Industry news

With that pesky Icelandic volcano once again dishing out clouds of ash and intermittent misery to travellers across Europe this past weekend, aviation regulators have warned of a "summer of disruption" for airline passengers.

From an outsourcing perspective, I wonder if this could be very good news for providers of managed video conferencing services?

Already, the video conferencing industry has been quick to jump on the marketing opportunity offered by 'Volcano Chaos', with leading providers quick to report a significant uptick in business during the initial April disruptions.

Some commentators have said that their eagerness to exploit the marketing opportunity of a natural disaster smacks of desperation. "To me, it suggests that most organisations are still not sold on the whole concept," said one.

I'd be inclined to agree, if it weren't for the fact that market analyst company IDC recently reported that, well before Eyjafjallajokull kicked off, sales of video conferencing equipment managed to achieve 16.7 percent growth over 2008 figures, in an otherwise sluggish year for the IT industry.

Where I DO agree is that video conferencing is still viewed as a prohibitively expensive technology by many business leaders. But if it's true that businesses face months of disruption thanks to volcanic ash from Iceland, then it seems likely that some - especially those with significant overseas interests - may be looking for a managed services approach to video conferencing, where they simply hire the equipment and it's managed for them by a third-party specialist.

It's the old capex versus opex debate that so frequently arises in discussions of outsourcing today. Companies such as mvision, for example, are building healthy businesses around bringing visual collaboration for a fixed monthly cost to organisations that are unable or unwilling to make the substantial upfront investments required to buy, install and manage their own video conferencing systems.

Perhaps the threat of ongoing Volcano Chaos in Summer 2010 will be enough to convince others to take the same tech-savvy, cost-conscious approach to tackling business travel disruption?

Two Japanese IT services providers, Fujitsu and NTT Data, are said to be in talks to acquire a majority stake in Patni Computer Systems, according to reports in India's Economic Times.

Also alleged to be in the running is Indian engineering company, Larsen & Toubro, which already operates its own IT services division.

The newspaper cites unnamed sources who claim that the company’s three founders, brothers Narendra, Gajendra and Ashok Patni, are looking to offload part of their combined 46.5 percent holding in the company, along with private equity firm General Atlantic, which holds a 17.7 percent stake.

"The talks are on. But there are no exclusive talks to any of them at this point in time," said one source. "Patni is still talking to various suitors and a deal is still sometime away," he said.

It is likely that both Japanese companies would use Patni’s resources to boost their European businesses were the bids successful, as Japanese demand for offshore services is typically served from China.

Computer hardware, software and services giant IBM this week announced it has acquired Cast Iron Systems. The move is expected to give the company the technology and experience it requires to connect customers' cloud-based and in-house applications.

IBM expects the global cloud computing market to grow at a compounded annual rate of 28 percent from $47 billion in 2008 to $126 billion by 2012. 

But a key challenge that businesses face in successfully adopting cloud delivery models is integrating the disparate systems already running in their data centers with new, cloud-based applications. 

In the past, this involved time-consuming and resource-draining coding work. By contrast, Cast Iron Systems will offer IBM customers a platform to integrate cloud applications using a physical appliance, a virtual appliance or a cloud service, and from providers including Salesforce.com, Amazon, NetSuite, ADP, SAP and JD Edwards, according to the company release.

“The integration challenges Cast Iron Systems is tackling are crucial to clients who are looking to adopt alternative delivery models to manage their businesses,” said Craig Hayman, general manager, IBM WebSphere.  “The combination of IBM and Cast Iron Systems will make it easy for clients to integrate business applications, no matter where those applications reside.  This will give clients greater agility and as a result, better business outcomes,” he said.  

Enterprise applications represent some 40 percent to 60 percent of corporate IT budgets, but have yet to be significantly outsourced, according to a London Business School report released yesterday and commissioned by Fujitsu.

In part, say the report's authors, that's because many companies still have to get to grips with 'best practice' when it comes to handing enterprise applications over to third-party providers, which differs subtly but fundamentally from approaches commonly used in other areas of outsourcing: "The results of our survey show that while most of the lessons from other forms of IT outsourcing apply, applications outsourcing must be treated with extra are. Unlike infrastructure - a data center, for example - business applications are inextricably tied to the way a business functions."

