turn means that mid level IT specialists are becoming a rarer breed. Graduates need on-the-job training in order to become tomorrow’s IT specialists. Who will train future developers, networkers and IT managers if there is no one left in the country with the foundation skills?
Martyn Hart, Chairman of the National Outsourcing Association, commented, “As India and various other destinations enjoy a wealth of low level IT work, IT specialists in these countries will arguably have had better experience and training than their UK counterparts. In turn, those IT workers that have climbed the career ladder in key offshore destinations would have had such a breadth of experience that they may be better placed to manage the IT teams of the future.” So, where does this leave the UK?
Of course offshoring is understandable if not vital within a global economy. However, retained knowledge and balance are just as essential as offshoring. Companies must realise that they need to have an even spread between on-shore work and offshore. Their Indian suppliers will not tell them to keep work at home, that is for sure. So management teams need to wisen-up and be aware of the risks involved with overzealous offshoring.
Mr Hart points out the risks involved with handing over IT to an offshore supplier, “By not retaining enough good quality in-house IT expertise, businesses are at risk. They will no longer have the capability to design and run applications or IT systems themselves and will have no choice but to rely upon their offshore service providers. This would leave them in a very vulnerable position; suppliers could essentially charge what they wanted for applications and systems and they would lose their competitive edge because they would have to rely upon the same ‘off the shelf’ package as their competitors.”
So what are companies going to do? Well one area that is worth exploring is sending an in-house graduate team offshore for a period of time to learn the trade. The offshore suppliers will be best placed to train them because they have been fulfilling the work already, the graduates get the experience they need and supplier relations will be significantly improved. After the team’s tenure at the supplier’s base, they can return back in-house and bring their new found skills and knowledge with them.
The fact is that excessive offshoring is contributing to the UK’s ever increasing skills gap. If companies want to be best placed to ensure that they are prepared for future challenges, then they need to have the skills and knowledge in-house. Having a good mix of outsourced and in-house expertise is paramount if businesses don’t want to find themselves at the mercy of a supplier’s sales team.
Graduates need nurturing. It wont just be the likes of Lloyds quaking in their boots as they stare at their empty IT department, all businesses may find themselves at a distinct disadvantage unless UK organisations start taking the time to invest in the future of this country’s talent pool.
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IT spending down but do not fret!
by editor
Gartner forecasts released early this week will have confirmed what most CIOs knew and have been struggling with over the last year and a half. The recession has truly hit the IT industry with global spending down six percent to $3.2 trillion in 2009 compared to $3.4 trillion in 2008. When you put it in decimals the change seems small but it is highly significant. The collective fall in spending is the result of a lot of stress and wide scale efficiency initiatives being made by CIOs around the world. Prudence is forcing companies to look at cost cutting across the board and IT budgets have not escaped the spotlight. Gartner predicts IT spending to pick up slowly in 2010 but recent Ovum research provide a bleaker picture until 2013. In short, IT departments are likely to be under pressure for some time yet.
“The full impact of the global recession on the IT services and telecommunications sectors is still emerging, and forecast growth in these areas has been further reduced significantly,” commented Richard Gordon, research vice president and head of global forecasting at Gartner.
While no executives like budget reductions, it appears a forced reassessment of IT efficiencies could turn out to be a good thing. Richard Barker, MD of Sovereign Business Integration, an outsourcing company, sees the downturn as a wake-up call for IT.
“The past decade has been defined by conspicuous consumption across the board. The cheaper goods have become, the more the nation has bought. And the IT department has been one of the biggest culprits in encouraging this ‘pile it high’ culture. Cheap servers, network bandwidth and storage have encouraged inept practices and allowed users to treat the corporate network as an extension of their personal online presence,” commented Barker.
Of course, not all IT departments will have taken this approach, but where it has occurred this kind of profligacy will no longer go on unchecked. Those CIOs that have always erred towards prudence in their IT strategies, will happily continue down their well-planned paths. However, as budget reduction targets hit those less-prepared organisations, big changes will be necessary. So, what are the options for CIO’s to make the changes that matter?
The experts sourcingfocus.com spoke to were adamant that indiscriminate cost cutting is not a sustainable approach. A slash and burn mentality may bring significant cost reductions now but will not stand a company in good stead for the future.
“In past recessions, the ‘soloist’ CIO rapidly cancelled contracts, cut headcounts and really cut into the bone of IT. Companies quickly realised that this was damaging the core of businesses,” comments Myron Hrycyk, CIO of Severn and Trent, the utilities company. “IT is just too central to business for this approach to be viable now,” he adds
Indeed, approaching cost cutting now that IT is so central to the way a company runs, is a highly sensitive task. It seems that the approach can no longer be to simply reduce overheads but must be more of a balancing act of canny expenditure and efficiency in operations.
“CFOs and CEOs are facing a heightened challenge in identifying where to scale back and where to keep investing. This is particularly the case as stringent compliance requirements and cost of failure means cut backs in the wrong areas could be catastrophic,” comments Steve O’Connor, VP of IT transformation at BMC, an IT services provider.
He adds, “As IT is the only integrated function underpinning the entire organisation, it is crucial for business success that CIOs can clearly demonstrate to the board exactly where IT investment is needed, and where the fat can be cut. By doing so the CIO is able to strengthen his/her position as a business leader and can ensure that the business runs as lean as possible, whilst still maintaining success.”
With IT providing the backbone for most large organisations nowadays, it appears the CIO’s moment to truly shine has finally arrived. Clear, decisive and strategic actions could help consolidate his or her rightful place at the board table.
Balancing act in mind, the opportunities for cost cutting are many and a large number of them fairly simple to enact. The budgetary pressures may actually provide an opportunity in disguise, allowing CIO’s to ultimately create a more efficient and effective IT-driven organisation.
sourcingfocus.com asked the industry their top tips on how CIO’s can make positive cost cutting measures:
Consulting costs:
• “n good times, consulting companies made a lot of money from your company. Now it is time for them to share some of the pain. Request a ten percent to 20 percent rate reduction. Make it clear this is temporary – but also that companies who participate will continue to be long-term partners when economic conditions improve with the implicit understanding that not participating in the rate reduction will directly impact the long-term partnership with the consulting company.” Rich Murphy, Executive in Residence, Planview (and ex-CIO at Deutsche Bank).
Applications:
• “Retained support costs can often be reduced. We went to one supplier after realising we only used 60 percent functionality for one system. We proposed to pay them 60 percent of the existing retainer and they went for it.” Myron Hrycyk, CIO, Severn and Trent.
• “Pull together an inventory of your applications, their purpose, and the number of users. You can collect more information but start with the basics, which is easy and low-cost to obtain, and progress from there. This inventory of applications will allow you to identify duplicate, low usage, and low value systems.” Rich Murphy, Executive in Residence, Planview.
Hardware and software:
• “Normal cost reduction measures for hardware are to extend the useable life of the equipment and thus push off the replacement cost. While this works in many cases, it is not always the best alternative. What if the replacement hardware uses 50 percent less electricity requires little to no maintenance, can handle five times the volume, or runs two to three times more efficiently than the old equipment? The total cost may be lower if you decide on a replacement strategy. Plus, hardware providers are also impacted by economic forces, so you should be able to negotiate a reduced price.” Rich Murphy, Executive in Residence, Planview.
• “Look at storage costs and policies, because technology changes in this area over the last few years provides a great opportunity for cost reductions,” Rich Murphy, Executive in Residence, Planview.
Outsourcing partnerships
• “We are no longer ‘soloists’, more part of a band. Work with partners to come to agreements on cost reductions. Our suppliers have an appetite for ensuring Severn and Trent gets the best value from its IT investments. They understand the long-term relationship is more valuable than their short-term margins.
“There are possibilities for reducing blended rates, recalibrating contracts and account management costs. It’s also not unreasonable to ask suppliers to invest in proving the business case for new projects as they will benefit if deals come through,” Myron Hrycyk, CIO, Severn and Trent.
• “Organisations also need to consider options such as pragmatic overhaul of procurement models, redefining “risk and reward” based approaches to managing suppliers, shared services and outsourcing,” David Roots, MD, local government, Civica.
• “At Severn and Trent I have brought IT and procurement closely together so each can more easily adapt to the needs of the business. This is part of our vendor management strategy to enhance vendor relationships,” Myron Hrycyk, CIO, Severn and Trent.
• “I’m a strong believer in multi-sourcing to create the strongest partnerships. The benefits to be gained far outweigh the extra management time involved in such relationships,” Myron Hrycyk, CIO, Severn and Trent.
• “Hidden IT spend is an important area to look at. Those IT expenses that appear in different departments can add-up. CIOs need to get a handle on every IT cost across the organisation,” Steve Wathmought, MD, Xantus, an IT consultancy.
Amid the gloom, there are clearly many opportunities for CIOs to make bold, business enhancing decisions that not only drive efficiencies but also create long-term effectiveness. And, while projections on the arrival of IT industry ‘green shoots’ vary, it is important companies are ready when they do finally arrive.
“If there is one good thing to come out of the recession, it will be that organisations will become far more prudent when it comes to purchasing and managing technology. IT departments may be feeling the pinch. But a return to good, business based IT practices will not only enable organisations to address IT costs today but will stand them in excellent stead as the recession lifts and the economic outlook brightens,” says Richard Barker.
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Green IT – A CFO’s best friend
by editor
Green IT has been on the radar of service providers and end users for some time now. Increasing regulations involving carbon reduction, energy efficiency and environmental impact have meant that green IT has crept up the boardroom agenda and is now probably one of the most discussed topics amongst C level executives. Analyst firms have recently been getting their teeth stuck into the issue and this week Datamonitor released a report entitled ‘Can green IT bloom in an economic downturn?’ CFOs are not keen on being put in a position where they have to hand over money in response to meeting government regulations, but would they change their mind if they could see that money making its way back into the coffers, with interest?
Over the past few years, green strategies amongst businesses have predominantly been half hearted initiatives. Organisations have been keen to appear to do something rather than to actually implement an effective strategy. Greenwashing became synonymous with big conglomerates and corporations were found to be making outrageous false claims about carbon neutrality, green infrastructure and other green fingered exploits.
Now however the paradigm has shifted. Greenwashing has lost its impact as stakeholders and the public have wised up to the real issues at hand and are adept at spotting phoney strategies.
Of course, any investment in time or money into the green agenda is spurred on by increasingly tougher government (or EU) legislation and not some altruistic need to save the planet. However, businesses are starting to explore whether there is a return on investment with initiatives which previously would have had CEO’s gritting their teeth as they watched their money go down the green drain. Green IT has become one such area where investment may mean efficiency and cost savings for many firms. The Datamonitor report has highlighted that organisations do not see green IT and cost-effective IT as mutually exclusive. Here is why:
The first area where savings are made is energy costs. Greener technology means less energy is used and the dial on the electricity meter doesn’t spin as fast. This may seem like a small saving, however when you consider the billions of pounds spent in keeping the world’s data centres running, a 10-25 percent energy saving means big bucks.
For vendors, investing into green IT may be one of the best moves they make in terms of winning new business. The majority of public sector contracts have rules and regulations with regards to the green credentials of a potential third party supplier. By investing in green technology, suppliers can make themselves as attractive as possible to green fingered government officials. Private sector end users are also not exempt from environmental regulation.
The Carbon Reduction Commitment is due to come into force in 2010 and businesses of all shapes and sizes will need to be aware of their emissions. Data centre outsourcing will increase as end users look to cut back their carbon by outsourcing it to the greenest suppliers. There is plenty of opportunity for vendors pushing a green USP.
Cloud computing is frequently being considered as a green IT tool. Companies are considering this virtualised route as a way of not only reducing the amount of old and inefficient servers they have, but also as a way of allowing employees to work anywhere and everywhere. Working from home (hotels or pubs are also very popular) schemes are allowing businesses to totally streamline the amount of IT they have and in turn reduce their carbon footprint.
Vendors are offering bespoke cloud computing applications that allow work to take place on a huge scale, meaning thousands of employees are able to work seamlessly with one another without having to switch on the office lights. Combine this with the reduction in emissions as a result of fewer workers needing to make the daily commute and cloud computing seems like an attractive green route.
Of course, all this comes at a price. Initial investment into any new technology is costly and if done without careful forethought can cause disruption to business. During times when IT budgets have been cut, the last thing on an IT manager’s mind would be to spend resources on helping the environment. However, businesses need to thoroughly investigate the ROI opportunities associated with clean technology and properly implemented green strategies. If people can show that being green can bring monetary benefit to a business then CFOs up and down the country will be prepared to listen to a proposal.
Displaying ROI in green technology will benefit both the business and of course the one thing that tends to be ignored in all of this, the planet.
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Sri Lanka stepping into the outsourcing spotlight
by editor
Sri Lanka has had its name in the press a great deal over recent years, coming to a grand crescendo in the past few months. The Tamil Tigers conflict has caused a vast amount of opinionated articles to be written, some neutral, but most cast a dark cloud over Sri Lanka’s politics and military activity. However, the 25 year conflict appears to have reached a final conclusion and, while the rest of the world pick through the pieces of the aftermath, Sri Lanka is setting it’s sights on building the country into an outsourcing hub.
In a bid to drum up business and support, Sri Lanka has this week launched its IT and BPO Industry Chamber into the UK market place. SLASSCOM (yes, like NASSCOM but Sri Lankan) has the UK in its sights and has one aim in mind, to attract new investment into Sri Lanka’s BPO and IT industry.
Big name Indian BPO companies have already setup operations in the country. More look set to follow suit as organisations such as Genpact ready themselves to launch a Sri Lankan presence. Tholons, the sourcing advisory company, has ranked Sri Lanka as one of the top 15 emerging outsourcing destinations in the world, so what makes Sri Lanka an appealing destination?
Well for one, they have a huge pool of UK certified accountants, all with cheaper salaries than their domestic counterparts. Government incentives are coming thick and fast in the form of tax breaks, infrastructure investment and other tantalising perks and language skills are also of a high standard.
One particularly unique angle being taken by Sri Lanka is its push towards making the country the destination of choice for SMEs. SLASSCOM believe that SMEs can fare particularly well by using Sri Lankan services and, in a market where many outsourcing destinations look to fight over the scraps from the tables of large cooperates, an SME targeted push may be one of the more innovative and interesting opportunities available to Sri Lanka.
However, the question remains, how much damage will the Tamil Tiger saga have had on promoting Sri Lanka within the UK? India was notoriously in full support of the Sri Lankan government during the conflict and it would be realistic to assume that the conflict did little to the confidence of Indian companies looking to open up Sri Lankan venues.
The UK market, on the other hand, is a completely different beast. Organisations are already concerned about their public image. Offshoring is considered a cardinal sin amongst unions and the public alike, however businesses grit their teeth and continue to offshore, or at least nearshore. However, offshoring to a country that has just emerged from a very high profile and somewhat controversial civil war maybe a step to far.
The only recent example of outsourcing crisis management we have comes from Sri Lanka’s neighbour, India. The terrorist attacks in Mumbai and the Satyam scandal had the potential to cause a devastating drop in confidence amongst offshorers. However, the events seemed to have little impact on the industry at all. India came out relatively unscathed (except of course those directly involved in the Satyam debacle) and it appears to be business as usual.
Now this may fill SLASSCOM with hope, however they must realise that India is a highly mature outsourcing destination that has developed such a lucrative offering that it would be hard to see anything significantly rocking the boat. Sri Lanka on the other hand is a new and evolving outsourcing destination and must position themselves exceptionally well in order to generate sufficient buy-in from UK companies.
Sri Lanka is on course to be a key destination, especially in the finance and accounting market. It is hard to ignore the fact that the likes of HSBC, Aviva and WNS have set up shop and Quattro are looking to expand their Colombo operations. SLASSCOM are making their way over to the UK in the next couple of weeks and sourcingfocus.com will be there to find out a bit more about the destination which has a lot of people in the industry talking.
As always, any question suggestions are welcome.
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Love it or hate it, the latest edition of The Black Book of Outsourcing is out
by Morgan F
The Black Book of Outsourcing is revered and derided in equal quantity. The launch of the latest edition, the ‘State of the Outsourcing Industry’, last week was no different and brought with it news of trends both obvious and unexpected. Whether the report’s findings (compiled from an estimated body of 25,000 outsourcing end-users), provides a true bearing on the industry, is still a matter of argument. Either way, the report certainly provides some interesting points for discussion though.
The first big revelation settled what has been a big source for debate over the last four months – the Satyam scandal. There has been much talk about the effects that the fallout has had on confidence in the industry. Most of this has focused on the fact that end-users will increasingly think twice when looking at Indian suppliers; or at least eye them with a more intense scrutiny than before. But the report shows that India has been quick to recover from any initial shocks with 81 percent of respondents having detected increased accountability in their Indian vendors since February 09. Likewise trust, transparency and other such complementary adjectives are attached to the stoic Indian vendors community.
“The pure-plays have put a huge amount of time and effort into reassuring existing and prospective clients with regards to their own compliance and governance. This has worked well for the tier one players in India,” commented Steve Sutton, Vice President, manufacturing, retail and distribution for Capgemini.
But it may not be the upstanding qualities of Indian outsourcing vendors that has bolstered confidence in the country. The economic downturn, of course achieved some major coverage in the report. For Mark Richards, CEO of expw: consulting, the downturn is one of the core reasons for the lack of tangible damage India-side.
“One suspects that the strength in the Indian outsourcing market has less to do with buyer confidence and more to do with restricted buyer purse strings. The Satyam issue could have been a big blow to Indian providers and offshoring in general but the global recession means that in the end buyers are willing to live with the risk if it means they are still able to invest in key strategic projects,” commented Richards.
However, the recession did not feature for the reasons most would expect. Rather than encouraging an expansion of existing and new deals, a more visible result has been a drive towards renegotiation of existing deals. 17 percent of respondents were shown to be in vendor re-evaluation and 89 percent of these were ‘outraged by three main vendor positions forced during tough times: -unwillingness to renegotiate rates, -unwillingness to provide sameshore options and -unwillingness to improve service levels.
The importance of renegotiating terms was a key theme and 47 percent of respondents reported overwhelming satisfaction with outsourcers that have agreed to address the three key issues. Of course all end users would love a push-over vendor that bows to all its demands. But the report and industry sentiment suggests that end-users want the opportunity to be able to discuss pushing costs down or at least altering the terms of agreements. Re-working or instigating new deals to create more rapid ROI was an important theme. But vendors are quick to state that trying to get too much ROI out too rapidly could result in service detriments.
“A successful outsourcing or offshoring programme should provide dramatic ROI but companies making the move to outsource or offshore should be realistic about the time to deliver that return. One is reminded of the old but very true adage: you can have it good, you can have it fast or you can have it cheap but never all three at once. Outsourcing Fast and Cheap rarely (if ever) delivers good results or ROI. Good and Fast outsourcing programmes are never cheap – both examples show the challenge to using outsourcing as the means for a quick ROI,” commented Richards.
Nevertheless the report found that many end users are looking for rapid ROI and ‘fast and ready’ outsourcing deals. 90 percent of respondents said that a 180 day or less ROI time frame was receiving immediate budget approvals in their companies. This trend to quick return has seen growth in the quick-win areas of procurement and accounts receivable but also in the slower-burn areas of payroll and HR benefits.
Other reasons for the expectation and interest in fast ROI came from the ITO arena and the word on everyone’s lips: cloud computing and SaaS. 82 percent of ‘large market clients’, according to the report, were actively evalutating cloud and SaaS for their US$1Bn+ annual revenue companies. It seems certain that cloud and SaaS is to become a booming business. But whether traditional outsourcers are the natural providers of such services remains to be seen.
“Cloud computing is not the death of offshoring/outsourcing but rather a new channel for companies making sourcing decision and it fills an important gap in the traditional options which all take much longer to implement and require much greater investments,” commented Richards.
So outsourcing vendors may find cloud services a natural extension of their existing repertoire. But it is clear there is still much work to be done by many before consistent integrated services can be offered. Stuart Okin, MD of Comsec Consulting UK, believes cloud becoming mainstream is still some way off.
“Cloud computing will revolutionise outsourcing, although it will take at least 10 years to become mainstream within larger enterprises. Although the savings are potentially huge, the challenges around business continuity, security and privacy are difficult to overcome. From an IT perspective, there are a number of emerging standards to help enterprises put in place redundancy, however, the game changer will be when a number of trusted brands come together to offer a combination of programmable environments with storage and processing services such as those being offered by Amazon and the traditional service providers,” stated Okin.
As usual, the black book offers vendors and end users a lot of food for thought. It seems that 2009-2010 will be the making and breaking of many vendors. In the battle to retain clients, it seems that competitive contracts, appropriate ROI and investment in cloud computing will be key. One thing is clear though; the opportunities are still out there for vendors and buyers alike, even if they look a little different from before.
For more things to think about, sourcingfocus.com readers can order the report here:
http://www.theblackbookofoutsourcing.com/
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Respect your elders
by editor
Big birthdays are few and far between for most outsourcing companies. The reason being that most of them are still so young. To reach just your tenth birthday by 2009 is a truly momentous feat in the outsourcing industry. Not for one outsourcing company however. Though lesser known than many of today’s outsourcing behemoths, LPM Outsourcing could be looked at almost as a father of the UK outsourcing industry having just celebrated a whopping 21 years in April. LPM, a UK-based outsourcer, started doing outsourcing even before the word was commonplace. Sourcingfocus.com got an invite to its birthday party and decided to find out a little more about LPM and the secret behind its longevity.
Philip Davies, the LPM MD, stood out from the crowd in a private room above the popular celeb hangout, Ivy Restaurant. A six foot plus, articulate businessman and avid cyclist amid a room of diminutive financial-types is of course bound to make an impact. The financial types were there representing some of the company’s longstanding customers spanning from Cisco Capital to The Strategic Rail authority and a recent new client in the British Transport Police.
The industry in which LPM operates is the outsourcing of leading and asset financing. What this basically boils down to is the management of the back office finance and premises management of companies around the world. This could be anything from the management of receivables for a large retail organisation to looking after the lease portfolio of a public sector organisation. But LPM’s services are not limited to larger companies, the offerings could also be of interest to the budding start-up or entrepreneur who cannot create or access the economies of scale that a dedicated outsourcer can.
“Many customers come to launch a new venture but lack the experience to set up their own business. Either that or they don’t want to be involved in the back office,” said Mr Davies.
That is all very well, but in the current climate, catering for new start-ups is unlikely to be a booming business. The ability for entrepreneurs to convince financial backers to invest in their ventures has decreased substantially as a result of the credit crunch. Those who have money are holding on to it. But this does not appear to worry LPM as they also maintain close relationships with many larger companies.
“At the moment, the recession is good for our business. I don’t like saying it but it’s true,” said Mr Davies.
Companies across the board are looking to outsourcing to cut costs and augment their businesses and many outsourcing providers are supposedly benefiting from this. However, the opportunities Philip was referring focus mainly on what could be seen as the scraps of the recession. LPM does a large amount of business in the portfolio run-out space, where they must ‘fire sale’ failed businesses’ asset portfolios making as much money as possible from the process. .
“Banks are withdrawing from asset financing, removing focus on new businesses and asking what can we do with distressed portfolios,” he said.
The process of a run out basically involved picking up the remnants of the company and seeing what it can be sold off for. Doing this can be a testing affair, especially working with the remaining management staff to gather information.
“You’re basically collecting information from people who you know have lost their jobs. You think, well the management has messed up, but you also have empathy for the humans who are left with other people’s problems,” he said.
It is certainly a macabre business, but someone has to do it. So how did LPM come into existence?
“When we started we were quite pioneering, the market wasn’t really known and it was a new idea to outsource. We started Five Arrows Leasing Group but wanted to focus on our new business so developed LPM as a separate business. We outsourced our back office to them but it worked so well that we bought the company,” commented Mr Davies.
For its longevity, you could say LPM has a bit of a head start on some of the other outsourcers about today. Starting out in 1988 initially benefitted from the first recession just a few years into its existence.
“In the early 90s many companies wanted saviours to come in, sort out the books and collect all the cash they can from distressed portfolios. Leasing and finance organisaions failing at this time let LPM become well-known,” commented Mr Davies.
In the midst of the second recession to engulf UK business during LPM’s long existence, what thoughts does Philip have on its future and the outsourcing industry in general?
“Our target market is going to change as time goes on. During the recession, insolvency practice is going to be a big area and there will be new opportunities from shareholders leaving markets,” he said. “Things will changes though from the more dismal recession-based customers back to more positive run-outs, new start-ups and probably the public sector too,” he added.
The recession as a whole was also seen as an opportunity not a threat for all outsourcing companies with one caveat.
“The economic pressures of cutting costs will ultimately benefit outsourcing in the short and long term. But providers need to be clever in focusing their marketing strategies in order to reap the rewards.”
It seems if other outsourcers want to survive the recession and reach their own longevity milestones they should take heed. Success in a recession is not a given – it takes insight, luck and clever thinking to really come out on top.
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Global Sourcing – a finger on the pulse
by editor
Everest, the international research institute, has recently released its 2009 Q1 Market Vista report. This report gives an overview of the global sourcing industry and highlights in particular the transaction trends within the outsourcing world. sourcingfocus.com takes a closer look at the report’s findings and explores just where the outsourcing market is heading.
The first thing that the report summary states is that the volume of outsourcing transactions has decreased by seven percent when compared to Q4 2008. This can hardly come as a surprise as many organisations would have been reluctant to shell out the initial investment associated with new outsourcing deals, instead opting to review their internal strategies first.
