Industry news

The ‘Risk to Reward Factor’ for outsourcing providers

Naturally, perhaps, customers have been previously more inclined to focus on the risk element - in terms of shifting risk on to their outsoucer; whilst service providers have been more interested in the reward and less interested in accepting risks over and above their standard model.This can lead to an ineffective standoff that is portrayed as a risk and reward arrangement but does little to drive the right behaviours by both sides. It is therefore imperative that the service provider changes this process and adopts a more co-operative stance to share risk with their customers in order to build confidence for a long term relationship. As organizations become more mature in managing their outsourcing partners they can start to move to Outcome Based Agreements (OBA), where suppliers are contracted to directly achieve business outcomes for and with the customer.

Many organisations often talk about building in risk and reward into their IT services or outsourcing relationships, but what does “risk and reward” really mean in practice and is there really such a thing as a genuine, balanced “risk and reward” offering?

Risk to Reward’ – What’s it all about?

Risk and reward can mean different things to many providers and their customers. At the simplest level, it can mean introducing a system of service performance. So, for example, an outsourcing provider may receive a bonus payment if they consistently exceed service performance over a defined period of time. Therefore the reward for an outsourcer could include a financial bonus for over performing.

Furthermore, the reward for over-performance could, alternatively, be the ability to off-set or earn-back previously incurred service credits. At a more collaborative level, the incentive could include a share of the improvement achieved or a percentage of the revenue achieved by the business. The risks, however, could include a penalty payment for underperforming such as not completing a project at a set deadline.

A successful Risk to Reward System

A successful risk-reward system is often based on projected revenue generation or cost savings and predefined Service Level Agreements (SLA’s).

The most obvious way of measuring performance for the purposes of service reward is against defined SLA agreements. Incentive mechanisms could also be linked to overall industry performance. Therefore the service provider could, for example, be rewarded with extra incentives if its performance in certain key measures over a defined period of time puts it in the top quartile of industry performance in that particular set of metrics. Alternatively, a customer may prefer to tie risk and reward to their monthly SLA measurements, key business events or overall customer satisfaction measures.

It's important to realise, however, that a critical success factor in a risk and reward system should be aligned with the business needs of the customer. The outsourcer, regardless of economic conditions, should be focussed on what gives true value or benefit to the customer. There is little point in penalising a service provider for failing to meet a response time service level in a non-critical area of the business or, conversely, rewarding a service provider for meeting a specific availability target if the target, whatever this may prove to be, has no material impact on the end-user's ability to function effectively.

In one very successful example of risk and reward the service provider offered to pay the customer the projected cost saving up front in cash and then got on with reaping the rewards by exceeding the original cost savings estimate. Nothing like ‘putting your money where your mouth is!’.

As an industry, IT Services is still fairly immature in its approach to Risk and reward. At a recent Customer Forum one of our banking customers was asking why Service Providers did not take a broader view of risk (as the banking industry does) and price their services by individual transaction rather than by Project e.g. a standard price for all SAP upgrades delivered in a factory mode rather than a different price for each individual customer. Certainly it is an interesting argument and one that service providers may migrate to if they had the same transaction volumes as banks.

It’s been long enough since sourcingfocus.com last looked at the topic of innovation to warrant a return to the subject. Our last feature on this area looked into the reason for innovation and some of the precursors that should be in place to foster its development. To ensure we didn’t cover too much of the same ground, we asked key industry commentators and players what innovation meant to them. The results were as follows:

Dan Lieghio, managing partner at 4C Associates, explained that though some outsourcing can cost a little more, those costs can be offset in related costs. Procurement is a prime example where outsourced providers can develop economies of scale, streamlined processes and extra clout allowing them to drive down the costs of what is being procured, though their service may cost more.

“Interestingly, one of the fastest-growing areas of back-office outsourcing is the strategic procurement function, in which ‘innovation’ often means developing new ways of reducing costs.

“The service typically costs more than was previously spent running the in-house procurement function, with the trade-off that quality/results are substantially better – i.e. the firm ultimately spends a lot less on the goods & services it procures. Clients recognize that an outsourced service provider brings substantial structural advantages, e.g. scale of spend, breadth of expertise, in-depth market knowledge, detailed benchmarks, best-in-class reporting and supplier management tools, and a firm incentive to deliver results. On top of this, service providers who are able to demonstrate innovation reinforce clients’ confidence in making the investment in the outsourced service.