As a result, while there are significant cost savings to be achieved, the costs of getting application outsourcing wrong can be very high, too - and potentially damaging to an organisation's ability to do business, according to John Hanley, managing director of the applications division at Fujitsu UK and Ireland

Chief among the study’s findings and recommendations are the following points:

• Competitive advantage drives outsourcing direction and decision-making – decision-makers must have a clear understanding about what constitutes ‘competitive advantage’ for their business and be able to segment their applications portfolio accordingly.

• CIOs who are successful at application outsourcing have a deep business knowledge about their organisations, good board relationships and develop business performance (not just IT- or finance-based) measures for assessing outcomes.

• The ability to manage internal stakeholders effectively is essential – in particular, collaboration between heads of IT and heads of finance is vital. The finance department needs to be involved as early as possible in the outsourcing discussion.

• Strike a balance in the type of applications outsourced – failure to do so will affect flexibility and agility.

• Enable continuous management – the way application outsourcing is implemented and managed must be continuously reviewed, and should be adapted as the business landscape changes.

“Whilst these findings are by no means an exhaustive list, the recommendations – and the corresponding report – should provide guidance and insight to CIOs planning to review their approach to application outsourcing," said Hanley. A full copy can be download here.

In April, Fujitsu UK & Ireland appointed Hanley head of its applications division and announced an ambitious three-year plan to double revenues from this part of its business by 2013.

HCL Technologies has announced that it has signed a five-year $500 million deal with pharmaceutical giant MSD (also known as Merck & Co).

HCL will build on its existing relationship with MSD, dating back to 2004, to offer the company software-led information technology solutions, remote infrastructure management, engineering and business and knowledge process services.

Under the terms of the deal, Merck will leverage HCL's near-shore delivery network in the US, comprising an operations centre in Raleigh, North Carolina and its global data centre delivery ecosystem, supported by global partner footprints. In all, HCL will deliver services to MSD out of 20 worldwide locations, including in the US, Poland, China and Brazil. The company plans to expand its team in North Carolina, relying on local hires to staff projects.

“For five years, MSD has leveraged HCL’s extensive expertise in life sciences and healthcare to streamline operational efficiencies and consolidate its IT portfolio,” said Richard Branton, vice president of application services for MSD. "As we continue to leverage global delivery services to meet our business imperatives, we have chosen HCL as our strategic partner for its depth of technology and pharmaceutical domain experience, coupled with its flexibility to engage and a commitment to deliver.”

"This is a landmark win for HCL, and we are proud that our growing leadership in pharmaceutical and healthcare, coupled with our previous delivery for MSD, has positioned HCL as a strategic partner for MSD,” said Shami Khorana, president of HCL Americas.  “We are committed to creating transformational value for MSD in this engagement and we look forward to playing a key role in the organization’s growth across global markets."

The life sciences division contributed 7.5 per cent to HCL’s revenue in the third quarter ended March 31.

Business outcomes are increasingly being written into outsourcing agreements as companies respond to the recession, according to analysts at IT market research company Gartner.

The IT services market declined last year as a result of businesses changing strategies amid recession, says the company. Worldwide spending on IT services declined 5.3 percent to $763 billion in 2009, compared with $805 billion in 2008.

In the wake of economic turmoil, suppliers and end-customers are increasingly drafting outsourcing agreements with a defined business outcome. According to the Gartner research, suppliers that focused on the business outcome did better than average last year.

"The economic uncertainties and the crisis in industry have had negative implications on the worldwide consulting market in 2009, and many providers' revenue growth rates were negatively impacted. However, business outcome-focused providers of consulting services with established business relationships were often successful in growing their market share better than the market average," says Gartner.

Up to $37.5 billion worth of long-running IT contracts are set to expire in the next six months, creating a significant opportunity for IT providers that are quick to spot customer opportunities and understand their needs and motivations.

Ovum’s research examined over 20 business sectors and identified over 500 IT contracts due to expire before September 2010.

The biggest opportunities, according to Ovum research director Ian Charlesworth, will be in the financial services, energy and communications industries. These are followed by government and not-for-profit organisations, and the aerospace and defence sector.

