Industry news

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?

One-quarter of the top business process outsourcing (BPO) operatives will not exist as separate entities by 2012, according to Gartner, Inc. Gartner said that market exit, acquisitions, and the ascent of new vendors will rearrange the BPO provider landscape in the coming years, and enterprises should look for warning signs when evaluating BPO vendors to mitigate risk.

“As providers are exposed to the economic crisis, loss-making contracts, and an inability to adapt to standardised delivery models, many will struggle to survive in their current form,” said Robert H. Brown, research vice president at Gartner. “Some will be acquired and some will exit the market completely to be replaced by dynamic new players delivering BPO as automated, utility services.”

Gartner has identified six key signposts to watch for that might herald the predicted market shakeout and identified which BPO vendors might be candidates for acquisition or outright market exit.

1. Chronically Unprofitable Portfolio BPO Deals

Some BPO providers are carrying unprofitable contract portfolios, largely stemming from too-much, too-soon pursuit of deals, without much thought as to how to transition them to a standardised, rationalised, profitable state of ongoing operations. Buyers’ vendor selection teams should gain insight into prospective providers’ deals to understand how profitable the vendor is. While most vendors will be reluctant to share this information, those that stand the best chance of longevity will realize that BPO is a partnership and being open about profitability can limit long-term risk to both parties.

2. Sustained Inability to Win Significant New Business or Drive Growth and/or Profitability

It is important to gain insight into the vendor’s track record of winning new business, particularly over a sustained period of two to three years. Handling multiple deals at once is a necessity in outsourcing, and buyers need to know that a vendor can successfully cater to the needs of more than one customer. A lack of recent new business activity can indicate that a vendor is choking on a backlog of business.

3. Loss of Visible, Established Marquee BPO Deals To Competitors Because of 'Recompetes' at the End of a Contract Life

For some exposed vendors, the loss of a major, or ‘marquee’, customer can be a leading indicator of trouble, especially if the remaining portfolio of business is small. It will always be prudent due diligence to seek and gain a reference from any current anchor clients to understand how committed they are to the vendor and their experiences in dealing with them.

4. Capitalisation Prevents Funding for Bidding on New Deals

Some heavily leveraged — or risk adverse — vendors may be unable to obtain the necessary investment needed to bid on a business opportunity, however attractive the proposition. In addition to the costs of the bid and proposal, large BPO deals usually require significant amounts of upfront cash investment on the part of the vendor. For this reason, more providers are making investments in platform-intensive approaches to BPO that require buyers to adopt their standard platform and service-level agreements, as opposed to the "lift-and-shift" strategy. Heavily leveraged vendors still invested in the lift-and-shift approach are the most likely to run into problems acquiring funding.

5. Exposure to the Banking and Finance Sector

The financial services sector accounts for about one-third of the total BPO market globally, and providers with significant amounts of BPO revenue from the banking sector were the first exposed to the credit crunch and ensuing financial meltdown. Subsequent mergers and acquisitions saw both current and prospective buyers of BPO "taken out of play" and this exposure could still leave many BPO providers vulnerable in the longer term. While exposure to the banking sector is by no means an absolute harbinger of doom, sourcing executives should be aware of the potential impact if their provider has a significant amount of revenue (more than 85 percent) as a financial services pure play BPO vendor.

6. Levels of BPO Contract Cancellation and Re-Insourcing Rise Even Higher

Cancellation rates among Gartner’s annual BPO buyer survey in 2008 rose sharply from the 2007 data. Therefore, Gartner advises buyers to build exit strategies into contracts and develop contingencies for contract termination, especially before signing the deal. BPO switching costs can be steep, so it’s important to understand contractual issue escalation procedures to ensure that all rational options are exhausted before initiating legal and/or termination discussions.

Additional information is available in the Gartner report Business Process Outsourcing Vendor Consolidations: Is Your Contract at Risk?