Anand Ramesh, research director at the Everest Institute, commented on the dip in transactions, “There is a significant amount of caution about new spending or new initiatives. Organisations are in a wait and watch mode.”
The actual cash value of transactions also dropped by 16 percent. Does this clarify the theory that end users are taking a cost is king approach to outsourcing? Suppliers might be having to offer lower rates in order to entice new business. In turn, end users who are renewing their contracts will inevitably be looking for a reduction in price.
Martyn Hart, chairman of the National Outsourcing Association warns end users of the risks associated with excessive bartering, “The recession will prompt end users to pin suppliers to the ground on price, heavy bartering will be taking place at contract negotiation meetings across the world. However, suppliers will make up their money somehow, probably through pricey change requests and we may find end users regretting their initial price busting tactics.”
Mr Ramesh also pointed to the fact that organisations are taking a piecemeal approach to outsourcing, “Organisations are hesitant to sign long contracts. They are not putting their eggs in one basket and are [instead] engaging in smaller transactions for small ACV.”
As a result Mr Ramesh believes that multisourcing is increasing. Big transactions mean big upfront costs, something which no organisation is very keen on doing.
Despite a slump in transactions, the outsourcing industry is growing. The amount of transactions are up from Q1 in 2008 and all involved in the market can rest assured that there will be a continued upward trend. Mr Ramesh believes that by Q4 of 2009 the market will be significantly more positive.
One area of particular interest is the large amount of outsourcing activity within the Banking Financial Services and Insurance (BFSI) sector. Transactions within the BFSI sector have grown by 40 percent compared to Q4 2008, this indicates that an extensive review of resource allocation is taking place within the sector. All those involved in financial services outsourcing have certainly had to look at efficiency.
Large mergers and acquisitions within BFSI will mean a duplication of roles, higher overheads and costly IT infrastructure. It is therefore understandable that outsourcing within that industry has grown.
Within the BFSI sector, ITO was reported as being by far the largest growth area with a 38 percent increase in the number of ITO transactions. This has amounted to a massive 120 percent increase in ACV for ITO transactions in the BFSI space, bearing in mind, this is only an indication of deals for which contract value was disclosed. BPO however was reported as staying pretty much the same as the previous quarter.
2009 was supposed to be the year for BPO. Research from organisations such as the London School of Economics predicted BPO to be racing ahead, even overtaking ITO in speed of growth. Well if that is the case, then the Market vista report shows BPO as a late starter, because in Q1 of this year the value of BPO transactions was down by US$530 million. This did not surprise Ian McGowan, a Director at ADEC, a provider of BPO solutions, “Revenue losses in the banking sector last year and the Lehman Brothers collapse would have had a direct affect on BPO.”
While BPO appears to be stalling, the report points to an increase in captive investment, with areas such as the Philippines enjoying particular growth. “This is a clear indication of large global corporates investing in captives rather than third party suppliers. There is more risk involved, however results can be seen within 12 months”, commented Mr McGowen.
So, this report brings a mixed bag for the outsourcing community to digest. There are certainly no signs of a long term slowdown, however there appears to be significant changes in end user strategy. Suppliers will need to be wary of cost, which in this economy is a given. However, vendors will also need to be prepared to deal wtih smaller, quick turnaround contracts, rather than mega-deals. Captives look set to gain more traction in 2009 and locations such as the Vietnam and Turkey will also be looking ahead with great optimism.
The recession has not significantly slowed down the industry, it has just catalysed a change in strategy. All those involved in outsourcing should take note and prepare for a dynamic 2nd half of 2009.
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Outsourcing the media
by editor
At the launch of sourcingfocus.com in 2007 I was confronted by a – I thought at the time – rather over-zealous outsourcer. Such was his enthusiasm in all things outsourcing that he appeared hell-bent on showing me that anything and everything can and should be outsourced. He even tried to outsource me. Two years later, the portal is going well and growing rapidly. And I still have my job – I have not been outsourced…yet.
The subject of ‘media outsourcing’ is a nebulous concept and one that has been around for longer than most think. Articles of outrage from, presumably domestic journalists can be found online from as far back as 2004. Even back in those rather good economic times some canny or crazy publishers were looking at the opportunities for outsourcing core publishing functions. The outrage was real and valid but chatter about media outsourcing has since died down, precisely at a time when publishers are sacking staff, scraping for every penny they have available.
sourcingfocus.com’s interest in the issue was piqued last week with news that Channel 4 is outsourcing its HR and payroll administration to Logica. Though not a true media outsourcing function, it does at least indicate that the big guys, and those in financial trouble, are looking again to outsourcing as a viable business option. But what of the core functions such as content creation and editing? After the initial furore and five years of silence what has been happening in media outsourcing?
“You can outsource basically anything nowadays,” commented a source that wished to remain anonymous. “Media outsourcing can be a contentious area but there are loads of companies doing it now from basic BPO right up to high-end copywriting,” he said.
The main complaint over media outsourcing came from suggestions that the high-end processes such as editing and writing would all suddenly be shipped offshore resulting in reduced quality content. Perhaps owing to such complaints, the move towards outsourcing these functions has certainly not been a tidal wave in scale. But there is a growing outsourcing undercurrent in this area. In the last few years there have been new content outsourcing deals from Thompson Reuters, Time Warner, Pearson, the New York Times, The Daily Telegraph and even the Financial Times.
All these publishers have outsourced content creation in some capacity deriving various benefits such as cost reduction to the follow-the-sun capacity. For example, The Telegraph has outsourced its weekend supplements to Australia. Despite these deals, complaints over consistency and quality have not resurfaced, indicating that worries over this type of outsourcing may have been unfounded.
In 2004 Forrester predicted that 4,000 British media jobs would be off-shored for this kind of outsourcing over the following 10 years. Many more than this have been lost due to the ongoing recession and turmoil in the media sector and this has fuelled media outsourcing even more. Various domestic ‘content’ outsourcers have been created by this trend by taking on freelance journalists and creating almost ‘on-tap’ news services. Adfero is one that is taking a lead in this area.
“Everything is 24 hour now. Getting news content out there first is taking precedence over the depth of story. So many [organisations] are finding they can outsource and offshore news production and things like press release editing to cut costs whilst also giving them 24-hour news output and letting them focus on more in-depth editorial,” the source said.
But even though content production jobs are some of the most important in publishing, they are not always an organisation’s largest cost. Media organisations are also looking to cut costs in other areas. Cognizant is one company that has benefited from the media sector’s need to both cut costs and enhance operations due to increased competition. Interest in other areas of media outsourcing also appear to have surged as publishing companies attempt to adapt themselves to the digital age. IT outsourcing, the backbone for operating in the digital world, looks set to perform well in this area.
For example, one client of Cognizant’s wanted to create and monitise its online magazine presence. The company built a next-generation platform for the company which was fully able to be monitised whilst enabling them advanced tracking and reporting capabilities on the site back-end, further enhancing the saleability of the site’s offering.
Virtualisation and SaaS is also playing a big part in the growth of media outsourcing. The increasing availability of web-delivered applications and collaboration tools perfectly fits with the working style of many organisations and the 24 hour news culture. The Guardian for example, recently moved to using Google applications in favour of Microsoft. Likewise, few modern newsrooms are to be found without a wiki for organising the vast amounts of information they assimilate on a daily basis.
Industry observers predict that IT outsourcing is entering an entirely new phase, with vendors such as Microsoft, Google and Amazon increasingly dominating by offering cheaper and easier, commodity-based IT services. Gartner expects this market to grow by 43 percent this year to over US $2.7 billion.
While it has not been covered widely, the media outsourcing industry has clearly been growing steadily in the background. Though it is still a relatively niche area, the movement towards smaller outsourcing deals and ‘on tap’ provision of things like IT services seems likely to increase and make outsourcing viable for smaller players. Media companies are going through a period of rapid change and outsourcing looks set to play an increasingly large part in shaping the media company of the future.
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Obama vs Outsourcing
by editor
This week we find that Obama plans to clamp down on the overseas earnings of US corporations by making a variety of amendments to the US tax code. His statement earlier this week certainly had some offshore service providers a little nervous, “That [old tax code] says that you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.”
Eyebrows were certainly raised in the outsourcing world, evident through a host of sensational headlines in India’s Economic Times such as, ‘Obama torpedos Bangalore again’. But what do these proposed tax revisions mean for US companies and their offshore partners?
Essentially the tax code system, which Obama is attempting to change, allows US companies to defer paying corporate tax on income earned overseas, until that income returned back to US soil. A tax credit for tax paid overseas is also given to the businesses and the US Government will take whatever is left.
Obama’s revisions will mean that US companies will have to pay the US corporate tax immediately, although the tax credit will still apply. This revision will see US companies having to pay more tax however, will we see a significant drop in offshoring as a result? Will this bring the big players of the global offshoring market to their knees?
Mark Kobayashi-Hillary, NOA Offshore Director and industry expert, thinks not, “This is not a big threat to the outsourcing industry. Obama pledged these tax reforms in the election campaign so they should not come as a surprise to anyone. He is simply trying to stimulate future investment on home soil and in turn generate more jobs.”
A rational response, however, are these protectionist policies a determent to free trade? Emerging outsourcing destinations such as Kenya, Vietnam, Sri Lanka and Egypt have previously been unable to compete within global markets, however with a booming outsourcing market, these regions are now able to step up to the plate and engage in business with the rest of the world.
“It will be difficult for the Obama administration to be harsher on offshoring. If Obama does try to implement tougher sanctions then he would be going against international free trade laws that the US have signed up to.” Mr Kobayashi-Hillary responded.
So, can US companies and overseas service providers breathe a sigh of relief?
Peter Ryan, head of offshoring analysis at Datamonitor, believes that there is some cause for concern, “President Obama’s recently announced changes to the tax code for US firms doing business abroad, could have significant implications for US firms with offshore sites. Should Obama’s new tax plans become law in 2011 as planned, the initial impact for contact center outsourcers selling offshore delivery will be increased price points. In an era of ever-tightening margins, not only will this option be unpalatable for many prospects looking to work with an outsourcer, it could also force existing clients to examine other business models for customer-facing work.”
Increased prices in difficult times may indeed have an impact on the market. However, as Mr Kobayashi-Hillary commented, “The savings made by offshoring work far outweigh the tax increases.”
Lower wage costs, lower infrastructure fees and government incentives all combine to make offshoring an attractive proposition. Tax adjustments, such as the ones planned for 2011, will not significantly impact the outsourcing market and in all probability will not enhance the job market in the US. Businesses don’t set up shop in Bangalore for tax relief. They set up shop in Bangalore because it costs significantly less to produce the same work than if they stayed on home soil.
Voters will be pleased that Obama appears to be coming good on his pre election promises. However, this is not the assault on offshoring that some were expecting. Obama may still have things in store for the offshoring community, but it is unlikely that the impact will be great. We are on the cusp of true globalisation and I can’t see any entity halting the progress. Outsourcing and offshoring is just too integrated into modern business to suddenly stop.
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Multisourcing – a poisoned chalice?
by editor
Outsourcing end-users are looking increasingly immature in the way they manage their contracts. What justification do I have for this sweeping and stinging appraisal? The new PA Consulting report ‘Outsourcing – what lies beneath’ - that’s what. A quality report, from a respected consultancy, based on reasoned, systematic research – who can argue with that?
Some of the findings are stark and provide a real wake up call for those that have been resting on their laurels where outsourcing deals are concerned. The first and most surprising in the current financial climate, is that 31 percent of respondents were unaware what percentage of their outsourcing spend went into managing suppliers.
The lack of knowledge on outsourcing management spend was also mirrored when respondents were asked about the levels of outsourcing maturity. Only 16 percent assessed themselves as having a mature governance model for their outsourced services. The report is clear, although many companies are now old-hands at outsourcing, the way deals are managed and the amount of focus placed on the management process has not massively progressed.
These stats are worrying when looked at alongside an ongoing industry trend. Multi-sourcing, where multiple suppliers serve different parts of an end-user’s requirements, has been the talk of the industry over the last few years. Gartner’s ongoing research into outsourcing ‘megadeals’ continues to see the overall interest in multisourcing growing. But PA Consulting’s report questions whether end-users know the risks involved in splitting outsourced processes into continually smaller parts.
Jonathan Cooper-Bagnall, Member of PA Consulting’s Management Group, commented, “We are seeing more and more that multisourcing is a developing trend, making integration of services all the more crucial. However, many ‘tier one’ organisations have already had to invest heavily in teams of people to fulfil the integration role, simply through lack of an early identification of the need for service integration.”
There is a clear clash between the industry’s drive towards multisourcing and its overall understanding of what the concept entails. But the somewhat blind trend towards multisourcing is set to continue with 28 percent of respondents in PA’s report planning to split their outsourcing by vertical service over the next five years.
So what is driving this lemming-esque trend? Smaller vendors surely have to take on some of the culpability, after all the larger vendors will continue to push their full managed-service offerings. Multisourcing is attractive for smaller vendors who are generally high in service expertise but lack in-house management resources.
However, by and large, the biggest thing prompting end-users to explore outsourcing are the prospects of cutting costs. 75 percent of respondents said they would use competitive multi-sourcing in an attempt to drive down cost. The aim being to ‘improve competition, maximise supplier skills and expertise and, critically, drive down costs by achieving better contract pricing’.
But this is where the problem lies. A large proportion of respondents were largely unaware of what goes into the management of multiple contracts and consequently are going to have a steep learning curve.
Graham Beck, Senior Sourcing Advisor for PA Consulting, commented, “In a single-source relationship where gaps in integration occur, the supplier will usually step up to the mark. But in a multi-sourced set-up where there are interface problems, no supplier is likely to take up the slack.”
sourcingfocus.com met with the PA Consulting team at the report launch to discuss the issues. The feeling was not that multisourcing is an inherently flawed concept, but that users need to be fully appraised of what’s involved before doing anything. The management extras that full-service suppliers provide, both paid and unpaid, are not easily visible from the outside. If an unprepared end-user decides to jump headlong into multisourcing, these hidden management activities could become all too visible, all too quickly.
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India’s BPO market share to double?
by editor
In a recent sourcingfocus.com news analysis, we covered the London School of Economics’ Beyond BRIC study. From that study we drew the conclusion that India may be having its iron-grip on the BPO industry loosened somewhat by emerging destinations. In swift succession Gartner has released a report saying that the Indian BPO industry is as strong as ever and it sees no reason why the Indian market share should fall. In fact Gartner thinks that its share will double by 2010.
This seems to totally contradict the speculation that India’s market share may be threatened by emerging destinations, nearshore vendors and a change in end user procurement needs. sourcingfocus.com spoke with Rick Simmonds, Partner and Head if Financial Services at Alsbridge, a global advisory firm, to ask his opinion these predictions
“I disagree, I think India’s market share is set to drop,” he commented. A reasonable opinion considering a recent FT article reported on Indian contact centres suffering from higher wage and location costs, with some having to get rid of staff and move to cheaper areas. Mr Simmonds goes on to state that more non-English speaking countries will take advantage of offshoring and as a result will be looking at other destinations to suit their BPO needs. “Spanish speaking nations will be looking to Morocco and Argentina. Egypt is also forging ahead in the BPO world.”
But It is not just the language similarities that businesses will be looking for when considering BPO. Mr Simmonds also believes that the current political and economic climate may deter some businesses from offshoring chunks of their processes, “Cheaper regional areas in Europe and the UK may appeal more to organisations now. Banks taking Government money won’t want to be seen offshoring either.”
Patriotic and protectionist sentiments are also adding to the increased interest in new destinations. Nearshore locations such as Northern Ireland are reaping the new wave of UK companies looking to offshore, but not too far. President Obama’s administration firmly stressed the importance of keeping jobs on American soil. While this contributed to the election winning strategy, it would have sounded nails on a chalkboard to U.S. companies. As a ‘halfway house’ US businesses will be looking to countries such as Costa Rica, Philippines and Brazil to provide them with nearshore outsourcing services. These destinations give the appearance of being ‘homegrown’ whilst still offering the cost effective benefits.
BPO is certainly flourishing. The growth in this sector is increasing at a far rapid rate than that of ITO, however, it is not monopolised by the big players. It seems that all nations can conceivably compete for a piece of that BPO pie. That will surely mean that India’s market share will reduce, despite an increase in internal growth. However, we are not prophesising India’s demise. As Mr Simmonds says, “India is always on the offshoring agenda.” The prices Indian vendors offer and the size of their work force are still very competitive and cannot be ignored. We just feel that the Gartner predictions are simply over-zealous.”
This year’s Nasscom leadership conference had a whole host of major Indian players taking the stage and delivering exceptionally up-beat forecasts for the future. This is all well and good and I am sure there is not a person out there who does not understand the importance of keeping your chin up in front of shareholders and the public. However simply burying heads in sand and dancing around issues such as, protectionist policies and a drop in IT spending will not do anyone any good. But then neither will over optimistic forecasts.
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Satyam - the next chapter
by editor
Friday the 10th of January went like any other day for Ramalinga Raju – business as usual. His arrest alongside his brother that evening was anything but. From that moment he was the ex-Chairman of one of India’s most successful outsourcing companies and exposed as the main perpetrator of the country’s biggest ever financial fraud. He and those involved with him had systematically brought Satyam - once a shining paragon of India’s outsourcing elite - to its knees. Since the arrest, many more have followed, both at Satyam and their auditors, PriceWaterhouseCoopers, leaving an indelible stain on both companies. The investigation has uncovered over $1bn worth of fraud and the quest to weed out all those culpable and right the wrongs of years of systematic ‘book-cooking’ will continue for some time.
But, emerging from these bleak and embarrassing times for Indian business, comes a ray of light. This week Tech Mahindra, the telecom-focused joint venture between BT and India’s Mahindra and Mahindra, has emerged as the highest bidder in a Satyam centric ‘fire sale’. Instigated by the Government and pushed along by NASSCOM, the industry body for Indian outsourcing, it is hoped the sale will draw a line under the scandal and signal a new beginning for Satyam and the outsourcing industry in general. But will it? Are Satyam’s troubles finally over and can Tech Mahindra, a relatively small fish in the outsourcing pond, make the deal work for the both of them?
“It’s likely the Enron-esque scandal will rumble on for some time. There is still some way to go in sorting out all the problems the company faces,” comments Phil Morris, COO for EquaTerra Europe, a leading advisory firm.
Indeed there is still a big question mark over the company; three more Satyam execs were arrested just last week and investigators are still digging. And, all forward-looking rhetoric aside, there is still no telling just how ingrained the fraud had become and how deep culpability goes. But industry commentators are broadly positive about the move, presumably welcoming a change rather than leaving Satyam to burn slowly to the ground.
None are more positive than Tech Mahindra itself. Preferring not to comment broadly prior to the Company Law Board’s (CLB) final approval [approved this Thursday 16th, ed.], the company issued a gushing press release, “This is a landmark development for Tech Mahindra and I am delighted that we are the highest bidder for Satyam.”
But the industry in general also seems convinced that this really is a new beginning for Satyam. “The fact that this move has been concluded (relatively) quickly is good news for Satyam’s customers. The Indian government and the offshore and outsourcing industry in general has operated effectively to make certain that the sell-off off Satyam does not become a protracted experience. The hope of the Indian Government must be that the sell-off draws a line under the Satyam scandal,” commented Alistair Maughan, a Partner at Law Firm, Morrison & Foerster.
However, despite the fact CLB approval has now come through, there is still a long way to go. Mergers and acquisitions are notoriously troublesome for those unprepared and questions still remain over exactly how Tech Mahindra will tackle the numerous challenges to come.
“The merger will stretch them (Tech Mahindra) quite a lot because M&A’s are not something most companies are geared up to tackle. Executives will be challenged and will definitely need outside help to make things work,” commented Phil Morris.
He added, “But it will help them address the limitations of the company and its having been tied into and reliant upon BT. Tech Mahindra has been limited in scope and delivery capability and Satyam gives them a great leg-up.”
The Chairman of Tech Mahindra, Anand Mahindra, sounded confident that the company can fix things, “The Mahindra Group is known for its good governance and the Tech Mahindra team has demonstrated its outstanding customer centric focus over the last many years. I am sure that Satyam’s customers and employees will welcome this news. Looking forward, we are confident that this will lead to a positive transformation in Satyam’s business.”
If Tech Mahindra can make the acquisition work well, it will be a giant leap for the previously telecom’s centric provider. Satyam is an impressive animal delivery-wise and will open Tech Mahindra to clients and delivery capabilities in numerous new industries.
But there is still the matter of customers to consider first. As you would expect during a huge scandal such as this, Satyam has lost a reported 46 customers since the news broke including the lucrative National Australia Bank (NAB) contract. While many larger clients will be weary of risking the upheaval that changing large contract suppliers entails, Tech Mahindra must act fast to placate worries and prevent further client exodus.
“If I was Tech Mahindra or Satyam I would want to rebrand the company as a rebirth and new start. This would mark an end to the affair and I think the market would really understand and get behind such a move,” commented Phil Morris.
A rebrand is certainly an option to address Satyam’s severely damaged brand. But there is more that needs to be done directly to help keep customers on side.
“Once Tech Mahindra takes over, the main focus will be on the customers. Tech Mahindra will need to ensure that it targets the highest profile and highest revenue generating customers with the best prospect of continued relationship and focus absolutely in locking them in and keeping the vultures at bay. TM needs to convince Satyam’s key customers that it is big enough and experienced enough in the right sectors to continue to deliver great quality services,” commented, Alistair Maughan.
According to Phil Morris, those customers that decide to stick with Satyam either out of necessity or good faith will also need to do their part to keep things on track during the merger process. “Customers need to work to drive communications going forward and make sure they get Tech Mahindra and Satyam to sit down and talk about continuity of skill and service while changes are taking place.”
It is clear Tech Mahindra’s move is broadly welcomed by the industry but equally certain that there is still a long way to go. Learning from the past and making sure the M&A process is completed as smoothly as possible will be central to the success of the venture. The most important thing, however, has to be transparency. The lack of clarity that has almost been Satyam’s undoing will also make or break it in the future.
Phil Morris succinctly summed it up, “The company must display complete openness and transparency going forward; if they can’t do this, the problems they face now will continue to haunt them for a long time to come.”
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Beyond BRIC
by editor
Last week the London School Of Economics released their report entitled, ‘Beyond BRIC – Offshoring in non-BRIC countries: Egypt – a new growth market’. sourcingfocus.com was excited by the prospect of a study that looked beyond BRIC, there has been much speculation that India is losing its iron grip on the outsourcing industry so it’s poignant that this report has been released.
Martyn Hart, Chairman of the National Outsourcing Association, commented on India’s situation, “India has long been the nation of choice for British and American organisations to offshore their IT and business process service provision. Tax breaks, a cost effective workforce and excellent currency exchange rates meant that in terms of cost cutting India was second to none.”
Mr Hart goes on to outline the reasons why India may be experiencing a drop in demand and why other destinations appear to be capitalising on a turbulent economy, “In recent years it hasn’t been such smooth sailing for India. 2008 saw the combination of inflation and currency appreciation have an impact on the Indian market, with the Rupee almost reaching a ten year high against the dollar. Soaring demand for services also meant that there was a significant increase in local salaries. This saw the cost of offshoring to India rise, making other low cost destinations just as desirable to end-users.”
It would also be fair to assume that recent events, such as the Satyam debacle, have dented India’s reputation and in turn end user confidence. So what does this mean for rising stars in the outsourcing industry?
Nicholas Nesbitt, CEO of the largest Kenyan call centre, Kencall, commented that it is not just for financial reasons that customers are considering other destinations, “India’s top workers are no longer looking for work with outsourcing suppliers, they are looking to be employed directly with the likes of Google and so on. Kenya has a fantastic skills base which suppliers can still readily access. This means that we can cherry pick the very best graduates to offer our clients.”
Protectionist attitudes are also acting as a catalyst for end users to look closer to home for service providers, or at least to vendors with cultural similarities. The Beyond BRIC study identifies nearshoring as a strong trend, pointing out that reduced time zone differences and fewer travel costs appeal to potential outsourcers. Mr Nesbitt believes that cultural similarities are a real driving force behind his business “All of our staff speak English 24 hrs a day. They are educated in a British style system and are very much in tune with Western culture, from sports personalities to current affairs.” Any company concerned with alienating their customers by engaging with a far flung supplier would surely be enticed by these cultural touch-points.
ITIDA, the Egyptian development agency, will certainly be happy with the report’s findings. Indeed Egypt has been powering ahead in the outsourcing industry, picking up ‘Outsourcing Destination of the Year’ award at last years National Outsourcing Association’s industry awards. However we see the Egyptian outsourcing market being rooted in ITO for the time being. Yes, Egypt has a large skill base, good language capabilities and low costs. However the cultural touch-points, which are becoming so synonymous with companies looking to new destinations, are simply not as good as competing destinations.
In conclusion this latest report, although heavily geared towards promoting Egypt, does effectively give an idea of why new destinations are starting to gain momentum in a changing market. The BRIC countries will need to be wary of the shift in business strategy, as companies look to take advantages of offshoring whilst avoiding long distance offshoring deals. We may find that this rise in competition will push all involved in the industry to up their service as well as create innovative solutions that not only win new business, but retain existing clients. Outsourcing is now a truly global industry.
