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In the second of a three part series, Tim Palmer, the lead in HR Transformation at PA Consulting Group, begins to answer the two fundamental questions that must be satisfied before embarking on successful sourcing contracts.

Last week, we began to assess how sourcing contracts are best constructed in the current climate and identified two fundamental questions that determine how the contract is defined and how successful the relationship will be in the long term – what is the overriding intent for the sourcing project, and what compromises are steps too far?

Often, the answers to these questions do not become fully apparent until the closing stages of a shared service implementation or outsourcing negotiation, when the client realises there is no point pushing further as the service provider has no more to bring to the table.

There are therefore four steps that should be built into any sourcing approach to ensure that objectives are mutually agreed and achieved. The same need for balanced risk exists for both captive shared services and outsourced relationships. Similar steps can be used when planning shared service projects, helping to create a common purpose for the implementation and helping to agree an accounting approach for factoring in the risks involved.

Step 1 – Understand your intent

As you prepare for a sourcing evaluation, work out the most critical goals for your solution. Prioritise between ‘must’, ‘should’, ‘could’ and ‘will not’ have features. What are you prepared to give up to secure your ‘musts’? This is a particularly important conversation to have if flexibility and the ability to scale services up and down are key priorities. To arrive at your overall intent, you will need to consult with key decision makers and stakeholders throughout the organisation.

Step 2 – Put the intent at the centre of the sourcing process

As you move through your selection process, make your intention clear – be it with potential providers or your internal team. Embed the intent in all that you do; it should be the core part of any prequalification process. Do this by speaking to potential service providers and articulating clearly what you are looking for, asking for their help, insight and ideas. The best outcome is where any providers that cannot deliver exclude themselves from the process, and those that can, gear themselves up to meet your intent in the most appropriate way.

If flexibility is a key requirement for your organisation, use scenarios to illustrate how the service providers will behave when significant, unpredictable business changes occur. Assess their willingness to live with the intent that you have set out by performing sensitivity analyses on the pricing and business case. (Keep thorough notes on their responses, these may prove invaluable later.)

There are two further steps for ensuring that you start as you mean to go on when devising sourcing contracts – checking the approach and the contract align with your intent, and then implementing the business change, also in line with intent. We will tackle these in more detail next week.

This blog is an extract from PA Consulting Group’s book, ‘Surviving and thriving in the economic crisis: The sourcing opportunity’, and is available free of charge. To request a copy of the book, please visit http://www.paconsulting.com/sourcingopportunity

The summer of 2010 is almost behind us and with it the third anniversary of the global financial meltdown that began with the US sub-prime crisis in August 2007, followed by the collapse of Lehman 12 months later.

Where some were initially optimistic about the duration of the downturn, others were able to discern the start of what would be a protracted recovery; 2009 was a particularly tough year and for many an annus horribilis. By Francinia Protti-Alvarez

In outsourcing, financial services is, perhaps understandably, where the impact has been felt the most. Certainly, outsourcing may not have witnessed such a drastic halt such as the one witnessed in the public listings and other financial sectors, but a slowdown was most definitely felt by most industry players as the effects trickled down.

“The financial services sector, seen by many as the most traditional user of outsourcing services was very quiet last year. It had little money to invest in new ITO projects and spent most of its time renegotiating contracts. Meanwhile, BPO was almost dead – no one really had the capital for the investment required,” said Alistair Maughan partner at international law firm Morrison Foerster.

However there are clear indications that this trend may be slowly reversing. Indeed, figures released in the latest Market Vista report, indicated that the banking, financial services and insurance (BFSI) sectors in particular have seen a 41% increase in transactions, with most contracts signed in the banking sub-sector; volume recorded was double over the Q1 this year.

The increase in transactions in the BSFI sector is indicative of a larger trend, which we are likely to see evolving: the increased attention to Cloud computing and XasS (anything as a service).

As the private and public sectors move to increase efficiencies and cut spending, Cloud computing presents a way to increase capacity or add capabilities on the fly without investing in new infrastructure, training new personnel, or licensing new software. It encompasses any subscription-based or pay-per-use service that, in real time over the Internet, extends IT's existing capabilities.

ITO suppliers are constrained to respond to client’s business demands through building capabilities to solve technical problems, expand services, and build consultative front ends and customised solutions for client’s differentiation.

Market experts suggest that this could see ITO suppliers in Central and Eastern Europe step up to respond to transformations caused by SaaS and Cloud Computing, adjust costs, upgrade delivery models among others issues.

In the UK there has been much talk about the G-Cloud. A strategy that would support everything from pooled government data centres to a communal email solution, collaboration tools and staff-editable wikis. It could allegedly save government £3.2bn of its annual £16bn IT budget – perfectly meeting the chancellor's 20% savings target. [The current ad hoc network of department- hosted systems is composed of a dozen dedicated government secure data centres, costing close to £250m each.]

“We don’t see an increase in Government IT happening over the next 12 months based on current deal flow as well as on the procurement cycle – it takes a good 12 months to get through a procurement process. This means such projects would not be implemented before autumn 2011,”commented Maughan.

