Industry news

It’s not often we hear about outsourcing supplier staff taking a stand against their client - but this week, that’s exactly what happened. It was announced on Wednesday that Siemens staff who provide the BBC’s technology, transmission and IT services are balloting for industrial action against the BBC over a pay freeze.

The freeze follows more than 70 redundancies among Siemens staff working on the BBC contract, according to broadcasting union Bectu, which had its claim for a £1,200 pay increase per Siemens employee rejected in October 2009.

Perhaps it’s about time outsourcing service providers start taking a stand when salaries or working conditions aren’t acceptable.

Elsewhere, outsourcing saw some serious progress in a relatively nascent sector – publishing. Major media organisation Reed Elsevier announced a 2009 increase in revenues and operating profit aided by cost savings from the outsourcing of IT development and back office activities.

Outsourcing its IT work helped hold down costs, as systems engineering and maintenance and software development engineering were all taken out of house, as well as some back office processes. This is a clear signal to other media and publishing companies that outsourcing reaps rewards and could see more follow suit.

Meanwhile, in the same week that the NOA held a Public Sector Steering Committee in a bid to further promote best practice in public sector outsourcing, it looks like more local authorities are jumping on the bandwagon.

Ipswich Borough Council announced plans this week to provide a customer contact centre in a bid to both improve services offered to residents, whilst making an estimated £1.5m saving over the next three years. The new centre will be a result of the council‘s recent merger with Northgate Public Services to both design and implement such a centre.

Overall, the sector glowed with health this week, as a plethora of fresh deals were announced – business was confirmed between Unisys and the Bank of Taiwan; HCL and Electrolux; and Logica and Morrison Utility Services.

And finally, it was revealed this week that fast food giant Burger King has launched a call centre in the UAE. The hub will be a centralised service point that allows customers in the UAE to dial one dedicated number and place orders at any Burger King restaurant anywhere in the country. The sweet smell of success is a flame-grill burger and a one-stop shop call centre, apparently.

As the green shoots of economic recovery begin to show, a number of reports are stating that outsourcing is ‘on the rise’ – declaring that businesses across a range of industries are now ready to look again at investing in offshore outsourcing. Businesses once more see outsourcing as a way of reducing costs, take advantage of the world’s most skilled workforces and generally improve their business processes.

Yet with this good news come equally striking warning signals. For many organisations, immediate cost savings remains the number one concern when looking to outsource. However, taking a cost-only approach is dangerous as businesses will often look to outsource to the regions with the lowest costs, ignoring things like quality and business innovation.

Although it’s easy to see why initial cost savings would be attractive, especially to companies struggling to survive day-to-day, such benefits aren’t necessarily enough to sustain long-term success. In order to be successful, businesses must change the way they work with outsourcers and change the focus of that relationship. In short, long-term benefits led by continued innovation – whether in technology or business processes - must now be the heartbeat of the industry.

Moving away from the familiar

Historically, businesses looking at offshore outsourcing have been attracted by initial cost savings such as lower staff overheads, lower land or rent charges and so on. However, focusing only on these areas means that organisations can be hit by hidden costs they weren’t anticipating.

Traditional offshore destinations, such as India, don’t always lend themselves to continual cost savings and efficiency. Firstly, these regions are far away from UK business hubs and therefore sites can be very difficult to manage effectively. Many businesses are now finding that offshoring to a different time zone can be disruptive. If mistakes are made it can take 24 hours to have them rectified rather than making a quick phone call. Face-to-face meetings can be even more problematical, as this will require days out of the office rather than just hours.

Outsourcing based on cheaper day-rates means companies are risking drops in quality and therefore does not support long-term success. Simply put, an organisation outsourcing its business functions is not guaranteed the highest quality of service if it has opted for cheap rates. The old rule ‘you get what you pay for’ may have been unpopular in the recession but it’s a fact. If businesses want to get the most out of outsourcing, investment with one eye on the future is needed. This may means higher initial costs but it will result in more substantial gains in the future.

With this in mind, it’s clear that the focus must shift from day-rates to sustainable savings that will ensure stability within the offshoring industry and within the businesses buying into it. In short, cost cutting should no longer be the outsourcing industry’s most effective selling point.

