Industry news

By Alex Blues, Head of IT Sourcing at PA Consulting Group

If you will forgive my leap onto the doom and gloom bandwagon, a recent Gartner report predicted that the IT services market will decrease by 1.7% in 2009, compared to a 6% increase in 2007. Furthermore, there will be no major recovery in IT spend until after 2012.

However, it should be remembered that behind those statistics, not every area will be affected equally severely – certain areas will suffer more or less than others. According to Gartner, consulting and systems integration will be hit hard, while process improvement, due to its nature of typically being driven by the business, won’t be.

And apparently, nor will outsourcing.

My concern though is that this apparent safety will result in outsourcing industry remaining complacent, as the step change in thinking, strategy and approach – which has often been called for but remains an accepted failing of outsourcing – will not be deemed necessary and therefore will not happen.

So, if Gartner is right, perhaps the recession will be good for the outsourcing industry as it will not be challenged. But for exactly this reason, the recession may actually harm outsourcing as the lack of challenge will allow a blind wandering through the slumped economy, without having to get fitter and leaner like the rest of the market.

I believe that the outsourcing industry needs this step change, and so two concepts urgently need to be adopted.

Firstly, ‘Outomation’ – the natural convergence of Outsourcing and Business Process Automation.

Many industries have already made the leap to automate, such as the automotive industry in the 1980s, and it is from here that we must learn our lessons. Outomation preaches, amongst other concepts, that development costs are shared with competitors, that shared and virtualised infrastructures are deployed and that the business becomes location independent. However, far from achieving this, outsourcing is still struggling just to move to the level where the emphasis is on growing and transforming the business, rather than just running it.

Secondly, there is an urgent need for suppliers to consolidate and collaborate so as to share the advances made for the benefit of their service offerings and the industry as a whole. In good times, this is unlikely to be even considered, but the deeper the recession and its impact, the quicker it will be forced to happen as we have recently seen in the financial services industry..

So, counter-intuitively, I hope the outsourcing industry will be affected by the recession. But just enough so as to have a significant impact on how services are delivered, to encourage suppliers to re-think their approach and to finally embrace the changes that other industries have made and seen succeed.

The U.S. Department of Treasury’s Office for the Controller of the Currency (OCC) has signed a US $30 million contract with EDS, an HP company, to maintain end-user computing resources in order to improve the overall user experience for the agency's workforce.

Under the agreement, EDS will provide workplace services support and deploy HP desktops and accessories. EDS will also aim to consolidate the number of desktops and help meet the needs of OCC employees by providing solutions tailored to improve productivity, simplify remote access and reduce support costs.

OCC charters, regulates and supervises national banks to ensure a safe, sound and competitive banking system that supports both the citizens and the economy of the United States. The contract will enable OCC’s mobile bank examiners to be more productive in regulating and supervising 1,600 national banks and 50 federal branches of foreign banks in the United States, which account for nearly two-thirds of the total assets of all U.S. commercial banks.

Cognizant has signed a definitive agreement to acquire UBS India Service Centre Private Limited (UBS ISC), the Hyderabad, India-based captive service provider to the UBS Group.

As part of the transaction, UBS and Cognizant have entered into a multi-year services agreement under which Cognizant will provide a range of business process outsourcing (BPO), knowledge process outsourcing (KPO), IT, and remote infrastructure management services to UBS divisions around the globe. Undertaking the service agreement will enable UBS to reduce time-to-market, expand service delivery, and enhance productivity, operational efficiency, and quality.

UBS' experience in wealth management, investment banking, asset management, research, and remote IT infrastructure management will help Cognizant strengthen its business and knowledge process capabilities, extend its financial services domain knowledge, and support its capabilities to provide integrated services across consulting, technology, and outsourcing.

Ulrich Körner, Group Chief Operating Officer of UBS AG, commented: “Cognizant’s broad banking and financial services expertise and its cultural fit with UBS complement the competencies provided by the India Service Centre today, while providing technology capabilities that expand the services we can buy from India and support our cost savings, efficiency and flexibility objectives.”

For those of you who missed last week's entertaining insight into the world of outsourcing at Mark Kobayashi-Hillary's book launch, do not fear. Mark, the most prolific blogger, author and networker in the industry, has kindly donated a signed copy of his book for us to give away. The book brings together almost three years of Mark's Computing blog, Talking Outsourcing, and charts the years of hard work that have gone into making the blog the most well-read on the Computing website.

Talking Outsourcing reads like a diary of the industry since its inception in 2006 to date. What's more, this insight into multifarious outsourcing industry could be yours by answering this simple question: what was the title of Mark's first ever Talking outsourcing blog post? (Tip: there is an archive section on the right hand side of Mark's blog)

Simply email in your answers to editor@sourcingfocus.com stating your name and the title of the blog to enter. The winner's name will be drawn randomly from all entries and announced next Friday.