“The provider’s remuneration is often linked partially to performance, and ‘innovation’ is often one measure. Thus the provider is always on the lookout for innovation opportunities, and decisions are made jointly – based on a clear business case – when an innovative approach would require additional investment.”

Manoj Tandon, a director from CSC India, reiterated the importance of a close end-user supplier relationship in fostering innovation. He explained it is also up to the vendor to go above and beyond, to fully understand and regularly present new ideas to clients. However, the business case for any new innovation must be made very clear.

“A vendor should not restrict itself to what is written in the contract, as the world of IT moves so fast and vendors are often in a better position than the customer to know what is required. For example, cloud computing, virtual desktop, data virtualisation are just a few advances. All of the advances in the internet arena can be of immense help to businesses looking to increase collaboration and transparency throughout their organisation, as well as helping to integrate customers and vendors more fully within the company. However, just suggesting these to the customer is not the way forward. The vendor has to create a scenario of how this will benefit the business, make it clear how the business case stacks up, so that the customer can really see the benefits that can be gained.”

Douglas Scott, VP EMEA Services for Diebold, listed as one of the ‘worlds top outsourcing companies’, commented that in the financial sector, clients are looking to get more for less. They want added-value while reducing costs at the same time. Such demands put pressure on end users to both innovate for clients and internally to ensure such hybrid-product offerings can be achieved.

“During a difficult economic climate, long-term initiatives like redesigning branch networks look likely to continue but in the short term banks are looking for new systems and services to add value whilst reducing costs. The future of outsourcing is allowing banks to respond quickly, strategically and accurately to as yet undiscovered trends.”

Douglas layed out some of the items on the financial sector’s innovation wishlist, which included:

• A more consistent experience across all banking channels

• The ability to link all types of accounts for various transactions

• Increased security through biometric identification and other ATM security measures

• The ability to set language preference on ATMs

• Quicker, faster, more automated deposit automation

• Check imaging and detailed receipts for cash deposits

• The ability to print statements, order checks, pay utilities and make address changes

Guy Kirkwood, a multisourcing transaction broker at Unisys, expounded the wonders of multisourcing for creating new innovative outsourcing relationships and results.

“Multi-sourcing arrangements are in themselves not new but they do lend themselves to an innovative approach to outsourcing and mitigate against outsourcing suppliers taking on work they don’t have the necessary expertise and capacity to carry out. By involving third party advisors and specialist sourcing companies it's possible to establish a closer, more reciprocal relationship between the outsourcing provider and third party advisor, ensuring stronger governance and accountability. In this more heterogeneous environment, the advisor acts as a trusted advisor to the client, stringently reviewing the providers’ performance and ensuring that the outsourcing contract is open, honest and more flexible to business needs.”

An example of innovation in this area comes in Unisys’s work in one of the most promising public sector shared service projects to have been developed so far. If of course the benefits and savings are delivered as planned. The project is as follows:

“The Kent County Council shared services project unites numerous local public sector bodies to deliver the best services possible to its citizens, at the lowest possible cost. The new Kent Public Services Network connects approximately 1,100 public sector establishments including schools, council offices and libraries, across the county, offering improved bandwidth and inter-governmental collaboration. It is the first formal arrangement in the UK to bring local government networks into a single structure.

“A particular benefit of the KPSN will be a single link to central government. It is estimated this will save Kent's public bodies £338,000 over the next four years. By adding the Ashford exchange to KPSN the cost of existing schools' network connections in the town could be reduced by up to £70,000.

“Future plans for the KPSN include a single telephone service covering all participating public sector organisations and a single directory and extension number scheme. There is also a possibility for direct network connections for home workers, which could offer virtual office and virtual call centre opportunities. Video conferencing and multi media services could also be made available at all offices to help reduce travel.”

Dr Roger Newman of Mahindra Satyam, explained a project they are working on as an example of some of the cutting-edge IT that currently being developed.