Innovation is the key

A key advantage of offshoring is you can work with regions leading the way in a particular industry. Companies benefit from the knowledge-base and put in place the kind of infrastructure and business process that’ll set them apart in the long-term. As always, the region a company chooses can dictate how substantial any savings will be. However, this shouldn’t be based purely on where the cheap labour lies.

Nearshoring to regions within the EU is one option for UK companies, potentially offering more long-term savings that will last years rather than months. There is a wealth of highly-skilled staff, who have extensive experience in complex projects, not to mention a close geographical and cultural affinity with the UK. For instance, regions such as Spain have proven track-records, developing efficient business processes for global brands such as Zara and Santander.

Look to the future

Although day-rates remain the priority for many companies looking at offshoring, it’s up to the outsourcers to show them that ‘quick win’ focus only gives brief respite. It does not lead to success in the long-term and offers little benefit to a global outsourcing market trying to prove its worth as budgets become available post-recession.

As businesses come out of the recession and look again at outsourcing, it is imperative to both the survival of those companies, and to the outsourcing industry as a whole, that innovation and value for money become the number one priorities.

In order to rise out of the economic gloom, companies must start to think strategically – the more advanced a company’s business methods, the more sustainable and substantial cost-savings will be.

If you've got a question about outsourcing contract law, Mike Henley at PA Consulting is a good person to ask. Before joining PA's sourcing practice seven months ago, he was a partner at commercial law firm Hammonds for over 20 years, most recently heading up its IT practice.

So when I got the chance to speak to Mike recently, I was interested to get his perspective on the recent BSkyB/EDS case, in which PA Consulting acted as an expert witness.

To quickly recap on this case, the court found that during the sales process, EDS "fraudulently misrepresented" the time it would take to design and build a customer relationship management (CRM) system for BSkyB. While EDS's new parent company Hewlett-Packard intends to appeal, it has been ordered to pay BSkyB £200 million in interim damages. In total, BSkyB is claiming £700 million in damages from EDS. The original contract value? Around £48 million.

So what does this case say about how the law treats breach-of-contract in IT cases? In Mike's opinion, the case creates nothing new in the way of legal precedent. While EDS built a clear liability cap of £30 million into the contract, this was deemed to be invalid, because EDS lied to get the contract.

Nor does he believe it will lead to more disgruntled customers of IT suppliers seeking legal redress, inspired by BSkyB's claim for a sum twenty times greater than the original contract value. "Litigation was the answer for BSkyB in this case, but it won't be the answer for many companies," he says.

For a start, cases like these are lengthy, expensive and time-consuming to pursue. EDS pitched to BSkyB back in 2000. The CRM project was scheduled to finish in 2002. BSkyB sued EDS in 2004 and finally completed the project in-house in 2006. The trial began in 2007 and it took the judge a further 18 months to reach his judgement.

So is there anything that IT suppliers and their clients can learn from the case? The old rule - caveat emptor, or 'let the buyer beware' - still applies, Mike says.

"What we're saying to our clients is that it's a false economy to embark on one of these projects just because they really want to get started, without being totally sure what they want and communicating that clearly to the supplier," he says. "If the specification isn't stable, then sure as night follows day, the supplier will respond to their requests by telling them it's not in the spec."

That said, the ruling could drive large suppliers working on large deals to scrutinise more closely the governance they have in place around the sales process. At the same time, customers should be committed to performing more "hard-headed due diligence" when considering the pitches of prospective suppliers.

But what about the complaints, frequently raised by large IT suppliers and outsourcing companies, about the huge costs they devote to pitching for deals, many of which they won't end up winning? Do these costs create an environment where there's a temptation to cut corners or make careless promises?

"You're right - it's a very common refrain. I have some sympathy for suppliers in that respect, because procurement processes can be lengthy, labyrinthine and absorb a lot of resources, so the cost of making a sale can be very high," he says. "But I don't think for a minute that means that many suppliers are cutting corners to the extent of fraud."

Shop Direct has delayed call centre closure plans after extending talks with Union of Shop, Distributive and Allied Workers (USDAW) local MP Lembit Opik, reports Call Centre Focus.

Littlewoods and Kays owner, Shop Direct announced earlier this year that the organisation intended to shut three of its call centres in Newtown, Sunderland and Burnley, with the loss of a total of 1,500 staff.

The Newtown site which was due to close in June has been postponed after the consultation talks. The closure dates for both Burnley and Sunderland centres however, are still being discussed.