Another trend that has been slowly building up is a move away from megadeals and into multi-sourcing type deals.

Indeed, for some in the outsourcing industry, these mega deals have become a thing of the past. The breaking down of larger contracts into smaller deals could open up the possibility of using smaller suppliers and manageable projects with appropriate governance and flexibility as required by volatile business environments, and altering systems when business change demands it.

“Under present circumstances, the projects will be axed (e.g Building Schools for the Future) or re-shaped. Reducing down the size of projects and capping them at £100m is also likely to be part of the landscape of the coming months,” notes Maughan.

“Anything above a £1m will have to go to ministers with projects over £100m going all the way to the top for authorisation,” continues Maughan “Reducing down the scope of projects is also likely to make them more manageable.”

The blending of the services provisions market is also a trend that has been evolving in the last three years. The distinction between Tier-1 providers (Accenture, IBM, EDS, CSC); mid tier/niche (Capita, Capgemini, Unysis), and the traditional (offshore) vendors (TCS, Wipro, WNS) was more of less clear.

However, things may not be as clearly delineated anymore. Tier-1 players are trying to develop their offshore capabilities while traditional providers are establishing onshore presence; mid Tier vendors are perhaps feeling a squeeze as they find it more difficult to compete with the larger players.

This market consolidation is also illustrated by acquisitions like that of EDS by Hewlett Packard, Perot Systems by Dell, ACS by Xerox or TCS’ purchase of UK-based Diligenta.

Whether reactionary, proactive or a bit of both; the trends evolving in the outsourcing market have been a few years in the making. Nevertheless, it would be unwise to bet on these trends evolving in a particular direction.

And while recent Gartner reports suggest the UK’s Government IT spending will be higher than financial and manufacturing sector. It also assumes that Chancellor George Osborne, in his aim to bring public sector to 1997 levels, will be successful in transforming people-driven processes into IT-driven processes – according to industry experts, that’s 450,000 jobs we are talking about cutting.

It would seem that before anything can happen the government is going to have to bite the bullet and make up its mind: efficiencies and virtualisation vs. unemployment. It’s going to be a tough one.

Earlier this week Dell trumped Hewlett-Packard’s (HP) $24 a share offer, but that was yesterday’s news. The bidding war between HP and Dell is getting more interesting as HP raised its offer from $27 a share (announced mid-week) to $30 a share.

Dell’s offer of $ 24.30 per share was made on 23 August and would see it pay $1.6bn (over £1bn) for all common 3Par stock.

But if Dell thought this would be enough to dissuade HP from the game, they were wrong.

On 26 August HP made its offer which was $3 higher than its original offer; 11% premium over Dell’s latest bid, which values the company at $2bn.

Since Dell made its original bid at $18 per share on 16 August the price offer per share has increased dramatically.

The stakes are rising quite quickly and it will be interesting to see who ends up making the acquisition.

While Dell may have made the first move, at $53bn its annual revenues are half of those of HP ($115bn). For Dell it maybe one of those games from which it is safer to walk away.

Sunoco has awarded IBM a deal that will see the manufacturer and marketer of petroleum and petrochemical products outsource its managed business process services and application support services.

Under the agreement IBM will help Sunoco drive improvements to a number of its back office processes by leveraging IBM's experience in the oil and gas industry, and deep business and applications process expertise, existing tools, and operational knowledge, thus enabling Sunoco to focus more of its resources on critical growth initiatives.

Similarly, as part of the agreement, IBM will provide services to Sunoco from its global operations centers, enabling Sunoco to better manage its Application Enhancement, Application Maintenance, Finance and Accounting, and Indirect Procurement processes.

It is not clear how large the contract is but last year Sunoco spent close to $90m, signing a $34m contract extension with India-based Wipro’s Infocrossing unit.

Sunoco also has contracts with AT&T Services and CompuCom. The company hired consulting firm EquaTerra earlier this year to identify other areas that might be ripe for outsourcing.

The Royal College of Nursing (RCN) has implemented NewVoiceMedia’s cloud-based telephony solution ContactWorld, to ensure that its members can always speak with an expert consultant regardless of any problems that the call centre encounters.

The RCN contact centre in Cardiff is a vital resource to nurses, providing advice and support on issues such as pay, working conditions, law, employment and retirement concerns, as well as specialist counselling services.

In addition to the disaster recovery function, RCN will use ContactWorld to manage incoming calls from nurses, students and healthcare professionals to its library service. All RCN members have access to the organisation’s library, currently one of the biggest specialist nursing resources in the world.

The NewVoiceMedia solution is entirely cloud-based, and can work with any phone - PBX extensions, home landlines and mobile phones - and does not require expensive hardware to operate.

Similarly, integration with other existing telephony systems is easy, allowing RCN to simply switch between its standard solution and ContactWorld within minutes via the web should an incident arise.

UK support services and construction service provider Carillion has recorded a healthy set of interim results, with profit before tax up 17% at £58.8m for the six months ending 30 June 2010; close to £9m higher that during the same period last year.