“At Mahindra Satyam, we have developed an innovative web based video editing and publishing application where in end users can add, edit, add effects and then share their videos, thereby, providing a compelling user experience to the visitors of the social networking websites. This application has the ability to render widgets, rich internet application (RIA) artifacts – that are hosted separately and propagated across social networking applications such as Facebook and MySpace. It also enables end users to easily and quickly assemble motion and audio content, add tags, and with a click of a button, publish videos and music to social networking portals, making the whole experience more personal and customised.”

The trouble with innovation as readers may have gathered is that it is so difficult to pin down – ‘like nailing jelly to the wall’ as the saying goes. In this rough and ready rundown, rather than assess and discuss the relative merits of individual’s efforts, we’ve tried to keep it plain and simple. If you have your own views on innovation or want to pick apart any of the ideas above, feel free to post your comments below or start a forum topic to discuss.

The San Francisco Bay Area Rapid Transit (BART) has signed a contract with IBM to manage the systems that support trains, stations, equipment and operations. The use of the new software is expected to contribute to more efficient operations, improved service and enhanced passenger safety.

Travelling by the San Francisco BART provides an alternative to driving thus contributing to the number of cars on the road. With more than 346,000 passengers riding every day, the rail system connects San Francisco to cities in the East Bay and suburbs in northern San Mateo County. To continue to serve the public's growing transportation needs, BART is undergoing a vast modernisation that includes station overhauls, new rail cars, and route extensions.

Randall Franklin, Program Director, Business Advancement Program, Bay Area Rapid Transit commented: "There are thousands of people and parts responsible for making sure that our trains arrive on time and deliver our passengers safely to their destinations." He continued "Because we are managing an aging fleet while planning for the future, the efficiency of BART requires visibility across all of our assets to provide safe and uninterrupted railway services to our customers."

See the video of the IBM rail overhaul.

BBC has renewed a ten-year iPlayer support contract with Capita and Transversal. Transversal has been working with Capita to provide self-service technology to support the BBC’s Audience Services.

The BBC Audience Services contract includes the BBC iPlayer application through a ‘Help’ website service developed by Transversal. It allows users to get instant online answers to questions. The technology is also used for FAQ support for all BBC general queries.

When commenting on the contract Jonathan Rush, Head of Business Development at Capita for BBC Audience Services said, “The BBC audiences want and expect new communications channels across the range of BBC services. They’re ready and willing to use self service technology and we are meeting that demand head-on."

SwedishAmerican Health System, a major healthcare provider with headquarters in Rockford, Illinois, has signed a contract with MedQuist Inc. to provide transcription outsourcing and speech recognition editing services to the system's hospital and medical centre.

SwedishAmerican projects annual savings of approximately $500,000 as a result of the move to outsourcing and speech recognition, while improving productivity through the replacement of old technology.

Phil Wasson, Vice President and CIO of SwedishAmerican commented: "To meet our increasingly complex medical documentation needs, we determined that a vendor with the scale, scope, and experience of MedQuist was best."

Singapore’s People’s Association, a statutory board under the Ministry of Community Development, Youth and Sports, has signed a two year multi-million dollar ITO contract with Tata Consultancy Services. The People’s Association is a grassroots government organisation in Singapore.

Under the agreement, TCS will develop and maintain People’s Associations’ business and citizen centric applications. The contract is expected to enable higher process efficiency and staff productivity across the organisation.

TCS has an established presence in Singapore for over 20 years, and has over 30 customers including Singapore Airlines, Citibank Asia Pacific, General Electric, Singapore Exchange, Temasek Holdings, Government of Singapore Investment Corporation (GIC), Standard Chartered Bank, ING Bank and others.

The City of Houston, which spends more than $125 million per year on technology, has signed the contract with TPI in the hope that they can offer advise on operational cost reductions and improved service deliveries, including outsourcing, in-sourcing and hybrid sourcing strategies.

Richard Lewis, Chief Information Officer, City of Houston commented: "We selected TPI because of its reputation in the sourcing industry, wide experience in the Public Sector and proven approach to helping enterprises identify sustainable programs for optimizing their IT infrastructure services."

Vertex, an international Customer Management Outsourcing business (CMO), commissioned the research which clients in the private and public sectors participated in. The results concluded that consumers find the high street retail environment delivers better customer service than any other sector including its online cousin with 68 per cent of claiming it to be ‘fairly good’ or ‘very good’. This is in sharp contrast to Central Government agencies which were rated ‘fairly good’ or ‘very good’ by only 28 per cent of respondents.