‘Shop Direct Group can confirm that the proposed closure date for the Newtown contact centre has been extended to the end of December 2010 to allow time to investigate further options with third parties for avoiding redundancies at Newtown,’ Shop Direct said.

The Bank of Taiwan has signed two-year core banking contract with a Unisys’ Taiwanese subsidiary.

Under the contract, Unisys will extend the core banking system to support the bank’s seven overseas branches and manage the requirements of Taiwan’s Anti-Money Laundering (AML) legislation.

The new system will be expanded to include overseas branches, creating a single global system. The bank hopes this will help: ‘leverage the bank’s existing investments in staff, reporting and risk management procedures.’

“In today’s complex banking environment it is vital that financial institutions have the tools and audit trail to help detect and prevent money laundering activity. The new core banking solution that Unisys is managing for Bank of Taiwan is designed to not only help the bank meet its AML obligations, but also enhance the services the bank provides to the overseas branches and their customers,” said Scott Whyman, vice president, Unisys Asia.

Ipswich Borough Council has announced it plans to provide a customer contact centre in a bid to both improve services offered to residents whilst making an estimated £1.5m saving over the next three years.

The new centre will be a result of the council‘s recent merger with Northgate Public Services to both design and implement such a centre. Staffed by specialist customer service teams, the centre is hoped to offer the most effective services possible.

"For the first time, local people will be able to raise questions and resolve their concerns through a single point of contact with council staff. As a result, the customer contact centre is certain to have a positive impact on improving the quality of life among our communities," said Terry Hayward, head of community and customer services.

Technology employees working for the BBC’s supplier, Siemens, are currently balloting for strike action following the broadcaster’s decision to introduce a pay freeze, according to Computing.

In 2005, Siemens signed a ten-year contract with the public service broadcaster to deliver an enterprise integration architecture layer and other key technology services after the BBC closed its Technology division.

The decision comes at a time when relations between the contractor and its employees at the BBC are already “at an all time low” union official, Suresh Chaula, following the 70 recent redundancies within the Projects and Media Systems division.

There are also a further 50 jobs at risk in the Network and Server Operations division, which is set to be outsourced to Romania.

"As the BBC's technology partner, Siemens are responsible for keeping our services on-air and online. They have kept us informed as talks have progressed and assured us that, in the event of strike action, contingency plans are in place to ensure there will be no adverse effect on audiences," the BBC said in a statement.

Utility provider Morrison Utility Services, has extended its outsourced IT contract with Logica for another eight years in a contract worth £10.9m.

The deal will see Logica provide IT support and management for Morrison Utility Services’ 3,200-strong workforce with until 2014.

Alongside infrastructure management, Logica will also provide application and change management services.

Graeme Cross, head of IT at Morrison Utility Services, said: "As our business grows and adapts to changing market conditions, Logica continues to re-engineer its service.

“The contract that we have with Logica provides a flexible framework that meets the changing nature of our business and we look forward to working together.”

Software exporter, L&T Infotech has announced it plans to provide business process outsourcing, (BPO) in addition to its existing portfolio of services.

With the aim of providing customers with a full range of services, starting from application development to testing back-office processing, the move will help beat off the firm’s larger rivals already in the outsourcing market.

L&T Infotech has also has appointed one of the big four consulting firms to help advise on its BPO strategy, delivery locations whilst helping to decide whether acquisitions are an appropriate entry strategy for the firm into BPO services.

“We want to be able to offer to the full range of services. We already have infrastructure management, independent testing services and application development and maintenance,” said Sudip Banerjee, CEO of L&T Infotech.

Emerging markets private equity investor, Actis, has recently signed a $50 million investment deal with Integreon, a Mumbai-based outsourcing firm backed by Ayala Corporation of Philippines.

Integreon, a knowledge processing outsourcer provide document, legal, analytic, and business services across the globe. Currently with operations in London, Los Angeles, New York, Mumbai, and New Delhi, Integreon hope the investment will help further expand their operations. As a result of the investment, UK firm Actis will also receive two seats on the firm’s board.

Integreon, whose clients include Microsoft and other well known legal firms, plans to double its work force of 200 in the Philippines, to 2,000 around the world, suggesting the KPO market is still strongly emerging with good investment opportunities.

Fred I. Ayala, chief executive of Ayala’s business process outsourcing (BPO) investment arm said, “the company continues to regard the BPO sector as a good area for investment.”