Korea Investment & Securities Co. Ltd. (KIS), has signed a ten-year strategic outsourcing agreement with IBM. Valued at $157 million, the contract is the largest outsourcing deal in the Korean investment and securities industry.

KIS is one of the country's leading security companies, offering a range of asset management and investment banking services. Since its merger with Dongwon Securities in 2005, KIS has been rapidly expanding its presence in other Asian markets.

Under the agreement, IBM will provide KIS with a full range of IT services. The new IT infrastructure system will be used to support KIS' major business areas, including account and financing, channel management, external interface, data analytics and call centres. In addition, IBM will manage the company's IT infrastructure operation including its management and maintenance.

Byung-ho Lee, Chief Information Officer, Korea Investment & Securities commented: "We decided to transform our business process for the purpose of reinforcing our global competitiveness in the fiercely competitive financial industry. By enhancing our IT capacity, we will be able to actively respond to the rapidly changing global financial environment."

Continued bullish reports of growth in their pipelines by the world’s largest outsourcing providers may be further evidence the economic storm is waning. Over 75 percent of the service providers polled in EquaTerra’s Q309 Advisor and Business/IT Service Provider Pulse Survey reported continued growth in their deal pipeline, up ten percent from last quarter and an impressive 34 percent rise from the same time last year, the highest levels of pipeline growth cited since Q3 2005. EquaTerra’s customer-facing advisors – whose insight into current buyer activity provides a forward view of demand two to three quarters out – forecast steady demand through the first quarter of the year.

“The bulk of outsourcing demand is still defensive, aimed at short-term cost-cutting and cost-containment strategies,” said Stan Lepeak, managing director of global research for EquaTerra.“But roughly 10 percent of both EquaTerra advisors and service providers see some buyers are preparing for an upturn with selective investments in new technology.”

The key findings from EquaTerra’s Q309 Pulse:

• Demand for outsourcing up – Pipeline growth, one of the strongest indicators of market demand, has been increasing by eight to ten percent per quarter since the first of the year, fuelled by the worldwide economic recession. Service providers (75 percent) continue to cite growth in their new-deal pipeline and over two-thirds of them (68 percent) predict demand will continue through the end of the year. Forty-eight percent of EquaTerra’s advisors cite growth remains steady, up two percent from last quarter.

• Buyer base growing – The severe economic downturn has made outsourcing more attractive to a broader base of clients, and business process outsourcing is often the lever. EquaTerra advisors report that offshoring is an increasingly compelling option for first-time buyers looking for short-term cost savings with little upfront investment, an approach well suited to the labour arbitrage model.

• Price competitiveness stabilizing – Service providers continue to indicate they are seeing less pricing pressure. The number of service providers citing increased levels of contract re-compete or renegotiations fell for the third straight quarter to 21 percent, indicating buyers are weighing quality against lower cost and/or service providers experiencing their own margin pressures are unwilling to make further cuts.

If readers want to find out more they can register for EquaTerra’s regular pulse update webinar here. The event takes place on the 15th of October at 11am.

Ford Motor Company has signed an ITO contract with Affiliated Computer Services, Inc. Under the contract ACS will provide the administration of health and welfare, pension, and savings plans.

These services will be deployed through ACS' call centre and Web portal. The self-service website provides participants accessible information that integrates Ford's benefit information, vendor partners, and benefit program information.

Royal Mail has been splashed all over the UK headlines again for causing havoc this week. Strikes have resulted in two of their largest customers, eBay and Argos, revealing interest in other service providers. The Guardian has also published that it had learned of thirty online retailers who have agreed to switch to other postal operators because of the disruption at Royal Mail. I think either in a personal or business capacity we all know someone who has been affected by the strikes. Luckily for our avid readers we are a web based publication and there is no delay on your weekly sourcing news round up.

Therefore I will not keep you waiting any longer…

Atos Origin won the 2016 RIO Olympic Games ITO Contract. 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. It is the largest sports related IT contract ever awarded. Unlike the Royal Mail, Atos Origin seem to know how not to loose their major customers!

In keeping with the theme of ITO contracts, there has also been news that the US City of Houston has signed a contract with TPI in the hope that they can advise on how to improve service deliveries. The City of Houston currently spends more than $125 million per year on technology. I think TPI couldn’t have arrived any sooner.

Since I seem to be consumed with name dropping this week, I don’t see why I shouldn’t finish the round up in the same way. The BBC has renewed its 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.

So, big names being won and big names lost all in one week. Let’s just hope the Royal Mail can pull their act together in time for Christmas. I can envisage more torrid times ahead for the postal operators if they mess with the distribution of Christmas cheer. Yep, I am afraid I went there; I brought up the C word in the first week of October! Before I say anymore I think I should stop writing. That will be the last mention of the C word until the middle of November. I promise.

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.