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Is 2.0 the way to go? sourcingfocus.com explores the rising value of outsourcing
by editor
This week sees the launch of the long awaited Op2i report into the outsourcing industry. Op2i, a Business Improvement Firm Specialising in Outsourcing, has looked into a perceived shift from outsourcing 1.0 towards outsourcing 2.0. That despite the economic downturn, outsourcers are still looking to climb the value chain and end users still want this.
The first good news for vendors is that interest in outsouring appears to have risen, with 51 percent of report respondents seeing increased interest in the discipline. This finding mirrors a recent report from EquaTerra finding that nine percent planned to instigate new outsourcing deals this year.
But what of outsourcing 2.0? The report describes the concept as “moving from a pure transactional, tactical approach to a more strategic partnership approach”. This sounds expensive and a difficult sell in times of financial hardship. One would expect a jump in outsourcing interest to be driven by simple cost necessities rather than strategic needs at a time like this.
Richard Nicholas of Browne Jacobson LLP, a law firm to the outsourcing industry, disagrees, “We have seen considerable demand for “added value” services. A good example would be call centres that do more than process information but which build up a rapport and can cross sell services better than an in house function.”
The report mirrors this view with 41 percent saying outsourcing ‘positively helps in terms of productivity and efficiency’. When asked about the impact outsourcing has on the economy an astounding 83 percent also thought that outsourcing ‘helps the domestic economy compete with the emerging countries’ and ‘gives access to new skills and labour’ - a ringing endorsement indeed.
So the view of outsourcing as a value-adding device is clearly increasing. However, accounts of companies actually outsourcing more extensive functions and higher value processes was not highly prevalent.
“Marketing, media management, IT security and virtual PA functions are the least likely activities to be outsourced – all representing critical organisational knowledge, or brand identity activities, which are typically central core competencies of an organisation,” the report said.
So what is behind outsourcers seeking to climb the value chain and is it in end user’s interests to relinquish so much control to an outsourced provider? Howard Sarna, CEO of Oceans Connect, an outsourcing provider, sees the possibility for creating relationships that both drive down costs whilst adding value at the same time.
“We initially engaged with a retail client [of ours] in a traditional 1.0 relationship with basic call-handling. Over the last couple of years, we’ve been able to expand the relationship through re-engineering processes with Six Sigma experts to proactively identify and up-selling opportunities. The expanded relationship also allowed us to introduce email back-office with increasing automation for the client.”
The opportunities for creating these kinds of relationships are clearly increasing. And as outsourcers become more finely attuned to their individual disciplines, end users could be set to benefit. However, Mr Nicolas sounds a word of caution,
“I have acted for clients who have, despite being outsourced providers, become indispensable to the customer because they know much more about the customer’s needs than the customer. Whilst of great benefit to the provider I’m not convinced that this is the healthiest position for the customer, since they no longer have a view of their overall needs.”
Indeed, the question of how far a company should go down the outsourcing 2.0 route is a valid one. The potential for losing core competencies and IP is great whilst the transfer process could also become difficult as a vendor becomes more valuable. This is obviously a good thing for the vendor but leaves questions open for the end user as to the direction they want to take their business.
“The tender, transition and exit process is a painful one for all concerned. By adopting a more co-operative approach the provider has a better chance of being retained longer,” commented Mr Nicholas.
In the wake of the report the onus is clearly on the end user to weigh up the benefits and risks involved with making outsourced vendors more integral parts of the business. The decision on whether to do so rests on which side tips the balance.
sourcingfocus.com readers can access the full report by visiting oP2i’s website and requesting a copy: Outsourcing Survey Report 2008
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Northern Ireland: A risky venture?
by editor
Over the past few weeks we have had a recurrence of deplorable violent activity in Northern Ireland. A policeman and two soldiers have been murdered by the Real IRA and many are concerned that this will restart the ‘troubles’ Irish people have long fought to end. Public feeling against renewed violence was palpable as more than 2000 people took to the streets in Northern Ireland holding ‘No going back!’ placards and making a stand for peace.
However, despite the uproar from the general public, potential investors may be concerned that the near-shoring hub has trouble bubbling under the surface and this could deter organisations from taking advantage of the outsourcing opportunities Northern Ireland has to offer. These opportunities have led to a significant surge in investment, something that Northern Ireland has been relishing over recent years. As recently as the beginning of the month gem, a contact centre provider based in Belfast, announced a £19.5m expansion plan which will see another 900 seats made available for an ever increasing client list. Geraldine Fusciardi, Sales and Marketing Director of gem, further promoted the image of Northern Ireland and commented, “We are extremely busy right now as businesses are looking to use contact centres with similar cultural touchpoints.”
This is all welcoming news, especially as the global economy is experiencing a period of financial instability. The last thing Northern Ireland needed was an obstacle in its progress to becoming one of the most attractive destinations for near shore outsourcing. The recent ‘Black Book of Outsourcing’ produced by Brown and Wilson had a section devoted to establishing the riskiest and safest locations to outsource to. This outsourcing handbook had Belfast in the safest 25 destinations to outsource to. This is certainly an acknowledgement of the benefit that peace has brought to the country and in turn highlights how Northern Ireland has become an attractive business area. However the Black Book was published before the recent activity and as we all know, bad news has the potential to severely knock confidence in a location, you only have to look to India for an example of how quickly confidence can be rocked within the outsourcing world.
The Mumbai attacks and the resignation of the CEO of Satyam over a £1bn fraud may have contributed to Mumbai being placed in the 25 riskiest destinations to outsource to. We have certainly heard mumblings of a slowing down in the Indian BPO market and many people are wondering whether emerging destinations such as South Africa and Eastern Europe are going to chip away at the Indian stronghold as a result of a confidence downturn. Does Northern Ireland risk having its end users lose confidence and consider other destinations first?
Speaking to Sourcingfocus.com Bill Montgomery, Director for International Investment at Invest Northern Ireland, commented on the impact the recent events will have on Northern Irish businesses, ‘These are utterly terrible events that have occurred, however in relation to business we are not seeing any adverse effect. Of course questions have been asked however there have been no investment cancellations or potential investment trips halted. Mr Montgomery goes on to say that the events have been ‘isolated and targeted incidents that everyone is against’.
Indeed it appears that it has been pretty much back to business as usual. After putting their U.S. tour on hold briefly, to deal with the events, Martin McGuiness and Peter Robinson met Barack Obama this week in Washington and will presumably continue to promote Northern Ireland as a foreign investment destination.
So concern of a possible reduction in business interest in Northern Ireland may be premature. As Bill Montgomery highlighted, Northern Ireland has done extremely well and the proposition they offer is too strong to ignore. Potential investors should, like with any investment, carry out a thorough risk analysis of the potential locations they are considering. However, they should not be overly concerned about a sudden turn for the worse in Northern Irish violence. The country is united against falling back into the awful times that characterised the late 60’s and continued for nearly 30 years. The area has evolved and despite the awful actions of a few extremists, Northern Ireland looks set for continued growth continue to grow as the country continues offer one of the most competitive near-shore outsourcing models in the industry.
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For whom the bell tolls
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Much to the umbrage of those languishing at the foot of the rankings, the launch of Brown and Wilson’s ‘2009 Black Book of Outsourcing’ has put offshoring and the risks involved, perceived or otherwise, firmly back on the news agenda.
This year’s report, ominously titled ‘The Year of Outsourcing Dangerously’, takes the 50 best recognised offshoring locations and ranks them in the Safest and Riskiest 25. Taking into account ten factors that could conceivably affect offshoring operations, and therefore end-user’s businesses, the report aims to give those involved in outsourcing an idea of the threat each country poses to business continuity.
Some of the big winners in the report include Singapore coming in at number one in the ‘Safest’ category followed closely by Dublin, though of course coming complete with its higher European price ticket. The current bellwether of Africa, Egypt comes in at number ten but the rest of the continent is dismissed by Brown and Wilson in one sentence “The entire continent of Africa still poses serious dangers to business continuity and is recommended to be avoided.”
But what stall can today’s potential outsourcers really set in these rankings as cost pressures of the recession intensify?
Dinish Goel of TPI, commented, “That would really depend on what parameters and criteria have been used in arriving at the ranking. Further, generic rankings, while relevant, do not necessarily apply in the same rank order to a specific client situation.”
The report itself is extensive having surveyed 3010 end-user executives during the later half of the year, 448 of these were then included within the analysis and 125 offshore locations were selected to feature in the report based on employee counts. So while vendors and industry watchers may be surprised at some of the countries’ positions, the results reflect the views of a sizeable chunk of the end user marketplace.
Kit Burden, a Partner at the DLA Piper law firm, recommended a common sense approach in light of the report, “Some destinations are generally recognised as being relatively “safe” for example the nearshore options such as Czech Republic, Poland, Ireland and further afield options such as India and the Philippines, and insofar as the rankings reflect this, they are worthwhile to support the basic sourcing decision.”
But most advisors sourcingfocus.com spoke with were quick to add that the Black Book and other similar surveys can only take a potential outsourcer so far and need to be considered alongside other factors.
“Most users of outsourcing tend to be more sophisticated nowadays in their offshoring decisions and consider many more factors when making their decisions,” said David Skinner, from the Global Sourcing arm of Morrison and Foerster. “Most advisors nowadays will give extensive insight and analysis on offshoring locations beyond what a report can divulge.”
Another reoccurring theme was that of perception over reality – whether civil unrest and terrorist attacks were actually causing problems for outsourcers. In one case sourcingfocus.com spoke with a Kenyan call centre that continued to operate without hitch during last year’s civil unrest around Nairobi; meanwhile global media outlets conveyed an entire country in turmoil. Likewise Mumbai languishes at number 42, surely suffering from last year’s terrorist attacks. sourcingfocus.com heard no reports of Mumbai’s attacks affecting outsourcing operations.
“There is a lot of scaremongering but the reality is that there are very few instances of impacts upon offshoring or outsourcing,” commented Kit Burden.
Nevertheless those that spoke to sourcingfocus.com were keen to convey the importance of spreading risk.
“It’s important that end-users look at the supplier, not just the location. Most of the big suppliers will have delivery locations worldwide now and will be able to handle any problems,” said David Skinner. Also adding, “A good thing about assessing risk in offshore locations is that it gets end-users asking the right questions of suppliers. It makes companies do things correctly.”
Prudence it seems will be a key theme in offshoring throughout 2009. But while the report predicts a shift in preference towards nearshoring, stating that offshore vendors without sufficient nearshore representation would face problems securing contracts, this was not echoed by experts.
“The cost pressures are simply too acute,” says Kit Burden. “So long as the destinations in view “pass muster” at a basic level, they will not be seen as being so risky as to justify foregoing the cost advantages otherwise on offer.”
Chris Tiernan, Managing Partner of Grosvenor Consultancy Services LLP, explained the choice ultimately does come down to cost but it’s not as simple as a direct comparison, “The issue is the balance of what might happen if risks materialise against the cost of taking steps to address them.” He also said that the costs involved should be assessed and worked out in the outsourcing contract. “Interestingly a deal with these contractual stipulations was signed just two weeks after the Mumbai incident, the client having been there while they were still clearing up after the incident,” he added.
This common sense approach was supported widely but Andy Gallagher, head of sourcing at Compass Management Consulting, recommended further due-diligence and contingency planning. “Contingency planning is an issue which many clients choose to brush away in the drive to minimise costs. The Satyam case in India was a dramatic reminder of the need for some contingency capability on the client side of outsourcing deals in order to minimise risk and keep systems running.”
David Skinner of Morrison and Foerster summed things up succinctly “Of course there are risks but these are often exaggerated by the media. Although, those dependent on just one location for their offshoring should have cause to be worried. The report should prompt all those who aren’t doing things correctly to assess their arrangements and put the necessary measures in place to protect themselves.”
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Online brand threat requires a new approach, says Ovum
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The web, one of the most powerful tools for both promoting and undermining a company’s valuable corporate assets - brand and reputation, has also changed the entire nature of protecting them. In a new report, ‘Brand protection services’, global advisory and consulting firm Ovum says the task will become even more challenging as Web 2.0 technology spreads. It points out that policy makers have yet to balance the legitimate concerns of organisations with respect for freedom of speech and truthful debate and organisations have to be proactive in protecting their online reputations.
“The fundamental problem is that there is no quality control of content on the Internet.” says Graham Titterington, Principle Analyst and information security specialist at Ovum and author of the report. “The corporate mindset has been slow to adapt to the changing world. New techniques are needed to detect attacks and defend reputation in the online world, even when the remedy requires conventional legal action.”
The Internet is now a major channel for the sale of fake branded goods, which in some cases results in danger to the customer. Copyright and trademark infringement are commonplace. Businesses have suffered real damage as a result of false allegations spread on the Internet. The annual revenue of online counterfeiting fraudsters has been estimated at $110 bn (source MarkMonitor).
Another aspect of online counterfeiting is represented by the misuse of a web domain name. The attacker sets up a website with a similar name to that of a legitimate organisation with the deliberate intention of deceiving visitors. It extends to virtual services offered by fraudsters on the Web purporting to be the legitimate organisation. The issue will become more prominent as the Web becomes more interactive.
A niche group of service providers has grown up to monitor the Internet for these offences and initiate enforcement action both at the ISP level and in the physical world. “For example MarkMonitor is a niche vendor offering services in domain management, online trademark protection, online channel monitoring, and anti-phishing. Larger IT vendors also offer protection services, such as IBM’s COBRA alerting service.”
However, according to Ovum countering bad publicity needs a more subtle approach. Debate has to be matched by a positive involvement in online discussion forums. The wider issues of reputation abuse need to be tackled by a combination of prevention, detection and reaction. The first stage in protection is the registration of trademarks, domain names and intellectual property. Web monitoring can detect early stages in the development of an attack strategy. More detailed detection requires the co-operation of ISPs in identifying the use of specific IP addresses and their ownership. Reaction includes, forensic analysis, the issuing of legal notices and follow up action, and the closure of web sites and IP addresses that are engaging in illegal activity.
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Outsourcing booming in tough climate, says TPI
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Companies are responding to the effects of a tough economy by expanding their use of existing outsourcing agreements and awarding new contracts, according to the latest market data from TPI, the sourcing advisory firm.
TPI data reveals that 282 outsourcing contracts totaling over €39 billion have been signed so far this year – the strongest half year performance in 10 years. This represents an increase of 24 percent on the total value of contracts signed at this point last year. Demand for outsourcing is being driven by companies looking to cut expenditure and deliver variability in costs in the current economic climate. Corporate strategies that were growth-driven during more prosperous times are becoming profitability-driven in response to the economic challenges.
EMEA leads the way
Growth in the outsourcing market is taking place predominantly in Europe, Middle East and Africa region (EMEA). TPI data shows that the EMEA represents 61.5 percent of the outsourcing market to date in 2008 compared with 51 percent a year ago. So far this year. 126 contracts totaling €25.5 billion have been signed – up 58 percent on the value signed at this point last year.
Duncan Aitchison, partner and president, TPI EMEA comments, “European companies are expressing their concerns regarding the softening business climate by taking steps to reduce operating costs, and restructure the nature of their business-support functions to have a more variable cost profile. They are doing this to gain the benefits of near-term cost savings, but also to position themselves to respond more effectively when the economy strengthens and growth is once again at the top of the agenda.
“While I wouldn’t call today’s corporate attitude towards cost-reduction ‘desperate’, there is certainly a tone of urgency in play.”
Reflecting the increasing adoption of outsourcing by large European corporations, 10 of the 13 mega deals (contracts valued at €800 million or greater) signed so far this year were in EMEA. The average value of a contract in EMEA is growing in contrast to declining contract values in the US and Asia Pacific. This growth in contract values in EMEA is being fueled by this rise in mega deals.
What does the future hold?
TPI’s data shows unprecedented market momentum in terms of new outsourcing contract awards – the best sequential nine months in the history of outsourcing. To date in 2008, 237 new scope outsourcing contracts have been signed globally totaling €32.6 billion – an increase in total contract value of over 25 percent from 214 contracts totaling €26 billion a year ago.
Considering this strong start to the year, TPI estimates that global annualised revenue from outsourcing contracts will grow by around 10% to over €70 billion by the close of the year. This would surpass the €64 billion in 2007 and 2006.
“This surge in new scope outsourcing contracts indicates healthy market demand and underlines the fundamental momentum in demand for outsourcing,” explains Duncan Aitchison. “We could well see a record sum for the total value of outsourcing contracts signed in 2008. While third quarters are traditionally the softest for outsourcing contracts, we see little to disrupt the current momentum.”
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TCS hit hard by falling rupee
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Tata Consultancy Services (TCS) has reported a massive drop in net income growth in the first quarter of its financial year: Q1 2008 net income was up just two percent, at $296 million, against Q1 2007’s figure of 55 percent growth. However, revenues were up 21 percent year on year at $1.5 billion, and margins remained steady.
The reason for the collapse in income growth was a sudden fall of the value of the rupee: the company had hedged that the currency’s value would continue to rise against the dollar as the downturn hit. Instead, the value of the rupee has fallen sharply in recent weeks, leading to related losses of some $18 million.
“We have been able to respond to the challenging macro environment and drive growth in the business under tough operating conditions and manage costs,” said S Ramadorai, TCS chief executive and managing director of TCS.
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HCL makes UK financial services acquisition
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The rise of India continues apace as global IT services provider HCL Technologies, part of the $4.9 billion giant HCL Enterprise, has announced the acquisition of the UK’s Liberata Financial Services (LFS) for an undisclosed sum.
The British BPO specialist provides end-to-end administrative and customer services for the life and pensions industry.
LFS’ parent company Liberata Ltd. will now focus anew on its public-sector business, where demand for its services is strong and growing, as pressures intensify to cut costs.
Fulfilling predictions from sourcingfocus.com and other industry commentators that the strength of Indian outsourcing would inevitably mean acquisitions in the UK and Europe during the downturn, HCL will acquire four delivery centres in the UK, together with 800 staff who come to HCL with both domain knowledge and technical expertise.
Acknowledging the significance of the deal, Ovum analyst Peter Clarke said: “The logic of the deal is clear. HCL Technologies has the capacity to take forward Liberata’s financial services platform, using it to develop its LP&I business.
“Liberata has done well to win business in this space but has constantly faced questions from clients about its ability to sustain its interest in the long term, given its relatively small scale in this highly competitive market.”
HCL’s insurance practice will be strengthened by LFS’s core capability to manage complex transactions, as well as a number of multiyear contracts with its customers which include blue-chip names.
Ranjit Narasimhan, president and CEO of HCL BPO, said: “This strategic acquisition of LFS enhances HCL’s ability to become an end-to-end provider of business process outsourcing services in the financial services space.
“This acquisition will equip HCL with a ready capability across the value chain by providing access to an existing revenue stream of policy management, actuarial and analytics catapulting HCL to become a leading service provider in the UK market for the life and pensions industry.”
It may also, of course, give HCL some leverage with a UK parent business that has embedded connections with many local authorities – as well as the obvious long-term revenue streams from within the more stable end of the financial services market.
For Liberata Ltd, the deal offers some relief from the private sector uncertainties of the Western money markets, while also allowing it to focus on public-sector deals where both local and central government make promising medium-term customers.
Robert Gogel, CEO of LFS’ parent Liberata Ltd, confirmed this view, saying: “We are pleased to have found an appropriate buyer for this business, thereby assuring its long-term future development. We have made significant investments in people, platform and service line development which has allowed our clients to benefit from high levels of service excellence.”
Of Liberata’s plans for a stronger focus on the public sector, Ovum analyst Peter Clarke said: “Liberata has clearly convinced its private equity parent General Atlantic that this is sound logic.
“Its recent wins at the Local Government Association [the body representing all local authorities in the UK], where Liberata now runs the LGA’s whole back office, and at Rushcliffe and Charnwood District Councils, where it won preferred supplier status for a revenues and benefits shared services contract against old rivals Capita, clearly strengthen this argument.
“Liberata recently demonstrated its long-term intentions in the public sector by becoming a Gold Partner with SOLACE, the Society of Local Government Chief Executives.
“If the FSA approves [the HCL] deal, it looks like a win for all concerned and sends some important signals to the market.”
Although LFS’ new owner HCL has built a thirty-year business from private-sector areas such as retail, telecoms, and media – along with financial services, of course – the public sector might be a logical next step for it too as it seeks to build a long-term outsourcing base in the UK.
But for now, there is money to be made in the downturn for ambitious Indian outsourcers.
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UK telecoms outsourcing on the rise
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Analyst house Pierre Audoin Consultants (PAC)‘s latest figures for the UK telecom industry show outsourcing expenditure surpassing that of project services for the first time: outsourcing accounted for £860 million and project services £841 million in 2007. This trend was driven in particular by EDS’s applications deal with Vodafone that saw the Texan firm jump from fourth to first largest IT outsourcer to the UK telecom market.
The UK telecom sector has historically been slow to outsource IT compared to other sectors such as financial services. However, Vodafone’s landmark applications management deal with EDS and IBM in November 2006 set the tone for change. The BT group was already actively outsourcing IT, but 2007 saw a step up in pace. It outsourced infrastructure management to Computacenter in March 07, F&A processes to Xansa in August 07 and HR processes to Accenture in September 07. Other examples include T-Mobile’s infrastructure management deal with T-Systems in November 07 and THUS’s application management deal with Nortel in May 07.
This growing appetite for outsourcing results from the saturated UK telecom market. Operators can no longer rely on ‘greenfield’ customers, and must fight for the existing market. This requires operators to drop prices to remain competitive, and cut costs to protect their profit margins. An emergent trend in the UK telecoms market in order to achieve this is BPO, and BT is a company that has taken the concept to heart. It was amongst the first telecom operators off the mark in implementing BPO on a large scale, the deal with Accenture mentioned above being an expansion upon an initial deal signed in 2005, and the later deal with Xansa shows that it has the appetite for more. Other telecom operators are likely to follow suit in the hunt for further efficiencies.
Another key trend is the growing acceptance of offshore IT. Where until recent years UK telecom operators were reluctant to outsource at all, they are now keen to make use of the reduced labor costs available offshore. This is helping offshore specialists like Xansa (now owned by Steria), TCS and Wipro to thrive.
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NASSCOM reduces Indian growth forecasts
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Indian IT outsourcing body NASSCOM has reduced its forecast cumulative growth rate for the Indian IT BPO sector for 2008-09 to 21-24%, a significant fall-off from the 28% growth reported in its year-end results for 2007-08, released this week.
The reduced growth, while still stellar by US and UK standards, is the first evidence of the credit crunch and soaring energy and food bills impacting on the West’s outsourcing partners in the East.
While the local economy in India remains strong and largely immune from the economic woes of the past twelve months, NASSCOM clearly sees the beginnings of an impact of reduced customer circumstances and decision-making on order books.
It’s a significant issue for the Indian services market: NASSCOM president Som Mittal said that the estimated slowdown in the growth of IT-BPO spending would translate to revenues of $62-64 billion, with $50-billion of that coming from the export sector. Any real downturn in spending there over the next 18 months to two years would hit India hard.
The report comes at a time when many in the broader outsourcing sector are bullish about prospects of increased spending, while NASSCOM’s own summary of the situation sees steady, if reduced growth. Its domestic market remains strong, with full-year growth rates for 2007-08 reported as being 26%, with revenues of $11.6 billion.
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Atos wins biometric passport contract: Ovum comment
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French IT services company Atos Origin recently announced that it has been appointed by France’s National Secure Credentials Agency to manage the development and rollout of the biometric passport system in France.
The new passport, which is the result of a European Union directive, is expected to improve personal security and reduce fraud. The introduction of a biometric passport is part of France’s modernisation strategy and secure identity programme, and will see Atos working with identity systems supplier Sagem Securite.
The value of the contract was not disclosed, but it is clearly an ambitious programme and an important win for Atos. Under the deal, Atos and Sagem Securite will deploy nearly 5,000 data acquisition and processing systems in 2,000 French town halls and 350 prefectures and sub-prefectures before June 2009, making it possible to include fingerprints on passports.
Cynics might say that being French helped Atos and Sagem win this contract, which has clear national security implications. However, both companies have a good track record in the area of security and identity globally.
It is not a surprise to see Atos winning a biometrics contract: the company has extensive expertise and relationships in this field through its UK public sector business. It undertook a biometric technology trial for the UK Passport Service and defined an implementation strategy, framework and business case for the rollout of a citizen multi-application smartcard in Scotland.
It also has strong relationships with GCHQ and the Border and Immigration Agency and, as IT partner for the Olympic Games, has security-specific offerings high on its agenda.
Despite these existing relationships with key UK public sector security and identity organisations, it missed out on the e-Borders contract and has failed to win a framework contract as part of the procurement for the national ID card scheme (CSC, EDS, Fujitsu, IBM and Thales were the successful suppliers here).
So it is likely that Atos is hoping that this flagship project in France will prove a useful reference site as it looks to grow its security and identity business across Europe. Biometrics will increasingly become important to many European governments as a way to monitor the flux of populations. If Atos can deliver this project successfully, to time and to expectations, then it could put itself in a strong position to meet future demand for these capabilities.
Atos’ next major opportunity to demonstrate its security and biometric credentials could be the Olympic Games. As the official IT partner to the International Olympic Committee since 2002, Atos plays a key role in the supply of IT systems and services during the Olympic Games. With the threat of terrorism ever present, a large part of the IT requirements will be focused on security, and in particular identity management.
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Data risks an afterthought when outsourcing IT says ISF
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Despite awareness of the information security risks associated with outsourcing projects and well publicised cases of data loss or theft, many companies still ignore the potential problems until it is too late. That is the warning highlighted by the Information Security Forum (ISF) – an independent organisation with some 300 major business and public sector Members from around the world.