However, revenue shrank 11% to £2.51bn (H1 2009: £2.83bn), owed to the disposal of non-core businesses, the sale of equity investments in public-private partnership (PPP) projects, among other things.

Earlier in August, the firm was awarded a five-year extension to its existing infrastructure contracts with EDF Energy Networks, worth £40m a year.

Under the extension, which is set to kick in January 2011, Carillion will deliver infrastructure services for sub-stations and cabling to support the electricity network in the East of England.

The coalition government’s spending review, due in October. With projects such as the Building Schools for the Future (BSF) being axed, many in the construction and outsourcing community are waiting to get a better grasp of the extent to which cuts to public spending will affect them.

Public Sector Bank UCO Bank has awarded IT and business transformation service provider Wipro Infotech signed a 7 year total outsourcing contract with five Regional Rural Banks (RRBs).

The contract is for implementing a Core Banking Solution (CBS) across 803 branches of RRBs under UCO Bank’s sponsorship.

With this initiative, all five RRBs would come under the ambit of core banking, thereby ensuring uniformity in technology platform and related business processes for improved business efficiency and customer care.

The scope of services includes building, hosting and managing the underlying infrastructure at the Data Centers, in addition to implementing the Finacle CBS across the five RRBs in question.

Wipro would also provide network management and user training across all 803 branch locations as a part of the Total Outsourcing relationship.

The CBS would be executed on an Application Service Provider (ASP) model where Wipro would get paid on a monthly pay-per-use basis. Roll out of all branches is expected to be completed by September 2011.

Global IT and BPO services provider has been awarded a seven-year contract with Serco Learning for the development and delivery of ‘Progresso’; Serco’s new information management platform for schools.

The Progresso platform is being designed by Serco and developed by Patni and will be available at the end of 2011.

The platform is a centrally hosted management information platform that provides relevant data, tools and services directly to schools, parents and local authorities.

It will reinforce the Serco Learning position as a provider of high quality and innovative solutions in education and over time will replace ‘Facility’, the existing platform

Serco will continue to provide direct user support and market direction for both, Facility and Progresso. Patni and Serco will deliver the new Progresso platform and then optionally host it as a managed service to schools, academies and local authorities.

Patni has also won a three-year contract from Codan Group part of the insurance giant RSA Group.

The seven-figure agreement will see Patni provide managed services around some of Scandinavia’s core insurance platforms.

The Codan Group, which operates in Denmark, Sweden, and Norway, invited five leading outsourcing companies including Patni to bid for the application management contract in September 2009.

It short-listed three vendors in March 2010 and made its final decision to appoint Patni in June.

Gordon Easden, financial services practice leader at FusionExperience, explores some of the concerns in the minds of fund managers when it comes to outsourcing.

Traditionally there has been reluctance within the fund management industry to widen the scope of the business processes fund managers outsource. Although many are happy to outsource back office functions such as fund accounting many are still slow to recognise the value of broadening the scope of operations they are willing to entrust to a third party. However, the outsourcing landscape has changed, creating the opportunity for fund managers to transform service quality and cost by outsourcing much more and much more cost effectively.

The present day outsourcing by fund managers is part of a continuum that started 15 years ago. At its inception, fund managers were happy to outsource basic back office functions but would not have been comfortable allowing access to more complicated or ‘core processes’ such as customer service for example. The evolution in those 15 years is illustrated in the development of outsourced customer service solutions. This has almost become a matter of course for fund managers. Many are also considering outsourcing to a centre of excellence that provides a more holistic service as it would be supported by much wider range of technologies at a cheaper price.

This evolution has presented the fund manager with a wide array of options when deciding what to outsource, a question that can sometimes feel a little daunting. It is important for a fund manager to consider its options holistically and develop an in-depth understanding of what its operations are there to do. Fund managers must have a handle on core structure and costs and an understanding of what is going wrong. This will help isolate what functions are advisable to outsource and which may not be necessary.

A concern for many in the industry when looking to outsource are the perceived risks involved. It is fair to say that in some cases, when not managed adequately, outsourcing can create risk. Fund managers run the risk of losing the capability and knowledge to run processes and also the possibility that too many processes are embedded with the provider. This can make it difficult for fund managers to migrate away or renegotiate contracts favourably. There is also the risk of choosing a provider that is not a specialist in the areas that they have been earmarked to outsource.

The industry undeniably has specificities that present challenges in outsourcing, but also illustrate the importance of it. Fund managers’ operations are rapidly evolving, particularly in the technology and regulatory landscape, from customer care to the evolution of the STP market place with regards to targeting and positioning. This necessitates a high level of reporting and presentation technology to cater for regulations that are in constant evolution. The average size of a fund management firm remains small so there is a demand for centralised and cheaper service.

Finally, as the UK emerges from the recession, the specifics of the fund management industry and the evolution in regulation have led to a much greater emphasis on transparency of reporting and compliance. Outsourcing providers with evolving platforms and new technologies can help fund managers move from more traditional monthly reporting to a daily reporting cycle that many clients have come to expect.

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…