Charlesworth advised IT providers to focus on contracts coming up for renewal, take the time to understand specific sector needs, and carefully target their approach.

"With hundreds of contracts ranging in value from $1m to $1bn potentially coming onto the market in the next few months, business development teams can quickly gain competitive advantage in a difficult market by knowing who is going to be spending and why," he said.

3663 First for Foodservice, the UK's leading distributor to the foodservice sector, has signed a five-year IT managed service contract with Fujitsu.

Part of the Bidvest Group, 3663 handles some 23,000 orders a day, offering next-day delivery to restaurants, cafes, canteens and other food outlets, via its fleet of over 1,000 temperature-controlled lorries.

“3663 operates under extremely tight deadlines and having reliable IT systems with high availability rates is critical to successfully processing and fulfilling orders, as well as managing the supply chain," said Anne Stokes, business unit director for retail, transportation, manufacturing and services at Fujitsu UK & Ireland. "In this economic climate, they also require flexibility in their IT systems, with continued service improvement and support, which will enable them to implement change in a cost-effective way.”

Under the terms of the agreement, Fujitsu will provide 3663 First for Foodservice a full IT managed service including hosting all systems, managing servers and desktops and providing helpdesk and process support.

Sweden, France and Germany were the strongest outsourcing markets outside of the US during the first quarter of 2010, surpassing the UK for the first time, according to outsourcing advisory firm TPI.

The TPI Index, which measures commercial outsourcing contracts valued at €20 million or more, recorded just of €7 billion in total contract value (TCV) during the first three months of 2010, up 7 percent over the corresponding 2009 period.

Sweden more than doubled its full-year 209 TCV with one single mega-deal, which accounted for more than 14 percent of the global market's TCV for the quarter.

France, meanwhile saw almost €2 billion in TCV awarded, making it the world's third largest marketing in the first quarter of 2010, again due largely to a mega-deal, in this case awarded by French railways company SNCF.

But while Germany exceeded €1 billion in TCV during 1Q2010, the country also experienced a drop in global market share. And the UK, historically Europe's strongest and most mature outsourcing market, saw a decline of almost 50 percent year-over-year, to less than €800 million.

“Even though this is only one quarter’s results, it does appear that the key countries contributing to Europe’s outsourcing performance are shifting to the less mature Continental markets,” said Duncan Aitchison, Partner and President of TPI for EMEA.

By industry sector, the Travel, Transportation and Hospitality vertical accounted for one of only two increases in the quarter. With a TCV of €2.7 billion, it nearly quadrupled year-over-year due to the mega-deal awarded by SNCF in France, making it the number one industry vertical in the quarter. The Financial Services sector came in second with a TCV of €2.4 billion, a decline of 23 percent. The Business Services sector increased its TCV by 400 percent to €500 million, also due to a mega-deal, tying it for fourth place with the Telecom and Media sector. Manufacturing TCV fell 29 percent year-on-year.

“Looking forward, the number of contracts coming up for renewal has increased year-over-year and we believe these will continue to flow into the industry pipeline throughout the coming months,” Aitchison said. “In later quarters, we expect to see the market continue to recover at a slow and uneven pace, with a steady flow of new opportunities and an increase in new scope activity in the industry pipeline.”

IBM has signed a $130 million, five-year agreement with the Greater Toronto Airports Authority (GTAA), which runs the city's Toronto Pearson International Airport.

Under the terms of the deal, IBM will assume responsibility for ticket kiosks, passenger and baggage check-in and aircraft gates at Canada's busiest airport, which handles over 30.4 million passengers per year.

Toronto Pearson is one of the world's largest airports to run on a "common use equipment" model, whereby airport resources - such as check-in counters and boarding gates - can be accessed and utilised by any of the 60 airlines that the airport serves.

In future, IBM's technology will enable these airlines will be billed directly by IBM for access to these resources on a per usage basis, replacing the traditional bundle of landing fees and terminal charges currently calculated and billed by GTAA.

"Moving technology support and billing to IBM allows the GTAA to focus on what they do best - running Canada's largest airport and ensuring safe travel for passengers, while maximizing savings for the airlines and the GTAA," said Saad Toma, general manager, Global Technology Services, IBM Canada.