“The potential to cut significant costs and increase speed to market clearly make outsourcing and offshoring an attractive proposition,” says Simone Seth, author of a new report published by the ISF. “But without the right level of security expertise from the outset to fully identify information risk, there will always be important gaps in the business case. If the necessary controls are not budgeted or put in place to mitigate the risks, it can have serious consequences and even threaten the long term success of the outsourcing project.”
The ISF’s research shows that information risk management is often integrated as an afterthought, and information security professionals become involved too late in the lifecycle. This can often be explained by a lack of awareness at the highest levels and a failure to understand the importance of information risk management through all stages of an outsourcing project.
“Failure to involve information risk managers at the start of a project and through its lifecycle increases the enterprise’s exposure to risk; whether it’s data theft, information leakage or disputes that may arise from questions of ownership of intellectual property,” says Simone Seth.
Information mangers need to identify all outsourced processes, operations and technology and agree business criticality levels through all four steps that comprise an outsourcing lifecycle: Prepare, Implement, Operate and Review. Information risk managers are also able to add contractual clauses that relate to information security regulatory requirements and offer additional protection from a legal standpoint. It is also important to understand regional compliance requirements and regulations as well as the wording of contractual terms to prevent future disputes over the ownership of intellectual property and the transfer of data.
Typical risks at implementation and operational stages that can occur if the right controls are not effective, include fraud, data theft or hacking that can lead to data loss and confidentiality breaches.
The ISF is a not-for-profit international association of some 300 leading international organisations, which fund and co-operate in the development of practical, business driven solutions to information security and risk management problems.
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Recruitment process outsourcing: an upside of the downturn?
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Recruitment process outsourcing (RPO) is growing rapidly and has the potential to be a multibillion dollar market, taking advantage of the trend towards single process deals in human resources outsourcing. This is according to the latest report by independent market analysis firm Datamonitor. The report Opportunities for Recruitment Process Outsourcing in a Changing HRO Market estimates the global RPO market in 2007 was worth $720 million and forecasts it will grow by 22% in 2008 to $880 million, and surpass the $1 billion level in 2009.
According to the report, demand is predominantly from Fortune 1,000 companies in the US, but the market is growing rapidly in the UK and continental Europe and is beginning to gain traction in the Asia Pacific region.
However, the predictions come at a time when many businesses are facing the prospect of redundancies, as the ‘perfect storm’ of the combined credit crunch and soaring food and energy costs are hitting many sectors hard – in some cases, very suddenly.
While RPO vendors claim to reduce costs by up to 40% in some cases, it is the lure of recruiting a higher quality workforce that has been driving growth, says Datamonitor. Nevertheless, the growth forecasts themselves are extrapolated from 2007 data and presumably do not factor in the effects of a precipitous decline in the Western economy.
Although the strategic importance of recruitment means quality will remain of utmost importance, says the analyst firm, it is likely in an economic downturn that it is those who can deliver on both quality and price that will succeed.
“Despite the expectation that outsourcing will thrive as companies search for ways to cut costs, increased unemployment will result in lower business volumes which will be reflected in the variable price nature of RPO contracts. But, this will be mitigated by the increasing demand for RPO from new clients,” says Patrick O’Brien, IT and BPO analyst at Datamonitor and author of the report. “For RPO to continue its rapid growth in the near term, vendors may have to go to market by pricing more aggressively as recruitment will need to be seen as a primary function for easy cost reduction among company processes.”
RPO vendors are split over the use of offshore provision. Many players have little experience or understanding of how to derive the fullest benefits from RPO, while others see it as unworkable in recruitment services which require constant contact with both the client organization and, using the client’s brand, with candidates.
Approximately half of RPO vendors have some offshore workforce, mainly carrying out tasks around name generation, sourcing, early screening of resumes and other administrative duties. A few have moved tasks which involve contact with the candidate offshore as per customer demand.
“While there is a lot of resistance from vendors, the increasing competitiveness of the market and the growing focus on cost cutting in the economic downturn will push vendors into examining ways in which to begin to increase the use of offshore delivery,” says O’Brien.
The first half of 2008 has seen a wave of acquisitions as vendors attempt to build out their recruitment expertise, technology capabilities and geographic footprint. A number of competing vendors still need to broaden their capabilities, and many of the larger vendors are looking to expand further overseas.
Some companies have put forward global request for proposals (RFPs), but these have subsequently been split into regions and handed to different vendors. The one-vendor global deal has not arrived yet, but a number of vendors believe that a breakthrough will occur in the next 12 months. The key reason for the break-up of global RFPs has been the fact that vendors do not have the capabilities to deliver on an international basis. Many have taken heed and are busy investing in international expansion, acquiring companies, building a global set of processes and forming partnerships with vendors in other regions.
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Shared services gaining momentum in Europe’s public sector
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The adoption of shared services programmes among European governments is going to accelerate over the next few years, according to new research by Ovum, a global advisory and consulting firm.
“While the market is still in its early days, certain forward-looking governments in Europe are tackling the issue head-on as a means to both cut costs and improve public service delivery to their citizens,” says John O’Brien, senior analyst at Ovum.
According to the consultancy, European governments are under real pressure to perform. “For many governments there is a growing need to respond to new socio-economic challenges,” says O’Brien. “These include finding solutions to the impact of an ageing population, increased international competition and now a more difficult economic environment.”
Opposition is starting to recede among the more forward-looking Western European governments of Germany, France, the Netherlands and the Nordic markets of Sweden, Norway and Finland. Ovum believes these governments will present greater potential opportunities for suppliers of shared services over the next few years as investments are made in governmental modernisation and transformation programmes.
But considerable barriers remain, which could restrict progress. Some European governments for example still remain resistant to change, and most have yet to develop coherent strategies for shared services adoption. Consequently, there is much to be done to raise awareness over the next few years. This will provide suppliers with an early opportunity to consult, educate and advise government organisations on future shared services investments.
Software and IT suppliers with prior experience in implementing successful programmes will be at an advantage to help shape the opportunity. However, the cultural challenges will also present opportunities for consulting suppliers that can offer the softer skills to help shape the right environment for shared services. These include:
· local knowledge and local customer relationships
· knowledge of the target market and its drivers
· an understanding of the customer’s specific pain points
O’Brien concludes that “before shared services can really take off in the European public sector, governments must establish the right environment and remove long-standing organisational blockers. Departments that have traditionally worked in silos will need to change their working practices and begin sharing information and resources.”
A copy of the report is available to subscribers here: The future of shared services in the European public sector.
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Black Book rewrites the industry for 2008
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The annual Black Book of Outsourcing has rewritten the outsourcing industry yet again. The new edition finds the magnetic pull of the US attracting people back towards it, and black marks against the name of offshore providers that forget customer service in the quest for revenues and elitist attitudes.
The Brown-Wilson Group survey of global outsourced service users assesses industry developments (from a solidly US perspective, it must be said) and provides a useful annual snapshot of outsourcing trends as seen from across the Atlantic divide.
Outsourcing models are still evolving and maturing, and change is the constant. Among the 2008 edition’s findings are that so-called ‘reverse outsourcing’ will continue to grow.
With more than 50 percent of many Indian outsourcing firms’ revenue flowing from North American clients, says the report, the apparent movement towards the US as a location is based on “simple supply and demand economics”.
As wages continue to rise in India and the US dollar’s value decreases against the rupee, it becomes expensive for Indian companies to maintain operations solely in India. Not only do US centres provide closer proximity to clients, the facilities also enable Indian outsourcing firms to draw from local talent pools – something that is often overlooked by highly vocal US doom mongers who equate outsourcing with US job losses.
That said, some of the statistics unveiled in the 2008 report confirm that Indian outsourcing providers remain the motive force at work in the centre of the outsourcing industry. The successful Indian companies are striving for an optimal mix of onshore and offshore operations to please clients and drive more business towards them.
Satyam, TCS and Wipro, three successful Indian outsourcing providers with growing North American operations, are among this year’s top honoured suppliers overall, says the report. Also highly placed in several categories are Genpact, Tata, and Cognizant – players that are doing well in the UK and wider European markets as well, as often discussed on sourcingfocus.com.
Indian providers continue to dominate the BPO market, with the 2008 BPO vendor top 10 (in descending order) being: Genpact; Satyam BPO; Wipro; Logica; IBM Global; 24/7 Customer; MphasiS; TechMahindra; and WNS Global. By comparison, the finance and accounting outsourcing top 10 for 2008 is (in descending order) is: Hewlett Packard; Capgemini; Wipro; Accenture; Xchanging; Genpact; BNY Mellon; Infosys BPO; WNS; Steria.
In the category of ‘Best Managed Vendor’, five Indian providers were lodged high in the top 20 listing. However, one of the Indian market’s prime movers, Infosys, tumbled out of the 2008 top 50, with clients reportedly describing “a noticeable shift from customer service to corporate revenue generation, and a corporate culture that has become disappointingly elitist”. If true, the message is clear: remember the principles that made your company successful: US and European clients are perfectly capable of finding remote, revenue-focused and elitist providers much closer to home.
Indicative of the growing re-appreciation of US-centric firms, says the report, is that top honours in this year’s survey went to number one full-service provider overall Hewlett Packard; and then to Perot Systems (2); Computer Sciences Corporation (CSC, 3); Unisys (4), and EDS (5). That top five also forms the top five best managed providers. (Obviously, the survey took place before the industry-shaking merger of HP and EDS, recently approved by the US authorities.)
Generally speaking, the other big approval winners were those vendors that placed a strong focus on verticalisation: outsourcers that adapted to their clients’ specific industry demands, rather than applying what the report describes as a “cookie-cutter domain approach”.
Unsurprisingly, the news was not all good for some firms in this year’s Black Book. Receiving the most fervent customer disapproval in the US market have been those outsourcing firms that have placed the majority of their company’s workforce offshore without maintaining adequately supported US-based ventures. Five major offshore firms’ overall client approval ratings cost them Top 50 positions from last year (Infosys, Hexaware, EXL Service, ICICI Firstsource and Sutherland).
US companies were not immune from criticism: IBM Global, a former Black Book champion, also tumbled in the ratings as users expressed a palpable shift of customer service conduits to centres outside North America, contributing to their frustration and discontent.
Among other trends reported in this year’s edition, is that outsourcing is “no longer the refuge of the financially weak or technically deficient enterprise, nor is it a stick to threaten US workers”. Rather, it has become an accepted strategic tool – albeit in a tougher market to navigate successfully. Customers are more sophisticated, and are demanding more flexible contracts, performance penalties, and benchmarking audits – particularly as the economy weakens.
Clients are also placing high value on collective user satisfaction data as a predictor of a supplier’s future performance. That hurts future deals for suppliers whose relationships are not their first priority. Again, the message is clear: in an industry where outsourcing partners are sought to complement the organisation’s skills base and core business, relationship building is the key to making the partnership work.
For the second year running, China – which has seen a tremendous increase in outsourcing investment – scored very low levels of satisfaction overall. Latin America and Central and Eastern European suppliers, meanwhile, saw the highest growth in terms of their outsourcing industry with parallel upsurges in client satisfaction scores. Many new vendors from these regions displaced Indian, Philippine, Chinese and Canadian outsourcing suppliers this year on a competitive KPI (key performance indicator) index.
This year’s edition also confirms findings that are already familiar to sourcingfocus.com readers: namely, that UK and European customers still view the US as the third most popular destination for offshore outsourcing after India and China. Western Europe tends to prefer regional vendors, while the US is leaning towards western hemisphere providers as likely considered alternatives to China and India next year – the phenomenon of nearshoring, says the report.
Other findings in the report include:
• The Top 10 full service outsourcing advisors for 2008 are In descending order): TPI; Gartner; Hackett Group; Everest Group; Pricewaterhouse Coopers; Booz & Company; 7 Avasant (formerly Stradling); PA Consulting; EquaTerra; AT Kearney.
• The Top 10 boutique outsourcing advisors are (in descending order): Pace Harmon; The W Group; NelsonHall; Hitachi; Vantage Partners; Alsbridge; Global Equations; Ineum Management Consulting; Archstone Consulting; ScottMadden.
• The top 10 document process outsourcing (DPO) vendors for 2008 are: Océ Business Services; Pitney Bowes; RR Donnelley; Innodata; Isogen; Williams Lea; Integreon; Xerox Corporation; Datrose; Merrill Corporation; Lanier.
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Downturn: not a money-spinner for debt collectors, finds report
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Research sponsored by Firstsource, the global business process outsourcing company, indicates that the credit crunch has not yet had a major impact on the consumer debt management industry. More than a quarter of respondents (26 percent) said they had not been affected by the declining economic environment, and over half (53 percent) reported that they had monitored only minimal impact.
The poll covered nearly 1,000 consumer debt managers of companies in the financial services, telecommunications, retail, and utility industries.
However, although debt managers say they have not yet been significantly affected by the credit crunch, the research showed signs that consumers are starting to take longer to pay their bills, and that write-offs of consumer debt are increasing. Twenty-seven percent of respondents said that some consumers are delaying payment of bills by up to three months, and twenty-two percent of debt managers reported that they had increased their write-offs of customer debt in the last 12 months.
In response to the uncertain economic outlook, debt managers expect to outsource more work to specialist collections and recovery agencies to increase their collections levels, reduce defaults, and lower their costs. Sixty eight percent of debt managers said they planned to increase their use of outsourcing within the next year; 27 percent said they would outsource more within the UK, 18 percent reported they would collect more from offshore, and 23 percent expect to outsource more both within the UK and offshore.
Matthew Vallance, Firstsource’s president, said: “Although most consumer debt managers report that they haven’t been rocked by the credit crisis, the trend amongst consumers is towards later payments which will consequently affect cash flow. Therefore debt managers are looking to specialist consumer debt collections and recoveries outsourcers in the UK and offshore that have the expertise and resources to collect more debt, in faster time frames and at lower cost than is possible in-house.”
Debt managers said that the main benefits of an offshore strategy are further cost reduction, the ability to recover more debt, and increased access to talent.
Most of the collections work that has been outsourced to date is debt collection (35 percent of respondents), tracing (identifying and prioritising debtors to contact, 25 percent) and legal collections (24 percent).
The majority of outsourced collections relates to early stage work (debt that is one to 60 days old, 42 percent of respondents), followed by recoveries (six months, 26 percent), late stage (90 to 180 days, 21 per cent), then mid stage (60 to 90 days, 10 percent).
Respondents said that there were many areas where they could see obvious rooms for improvement in their collections strategies. The main failings relate to poor use of technology. Over half of debt managers said greater use of online payment systems would improve their collections levels. Many managers also felt that they should make more use of interactive messaging and interactive voice recognition systems.
Better analysis of customers’ debt levels and internal training were two other key areas identified for improvement.
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Latin America – Growing in Popularity as a Global Sourcing Location
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The use of global delivery models is now common practice within the business process outsourcing (BPO) market and Latin America is becoming an increasingly popular destination for IT services and BPO vendors who are looking to provide low-cost services to clients, reveals a new report by independent market analysis firm Datamonitor.
The report, titled “Global Delivery Locations for BPO – Focus on Latin America”, looks at the factors driving this trend, discusses the main players currently active in the market and analyses possible strategies for including Latin America in a coherent global sourcing model. It also investigates the key BPO delivery locations within this region and the main business factors that will help companies choose the destination that best suits their needs.
“The last two years have seen a marked increase in the number of outsourcing vendors utilising Latin America as a low-cost delivery location”, says Ed Thomas, associate analyst for BPO at Datamonitor and author of the report. “Key examples include major players such as IBM, EDS, Tata Consultancy Services and ACS, all of which have significantly increased their presence in the region since 2006, while providers such as Infosys and Cognizant have opened centers in Latin America for the first time.”
Latin America has a competitive advantage due to proximity and linguistics
Due to its geographical proximity, Latin America can be used as a nearshore location to serve customers in the US. This enables client and vendor to maintain a close relationship, including more face-to-face meetings, and also means that problems can be solved in real-time, without the delays that inevitably occur when work from the US is offshored to more distant locations such as India or China.
Operating in Latin America gives clients access to a major pool of native Spanish and Portuguese speakers. Particularly in the case of customer-facing BPO functions, this offers the potential to provide better and more efficient services to the Hispanic community in the US, as well as opening up the Spanish and Portuguese markets in Southern Europe. Providing local language services also improves the quality of services offered to end users, increasing customer retention.
Many vendors are using Latin America as part of a multi-shore delivery model
Thomas points out that, in the past, IT services vendors tended to pick one offshore location, usually India, and deliver a range of services from there. “Now, more and more companies are adopting a multi-shoring strategy, whereby they set up centers in a number of countries in different geographic regions. This not only allows them to provide services from closer to the customer, but also reduces the risks associated with housing all their operations in one location.”
Many vendors have expressed to Datamonitor a fear of ‘putting all their eggs in one basket’, mindful of the chaos that could be caused should India’s economy crash or wage inflation in the country hit new peaks. In this context, Latin America is an attractive alternative location for vendors with an existing presence in India.
Skill shortages and concerns over stability will hinder the region’s growth
One of the main drivers behind the rise of India to its position as the pre-eminent global sourcing location was its vast reserve of skilled labor. Similarly, up-and-coming locations such as China and Russia offer large untapped labor pools, enabling vendors to scale up a delivery center quickly.
Customers may find that Latin American countries are unable to deliver the kind of scale available in these other, more populous regions. This is partly due to simple population size, but it is also the case that regions like India and Russia churn out more technical graduates than their counterparts in Latin America.
Latin American countries can circumvent this potential problem by offering highly skilled services in niche areas. Also, the region’s positioning as primarily a nearshore location necessitates a different operating model from the one utilised in India, for example, in which scale is of lesser importance.
Thomas notes that Latin America also still has some perception challenges to overcome in its development as a sourcing location. “Concerns about stability (both economic and political) and security continue to hang over many Latin American countries, including Brazil, Mexico and Colombia. This may cause vendors to think twice before setting up there.”
The recent activity in Latin America is set to continue
All of the vendors Datamonitor spoke to indicated that they expected the recent expansion of Latin America’s IT services and BPO sector to continue for the foreseeable future, with more vendors moving into the market.
The investment by international IT services and BPO providers has tended to focus around certain countries (most notably Mexico, Brazil and Argentina) and certain locations within those countries (including Mexico City, Monterrey and Guadalajara in Mexico, Sao Paulo and Rio de Janeiro in Brazil and Buenos Aires in Argentina). There are many other cities within those tier one countries which could be tapped, and also many other countries within Latin America which are still to be utilised to their full potential.
The second tier Latin American countries identified by Thomas in the report (including Chile, Colombia, Costa Rica, Panama and Uruguay) in some cases still represent relatively unknown quantities for many within the IT services and BPO industry. These locations each have their own unique set of strengths and weaknesses, but are all viable sourcing locations, many of which have yet to be fully exploited.
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37 percent of people willing to relocate globally for better careers, says Manpower Inc
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A survey released this week of nearly 28,000 employers across 27 countries and territories, revealed that 31 percent of employers worldwide are concerned about the impact on the labour market from talent leaving their country to work abroad. A parallel Relocating for Work survey, also conducted by US-based Manpower research, revealed that 37 percent of individuals would be willing to relocate anywhere in the world for a better career, having interesting implications for outsourcing companies.
Jeffrey A. Joerres, Chairman and CEO of Manpower Inc, commented: “As the talent shortage becomes more severe, employers are naturally concerned about losing employees, not just to competitors within their own markets, but to those based overseas too. Individuals are now increasingly willing and able to find employment far from their homes. More people are living and working away from their home countries than at any other point in history: about three percent of the world’s population. Talent goes where talent is needed and we are truly becoming a global, borderless workforce”.
The survey found that 78 percent of individuals would be willing to relocate within their national borders or abroad for work and 41 percent of those would be willing to relocate permanently. Respondents from the Philippines (96 percent), Ireland (93 percent), Brazil (93 percent), Portugal (92 percent), Colombia (92 percent), Mexico and Central America (92 percent) and Peru (90 percent) were the most likely to consider relocating for employment opportunities in the future.
Respondents under 30 years old were more receptive to moving for work than their older colleagues. In terms of gender differences, men were more inclined to move for longer periods of time (four to six years or longer) while women preferred assignments varying from one to three years and less than six months. The majority of people (82 percent) would relocate to increase their pay and 74 percent would move for career advancement. 47 percent would move across borders for the opportunity to learn another language and, interestingly, this was the strongest reason for women (50 percent) to relocate for work.
The most popular destinations that people would want to relocate across borders for work are the US, the UK and Spain. This preference changed somewhat based upon the region in which respondents live. The US was the preferred destination in the Americas while China topped the list in Asia Pacific. The UK was preferred by those in the EMEA region. The parallel Manpower Borderless Workforce survey indicates that employers are currently sourcing the largest number of foreign professionals from China, the US, India, the UK and Germany.
The Top 10 Preferred Destinations for Work
1. United States
2. United Kingdom
3. India
4. Canada
5. Australia
6. United Arab Emirates
7. France
8. Italy
9. Germany
10. Argentina
Top 10 Source Countries for Foreign Talent
1. China
2. United States
3. Spain
4. United Kingdom
5. Germany
6. Japan
7. Spain
8. France
9. Canada
10. Poland
Employers expressed concern about the potential negative impact on the labour market from talent leaving their country to work abroad. These concerns are most prevalent in: Peru (82 percent), Argentina (66 percent), South Africa (65 percent), Taiwan (64 percent), India (57 percent) and New Zealand (52 percent). The exodus of talent is least concerning to employers in China (1 percent), Ireland (7 percent), Switzerland (12 percent), Japan (12 percent), the Netherlands (13 percent) and the U.S. (14 percent).
Only 15 percent of employers worldwide think government and businesses are doing enough to slow the outward migration of talent and attract these people back to their country. The top 10 countries reporting concerns are: Germany, Peru, Italy, Belgium, Austria, United Kingdom, Argentina, Canada, Mexico and South Africa. Employers in Costa Rica (35 percent), China (35 percent), Hong Kong (35 percent) and Ireland (33 percent) were the more optimistic regarding government and business response to the issue.
“In most countries, the consensus is that business and governments are not doing enough to slow outward migration, or to attract individuals back to their home country. While it’s true that many governments and businesses alike need to do more to keep their most talented workers, they must also consider how they can strengthen their collective employer ‘brands’ to attract more talented workers from overseas to fill their talent shortages,” commented Joerres.
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Collapsed NHS deal could see Fujitsu haemorrhaging jobs and money
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The fallout from Fujitsu severing ties with the NHS National Programme for IT (NpfIT) continues, with the rumoured potential loss of some seven hundred jobs at Fujitsu. 1,000 Fujitsu employees work within the NHS programme.
Also at stake are £340 million in revenues. The company has until the end of this month to pay back the NHS £67 million of the £143 million it received in advance payments.
Fujitsu walked away from talks earlier this month, prompting the NHS to terminate the 10-year, £846 million deal as the South’s technology service provider. Contract renegotiation terms had proved unacceptable to the Japanese company, which pressed the NHS for a return to the original deal.
Trade union Unite, which has been a highly vocal critic of several troubled outsourcing deals this year, has urged the Government to take action to prevent a haemorrhage of skilled workers from the programme.
“Government must act to ensure that the knowledge and skills gained in working for Fujitsu are retained, whoever the provider or providers are in the future, and ensure that the skilled staff can help the project continue to a successful conclusion in the interests of patients, the NHS and the health of the nation,” said Unite national officer for IT workers, Peter Skyte.
Last week the Public Accounts Committee (PAC) sat at Westminster to hear of central Whitehall mismanagement and local NHS tensions – a story that calls into question the viability of a central IT scheme imposed on local Trusts that have differing needs, skills and funding challenges.
Fujitsu executives told MPs that constant local modifications coupled with the withholding of funds forced the outsourcer’s hand. The changing terms of the contract would have been unaffordable, claimed Peter Hutchinson, UK public services group director at Fujitsu Services, who said there had been over 600 such alterations.
“We withdrew from the re-set negotiations. We were still perfectly willing and able to deliver to the original contract,” he said. “There was a limit beyond which we could not go,” he added, referring to the company’s employees, investors and pensioners.
In turn, the termination of the deal has left the NHS with a “gaping hole”, said the PAC chairman Edward Leigh. NHS COO Gordon Hextall said that BT was in the running to take over the eight former Fujitsu sites in the South of England.
• All hospitals in England and Wales were supposed to have had patient record systems installed by the end of 2006, but only 34 out of 169 have received their systems so far and, of these, 21 are reportedly outdated.
• See this week’s Editor’s Blog for more on public sector IT in crisis.
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‘Made in Green’ initiative aims to eliminate child labour
by editor
The abuse and exploitation of child workers in the textiles and clothing industry could be virtually eliminated if a voluntary international textile testing certification process was adopted in the UK and across Europe, says one of the world’s leading textile testing laboratories.
Manchester, UK, based Shirley Technologies (STL) is a member of the ‘Made in Green’ Group which tests and audits textiles and production processes for dangerous substances, and evidence of human rights abuse in the production chain.
Those products passing the tests and audit are awarded a ‘Made in Green’ (http://www.madeingreen.com) label, which can be stitched into clothing or textiles and indicates the product has been produced in respect of social responsibility, ecological and environmental guidelines.