While the research shows retailers and financial services (banks, building societies and insurance companies) are seen as the most trustworthy when it comes to protecting personal information, significant concerns remain with around a third still claiming they are ‘untrustworthy’. This lack of trust rises to an incredible 55 per cent for Central Government agencies.

The survey also confirmed the importance of a choice in the ways that consumers interact with organisations: 42 per cent of those surveyed actively seek to avoid face to face interactions with public bodies – a figure that is only exceeded by customers of utilities (74 per cent).

Other findings highlighted the major gripes of engaging with an organisation. Unsurprisingly “holding” or having to follow unnecessary automated responses topped the list (50 per cent) while the desire for first call resolution, and being dealt with by the person who answers the phone, was cited by around one in six.

Paul Sweeny, Chief Executive Officer at Vertex commented: “Although customer engagement is more complex than ever it’s important not to lose sight of the one consistent factor that makes for a great experience – the capabilities of the organisation’s people. In our experience, motivated, empowered and passionate customer service personnel make the biggest contribution to a brand’s satisfaction scores.”

Atos Origin, the global IT outsourcer, has been chosen to handle IT for the 2012 Olympic games in Rio. After Vancouver in 2010 and London in 2012, Atos Origin will also serve as the IT systems integrator for the Sochi Games in 2014 in Russia before delivering all back-end IT for the 2016 Olympic and Paralympic Games in Rio de Janeiro.

The ITO contract between Atos Origin and the Olympic Games is the largest sports related information technology contract ever awarded. It covers the Olympic Games in Salt Lake City in 2002, Athens in 2004, Torino in 2006, Beijing in 2008, Vancouver in 2010, London in 2012, Sochi in 2014 and Rio in 2016. As part of the contract with the Olympic Games Atos Origin manages the relay of competition results and information about athletes in less than 0.3 seconds to spectators and media around the world.

Atos Origin has already had a presence in Brazil for over 19 years and currently employs 1,500 people in consulting, managed operations and systems integration. In July 2007 Atos Origin was responsible for the IT at the Rio 2007 XV Pan American Games.

Recently, I've been blogging about the differences (and similarities) between cloud computing and traditional outsourcing. This generated some thought-provoking comments from Kate Craig-Wood, the managing director of IT hosting company Memset.

Cutting straight to the chase, Craig-Wood believes there are only three real differences - at least between cloud computing and IT infrastructure outsourcing. They are:

1) Shorter contracts: Hours, days or weeks ("at most, one month"), rather than months or years ("usually at least six months for traditional outsourcing").

2) On-demand capabilities: near-instant scaling up and down of available resources.

3) No up-front costs: Capital expenditure (cap ex) and installation fees, she explains, are absorbed into the rental charges. In effect that transforms the cap ex usually associated with IT infrastructure into operational expenditure (op ex).

"Modern 'managed hosting' providers like my company are largely synonymous with 'cloud computing' or 'utility Computing' providers," Craig-Wood argues. After all, she continues, a company such as Memset can provide a customer with anything from a single virtual machine to a large dedicated cluster, with a contract of one month and no set-up fees.

"We are blurring the line between traditional IT infrastructure outsourcing (for example, HP/EDS at the high end and Rackspace at the low end) and 'pure' cloud providers, such as Amazon EC2."

The impact for IT outsourcing providers is clear, she believes: cloud computing is exposing the true costs of computer resources - which, thanks to Moore's Law, are "really, really cheap".

According to Craig-Wood, "Cloud/utility providers are driving the commoditisation of compute and storage resources, thus eviscarating the outrageous profit margins enjoyed by the old guard of IT outsourcing providers."

It's a controversial viewpoint - and I have to admit that I'm still mulling it over. I guess it all depends on what services are provided around these resources, the level at which they are delivered, as well as the level of assurance required by many corporate customers. Kate claims that cloud computing "threatens the livelihoods of the big IT firms who have become better at selling peoples' time than actual IT services"; I, on the other hand, wonder if peoples' time is something many companies are still happy to pay for - if it frees up time for their own employees, or indeed, enables them to run a leaner workforce? What do you think?