Discussing recent news coverage about clothing chains such as Primark, most notably in the recent BBC Panorama programme about it, STL’s Phil Whitaker sais: “The programme was interesting in that it showed up the problems in auditing and tracking supplier chains in the textile industry. The advantage of ‘Made in Green’ is that it tests the product range, audits the processing in the factory, audits the environmental impact and ensures compliance with social responsibility guidelines all at once,” said Phil Whitaker of STL.
“Obviously, we are not party to all the detail, but we would offer the cautious observations that the social responsibility audit carried out in the factory shown in Monday night’s programme appeared not to have ‘cross referenced’ to production processes and products. Obviously, handsewn items are going to be labour intensive and time consuming and so it seems to follow that in order to hand sew sequins or any other similar accessory on hundreds of thousands of garments in a very short time it would take a small army of people to complete on schedule.”
The ‘Made in Green’ testing and audit process involves three elements: Oeko-Tex 100 certification which guarantees products do not contain substances harmful to health, Oeko-Tex 1000 which confirms current environmental legislation compliance, and CCRS-AITEX, which ensures compliance with corporate social responsibility guidelines including child labour.
However STL recently asked 2,000 UK shoppers did they recognise Oeko-Tex labelling (which can also be a stand-alone certification), and only six percent said they knew what it was.
Despite the worthy, voluntary initiative, the inclusion of textile labels within the manufacturing process is surely open to abuse at the manufacturing or offshore distribution end of the process – the very link in the chain where the problem originates. Given the vast global business in fake designer clothing and accessories – found on every street corner wherever there are tourists with money to spend – it would surely be routine to fake such a voluntary accreditation process, given that it is so poorly recognised and understood.
The real issue is one of simple economics: any Western superstore-style retailer able to sell in bulk apparently quality, pret-a-porter-inspired goods for the cost of a sandwich and a coffee must be sourcing the materials at next-to-zero prices from large offshore workforces. There is, after all, no such thing as a free (in any sense) shirt.
As labour costs rise on the back of high net worth industries in China, India, and elsewhere, labour arbitrage advantages become harder and harder to find at the lower-end manufacturing part of the market. In countries and regions where labour laws are decades behind those of the West – partly suppressed by European and American purchasing power – abuses within the workforce are the inevitable concomitant of low high street prices. Ethics come with a higher price tag – and it is one we must now bear.
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Offshoring fuels high net worth individuals in Asia as Western economy slows
by editor
Driven by market capitalisation growth in emerging economies, the wealth of the world’s high net worth individuals (HNWIs) increased 9.4 percent to US$40.7 trillion in 2007, according to the 12th annual World Wealth Report, released today by Merrill Lynch (NYSE: MER) and Capgemini.
India led the world in HNWI population growth at 22.7 percent, driven by market capitalisation growth of 118 percent and real GDP growth of 7.9 percent. Although India’s real GDP growth decelerated from 9.4 percent in 2006, current levels are considered more stable and sustainable. India’s two largest exchanges – the Bombay Stock Exchange and the National Stock Exchange – ranked among the world’s top 12 exchanges by end of 2007, boosted by initial public offering markets and heightened international interest.
China experienced the second largest expansion of their HNWI population, advancing 20.3 percent – an increase fueled by market capitalisation growth of 291 percent and real GDP growth of 11.4 percent. Significant price increases and strong IPO activity propelled the Shanghai Exchange to become the sixth largest exchange in the world in terms of market capitalisation.
But while market capitalisation and real GDP growth rates were higher in China than India, the HNWI population of India grew faster in 2007. The Report suggests that as market capitalisation and real GDP in China were spread over a larger population, there were smaller per capita gains in China. In 2006, India had a larger market capitalisation growth than gross national income, significantly impacting HNWI population growth in India. In addition, China is currently experiencing explosive growth in its “mass affluent” population, which has yet to break the HNWI threshold of US$1 million.
Brazil enjoyed the third-highest HNWI growth rate in 2007, with a 19.1 percent increase, spurred by a wave of robust market capitalisation growth of 93 percent and real GDP growth of 5.1 percent. Net private capital flows to Latin America doubled in 2007, contributing to the Brazilian Stock Exchange’s fourth place ranking among the world’s largest IPO markets and 7.2 percent market share gain. This, according to the Report, lent support to the establishment and global integration of the Brazilian financial system.
Russia was home to one of the world’s 10 fastest-growing HNWI populations, despite growth deceleration from 15.5 percent in 2006 to 14.4 percent in 2007. Solid gains of 37.6 percent in market capitalisation and 7.4 percent in real GDP represented the growing international interest in the country as a global player, suggesting that the ongoing development of Russia’s external relationships will likely improve the economy’s fundamentals.
Green investing has become widely popular across the globe in recent years, offering investors lucrative returns and an opportunity to become actively involved in social responsibility. An array of vehicles through which to back green initiatives drove robust growth in green sectors in 2007, such as mutual funds, ETFs and other pooled products, or alternative investments. The total investment in clean technology, for example, increased to US$117 billion in 2007, up 41 percent from 2005, with notable strength in wind and solar.
The Middle East and Europe were the most environmentally attuned HNWI and Ultra-HNWI populations, with participation ranging from around 17 percent to 21 percent in 2007. In comparison, only 5 percent of HNWIs and 7 percent of Ultra-HNWIs in North America allocated part of their portfolio holdings to green investing. North America was also the only region in which social responsibility was the primary driver of HNWIs’ green investing. Among HNWIs worldwide, approximately half pointed to financial returns as the primary reason for their allocation to green investing.
Impressive growth of emerging economies was boosted by thriving exports and heightened domestic demand. The largest regional growth of the HNWI population occurred in the Middle East, Eastern Europe, and Latin America, with increases of 15.6 percent, 14.3 percent, and 12.2 percent, respectively. Gains in commodity exports, paired with growing international acceptance of emerging financial centres as significant global players, contributed to the growth rates of emerging economies.
The BRIC nations (Brazil, Russia, India and China) continued to play pivotal roles in the global economy in 2007, driven by impressive economic gains and robust market capitalisation growth.
“This year’s Report found that the number of high net worth individuals, and the amount of wealth they control, continued to increase in 2007, with the greatest wealth being created in the emerging markets of India, China, and Brazil,” said Nick Tucker. “While trends indicate opportunities exist for wealth management firms to tap into new growth markets, success will go to those that recognise their existing service, delivery and technology strategies must be adapted and tailored to meet the particular needs of these growth markets.”
With a significant portion of HNWI wealth invested in stock markets, market capitalisation performance is an important determinant of HNWI wealth generation. While traditional United States, European, and Asian stock market indexes experienced moderate growth, many emerging markets extended winning streaks of robust gains. Various Dow Jones Market Indexes, for example, had moderate returns in 2007, averaging 6.8 percent, far below the 17.3 percent average in 2006, and compared to 2006, market gains in 2007 failed to have as positive an impact on HNWI wealth generation.
Most major European and Asian indexes were contained to low single-digit growth; the world’s worst performer, the Nikkei 225, contracted 11.1 percent, while Europe’s best performer, the German DAX, was the only major traditional index to outpace its 2006 performance and sustain double-digit growth.
Fueled mostly by organic price increases, the Shanghai and the Shenzhen Stock Exchanges grew at 303 percent and 244 percent, respectively. India’s Bombay Exchange and National Stock Exchange had respective growth rates of 122 percent and 115 percent.
“The divide between market capitalisation growth in mature and emerging economies was significantly more pronounced in 2007 than in previous years,” said Chris Gant, Head of Wealth Management, Capgemini Financial Services UK. “Despite slowdowns in the growth of traditional stock exchanges and significant market volatility, several emerging market exchanges experienced robust gains in 2007, further accelerating global wealth.”
Emerging markets made significant contributions to record-level worldwide IPO activity in 2007. More than 1,300 IPOs raised about US$300 billion during the year—and emerging markets captured 7 of the top 10 issues. The BRIC nations exhibited particular strength in the area, accounting for 39 percent of global IPO volume in 2007, up from 32 percent in 2006.
Net private capital flows to emerging markets also increased in 2007. China attracted the largest absolute amount of private capital in 2007 at a country level, drawing in about US$55 billion. Emerging Europe was the most popular regional destination, attracting US$276 billion. Emerging Asia experienced a 20 percent drop in private capital flows, reflecting, in part, that equity flows helped policymakers accumulate foreign exchange reserves, which reached roughly US$1 trillion in China alone. Private capital flows to Latin America, however, more than doubled to US$106 billion in 2007.
Overall, hedge funds performed well in 2007 with average gains reaching 12.6 percent, down only slightly from 2006. Hedge fund returns outperformed traditional stock indexes in 2007, boosted by 20.3 percent average gains in emerging markets. In recent years, an increasing proportion of hedge fund assets have come from institutional investors, versus wealthy clients, shifting the main driver of the industry’s growth.
Fueled largely by the growth of capital-intensive sectors, venture capitalist fundraising and investing in 2007 reached their highest levels since 2001. New opportunities in life sciences and clean technologies expanded market opportunities and the renewable energy sector hosted a record IPO issuance last year led by the US$6.5 billion IPO of a Spanish utilities group and the US$1.2 billion IPO of a Brazilian sugar and ethanol producer. Total investment in clean technology increased 35 percent, boosted by numerous clean technology benchmark indexes gaining more than 50 percent for the year.
Effects from the downturn in the United States economy weighed on other mature economies – as evident by slowed GDP growth and weak equity market performances in parts of Europe and Asia – and were fueled by three main factors: a cooling housing market, tightened credit availability, and greater volatility and price declines in equity markets. This chain of events impacted both consumers and institutions, impeding their ability to maintain liquidity and operate businesses.
In line with housing market downturns, REIT indexes incurred significant losses globally – in marked contrast to robust gains in 2006. Worldwide equity market performances proved the divergence between mature and emerging markets – the MSCI Global Indexes recorded 0.1 percent and 3.2 percent contractions in Europe and the United States, respectively, in the second half of the year, versus gains of 10.4 percent and 6.3 percent in the first half. The Emerging Market MSCI Global Indexes excelled – led by Latin America in the beginning of the year and the BRIC nations in the second half. Equity market losses in mature economies reverberated throughout international credit markets in the second half of 2007. The economic slowdown in the United States drove a severe depreciation of the U.S. dollar against most major currencies worldwide – the dollar fell 10.5 percent, 15.8 percent, and 17 percent, respectively, relative to the euro, the Canadian dollar, and the Brazilian real.
Since the close of 2007, economic indicators in the United States have deteriorated further; notably: slowing consumer spending, cooling housing markets and softening labor market conditions. A flurry of developments in international credit and equity markets, all stemming from the United States’ economic slowdown, shaped the opening months of 2008. Early on, greater downside risks to growth in the United States, along with the far-reaching implications of tightening international credit markets, weighed heavily on equity markets around the globe. By mid-January, losses incurred in virtually all geographic markets exceeded 10 percent.[3] However, mature markets have stabilised somewhat, bringing average 2008 losses down to roughly 4 percent, and emerging markets have actually reclaimed and exceeded incurred losses, generating an average net gain by mid-April.[4]
The diverging macroeconomic environments at either end of 2007 helped define HNWIs’ asset allocation strategies. Building on the optimism of 2006, the early months of 2007 showed HNWIs betting heavily on riskier asset classes. But as the year wore on, and financial market turmoil and economic uncertainty intensified, HNWIs began to retrench, shifting their investments to safer, less volatile asset classes.
The Report found that cash/deposits and fixed income securities accounted for 44 percent of HNWI financial assets, up 9 percentage points from 2006. Fixed income securities saw a 6 percentage point increase in asset allocation, accounting for 27 percent of holdings, up from 21 percent in 2006.
Globally, HNWIs continued to decrease their holdings in North America and showed greater interest in domestic market investments, preferring more familiar ground amid heightened levels of economic uncertainty.
Despite heightened uncertainty regarding the near-term global outlook, still-strong fundamentals in emerging markets are likely to sustain high levels of growth. The balance between emerging market strength and mature market recovery will likely persist through 2008, with the short-term outlook subject to variability given that aspects of potential risk may still be unknown.
By and large, the global economy has two distinctive obstacles to overcome: inhibitors to growth in mature markets and high risks of inflation in emerging markets. How well these challenges are met will shape global HNWI growth prospects going forward. Given 2007 performances and taking into consideration recent developments in world markets, the Report suggests that global HNWI wealth will grow to US$59.1 trillion by 2012, advancing at a rate of 7.7 percent per year.
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Uk business failing to protect data assets
by editor
The security division of value-added distributor Bell Micro today announced findings from a new independent research report which suggests that UK businesses are still failing to address the protection of data assets on the network from staff abuse, misuse or direct theft.
Nearly half (47%) of the respondents questioned at InfoSecurity Europe 2008 believed their companies were yet to implement real-time systems that would inform IT departments if security levels were breached.
This latest research follows similar reports in recent weeks suggesting that more than one third of IT directors say that their organisations have suffered either data loss or data theft internally – not to mention, of course, the latest in a spate of public sector security lapses, from confidential documents being left on commuter trains to laptop thefts from the Home Office and Ministry of Defence.
Most respondents in IT based roles (74%) recognise, and work to protect, against the danger of rogue connections such as customer or contractor laptops, and yet almost half (43%) were failing to enforce a policy of encrypting data on portable devices - such as personal laptops, PDAs and removable media. Worse still, 62% of respondents indicated that IT departments would be unable to detect if an employee copied data off a server onto a PC, laptop, USB stick or a disk.
This is further clear evidence of the unexpected knock-on effects of increased mobility and teleworking: consumer devices, together with business laptops, Blackberrys, mobiles and PDAs are increasingly falling into a grey area of unsupported devices, or computers that serve functions both in the office, at home, and on the journey in between.
This is the logical extension of the famous incident of the IT CEO who left his laptop unattended while speaking at a security conference – when it went missing, he realised that he had essentially allowed the entire company to be stolen by a passing stranger.
Despite the latest report, It’s clear that policy, governance and good management are the only viable solutions here, rather than more technology. However, the problem for CIOs, especially those dealing with networks of outsourcing partners, is balancing the increased productivity and flexibility offered by teleworking, homeshoring and homeworking (which some studies put as high as 20-25%) with the increased security risk and potential for data or equipment loss and theft.
“What these findings show is that there is still a paramount need to increase attention to data management and protection in an organisation,” said Steve Browell, general manager of the Security Division at Bell Micro. “How data is encrypted, moved and stored must move up the business agenda, otherwise we are just leaving the gates wide open for the horse to bolt. The tools are already available but vendors, distributors and resellers alike must come together to deliver better education to customers and create a total service that can deliver true data loss prevention.”
While security remains a key investment for UK businesses, this latest research suggests that critical network security services are either yet to be broadly adopted or have been purchased but incorrectly implemented.
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IBM and HP ‘going green’: Ovum comments
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IBM announced enterprise additions to its Project Big Green this week, a week after HP announced its Sustainability Laboratory. Both vendors have a history of interest in this area, but HP has achieved a higher profile for its efforts.
The HP announcement included long-term datacentre issues while IBM concentrated on new product releases to help in this area. However, there were large areas of agreement and overlap in the two presentations, and both said that energy use has become a high-level concern for enterprises, which will grow in importance.
Both see an immediate opportunity for savings in energy use with a strong financial investment case through monitoring and intelligent control systems. IBM talks of the payback period from investments in this area being less than two years. Both back these claims with case studies, although at this early stage these are thin on the ground at present. The environmental payback period may be longer where this involves hardware replacement.
• Both initiatives contrast with recent research published on sourcingfocus.com, which suggested that many clients – in fact, a majority of organisations – are not able to make their datacentre usage more efficient or environmentally friendly as they lack either the skills or the will to tackle the issue, to deactivate so-called ghost servers, or even to make use of the energy efficiency controls on servers within the datacentre.
• The issue is a pressing one, as IT systems usage worldwide now matches the carbon footprint of the global airline industry – each contributing roughly two percent of the world’s greenhouse gas emissions.
The datacentre energy problem
The demands on information processing systems are growing exponentially. For example IBM expects server usage to grow six-fold and the volume of stored data to grow 70-fold over the decade, and these figures are consistent with Ovum’s research.
Technology is delivering efficiency improvements, but these tend to be linear in nature. Consequently energy use by datacentres is still rising rapidly. In the longer term we need changes in business processes, data retention practice and law, and a change in expectations. In particular the desire for richer presentation media is placing exponential demands on datacentres, such as replacing pictures with movies.
We need to question how much processing we do, and how much data we hold, and for how long. The present tendency to hold everything that it is technologically possible to hold will have to be challenged. We need systems that can store a single copy of a document and not replicate it multiple times across the organisation, without this placing complexity on users. If a practice is worth doing we will need to justify it by identifying balancing savings outside the realm of the datacentre.
HP’s long-term vision
HP has demonstrated its commitment to long-term improvement in this area by designating sustainable computing as one of the five areas that HP Labs will focus on, and by including a project in its initial agenda to develop optical computing. This is an important element in its long-term objective of cutting datacentre energy use by 75%.
The replacement of copper by fibre optic cable carrying laser signals will deliver major energy savings in data centre communications, and eventually in the processor chip. It will allow much greater density of processing within a single chip. HP has set itself a target of five years for delivering on this vision, which we regard as being at the optimistic end of the spectrum.
The medium term: monitoring and intelligent control
HP claims it has achieved a 40% energy saving at a new datacentre it has recently built in Bangalore by deploying its smart cooling technology. IBM claims similar savings in the short term by deploying its current technology including its new monitoring systems. Tivoli monitoring software has been extended from processor monitoring to include all aspects of the data centre facility. It monitors kilowatts of power consumption, and not just processor utilisation. It provides connections into several important business activities to make it an attractive proposition for business:
• Green business services: for example detecting ‘brownout’ situations and invoking business continuity services.
• Intelligent chargeback: bringing business accountability into the picture
• Optimising asset usage
• Energy-aware provisioning, so that servers can be selected for each workload based on their ability to meet required service levels and minimise cost.
HP has shown a commendable attention to lifetime issues in its green IT agenda. This is continuing in the current announcement. It points out that the energy required to smelt bauxite into aluminium to make a server is equivalent to the energy the server will use in two years of its life. It is now embarking on a project to build up a database of lifecycle energy consumption to create a comprehensive database from which lifecycle issues can be more accurately evaluated. It promises to put the results in the public domain, and is appealing for partners to help populate this.
The immediate future
IBM is using this platform to attract attention to technical advances in some areas of its IT infrastructure products, such as improved storage products and its partnership with VMware to deliver virtualisation to its customers. Virtualisation can reduce hardware requirements by a factor of six, cutting hardware and operating costs in half. Energy costs can be reduced by between 10% and 40%. Of course this also plays to IBM’s strengths in providing suitable servers for virtualised environments.
• Despite these very welcome initiatives by two large vendors, the onus rests equally on education, management and enforcement of green initiatives within customer companies to minimise the environmental impact of their data systems and assets. This would be a key area of differentiation between the newly merged HP/EDS and their main rival, IBM: not just greener products, services and policies, but a down-the-line education programme to ensure all the facilities are both understood and used.
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SUPINFO extends Telecity deal
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TelecityGroup, the pan European provider of network independent data centres and value added services, today announces that the International Institute of Information Technology, also called “SUPINFO”, France’s leading international ICT school, has extended its relationship with the company by taking additional hosting space and value added services to cater for the rapid growth of its server housing, network and storage requirements.
Founded in 1965, the Ecole Supérieure d’Informatique, recently renamed as the International Institute of Information Technology and more commonly known as SUPINFO, is an international school that has become the leading higher education establishment in France for the tuition of Information and Communication Technologies. Today, the school has more than 5,000 students at 41 sites across the world, including 28 in France.
With a seven-fold increase in the number of students in the last five years, and an ever-expanding number of commercial services on offer, SUPINFO’s in-house solution could no longer meet the hosting and bandwidth requirements of its critical server infrastructure, nor provide the appropriate level of physical security required.
Already a TelecityGroup customer, SUPINFO is now expanded its partnership by outsourcing the entire hosting of its IT systems to the TelecityGroup facility in Aubervilliers, Paris. TelecityGroup’s IP-Transit services will assure SUPINFO resilient, scaleable connectivity.
François Fanuel, Systems and Networks Director at SUPINFO, explains: “SUPNIFO has hosted some of its IT systems’ infrastructure with TelecityGroup for a number of years and our experience has been very positive. The staff are highly professional and attentive to our requirements day and night and the technical standards of its data centre infrastructure are excellent. We particularly appreciate its strict cabling standards – quite a departure from what you find in most other data centre companies - and the access to connectivity and peering points.”
“By hosting our entire IT systems’ infrastructure with TelecityGroup, we have cut our Internet connection costs in half while multiplying available bandwidth by an order of magnitude.”
Stephane Duproz, TelecityGroup France Managing Director comments: “I am very pleased that we have extended our agreement with SUPINFO. That such a well-informed organisation should continue to show confidence in our people and services is a clear demonstration of our strengths in this sector, and the level of support we can offer.”
TelecityGroup has recently announced it will build its third data centre in Paris. The data centre is to be launched in phases from the second half of 2009 through to the second quarter of 2011 providing over 3000 square metres of net customer space. Overall data centre power will be approximately 14 megawatts (MW) and total customer power will be approximately 5 MW, with the ability to support high power density requirements of up to 20 kilowatts per rack. Subject to final planning permission for the site, which is expected towards the end of 2008, the Group will invest a total of €48 million in the project,
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Credit crunch drives financial services outsourcing demand, says MCA
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A new report from the Management Consultancies Association (MCA) based on a survey of British Bankers’ Association (BBA) members, has found that the credit crunch will drive a new wave of outsourcing and offshoring in financial services. However, only 54 per cent of respondents felt that their organisation understood how to get good value from outsourcing and only 24 per cent thought they adequately understood the offshoring industry.
Countering some of the negative publicity typically associated with outsourcing and offshoring, the MCA report also found that the majority of respondents (89 per cent) do not think that many jobs in their organisations have been lost as a result of either outsourcing or offshoring and almost two thirds (58 per cent) also think that outsourcing has made the organisation more competitive.
The survey, conducted across over 70 organisations in the financial services sectors, also found that over 90 per cent of financial services’ organisations had outsourced and almost a third had offshored some part of the business and 41 per cent planned to expand their involvement in outsourcing in the near future.
Fiona Czerniawska, author of the report and Director of the MCA Think Tank, commented: “While innovation and creativity is exciting, the credit crunch has also created something of a wake-up call to the financial services sector. Many institutions which have so far ignored the benefits of outsourcing are being forced to revisit it because of financial constraints and liquidity problems. Often they have failed to integrate and are still lumbering under a weight of legacy systems and processes and carrying both unnecessary variable cost and balance sheet assets.”
Apart from a small number of banks that outsource ‘religiously’ and have succeeded in building common platforms for functions like IT and finance, the report found that insurance and investment are ahead of retail banking in their use of outsourcing, with many banks still yet to achieve the standardisation and economies of scale that their size would suggest.
Another source of difference across the financial services sector is the extent to which different functions within the organisation have been outsourced. The survey suggests that finance and HR outsourcing are not growing any faster than IT outsourcing despite the marketing activity by outsourcing suppliers.
Lesley McLeod, Communications Director at the BBA, said: “Outsourcing is an accepted part of financial services today but this report demonstrates there are still important lessons to be learned in terms of getting the best possible value from such an arrangement. We need to ensure the buying side is more informed and better at building more collaborative relationships.”
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‘Megadeals’ fall off as companies look to multisourcing, says Gartner
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As companies continue to move to using multiple providers for their outsourcing services, the number of reported “megadeals” (those worth over $1bn) awarded to a single service provider has declined, according to a new report by Gartner. In 2007, 10 outsourcing megadeals were awarded, a decline from 12 in 2006.
“The decline in reported outsourcing contracts can be partially explained by the fact that outsourcing is now ‘business as usual’ for many enterprises,” said Kurt Potter, research director at Gartner. “There is more outsourcing activity, but fewer deals on average are reported and this creates the false impression that outsourcing is decreasing.”
In terms of megadeal total contact value (TCV), the total for the 10 megadeals in 2007 was $12 billion, the lowest level reported during the last eight years, with the closest level being that of $20.3 billion in 2001. Average contract value (ACV) of megadeals also continued to decrease, from an average of $2.6 billion in 2006 to $1.2 billion in 2007.
“While further TCV erosion may be driven by the irreversible trends of global delivery and IT services industrialisation as many leading-edge organisations move into their second and third generations of IT outsourcing, they may be looking at deal expansion to include wider application or business initiatives,” said Mr. Potter. “Although these opportunities are likely to evolve from a single-provider to a multiple-provider engagement, in some cases, historical ties between provider and recipient may retain the potential for megadeals.”
Of the TCV of all outsourcing deals reported in 2007, Gartner said megadeals represented 39.4 percent of the contract value and represented only 6.8 percent of the number of total contracts in 2007, down from 7.4 percent in 2006. Although deals with less than $50 million in TCV continued to increase and reached 39.5 percent of the total number of contracts, they only represented 3.3 percent of TCV for 2007.
“Many providers are pursuing smaller contract strategies as a consequence of the new market realities, new competition and natural market pressures toward commoditisation, which reduces per-unit pricing. These strategies are often in the form of pursuit of smaller contracts from larger clients, or larger contracts from smaller companies,” said Mr. Potter. “Many clients want to test providers’ contracting practices, capabilities and cultures before moving favored providers into larger contracts, or organisations are using smaller doses of outsourcing to delay larger outsourcing adventures. Many providers are forced to pursue larger contracts to meet growth expectations. Despite this pressure, providers should continue to evaluate different or at least accommodate go-to-market and product portfolio strategies for smaller clients.”
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Indian businesses taking the lead, says BT Global Services
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British companies are falling behind their developing economy competitors when it comes to taking calculated risks, according to a new study from BT Global Services. Ninety per cent of Indian companies view risk as a means of increasing competitive advantage, compared to just 44 per cent in the UK, who tend to shy away from risks.
The research, conducted by Datamonitor on behalf of BT Global Services, reveals an interesting gap between developing economies and the UK when it comes to making profitable business decisions based on their calculation of the risk involved.
The key to the difference in attitudes seems to be the role of risk in enabling business development. Eighty-five per cent of Indian companies see risk management as a tool to foster innovation and creativity, whereas only 34 per cent of UK companies share that sentiment. The research suggests that a more proactive attitude towards risk is leading to a fuller understanding of opportunities for originality and resourcefulness in India and other developing economies.
This commitment to treating risk management as core to business growth has also resulted in the overwhelming majority of Indian companies (90 per cent) appointing a manager with overall responsibility for risk. By contrast, only 14 per cent of businesses in the UK have taken a similar step. Where Indian firms have appointed a “risk supremo”, 94 per cent have elevated the role to board level, compared with just 63 per cent in the UK.
John Dovey, president UK corporates, BT Global Services, said: “There are some well-established FTSE100 companies working in complex environments who have to manage huge levels of risk on a daily basis. But in general, UK companies tend to see the kind of risks associated with aggressive economic growth as something to avoid, while competitors in India have had to see them as something to manage.
“By taking a pragmatic view of managing risk, Indian companies are better able to seek considerable growth by taking on and offering their customers aggressive, innovative commercial propositions.”
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IT industry body publishes guidelines for UK companies outsourcing their data
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Regulators are becoming ever-more aggressive in penalising companies which do not comply with data security and data protection requirements, imposing fines on them and publicising data breaches. Intellect, the UK technology trade association, believes that companies which fail to take data issues seriously will be subject to increased scrutiny and will compromise the trust that staff and clients place in them.
Intellect is publishing a checklist for avoiding the common data security and protection issues encountered in outsourcing projects. If followed by IT outsourcers and their customers, the guidelines will greatly diminish their chances of losing or compromising data, breaching regulations and facing fines.
The guidelines provide a clear overview of the types of issues outsourcing projects might encounter, when the best time to address them is and which party is legally obliged or best placed to deal with them. For each of the seven stages of a project Intellect provides a checklist of data security and protection related actions that must be taken, ranging from determining the volume of data that will flow between outsourcer and customer, to procedures for destroying retained data at the end of a project.
David Evans, senior data protection practice manager at the Information Commissioner’s Office, comments: “Outsourcing IT operations often involves the transfer of personal data to a third party, either in the UK or overseas. For an organisation to retain the trust of its staff and clients it is important that their outsourcing complies with the Data Protection Act. This means ensuring that personal information is stored and processed securely, that is accurate and up to date and accessed only by those with justifiable reason.“
The data protection laws of the EU require careful consideration in the context of outsourcing, especially where personal data is transferred outside of the EU. The guidelines have been written with this in mind and also include information on non-European countries that have data protection laws, including the United States, Canada, Russia, Dubai, Korea and Australia.
John Higgins, director general of Intellect comments: “The money that outsourcers and their customers pay in data breach fines would be better spent improving data security processes, so these breaches don’t occur in the first place. Consumer data is a highly valuable commodity and should be treated as such. Companies recognise their responsibility towards consumers’ data but don’t always understand the best way to achieve this. We believe our guidance can help address the situation.“
Outsourcing and offshoring are an integral part of business in the 21st century. But they do mean that companies have to be more vigilant than ever in assuring the security of the data their customers trust them with. If followed by both outsourcers and their customers, our guidance will help ensure consumers’ details remain secure.“
The guidelines state that vendors and customers must work together more closely to anticipate and address data security and protection issues, which may affect the success of their project. The lead-time that anticipation provides can be critical to developing efficient solutions.
The guidelines are available to download free of charge from http://www.intellectuk.org/dataguidelines.
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Offshoring creates UK jobs, not loses them says policy centre
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The growing trend for British firms to send jobs overseas has helped boost employment in the UK, creating thousands of jobs, according to new research.
Economists at the Globalisation and Economic Policy Centre (GEP) at the University of Nottingham say their research contradicts common perceptions that British firms are exporting jobs overseas to India and China simply to cut costs, leaving many here unemployed. It may also suggest that its use as an easy electioneering tool both here and in the US may be misconceived.
GEP economists analysed data from more than 66,000 UK firms over a ten-year period from 1996 to 2005. The results of the study – the largest ever carried out into offshoring – showed that far from increasing unemployment in the UK, the policy had resulted in the creation of 100,000 extra jobs and an increase of £10 billion in turnover.
According to the study, firms that offshore part of their production process or service provision overseas become more efficient. This boosts productivity and turnover and as a result these firms grow and end up employing more people at home.
GEP Centre Director, Professor David Greenaway said: “People fear their jobs are being exported to countries like India and China where labour is cheaper, but the picture is far more complex than that and much more positive.”
That said, the perception that offshoring equals unemployment and poorer service is deeply entrenched in the UK consumer psyche, brought on by poor experience of public-facing offshore services, together with rising domestic unemployment and an increasing gap between the better off and the most poorly paid workers. That perception is also embedded in many sectors of the workforce, particularly in manufacturing.
sourcingfocus.com’s own offshore survey in April found that the vast majority of consumers would prefer to receive UK-based provision, even if it meant paying more for goods and services. In some sectors and regions of the population, only single-digit percentages of people described themselves as happy with offshoring.
Professor Greenaway confirmed that there are losers from offshoring, most notably in the levels of staff ‘churn’ “Offshoring does lead to increased job turnover and a change in the skills mix in a firm. The winners are those who have the skills required by firms that are offshoring and growing; the losers are those who cannot adapt.
“The lesson for policymakers is that offshoring is to be embraced, not feared, but we need to continually invest in upgrading the skills of British workers
to increase their adaptability and help smooth the transition from one job to another.”
However, that adaptability is required at all levels of the organisation. As sourcingfocus.com has found at all of this year’s outsourcing conferences, often senior managers, such as CIOs, find themselves without the requisite skills to manage a chain of offshore partners located in other parts of the world; some leave and join outsourcing companies as a result.
Of course, communities that have built up around the provision of labour power within the UK, particularly those centred around manufacturing facilities, are usually the hardest hit, and it is a much greater challenge to provide those workers with new skills. Few may care about the newly efficient organisation that has uprooted itself overseas – although some companies do so in order to survive.
That said, the research also exploded another offshoring myth. Report co-author, Dr Richard Kneller said: “The common perception of offshoring is that its largely low paid call centre jobs being exported to lower wage economies like China and India, but that’s not the case.
“If you think of manufacturing and the production of parts, then it is skilled work. If you look at car manufacturing, Ford may make engines at Dagenham but gear boxes in Spain; if you think of Airbus – Britain makes the wings and engines, France the bodies. Most offshoring is actually to similarly developed European nations and the US, where the language skills are better.”
At the core of this is essentially the offshoring of risk: a risk shared is a risk reduced, and many analysts now portray the 21st century company as a globally distributed network of suppliers united around a brand name. This does not just apply to major engineering projects, but also to consumer and business technology, among countless other areas; Apple is one company that is now a carefully managed network of suppliers and IP owners, united by a powerful brand message.
Britain is a major beneficiary of offshoring, said Kneller. “In the services sector Britain has a reputation for areas like finance and creative media, and overseas firms will offshore work in this area to UK firms.”
Arguably, this is the logical conclusion of the 1980s Tory project of turning the UK into a skilled finance and services centre at the expense of the manufacturing sector. How long that vision may play out is now a moot point, as low-cost, high-skill countries such as India will inevitably begin to eat into the centre of the UK economy over the next five years.
The GEP research findings are to be presented at a major conference on offshoring to be held at the University of Nottingham later this month, which is expected to attract some of the world’s leading economists and experts on the subject as well as senior figures from the policymaking community.
• Intellect has just launched an online survey into the future of offshoring. See today’s separate story to take part in the survey.
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Global sourcing on the rise, says PricewaterhouseCoopers
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Global sourcing in the retail and consumer sector is thriving, but many companies are not particularly clear on their cost savings nor are they confident of product safety and other risks, according to a survey launched today by PricewaterhouseCoopers (PwC).
Cost is the main driver of global sourcing decisions, yet 21% of respondents do not know what savings to expect. Furthermore, the survey of nearly 60 retail and consumer goods’ companies found that one-quarter of respondents did not know what their actual savings were - both largely due to lack of organised measurement techniques.
Companies from Australia, Canada, China, France, Germany, India, the UK and the US took part in the survey, 44% of whom source more than £250 million of product globally each year and 27% source more than £500 billion globally. The survey showed that China is still the number one destination for global sourcing for 83% of respondents. India followed with 58% but Mexico, Brazil, Malaysia, Canada, Chile, Italy and Bangladesh were also cited.
According to the respondents overseas sourcing has become so widely embraced that the cost savings generated no longer necessarily provide a competitive advantage. As executives watch competitors reduce costs through overseas sourcing they have no choice but to follow suit because “everyone else is doing it too.”
“Given rising oil costs, currency fluctuations, inflation in China and quality concerns companies need to consider whether or not it is cost effective to source raw materials or finished products from overseas sourcing locations,” says Lino Casalino, PwC Canada’s retail and consumer advisory leader.
“The survey results show that while some companies have a robust process for reviewing and monitoring the benefits and savings arising from their global sourcing efforts, other companies are either not aware of the potential benefits or do not have the systems in place to track them.”
Another key theme emerging from the companies surveyed is that the practice of global sourcing is dynamic and growing. In fact, both historic growth rates and projected growth rates are double-digit figures - almost half of survey respondents have seen a growth rate of more than 10% in the past five years and four in ten project growth rates of more than 10% in the next five years.
The survey also picked up that product quality is the single greatest risk to global sourcing, cited by 68% of the survey sample. However, less than half said they were very confident of managing the risks associated with product safety, despite the potentially damaging repercussions of a product failure or product recall. A quarter of respondents source over 75% of their product globally and with such a high percentage lacking confidence, more active steps are needed to manage product quality risk.
Sustainability concerns have clearly gained ground in the retail and consumer goods sector, illustrated by the fact that 41% of respondents feel climate change is one of the most significant risks to their supply chain. However, almost one-third of respondents were ‘not very confident’ or ‘not confident at all’ about their organisations’ ability to properly manage carbon footprint risks.
“Global sourcing in the retail and consumer sector will experience robust growth in the future. What is clear from the survey is that while they are moving in that direction - the majority of survey respondents are not yet taking advantage of all the potential benefits of their global sourcing operations,” says Casalino. “Companies must adapt their organisation structure and processes to maximise cost savings and minimise associated risks, while identifying new ways to differentiate themselves through global sourcing - through cost, quality, brand or environmental approaches.”
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Music industry outsourcer creates back office niche
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Release Consulting, an independent IT consultancy specialising in the music and entertainment industries, has this week finalised an agreement with Universal Music Group (UMG) to service its international IT digital initiatives department.
In fact, the new specialist outsourcer was spun out of Universal in February this year by its founding MD, Will Lovegrove. The ambition now, he says, is to build out into new areas from the foundation stone of music-giant expertise that he and his team have acquired.
“I was working inside Universal for five years and built what I thought was a very high-performing technology team in a media company and we’ve taken that team out and formed a consultancy. Our ambition is to carry on doing what we were doing for Universal but for other similar types of company. Obviously other music labels spring to mind, but also broadcasting companies and publishing companies as well.”
Release Consulting says that it offers entertainment companies the opportunity to benefit from the IT expertise behind the systems that enable Universal’s international digital supply chain.
However, the real core of the new company’s business is not entertainment or the media, necessarily, but intellectual- property-based organisations of all kinds, and how they digitise their assets and manage them.
“We were involved in setting up the IT systems, workflows and processes to help Universal exploit its digital audio archives,” says Lovegrove.
“So [such assets might be] sitting over here in an archive system surrounded by metadata designed for a specific purpose, but they perhaps need to be over there instead, so new metadata needs to be written, and then the material needs to be sent out over corporate systems. At the end of that process is consuming the material in an online form in an online channel by retailers or consumers.
That process and that learning and expertise that we’ve developed, I think could be applied to broadcasters and publishers as well, where intellectual property is at the heart of that process. ”
For many organisations, those archives may date back decades, perhaps? “Yep, absolutely,” says Lovegrove. “We understand archives, we understand incomplete data. We understand that data collected a number of years ago may not have all the things a company needs to do things with it in today’s age. So we understand a lot of the issues and complexities of companies that deal with intellectual property.”
In fact, Lovegrove’s business is in many ways a traditional IT outsourcing one: “On the practical side, we understand international media companies, we understand how projects are governed with multiple stakeholders in multiple countries – with language barriers and time barriers,” he says.
“On that very pragmatic basis we understand how projects can work in international environments, in large companies. Where I see those kinds of indicators then I see where we can add value and have a meaningful conversation.”
Of course, broadcasters are ahead of the game in the UK, with the BBC’s iPlayer and its plans announced this week to digitise its entire archive, or at least create a webpage for every programme ever broadcast.
“What happened to music five years ago is now happening to other vertical sectors today,” agrees Lovegrove. “They are making advances and tackling issues such as making their archives available and deciding whether to use their own software or other people’s software, and which stage in the value chain do they want to occupy and what does that mean for their own internal resources and how they change and adapt and evolve.”
For Lovegrove, though, these conversations should happen internally before Release is called in. “What I’ve seen with companies that deal in intellectual property is that they are investigating as many different strategies as they can. Strategic business planning is not one of our billable services.”
Music, cinema/video and broadcasting are three industries that are being rewritten by the day by Internet-based businesses, from the original Napster – which, aside from all the noise about piracy, arguably proved both the business model and the market of online music distribution and saved the industry billions of dollars in R&D – to YouTube, Bebo, Amiestreet.com and MySpace.
Does Lovegrove have any bets of his own about what business model might succeed? “My opinions are as a consumer. I get involved where by and large a company has already set out its strategy and they want it executed.
For myself as a consumer, I like and want subscription services to prosper. I worry about advertising based services… I understand how they might work with very established, very famous high-profile stars, but the music business is also about nurturing new talent and I don’t see how they would get a share of the revenue stream from advertising, when the media buyers don’t understand who they are and what they do.”
For Lovegrove, then, his business is not about how innovative the strategy might be – that is down to the customer – but instead about making it work. “That is the real challenge. However innovative your business model, your back office systems must be geared to operate in a certain way. There’s innovation in business models in the front office, but being able to to fulfil those is where I tend to be involved…. and how you relate those innovative ideas to a major [label].”
So the media companies may be hedging their bets up front, but Lovegrove’s money is invested in the thing that never changes: the backroom; the real engine of any business.
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Fewer megadeals in 2007, says Gartner
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As companies continue to move to using multiple providers for their outsourcing services, the number of reported megadeals (worth more than $1 billion) awarded to a single service provider has declined, according to analysts at Gartner. In 2007, 10 outsourcing megadeals were awarded, a decline from 12 in 2006.
“The decline in reported outsourcing contracts can be partially explained by the fact that outsourcing is now ‘business as usual’ for many enterprises,” said Kurt Potter, research director at Gartner. “There is more outsourcing activity, but fewer deals on average are reported and this creates the false impression that outsourcing is decreasing.”
In terms of megadeal total contact value (TCV), the total for the 10 megadeals in 2007 was $12 billion, the lowest level reported during the last eight years, with the closest level being that of $20.3 billion in 2001. Average contract value (ACV) of megadeals also continued to decrease, from an average of $2.6 billion in 2006 to $1.2 billion in 2007.
“While further TCV erosion may be driven by the irreversible trends of global delivery and IT services industrialisation as many leading-edge organisations move into their second and third generations of IT outsourcing, they may be looking at deal expansion to include wider application or business initiatives,” said Mr. Potter. “Although these opportunities are likely to evolve from a single-provider to a multiple-provider engagement, in some cases, historical ties between provider and recipient may retain the potential for megadeals.”
Of the TCV of all outsourcing deals reported in 2007, Gartner said megadeals represented 39.4 percent of the contract value and represented only 6.8 percent of the number of total contracts in 2007, down from 7.4 percent in 2006. Although deals with less than $50 million in TCV continued to increase and reached 39.5 percent of the total number of contracts, they only represented 3.3 percent of TCV for 2007.
“Many providers are pursuing smaller contract strategies as a consequence of the new market realities, new competition and natural market pressures toward commoditisation, which reduces per-unit pricing. These strategies are often in the form of pursuit of smaller contracts from larger clients, or larger contracts from smaller companies,” said Mr. Potter. “Many clients want to test providers’ contracting practices, capabilities and cultures before moving favoured providers into larger contracts, or organisations are using smaller doses of outsourcing to delay larger outsourcing adventures. Many providers are forced to pursue larger contracts to meet growth expectations. Despite this pressure, providers should continue to evaluate different or at least accommodate go-to-market and product portfolio strategies for smaller clients.”
Gartner has maintained an outsourcing contract trends database since the early 1990s as a means of tracking the activity and trends in the outsourcing market for public and private organisations. All of these contracts publicly disclosed their dollar value and the duration, as well as the nature of their services and the name of the client and the outsourcer. The database is a comprehensive history of all publicly disclosed contracts, but is representative. Contracts from more than 400 outsourcing vendors, 12 industries and the major global regions are included.
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Conference report: The top 30 locations for offshore services
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Gartner has revealed its top 30 destinations for offshore services, plus its ‘ones to watch’ for the remainder of the decade.
Region by region, the top locations are (not in order of merit): Argentina; Brazil; Canada; Chile; Costa Rica; Mexico, and Uruguay; the Czech Republic; Hungary; Ireland; Northern Ireland; Israel; Poland; Romania; Russia; Slovakia; Spain; Turkey, and Ukraine; South Africa; Australia; China; India; Malaysia; New Zealand; Pakistan; the Philippines; Singapore; Sri Lanka, and Vietnam.
Countries to watch, which have the potential for elevation to the list, include: Colombia; Guatemala; Panama; Peru; Puerto Rico Venezuela; Indonesia; Mauritius; Thailand; Belarus; Egypt; Latvia, and Morocco.
In addition, Gartner has identified Cuba, Jamaica, Nicaragua, Bangladesh, and Madagascar as already offering some offshore services, although in some cases they remain hamstrung by political and other considerations, said the analyst firm.
Gartner’s criteria for inclusion in the list include language proficiency and availability; government support in the promotion of IT-relevant education and the promotion of offshore services; cost; an educated labour pool; infrastructure robustness and pervasiveness, including transportation, communications, satellites, power, road, rail, ports and airports; the competitiveness of labour rates against other countries; and the political and economic environment, including currency volatility, corruption levels, and the risk of war or civil unrest.
More controversially, Gartner included the “potential for moving the legal system forward” and “a willingness to talk to Gartner” as being essential considerations – along with more familiar criteria, such as cultural affinity, data security and privacy. This was a refreshing dose of self-awareness and realpolitik from an organisation that is sometimes known for a paternalistic stance towards clients and prospects, and perhaps now even countries. (Not quite Naomi Klein’s ‘disaster capitalism’, perhaps, but certainly on the same path.)
There were some words of caution from the conference platform as well. Maturing locations mean higher cost locations, while low-cost destinations such as Vietnam fare badly in areas such as IP security.
So the picture is vibrant and constantly changing, especially as some parts of the world seem immune from the downturn that plagues the West. For example, hundreds of companies are emerging in China and beginning to engage with Western European companies that have a presence in Asia Pacific. Meanwhile, Latin American countries (the Americas as a whole showed strongly) often use Spain as a bridge to move into western Europe. At the same time, Israeli company Ness has made acquisitions in Russia to enable it to expand into Europe.
So a buyer’s market, perhaps, but one where it is essential that companies establish a framework for global sourcing.
Whether buyers are country led or vendor led, it is imperative that they do not just “seek the leader”, said analyst Ian Marriott, but determine which is the right organisation for the business.
Asked about ethical and human rights considerations, Marriott claimed that the kind of sweatshop and child labour issues that afflict the clothing and textiles industries do not apply to IT outsourcing, because workers typically have a much higher standard of living and are “upper middle class”. Nevertheless, he conceded, human rights issues remain a matter of conscience – for both individuals and companies.
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HR: the new poster child for SaaS, says Forrester
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HR outsourcing (HRO) is one of the most popular forms of outsourcing. As a sector it’s booming, with Everest Research Institute predicting that it will top $2.85 billion this year. It’s no surprise: after all, the one thing that every company has in common is people, so people management needs to be on every corporate agenda.
But not everyone wants to go down the full outsourcing route, which is why there is such growth in the HR software as a service (SaaS) market. According to Forrester Research, among enterprises that use or are piloting SaaS applications, adoption of HR applications is running at 54 percent compared to CRM at 38 percent. “CRM used to be the poster child for SaaS,” noted Forrester analyst Ray Wang. “It’s now HR apps areas like performance management and talent management, all these ancillary pieces, where people are using hosted applications.”
The most successful of these HR SaaS firms is SuccessFactors which boasts 3.7 million subscribers in 2,000 companies worldwide. In fact, while companies such as Salesforce.com and NetSuite have been feted as the leading lights of the SaaS movement, SuccessFactors stakes a claim to be the most successful SaaS firm in the industry. “SuccessFactors leads the SaaS industry with pure organic revenue growth of 89 percent,” argues founder and CEO Lars Dalgaard. “Few companies have ever grown this fast organically at this size, which is the engine of long-term, sustainable value creation.
“One of the world’s largest retailers has become a customer of SuccessFactors with the world’s largest planned SaaS deployment with 300,000 initial users. We think that’s three times bigger than anything that’s ever been done before. Also a large insurance agency added 24,000 users. SuccessFactors has a history of delivering the largest on-demand SaaS deployments in the past years.”
Dalgaard has a stated ambition: revolutionising the future of work… one employee at a time. “How many companies are there out there who have employees who just check in and do what they have to do to collect a pay cheque?” he asks. “It’s maddening on a human level that we have people who go to work and hate what it is that they do. Who is responsible for that situation? The employees are to a degree and the employers certainly are. If you are in a situation where half your workforce is not engaged with what they are doing and does not know why they’re doing it, then you have a problem.”
His other mantra is earthier: “No assholes!” All employees at SuccessFactors have to sign a contract that obliges them to guarantee they will not (in his words) “act like assholes”. “It’s all about respect for the individual,” he explains. “I want no assholes, no jerks. The contract says that people will not talk behind other people’s backs. No politics! Politics is the biggest stifler of personal performance.”
This week the firm held its user conference in San Francisco – a European event will follow later in the year – where more than 300 customers shared experiences of using SuccessFactors’ SaaS offering. For some, it’s been a long journey: Textron, a manufacturer of helicopters, aircraft, fastening systems, tools and components, and a provider of financing tools, began its deployment as far back as 2001, making it a veteran among SaaS users of any vendor in any business category.
“One of the major factors that made us take the plunge with SuccessFactors was that they could host this,” recalls Will Roth, director, organisational development at Textron. “The timing was right for us. At the time we were trying to outsource a lot of our IT infrastructure. Taking care of servers in-house wasn’t something that we saw as bringing us strategic competitive advantage. So in terms of making the business case, it just fitted right in with our wider thinking.
“We talked about the idea of doing the whole human resource outsourcing [sic], but there is a certain level of control that we still like to have on the HR side of things. If you do some of this internally, then it also forces you to know what you don’t know. That said, there are benefits to full outsourcing – and there are some applications that we dream about fully outsourcing – but you need to have a great deal of confidence and be comfortable with the level of customer support you’re going to get.”
Companies like Textron are evidence that SaaS is a viable alternative to full-blown outsourcing for enterprise organisations, not just the mid-market where the model has been most commonly seen. Roth argues that some of the often-cited concerns about SaaS, such as service outages, just don’t stand up to scrutiny. “I had experience of a downtime situation when I worked for Merck,” he notes. “We had a recruiting software application that was externally hosted, It usually worked beautifully I used to use it myself, checked it every couple of days and actually got a job through it. Then one Wednesday we came in and there was nothing there, the link was just gone. The company had gone bankrupt and it was a total disaster.
“The long and the short of it was that we had to decide to put our trust in SuccessFactors and that they had done their homework. Naturally, we audited them and there was nothing that we were doing any better than they could do. With IBM hosting the application, you’re just not going to be able to duplicate their level of quality. We have had outages but the majority of times they’ve only lasted a matter of minutes. We also built a lot of guarantees into our contract so that if we’re down for more than x amount of time, then the provider owes us money. But we’ve never had to get close to that.”
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Conference report: Services taking over IT industry, says Gartner
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Despite the downturn, global services spending is on the cusp of a substantial increase and CIOs must learn to grasp the opportunities this presents, said Gartner analysts at today’s Outsourcing summit keynote address in London.
The closing presentation identified the challenges that will determine the CIO’s role over the next few years, and how these will impact on enterprise outsourcing strategies. Externalisation, the primacy of business, globalisation, the internet, legacy modernisation, green IT, and global sourcing will be the critical factors for all IT-enabled business, said analysts.
Gartner said that, despite the downturn, spending on external services will continue to increase until the IT services industry becomes the largest overall sector of the IT marketplace by 2011.
Analyst Ben Pring said that services – including outsourcing and consulting – will reach “the commanding heights” of the IT industry. “You may change as a customer what you buy within the mix of the differing services that are available to you,” he said, “you may buy more application outsourcing in the downturn of the economic cycle… and less innovative consulting, but in total, and in aggregate, spending on all IT services is set to increase substantially. There is no sign that spending on external services will reverse in this period of the business cycle.”
However, the strategic decisions that businesses make about their sourcing strategies cannot themselves be outsourced, he advised. “Lawyers make a very good living sorting out that complexity. You must learn and must continue to improve your understanding of the techniques of multisourcing,” he said.
Top of the list of critical factors will be business primacy, said Gartner analyst Allie Young, referring to projects that enable business growth, linking IT more and more with business strategies. Attracting, developing and retaining IT personnel will be at the heart of this, she added.
This contradicted statements made at Monday’s fringe event hosted by Getronics, which strongly suggested that CIOs often leave the enterprise once outsourcing partnerships become established.
The Getronics event – chaired by sourcingfocus.com’s Chris Middleton – discussed the fact that once CIOs lose departmental staff they find themselves managing networks of suppliers rather than a coherent internal function – a role for which they are not necessarily qualified, and which challenges the fabled notion of the ‘chief innovation officer’. As a result, many switch sides to the outsourcing provider. (See Editor’s Blog).
Of course, the reality of outsourcing in a downturn is that ‘cost takeout’ is the primary aim of many projects, and not strategic enhancement of the business. This was acknowledged by Gartner’s Young. All too often “cheaper dominates”, she said, followed by “better and faster”, and it is this that dictates the buying decision. However, she warned that it should not be a cost takeout that is crippling to the company when the economy rebounds.
“What organisations need is growth, speed and agility,” Young continued. “Sourcing decisions must align to business goals. We individually have to take responsibility to break down that separation of business and IT. We all must become business leaders to think and connect business and IT in all we do.”
On the topic of globalisation, Young said the challenge of establishing globally integrated IT and business processes was what “kept CEOs awake at night”. A lot of companies get stuck in the immediate benefits of labour arbitrage, she said. However, the smart buyers will begin to balance cost imperatives with other benefits.
Core to the future of sourcing strategies will be the internet, specifically the promise of technology virtualisation, remote management, software as a service (SaaS), VMware, alternative delivery models, and enterprise virtualisation.
“Visionary business leaders exploit moments of change to innovate,” said Gartner’s Ben Pring, who went on to describe the “double-edged sword of legacy IT”. He said: “All of your business IP is invested in that technology; you’ve made big bets in the past, you’ve got skills based on that technology, and processes are invested in that too; but maintaining and enhancing that legacy footprint is expensive and getting more expensive, and the lack of flexibility means that changing things is difficult and too expensive.
“Legacy is not dead, the legacy is not turned off overnight, but simply is in terminal decline,” he said.
The gradual switch to net-native, web 2.0, and ‘cloud computing’ -based applications is inevitable, and will form a larger and larger proportion of your spending, and of the overall marketplace, he said.
“You need to understand that this is not a project… not like buying a new suit so you can look as though you are in fashionable times; it is not another upgrade, and if you treat it as such you will fail.”
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Payroll joins the queue as businesses fail to tackle inefficient systems
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Less than half of HR and finance professionals in charge of payroll have any efficiency measures in place, according to research published today by ADP Employer Services.
In a week of challenging surveys, this is the latest depressing evidence that companies look for quick-fix ways of saving money (cancelled contracts, redundancies) but often ignore the entrenched areas where money is being slowly drained out of the enterprise by inefficient systems.
ADP surveyed over 750 HR and finance professionals, and found finance professionals faired worse than their HR counterparts, with only 39% measuring payroll efficiency, compared with 49% in HR. Less than one third of all respondents consider payroll expenditure (aside from staff costs) when looking to reduce costs in the business.
The research also highlighted disagreement as to where responsibility for payroll rests in the organisation: in large businesses it is more likely to fall under finance than HR (49% versus 40%), rising to 69% versus 31% in smaller companies.
Despite this reluctance to grapple with payroll inefficiencies, 63% of all organisations retain the function in house – rising to more than three-quarters of finance companies. Data control and security were cited as the main causes of the decision not to outsource.
This, of course, is the key point: nearly forty percent of IT directors have experienced data theft or leakage and see internal security as the biggest threat to the enterprise. Specialist BPO companies, whose business bedrock must be security and process expertise to survive are perhaps better placed to take the problem off CIOs hands.
While payroll might be an often overlooked area of inefficiency, it joins energy consumption as a cause of money being wasted internally because no one has the skill or the will to tackle a deeply embedded and costly problem that haemorrhages money out of the enterprise. A separate report this week finds that 37% of datacentres have no plans to measure energy efficiency, and 76% of IT professionals do not charge the business for the power used by the IT it commissions (or refuses to decommission, in the case of ‘ghost servers’ that are never switched off).
In a large enterprise, power consumption is directly related to IT services demand, and many of those systems remain switched on even when dormant or no longer used.
The recent European Outsourcing Association conference in central London found cancelled contracts and slashed budgets were the response to the downturn in roughly a third of delegates’ companies. How many of these could save that money by tackling inefficiency on an enterprise scale, rather than hacking away at strategic investment?
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Green datacentres: a myth for many businesses
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The green datacentre is a myth for many companies, who either lack the skill or the will to implement green policies, despite their public support of green policies. Those are the findings of an investigation into the green datacentre, at a time when increased power consumption globally is linked to the demand for IT services.
A survey by datacentre specialist Aperture Research Institute (ARI) of more than 100 datacentre professionals has shown that organisations are unable or unwilling to meet the expectations set by their adoption of green initiatives for the datacentre. Organisations lack the tools to measure energy efficiency, lack processes to charge the business for energy use, and that many do not decommission ‘ghost’ servers that are no longer needed.
This follows an earlier ARI report published in March 2008, which discovered that 70% of organisations say they are adopting green initiatives – although 19% of those had omitted the datacentre from that programme.
In the latest ARI study, 74% of those surveyed refused to activate power saving features on devices if it would require a drop in performance. While 37% are concerned that the power/performance ratio doesn’t add up, 15% worry that they have no way to track whether the power saving setting is on or off. Nearly half (48%) of those surveyed blame the business for not using power-saving features, saying that users wouldn’t tolerate a drop in performance in the interests of saving power.
When it comes to procurement, energy efficiency and ease of disposal are the lowest priorities, rated as less significant than brand and price. 37% of datacentres have no plans to measure energy efficiency, and 76% do not charge the business for the power used by the IT it commissions. One reason for that is a lack of infrastructure for measuring power consumption.
Steve Yellen, principal of the Aperture Research Institute, said: “Although many organisations have made a commitment to cutting their environmental impact, when it comes to the datacentre, most lack the tools and processes they need if they are to deliver on that promise. The number one cause of increasing power consumption is an increase in demand for IT services, so business managers must be made accountable for the energy their applications consume. Only 24% of organisations we surveyed said the IT department charges the business for energy use. They simply don’t have the technology to be able to implement the management processes they need.”
The survey also found that decommissioning processes are not strictly followed, and “ghost servers” haunt the datacentres of 19% of organisations. Ghost servers are those servers which the business no longer needs, but which have not been switched off, and which are as a result needlessly consuming electricity, space and other limited resources.
The report comes in the wake of the recent European Outsourcing Association conference in London, where delegates said that datacentres were – in theory, at least – top of their green agenda in terms of IT services, but also voiced the opinion that innovation and education are often expected to come from their outsourcing services providers.
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CSC results: Ovum comment
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CSC has announced its fourth quarter results. Revenues were $4.48 billion, up 11% (or 7% on a constant currency basis). Its fourth quarter EBIT margin was 9.2%, compared to 9.5% in the same quarter last year. CSC signed major contracts worth $2.5 billion in the quarter, which took its total for FY08 to $13.3 billion.
Ovum analyst Phil Codling said: “This was a solid financial performance from CSC to round off a solid year. For FY08 as a whole, the revenue growth metrics were the same as for the quarter (i.e. 11% topline growth, 7% in constant currency). However, if we take out the c$500 million that CSC’s acquisitions contributed to FY08 revenues, organic growth looks more like four percent. That is, nonetheless, an improvement on the flat performance we saw in FY07, a fact that reflects contract revenue timings and better execution from CSC, rather than any pick-up in the market more generally.
“CSC’s deal signing performance raises some question marks, however. The sum of $13.3 billion in total contract value for the year is down on the $16.9 billion bagged in FY07. Bear in mind that $11.2 billion of the FY08 signings came from the public sector, which means just $2.1 billion came from CSC’s global commercial interests. CSC says some signings have slipped into FY09 and reports a reasonable start to the year, but the low level of major commercial signings is undoubtedly a weakness the company needs to address.
“In attempting to do this, it faces a tough market environment with few new opportunities for the kinds of big wins that have traditionally underpinned CSC’s outsourcing business. That said, a number of developments at CSC should give the company a chance of improving its position. Not least, its acquisition of Covansys last year means it now has a 15,000-strong workforce in India, a vital resource for competing effectively in the commercial sector in both North America and Europe. Secondly, under its ‘Project Accelerate’ strategy, the company has begun to align itself under targeted vertical markets which, in the private sector, should give it a better focus in financial services and manufacturing in particular. Finally, CSC is also focusing attention on what it terms ‘mid-sized’ deals (i.e. those typically $50-350 million in value) and appears to be gaining some traction here as the outsourcing market continues to fragment.
“There is also a positive sign in the fourth quarter numbers that CSC can do better in the commercial sector. Global commercial revenues actually counterbalanced a flatter quarterly performance in the federal sector with an impressive 16% top-line growth (or 11% in constant currency) to $3.0 billion. CSC’s improved and expanded consulting and projects capability accounts for much of this growth, not least in Europe (where the company’s performance has remained significantly better than in FY07).
“Overall, CSC is right to be aiming a little higher in the coming year (with a projection of 5-7% organic growth), particularly as CEO Mike Laphen appears to think he can capitalise on a likely wobble at major competitor EDS as it undergoes its integration with HP. (Whether such a wobble occurs is of course in the hands of EDS, HP, their partners and their customers, not CSC, but we acknowledge that it’s a possibility.) The last two years have seen CSC put some key strategic pieces in place to improve its performance. Having restructured and refocused the business, it’s now time to show that CSC really can accelerate. And in a competitive landscape that is about to be shaken up by the merger of HP and EDS, CSC needs to make it clear that it provides customers with a long-term alternative to its much larger competitors.”
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Security concerns frustrate enterprise mobility, says report
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Apple’s iPhone has reignited the debate over consumerisation - when new technologies are introduced into the consumer market and then brought into the enterprise market - with employees determined to integrate their personal devices with their enterprise applications. However, IT managers are reluctant to take on the responsibility of managing these devices.
This is according to a new report by Datamonitor. The report Enterprise Mobility: Trend Analysis to 2012, predicts global enterprise expenditure on mobile devices will grow from $6 billion in 2008 to an estimated $17 billion by 2012, which highlights the need for IT managers to begin to implement mobile device policies as ever more enterprises look to expand their mobile workforces. “Enterprises are fighting a losing battle against employees when it comes to mobile devices and they should consider supporting a limited selection of devices rather than banning them outright”, says Daniel Okubo, technology analyst with Datamonitor and the report’s author. “Allowing a range of the most popular devices will improve employee satisfaction and encourage more of them to embrace mobile devices and improve their productivity when away from the office.” Enterprises are understandably concerned about ensuring the security of their data. In a survey conducted by Datamonitor to establish issues that are currently preventing enterprises from investing in mobility solutions, the majority of the 467 respondents rated security as the greatest barrier to adoption of mobility solutions. Traditionally enterprises have allocated devices, such as the Blackberry, to employees to enable them to check their email and be responsive when they are away from the office. However, as other mobile devices like the iPhone are increasingly popular among end users, enterprises are finding that employees want to be able to integrate their personal device with their corporate email account and other applications. For many people their mobile device is a personal thing which they want to customise and keep on their person. They do not want one device for personal use and an IT issued device for work. So far very few IT departments have yielded to these requests and are refusing to be responsible for managing such a wide variety of mobile devices. However, the iPhone has set a new standard for device usability and the trend of consumerisation is going to continue. “There is an element of fear of the unknown,” says Okubo. “Enterprises question how security will be managed and whether mobility technologies will fit into their current IT infrastructure. Technology vendors have a role to play by properly addressing enterprise pain points.” The key issue is that regardless of device, IT managers need to ensure they have a clear policy on mobile devices and at least the basic security capabilities to lock devices remotely, wipe them back to their factory setting and block certain applications being loaded. Employees must be made aware that it is important to report lost or stolen devices immediately, and they should not use their mobile devices to transfer sensitive company data. Carriers such as Vodafone have started realising the problems that many enterprises face in managing devices and have started offering hosted device management solutions. This means that if an employee loses their phone they can call their operator and they will wipe or lock it. Similarly if their phone is broken they can contact their operator who can remotely diagnose and fix their device and install updates. IT managers should ensure they have these capabilities either through traditional security vendors such as Sybase or for smaller enterprises, perhaps a hosted solution from a carrier is more efficient. Okubo concludes: “As more enterprises look to expand their mobile workforces and equip their employees with mobile devices, the issue of device management is going to become increasingly important. The popularity of mobile devices in the consumer markets is forcing enterprises to consider how best to manage these devices in the workplace and they need to ensure they have clear policies in place to manage employee expectations.”
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Legal process outsourcing: a disaster for UK law students?
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The rise of legal process outsourcing (LPO) may have a significant impact on the numbers of junior lawyers in the UK, says one LPO specialist, and 2008 will be the tipping point.
Although LPO is in its infancy with a total industry population of perhaps 7,500 people, many legal functions. such as document drafting, analytics, and research are now being unbundled, commoditised and outsourced to India, along with locations such as South Africa and the Philippines. This will undoubtedly have an impact on the lives of people studying law in the UK, says Mark Ross, director of LPO specialist LawScribe.
Ross believes (unsurprisingly) that deregulation within legal services presents a great opportunity for the Indian market – from where the English lawyer’s Los Angeles-based company draws its pool of talent.
One of the reasons for the law being one of the last industries to use offshore services is that large legal practices traditionally make money by “leveraging out their junior associates”, he says. However, now that the Indian legal sector is being liberalised and opened up to foreign law firms, all that is set to change.
In India, 70.000 lawyers qualify annually – that’s double the number within the UK – and the economics of labour arbitrage within a traditionally expensive sector (especially in a downturn) will become attractive for many types of company. Fixed costs are are boon for any organisation grappling with its balance sheet, and LPO certainly promises more predictable pricing – on the surface at least.
However, the very nature of offshoring legal operations surely carries with it a whole range of additional elements, such as time, language, culture and distance (none of which have an obvious field in a spreadsheet), and that’s not even to mention currency fluctuations.
Nevertheless, the UK may be the key. The US legal system is “hooked on the hourly rate”, says Ross, whereas the UK is more flexible, with fixed quotes becoming commonplace. That means that UK firms are more likely to look for ways of improving their margin.
BPO organisations are already declaring their intention to join the large accounting firms in dipping their toes into the LPO market, and India is set to be the major player. Infosys and Wipro are commencing LPO operations, and evidence is emerging of consolidation among pureplay LPO practices.
Now it is possible for law firms to be publicly listed and their stocks traded, shareholder value and a private equity mentality come into play, and that inevitably means downward pressure on costs.
2008 will be “a tipping point year”, says Ross as higher value work begins to move offshore. Soon, he claims, it will be attractive for law firms to acknowledge offshore work in their client portfolios, and this, in turn, will become part of a client’s reasonable expectation.
Of course, the barriers are significant: the law is a nuanced, subtle and culturally charged sector, and local knowledge is at a premium – especially in the US, where state and federal laws are complex and sometimes contradictory.
Those 70.000 lawyers qualifying in India each year may have a good grounding in common law, but applying those skills in terms of local knowledge is a major challenge. Protectionism is rife, particularly in the US, and there are inevitably issues surrounding data confidentiality and regulation.
However, Ross counters that the huge scale of litigation in the US – you could fit the value of the rest of the world’s legal market several times into that of the US – means that firms are looking further afield than the proverbial ‘lawyer in the basement’.
Industry self regulation will emerge, says Ross, and companies are beginning to offer in-house training and qualifications for Indian lawyers training in the UK.
The closer cultural fit with India means that the LPO market may find its most fertile ground in this country – assuming of course, that deregulation doesn’t see the rise of ‘Tesco Law’ before offshore providers get a look in.
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Study reveals critical barriers in shared service delivery strategy
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Public sector bodies are facing a number of critical barriers in seeking to reap the benefits of shared service initiatives, according to a report published by law firm Browne Jacobson.
These include a lack of available resources, workforce opposition and risk-averse organisational cultures.
The Shared Services Survey 08 is the result of research carried out among 178 senior public sector managers in the health, local authority, social care, education and fire service sectors.
The research found that the primary barrier to implementing shared services, as identified by public sector managers, is a lack of adequate resources. Two thirds of public sector managers (65%) were concerned about a lack of financial resources, while 59% identified insufficient manpower. Resource challenges were particularly evident within the social care and education sectors, where 85% and 71% of managers expressed concern over financial and human resources respectively.
Dominic Swift, head of the Shared Services team at Browne Jacobson, said: “Having the necessary financial and human resources in place is a vital component if the full potential of shared services is to be realised.”
When asked to define shared services, the vast majority of respondents talked about ‘sharing, collaboration and the pooling of resources’. Surprisingly only one in four public sector managers (26%) referred to cost savings and end benefits.
Swift says: “Government is guiding the public sector to drive significant cost efficiencies while improving public services. Yet only a small minority of managers list these among the aims of the shared services agenda.
“This raises an interesting question: is it widely assumed that shared services will mean greater efficiency and translate into significant cost savings or have public sector managers not fully engaged with the government’s ambitions to drive efficiencies through shared services projects?”
When quizzed on who they believe is the driving force behind shared services, public sector managers principally identified senior management and central government. Over three quarters (77%) pointed to senior management, and over half (52%) Whitehall civil servants.
Frontline workers were cited by only 13% of managers – and customers by just a tenth (10%).
Swift says: “The momentum behind shared services is being generated internally – and from the top. It is critical that front line staff are equally engaged in the process right from the beginning. Managers need to consult with staff and customers in a consistent and coordinated way, consider the feedback received and decide together how to address any major concerns.”
The report also identifies a series of cultural issues, including internal opposition, risk-averseness and a lack of trust between partner organisations.
According to public sector managers less than a quarter (23%) of the workforce are active supporters of shared projects, while over a third (36%) actually oppose them. Opposition levels reach some 40% among fire services.
Over one third of public sector managers cite a lack of trust as a key challenge to implementing shared services. Concerns over partner organisations giving priority to their own issues, and a lack of authority over partner workforces, are the two principle barriers to establishing trust identified by the study.
Swift continues: “Clear consultation and communication with employees, unions and local representatives is essential if public bodies are to overcome cultural hurdles and internal opposition, and develop trusting partnerships.”
Close to half (41%) of managers identified the risk-averse nature of their organisations as a significant challenge to delivering shared services.
Ongoing liabilities and high exit costs are paramount among the risks keeping public sector managers awake at night. Close to three quarters (71%) cited these as key.
Other major risks identified are partners withdrawing from shared arrangements (cited by 66% of public sector managers); non-compliance with statutory procurement processes (61%); and inadequate consultation with staff (55%).
“Public sector managers are clearly concerned about a range of risks and barriers inherent in sharing operations with an external organisation,” says Swift.
“Managers will undoubtedly need to undertake a thorough profile to identify and assess any potential risks – including financial, personnel, regulatory, compliance, data privacy and intellectual property.
“They should also ensure that all the partners are clear about their responsibilities and obligations and put in place the necessary legal and governance structures before implementation.”
• A PDF of the full report is available in our Whitepapers section.
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Conference report: R&D outsourcing means India and China are rising in the East
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‘India Inc’ is moving from services to innovation, and both it and China are becoming world intellectual property (IP) hubs, believes Prof. Phanish Puranam of the London Business School. According to Puranam, if research and development can be done in a distributed, outsourced environment, then there is no limit to what can be delivered offshore.
The global IP picture is changing, and measuring “innovation as an outcome” is something that can now be quantified and explored in a statistical model, the professor told delegates at the FT Outsourcing conference this week.
So do the facts support this claim? Today, China and India account for two percent of the world’s IP activity, and that figure will soon increase to five percent – arguably low for countries representing perhaps 20% of the world’s population.
That said, the picture is, of course, massively distorted by the ‘elephant in the room’ of the rampaging US patent machine. So the fact that Indian inventors, designers and engineers are developing and registering so many patents, whether for domestic or international companies, is a significant and encouraging development. Dozens of US companies now figure strongly in the client list for India Inc’s innovation, including IBM, HP, Texas Instruments, GE, and Intel.
Nearly every patent that has come out of India in the past five years has been in such lucrative areas as organic chemistry, IT, pharmaceuticals, and telecoms, said Puranam, and these are often developed locally with global cooperation – what he called “the globalisation of knowledge production”.
Unsurprisingly, the picture in China is different: domestic firms are dominant in Chinese patenting activity, and in areas that complement their Indian counterparts. However, Puranam claimed that Indian patents have greater impacts relative to Chinese work in terms of forward citations – a claim that may itself be distorted by India’s more open outlook to, and cooperation with, the West.
So how does distributed knowledge work happen in terms of R&D? Puranam discussed research carried out by the London Business School across 17 firms and 120 projects, saying that the fundamentals are the same whether you are looking at call centres or high-end knowledge process outsourcing (KPO).
One model is so-called ‘black boxing’, where companies partition work into independent modules that can operate intensively with very little interaction, reducing the need for coordination – by implication, a hothousing approach. Puranam was critical of this model for many types of work: “You can’t really run an assembly line model with creative work,” he said.
The other, more effective strategy, said Puranam, is rooted in strong communication, where the main driver is not technology, but common knowledge and a shared mindset.
Certainly this year’s conference seemed to showcase a dialogue between two – unshared – mindsets: first, technology solutions solving technology problems (minus the hard evidence of their efficacy for human beings) versus a softer, more people-focused approach (which seemed, paradoxically, to be more grounded in fact and technological innovation). Needless to say, it is the latter that tends to suffer in a recession; a lesson our industry sometimes signally fails to learn.
Puranam’s presentation was one of the most interesting and challenging ones from the conference platform, but it did beg a question in this delegate’s eyes: if something as core as research and development to any (traditional) business is joining the ranks of manufacturing, customer service, back-office processes, marketing, communications, technology infrastructure management, knowledge process outsourcing, and applications development as a potentially offshored, third-party function, then what will the client company of the future consist of – and who will pay the CEO’s wages?
You?
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Conference report: The opportunities of KPO
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Knowledge process outsourcing (KPO) will help the Indian market move up the value chain beyond mere processing, said Anish Nanavaty, CEO knowledge services at WNS. “We believe the industry is at a real watershed point; there is an opportunity for us to add a lot of value to our customers,” he said in a challenging presentation to the FT Outsourcing conference in London this week.
So far, the definition of KPO has been driven incrementally by the many small ways in which people have been exposed to the industry, so what is it? Nanavaty claims it can be explained as the creation of knowledge-based shared services centres for solving a full range of business problems, within which issues are broken into analytic building blocks and solved by specialists with what he described as “factory-like efficiencies”.
In the developed world some of this knowledge is currently aggregated within the major consultancies, as this is fundamentally their product. “These companies are now trying to outsource the lower-end steps towards gathering information and knowledge,” he said.
The opportunity for outsourcers, he concluded, was to move further and further up the value chain and “democratise the consumption of analytics”. In other words, to lay open business information to all parts of the organisation and not just those with the most need, or which have historically “owned” the data.
If Nanavaty is correct, then the challenge for companies is twofold and obvious: management, and business culture, both of which often leave knowledge lying in silos of accounting, marketing, communications, and so on. A possible future for KPO, then: helping companies who are unable to communicate internally. The client’s CEO and CIO might approve, but I hear middle-management rebellion on the horizon…
The other (linked) issues moving forward, are security, due diligence, and regulation. As more and more intellectual property-driven industries, such as big pharma and IT, move to a KPO model, then providers are going to need an almost obsessive security and anti-corruption regime embedded within their own organisations to ensure all those ‘Chinese walls’ are not paper thin.
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Conference report: The future of customer service is automated, claims supplier
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The cost to serve customers is increasing, competitive pressures are intensifying, and the customer care industry needs to strike a new balance between cost and customer experience. That was the view of Sukant Srivastava, Convergys MD and country manager, India, at this week’s FT Outsourcing conference.
Srivastava said that cultural change is required in the shift from human voice to automation, and the associated move from reactive care to predictive/analytic care and continuous improvement – both of which changes he seemed to suggest were inevitable.
Indeed, he painted an immediate future for customer care outsourcing of multichannel self-care technologies and virtual/secret agents, which he described as “the next level of self service, remembering customer preferences, correcting the experience in real time”.
Pressed by sourcingfocus.com about whether there is any hard evidence to suggest that customers see automation as representing an improvement in customer experience, Srivastava was not able to supply any research; indeed, he seemed to suggest that more technology was the answer to the question – a form of self-perpetuating and -fulfilling market cycle. This suits relationship management, customer care and employee care specialist Convergys, which has 75,000 employees. $2.8 billion revenues, and a claimed one billion customer interactions annually.
The flaw in the customer experience, conceded Srivastava, is when customers receive different experiences across different channels, adding that “when technology is employed in a very static and mechanistic way [it] creates a negative experience”. Many companies have not kickstarted any investment in creating the much sought-after ‘single view’ of the customer (the Holy Grail of the CRM world), because it requires an overhaul of their IT systems. Inevitably that would entail a significant upfront investment, which is hardest to do in an economic downturn when people look for the short-term certainty of the slashed cost base.
Nevertheless, “the biggest thing” for clients, he maintained, is still “how do we become more proactive in anticipating customer needs? Our conclusion is that the global customer care companies are going to have an edge,” he said.
Srivastava finished by saying that “an agent is going to become an advisor”, and that self-care technologies will do the donkey work of managing customer interactions.
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Conference sketch: Can you hack it? (No you can’t!)
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The best way to avoid recession is to be working at a world-class level, said Julio Ramirez, managing partner and practice leader, globalization and outsourcing, for the Hackett Group.
Leaving aside for a moment the points that the Hackett Group’s all-too-visible brand message at the event was ‘world class defined and enabled’ and that recessions are only observed in retrospect (ie when it is too late), Ramirez did offer some practical observations about outsourcing trends away from the subliminal advertising.
There are two approaches to globalisation, he said at this week’s FT Outsourcing Conference. The first is the ‘“lift and shift’ move from a high-cost to a low-cost geography” (I suspect he meant ‘location’ – business people, please note: geography is the study of the earth and its features), or the better option: “fix it, and then move”.
“We at Hackett believe that transformation and globalisation should be embedded into a company,” he announced. “Very few have achieved world-class [that brand message again] performance levels from mere ‘lift and shift’.
“You won’t find world-class companies using the ‘lift and shift’ approach,” he added (in case you hadn’t got the message, or thought he was advising against a cosmetic procedure).
To be fair to Ramirez, his presentation did eventually suck out the fat and tighten the buckle in the general direction of a notch. “The challengers [to world-class companies] are catching up very quickly,” he conceded, “pushing the envelope of globalisation… large transactions… and BPO models.” The rest of the market Ramirez dismissed as “the incrementals”, characterised by a silo mentality and a disjointed, non-strategic approach to outsourcing. Such companies are attracted by the ‘lift and shift’ model to get some level of labour arbitrage, he said.
So how to recession-proof the business? “There are vast opportunities for taking cost out of the back office, he began, enticingly. “Nothing can get you into worse trouble in this type of recession than an outdated back office! The typical global 1000 company is sitting on $3 billion of excess working capital, and yet there is a massive liquidity crisis,” he warned, gearing himself up for the knockout.
And yet just as I was munching on a gratis mint and leaning discretely towards the underpowered soundsystem for the answer, Ramirez concluded: “World-class [kerching!] companies are there already! They’ve got captives built out, they have established relationships and so the upfront investment is already there and the work can be increased rapidly!”
So there you have it: if you’re not already world class (can you think of a company that might be, readers?), then it’s already too late. Sorry.
• The title of the presentation was “Will a Global Recession Drive More Offshoring and Outsourcing in the Future?
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Conference report: The future is about global delivery and relationship building
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The outsourcing market should be all about building a viable global delivery model, and no longer thinking about ‘offshoring’ and ‘outsourcing’, believes Cognizant VP and UK country manager Sanjiv Gossain.
“We believe the future of the market is the fourth-gen, global delivery model, where there is strong collaboration between client and service provider; a joint planning process; insight into what’s happening in the client’s business, and dynamic commercial models,” he said.
At the FT Outsourcing Conference in London this week, Gossain said that while people still consider pricing when signing a deal, that is shifting towards business alignment, innovation and transformation.
He added: “It’s not about people to revenue, but about value delivered to the business. That’s what’s important about this fourth-gen model, and it will be delivered from multiple locations. Where doesn’t matter to the end customer.” Transaction-based pricing will become more dominant, he said.
Cognizant is certainly evidence that captives can take up the challenge of becoming fully fledged outsourcing businesses: the company was formed as a captive of Dunn and Bradstreet some 40 years ago, and now boasts 35 delivery centres in India, Brazil, eastern Europe, Shanghai, and elsewhere.
Gossain claimed that the economic downturn is an opportunity to – essentially – slash internal IT functions and move the responsibility elsewhere – a bold claim given that many enterprises baulk at the uncertainty and upheaval of building a new relationship during a credit crunch, especially to a provider that promises to innovate more than reduce costs.
“There are a lot of opportunities in tight economic times for customers to transition their IT footprint,” he said, advising clients to “reduce the amount spent on keeping the lights on and more on adding value. The customer focuses on ‘core’, the provider focuses on ‘context’”.
“Cost reduction is not the primary driver anymore,” he continued. “Decisions are not just based on financials and the quantitative aspect. Beyond that it is about cultural fit. It is about how you as customer and provider get along. That is a more and more important part of the due diligence process.”
Gossain said that the reasons for outsourcing relationships failing on the provider side are a lack of flexibility, cultural misunderstandings (both business and regional), and not understanding the business. “There is an increasing emphasis on relationship. You don’t live and die by the contract. You have to be in it for the long haul. Think about the outcome you want to have; establish a joint vision and come up with measurable objectives. It’s about defining and documenting processes; strong sourcing governance, and cultural fit.”
“Go the extra mile if need be,” he advised providers. “You live and die by the way you work with the customer.”
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Conference report: Outsourcing: it’s a buyers’ market
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The economic downturn coupled with the “vast number of new providers” means that outsourcing is a buyers’ market, while the provider landscape is moving towards companies finding their niche.
Speaking at the FT Outsourcing Conference in London this week, Elizabeth Buckley, director of Arete Research said “The entire market is driven by the clients. In the last downturn we saw the number of outsourcers increase; we saw many players enter the market. [Now] if you go back to what clients want, these large, mega outsourcing relationships… we are seeing fewer and fewer of those. For example, EDS and GM was broken up; ABN Amro are also doing the same, bringing in lots of new providers. Whenever project work came up during the contract the actual provider would be chosen from [a number of] incumbents.”
“Lots of new, niche providers mean that the balance of power is very much in the client’s space. [Niche providers] need to differentiate themselves to win new business.”
Meanwhile, the large outsourcing providers are layering on new levels of business process outsourcing (BPO), she said, which she claimed remains an immature market outside of the CIO space.
“We’ve seen BPO become more mainstream and in horizontal areas such as HR,” she continued. “The big thrust now is very much toward vertical BPOs. If you look at horizontal BPOs, we’re seeing a lot of the remote, offshore providers moving into horizontal areas – for example, TCS moving into HR globally with an SAP platform.”
Niche players have an advantage in the uncertain economy, said Bruce Keith, director growth capital at 3i plc – a view not shared by some other speakers at the conference, who saw the momentum coming from the big, established players. “The FD has taken more control of what’s going on in businesses. I think [the economic downturn] will force FDs to consider whether captives should form part of the organisation. New people coming through will be the niche guys who will do something dfferent.”
This assumption of greater control by finance executives suggests that many clients are indeed are now feeling the economic pinch – for example, Vanco has recently lost its CEO to be temporarily replaced by the finance director (see News Analysis).
Keith said that in the current climate, fortune favours the brave – and the innovative mid-sized player: “A lot of the captives that have been built up in the past few years, have been because Bangalore is cheaper than Birmingham or Berlin. They have delivered on [service] being cheaper, but they haven’t delivered on the next stage [innovation]. I don’t think it will be the bigger players; it will be the medium players.”
Arete Research’s Buckley added: “You can imagine the problems of retaining quality staff when working with only one client; that will be one of the big challenges for Indian captives. Clients want to see their own dedicated teams; so the real challenge [for outsourcers] is being able to leverage a platform across other clients to get the kind of profitability you expect.”
Asked about the next hot outsourcing destination – that interminable watercooler topic for the industry – both speakers felt that “geography” (location – why do analysts insist on using the wrong word?) is irrelevant. “It’s about a global delivery mindset; you should be able to attract the best talent so that clients in New York, the Cayman Islands or London can have a 24/7 service,” said Keith, reeling off a choice selection of some of the wealthiest regions on earth as though low-cost destinations were, indeed, an irrelevance.
Arete’s Buckley was more on the money, topic-wise at least: “Regional players who lack differentiation are going to be in trouble. The challenge for Indian SIs, for example, will be having centres in Brazil or eastern Europe.”
Questioned about the consumer backlash against offshore call centres – as highlighted in sourcingfocus.com’s exclusive research last week – 3i’s Bruce had a solution for a US that believes it is haemorrhaging jobs overseas: “The Dollar is now so weak there is an opportunity for voice-based services [in the US].”
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Embattled Vanco loses CEO and seeks financial lifeline
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Virtual network operator Vanco is casting around for a financial lifeline after founder and CEO Allen Timpany jumped ship and it emerged that the company has spent much of a credit line it was thrown in January this year.
Barely two months ago, Vanco celebrated twenty years as a managed telecoms services provider at its AGM in Barcelona – a sparsely attended event in terms of customers presenting to the press, and one notable for customer complaints from the conference platform, as reported by sourcingfocus.com in March.
Vanco has built an apparently viable business on its knowledge of the global telecoms market and its infrastructure. That knowledge base – a virtual map of the global telecoms network – has plugged it into some 700 asset-based carriers (ABCs) and suppliers worldwide, from whose offerings the company chooses technologies and services for its customers.
So why is an asset-light, technology-neutral sourcer for telecoms and networking expertise in financial trouble?
At the AGM in Barcelona, this writer became concerned that Vanco’s real asset was that invaluable and sophisticated map and database of the world’s telecoms infrastructure, down to the granular level of a town or village’s network profile – an asset which might have persuaded Vanco towards opening a lucrative consultancy line. Indeed, one senior manager said the company had been both tempted by the idea – and approached by a consultancy suitor, but had (reluctantly, in that executive’s view, perhaps?) rejected the latter’s advances. It would make sense now for such a suitor to step forward again and grab what most of the company’s executives regard as its crown jewels.
However, at the AGM the CEO was emphatic. “We’ve had that discussion,” said Timpany to sourcingfocus.com, “but we don’t wish to monetise it [the database]. We would do a ‘white label’ service through the web portal [vanconetdirect.com], but minus the services and at a lower margin and a lower price.
“Our consulting team’s value is in landing a multimillion-dollar contract,” he continued, “not in offering a consultancy service at a few thousand dollars a day.”
Multimillion-dollar deals may have been the focus of Vanco’s business, and yet the company owns but a small percentage of the potential Fortune 1,000 contracts. Meanwhile, Ovum reports that BT and AT&T have both done $1 billion individual deals in the past year. Vanco only won its first $100 million-plus contract in early 2007, after many years in the vanguard of the VNO concept.
At the AGM event, Frost & Sullivan analyst Sharifah Amirah, head of research ICT EMEA for the analyst, identified the SME market as being the source of 80% of telecoms growth in Europe over the next few years – surely a sign of commoditisation of supply. CEO Timpany slammed the idea: “The SME market is a fools’ gold thing. The numbers look impressive if you listen to the analysts, but doing it effectively and making money is almost impossible, as they can get a better service from local suppliers.”
Indeed, it seems likely that this is what many large companies have done – telecoms, after all, is a market that is based on the known quantity and the familiar.
Also, with such a complex supplier network of 700+ companies spread across the globe, each carrier’s SLAs must have impacted on the quality of service that Vanco has been able to promise customers with its own SLAs.
However, that is not to say that the virtual network operator (VNO) model is dead. Perhaps it will find a more profitable home within the familiar portfolio of a Fortune 1000 name?
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HP buys EDS and creates a lumbering, old-fashioned behemoth
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They said the days of the outsourcing megadeal were dead, but news that services and hardware giant HP is acquiring EDS for $13.9 billion (£7.13 billion) suggests that a tier one deal on the provider side can still take place, even as IT stocks rally against a downward market.
EDS with its deeply embedded links with the public sector may have exceeded guidance in its latest results, but its accompanying earnings call suggested a need to hide a less than stellar underlying performance with wordplay and semantics.
EDS boasts depth of experience in huge, complex deals, while HP brings a range of service and software offerings for which that is an ideal shop window and sales floor.
However, while analysts such as IDC’s Douglas Hayward have been swift to roll out all the usual, predictable comments about the cultural and practical challenges facing them as they merge (surely that happens when any company buys or merges with another?), none of this provides much insight into the repercussions for the outsourcing industry.
It goes without saying that HP is embarking on the deal during a highly unusual US recession that sees both a lack of capital liquidity combined with sliding property prices, soaring commodity prices, inflationary pressures, and fears over job security.
The truth is that while the deal will doubtless shake up the market (in Ovum’s analysis) and hand HP a tranche of governmental deals, for example, there are risks lurking in the shadows.
First, big-ticket government deals have seen many a global name damaged locally by the very public backlash that follows whenever such deals overrun and/or overspend; that will play very badly with HP shareholders who treasure the company’s long-held reputation as a solid and reliable brand. No one was entirely convinced by the Fiorina-fronted vision of HP as the flexible, innovative service company rather than the offspring of two men in a shed.
The public sector is just that, and sector failures lodge in the public consciousness. EDS might not be a name on the lips of the average consumer, but HP certainly is.
Second, however, is the most important factor: the emerging topography and geography of outsourcing over the next five to ten years. That landscape that will lie in front of HP very swiftly after the months and years it will take to digest another mega-deal. By then, of course, a number of Indian service providers will have snapped up smaller, nimbler European services players and made themselves an attractive alternative to any giant that lumbers into view.
Knowledge process outsourcing (KPO), R&D outsourcing, and even legal process outsourcing (LPO) will soon become essential offerings for any global outsourced service provider – the latter on the back of deregulation in the legal services market and cost pressures within a highly litigious US. It seems unlikely that HP could even be in the frame to compete with the Accentures of the world in offering such a portfolio.
Mere marketplace muscle-flexing coupled with cost and labour arbitrage are gradually taking second place to skills, innovation and local knowledge, and you can’t just buy the market presence of, say, IBM off the shelf.
The emergence of software as a service (SaaS) offers both great opportunities in the mid market along with a shift in the role of the CIO towards innovation and away from mere systems management, so again the deal, while impressive, seems a little old-fashioned. The stockmarkets might – fleetingly – crack a Bolly or two, but it may be over the bows of the Titanic.
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Software and IT SMEs predict double-digit growth for 08, says report
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SMEs in the software and IT services sector are challenging gloomy economic projections, according to a survey from Intellect, the UK technology trade body. With 53% of respondents forecasting double-digit growth for 2008 compared to 49% that predicted double-digit growth last year, the mood among SMEs seems bullish, despite the global financial squeeze.
Outsourcing and offshoring are on the rise, says the report, but it appears that Asia is becoming less popular as a destination. The percentage of respondents outsourcing to Asia dropped to 44% from 55% in 2007. In contrast, both Western and Eastern Europe have seen an increase in R&D outsourcing.
Chris Barling, CEO of Actinic, a company profiled in the report said, “We are currently saving about 40% in costs by developing overseas, mostly in Eastern Europe. We decided on Hungary because of the cost and quality benefit.”
The survey, which contains case studies, as well as a variety of questions on performance, activity, pricing and development strategies, also shows that SMEs are embracing globalisation. In last year‘s survey, 59% of respondents identified globalisation as having a neutral or negative impact on their business. In 2007 respondents showed a marked turnaround in attitude, with 57% of respondents seeing globalisation as having a positive or very positive impact on their business. SMEs are today working on a global stage, identifying opportunities in the global market rather than focusing on home markets.
The Intellect survey, now in its second year asks software and IT services companies operating in the UK about their current and future performance. The SME software sector, in particular is an important contributor to the UK economy, and the survey aims to understand better the key challenges and opportunities of companies developing and selling software in the UK. The survey will be conducted annually to establish whether these findings are trends or blips, helping establish the most comprehensive overview of the SME software sector currently available.
Intellect is the UK trade association for the IT, telecoms and electronics industries. Its members account for over 80 percent of these markets and include blue-chip multinationals as well as early stage technology companies. These industries together generate around 10 percent of UK GDP and 15 percent of UK trade.
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Newsbite: UK colleges responding to overseas skills needs
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A new study published today shows that UK colleges are responding to the huge demand for education from China, India and other booming economies.
53,000 international students study at UK colleges - with Chinese and Indian students topping the league.
The Warwick University Study shows that the majority of students taught by UK colleges are from China (3,500) and India (3,300).
Julian Gravatt, director of Funding and Development for the Association of Colleges, which commissioned the report, said;
“The growth for the world’s fastest growing economies is outstripping their ability to teach their workforces. UK colleges are actively responding to this need. They’re forming new partnerships in the world’s most important markets, taking our own expertise in skills training to areas of the world where it is most needed.”
UK colleges around the globe:
* London Beijing Colleges partnership - London colleges providing skills training and curriculum development for the Beijing Olympics.
* Preston College providing knowledge exchange and staff training in Omsk, Russia
* Blackburn College developing expertise and skills training for the textile industry with South Delhi Polytechnic, India.
The report says:
• There is huge demand for education and training in India and China.
• China is seeking help internationally to expand and overhaul its further education system.
• Expenditure of GDP on education in India set to rise from three to six per cent.
• 50% of colleges see foreign expansion as a key future opportunity
• UK colleges’ key exports are English Language teaching, Business administration, Engineering and IT.
• UK education is most attractive for having a good international reputation, offering all teaching in English and being quality assured.
• UK Further Education’s strengths are its qualifications - that reflect industry’s needs, innovative curricula, a wide range of courses, flexible course delivery, a strong emphasis on independent learning and a good track record in international activities
Key recommendations:
* There needs to be better marketing and promotion of UK colleges, skills training and qualifications in foreign markets.
* There needs to be better joined-up working between government and UK colleges, to increase economies of scale and support expansion abroad.
* The recommendations of the Foster and Leitch reviews should be implemented to give UK colleges parity with their EU counterparts.
* UK qualifications need to be made more transferable and more widely accepted around the world.
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SaaS train has left the station so jump onboard, says Salesforce.com CEO
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The software as a service (SaaS) model of IT deployment – whereby business applications are housed in a remote, third-party datacentre and accessed via your web browser – is becoming the de facto way of doing business.
That was the claim of Marc Benioff, CEO of on-demand firm Salesforce.com, the poster child for the SaaS movement. “The biggest customer relationship management (CRM) transaction of 2007 was at Citibank and all the usual vendors were involved. We were chosen.,” he said. “We have been speaking to some of the largest and most interesting CIOs in the world. They are all going through their stack of applications and looking to move to SaaS. Believe me, that train has already left the station.
“The IT department is evolving When I started in the industry, the IS or the MIS department was all about executives who would go out and make technical decisions. They were interested in working on computer and writing their own software code. Then we had the chief information officer, but it was still about hooking up the wires and writing the custom software. Now we see the chief innovation officer. The next generation of CIOs will be more focused on innovation and not on infrastructure.
“We have all been told or hypnotised or brainwashed into thinking that we need a ton of servers and databases and that we need to integrated them all in a stack to make it work. It’s a lot of work and it’s a difficult path. The Cloud empowers every developer. Web 3.0 leverages the infrastructure of the internet to run your applications. Software is over. The whole concept of traditional packaged software built on a vertical stack is gone forever. We will come back in 2019 and we’ll talk about how far we’ve left those software-based platforms behind. Applications will be built on the Cloud. We are a driver of that change and an evangelist of that change.”
So despite the positive message, Benioff seems determined – like NetSuite’s Zach Nelson – to foist the term ‘cloud computing’ on a confused business community, as Chris Middleton in our Editor’s blog discussed the week before last, here.
Benioff was in London for the inaugural Dreamforce Europe, the company’s brand of user and developer conference that has previously only been staged in the firm’s home city of San Francisco. The move to launch a European version is indicative of the importance that Europe plays in the growth plans of firms such as Salesforce.com and as the next front in the war with the traditional software vendors, such as SAP and Microsoft. Some 2,200 people turned up on day one at the Barbican Centre in London, to hear keynote addresses – including from musician, technologist and human rights campaigner Peter Gabriel (see this week’s Editor’s blog) – and attend conference sessions from an agenda of 50-plus options.
It’s an important milestone in Salesforce.com’s evolution. Rival firms such as SAP have stalled with their own SaaS offerings, while Microsoft only makes their version available to customers with a US zip-code. Of the SaaS start-ups, RightNow has a much smaller scale user conference, but rival NetSuite still has no UK user conference (or a US one, come to that!). There is a good opportunity for Salesforce.com to establish the same thought-leadership and mindshare in Europe as it has in the US.
It is clearly a big business opportunity as SaaS implementations in Europe are set to boom. For example, overall growth of on-demand CRM applications is expected to grow by 41 percent over the next three years, with Europe and Asia leading the charge. According to a new report from Tier1 Research, the on-demand CRM market is expected to grow by a compound annual rate of 41 percent over the next three years, driven primarily by small and midsize businesses (SMBs).
Salesforce.com passed 7,000 customers and nearly 140,000 subscribers in EMEA in the first quarter of 2009 with new customers including the likes of The Christie Group, CODA, COLT Telecom Group, DSV, Rentokil Initial and Wartsila. Globally Salesforce.com has 41,000 customers, so EMEA is still a relatively small contributor in real terms, but the growth potential is enormous. “Salesforce.com EMEA out-paced industry growth rates with 69 percent year over year revenue growth and 70 percent Q4 08 revenue growth compared to the same quarter a year before,” said Lindsey Armstrong, co-president of Salesforce.com EMEA. “Business decision makers are realizing that this is the era of SaaS. It’s also the case that two of the biggest customers – Japan Post and Misys – are non-US customers.”
The firm has allied itself closely with Google in its growth, almost too closely at times perhaps as rumours that Google will buy Salesforce.com pop up with mononous regularity. But as Benioff quips: “The enemy of my enemy is my friend – and that makes Google my best friend.” The enemy in this case is Microsoft and its office productivity software such as Office, Excel and Outlook. Earlier this year Salesforce.com signed a deal with Google to resell GoogleApps, giving the free ‘Office-alternatives’ a channel into the corporate environment. “In two weeks, we have seen 2,000 Salesforce.com customers turn on the GoogleApps option,” said Benioff. “At Salesforce.com we have now decommissioned Office and Outlook and so on and are moving over to GoogleApps.”
For its part, Google clearly sees an alliance with Salesforce.com as being advantageous. “We are in the position of being a generation in the middle of a transformation,” said Nikesh Arora, European president of Google. “It’s sometimes difficult to see where you are when you are in the middle of an reinvention. I remember back in 1995 getting a broadband connection from AOL and the biggest innovation that we had in business was that I could now send email to someone outside the company. That was new. Now we couldn’t live without email.
“When Google started, there were 350 million people connected to the internet, with 30 million of them on broadband. Now we have 420 million connected to broadband. How many people could live for a week without broadband at home? When something goes from being nice to have to have to have, that’s when you understand that something has become ubiquitous. The trend of cloud computing is inevitable.”
Inevitable? Probably. From the point of view of 2,200 people this week, it’s certainly a compelling proposition. It’s also - theoretically - a relatively recession-proof technology option. Some of the main selling points for SaaS are ease of deployment, coupled with ease of use and reduced upfront cost as you pay as you go for your software usage. So not only do you not have to cough up a huge amount of money upfront for software that you might not end up using, but you can also switch it off and stop paying if you don’t need it any more. That kind of flexibility is very enticing in a time of tightening budgets and uncertain economic conditions. For the hard-pressed CFO at UK Plc, the idea of a flexible SaaS implementation as opposed to a high cost, rigid outsourcing deal must look very interesting.
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Nordic outsourcing opportunities significant, say EquaTerra
by editor
Major opportunities in the Nordic sourcing sector are there for the taking by any service provider willing and able to positively differentiate themselves from their competitors, according to the findings of EquaTerra’s Outsourcing Service Provider Study 2008 being launched today.
The study reveals that customers currently perceive very little difference between Nordic sourcing suppliers, and do not recognise any true leaders in sourcing service provision for the Nordic countries. “In general, customers in the Nordic region think outsourcing service providers are doing an OK job, but not a great one” explained Peter Skarendahl, director of EquaTerra Sweden. “This, combined with a relatively fragmented supplier market and a lack of distinction between local and global firms, strongly suggests that the time is ripe for proactive service providers to make a real impact in this region” he continued. The findings also very clearly indicate that the use of outsourcing by Nordic organisations is continuing to rise significantly with 82 percent of study participants intending to maintain their level of outsourcing, including 48 percent who are looking to increase it. In contrast, only 8 percent intend to outsource less. Global sourcing is also on the rise in the Nordic region, with the proportion of respondents using global sourcing increasing from 23 percent in 2007 up to 41 percent in 2008. A further 9 percent of study participants are considering using global sourcing in the future. This increase could be attributed to the threat of an IT skills crunch with over half of those organisations increasing their outsourcing activity doing so to get better access to skills. Of these skills, applications management is the area of most concern, with the average satisfaction level for this service slumping from 61 percent in 2007 to 55 per ent in 2008, well below the average satisfaction scores of 59 per cent for end user management and the 61 per cent for infrastructure management. Cost savings and quality improvements are also seen as important considerations, with quality of work emerging as a higher priority for companies based in the Nordic region, in comparison to elsewhere in Europe.
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