This week has been a turbulent one for the press. The ever increasing reality of the demise of print media is insurmountable. Last week News International’s the London Paper went to the newsroom in the sky after an epic battle with the London Lite. This week the UK’s Evening Standard announced it will be a free newspaper later this month, after more than 180 years as a paid-for title. The Standard has denied that there will be any immediate redundancies, although it will lose millions of pounds of revenue annually from the decision to drop the 50p cover price. It certainly doesn’t look good for us old journalists.

However, the Round-Up can’t sit in on a Friday afternoon moping when there is so much exiting sourcing news floating around. As long as the industry is booming, I am still in a job!

Before we look at all of the lucrative deals that have been signed, we must first look at the two interesting studies that have been released this week and are extremely pertinent to the sourcing sphere. The first is from Firstsource, who revealed the positive news that 55 percent of telecos will increase outsourcing in the next 12 months.

Cutting costs is the main driver according to the research of 85 leading telecoms companies across the world. The research showed that the recession has led to more than half of telecoms companies reporting lower customer spend, and over a quarter of telcos said that they have witnessed a rise in customers delaying payment of their bills. No wonder companies are turning to outsourcing.

On the other hand the second study, from Gartner, is a little less positive. It warns that one-quarter of top BPO providers will not exist in 2012. Apparently this due to a change in the BPO provider landscape which is as a direct result of market exit, acquisitions, and the ascent of new vendors.

Gartner has identified six key signposts to watch for that might herald the predicted market shakeout. Readers will be happy to know that a summary of which can be found in the news section of sourcingfocus.com.

Apart from the two studies there has been a plethora of ITO contracts that have been announced. These include Telfort signing with EDS; Nissan North America with CSC; and Her Majesty’s Treasury signs a contract with Fujitsu. Phew, that is a mouthful. So actually there is not a lot to moan about this week. As long as business is sailing high, so too are my spirits!

Telfort, a mobile telecommunications company, has signed a five-year technology infrastructure and applications services contract with EDS, a HP company. It is hoped that the agreement will contribute to business growth and reduce operational costs.

Under the terms of the agreement, EDS will manage the development and operation of Telfort’s applications and infrastructure. As Telfort’s service integrator, EDS will act as a single point of contact.

Marco Visser, chief executive officer at Telfort BV, commented: “In order for Telfort to grow our business in the low-cost wireless segment, it is necessary to adopt a cost leadership strategy and become more efficient,”. He continued “By partnering with EDS, we will be able to streamline our organization for efficiency, providing us the opportunity to focus on new areas for growth.”

The Transportation Security Administration (TSA) has signed an IT outsourcing contract with CSC. The contract, spread over a possible five-years, will see CSC provide IT infrastructure services in support of the TSA's Office of Information Technology. CSC will be responsible for IT security, solutions delivery, business activities and operational effectiveness throughout the nation, including all U.S. airports.

Cinepolis, one of the world's largest multiplex operators, has signed a three-year ITO contract with IBM which will commence operations in India. As part of the contract IBM will deploy, manage and support the IT infrastructure that will be vital for Cinepolis' roll-out plans in the country. Processes put in place by IBM will enable Cinepolis to control operating expenses as well as develop and deploy new customer facing applications.

Mexico-based Cinepolis was the first to introduce novel concepts to the Latin American exhibition industry, such as the first multiplexes in 1972. As part of its expansion, Cinepolis aims to open 500 screens in India by 2016. Of this, it is looking at making 130 screens go-live in eight cities over next 3 years. The ITO contract will result in IBM powering Cinepolis operations at each of these sites.

According to Ashish Shukla, Head Exhibition, Cinepolis India, "Cinepolis endeavors to look for best in class solutions across all functional and technical areas and IBM was the ideal strategic technology partner for us. With technology increasingly underpinning business growth, we are confident that our partnership with IBM will enable us to continue to provide differentiated services to customers."

More than half of telecoms companies plan to increase outsourcing in the next 12 months, according to research from Firstsource Solutions. Cutting costs is the main driver according to the research of 85 leading telecoms companies across the world.

The research showed that the recession has led to more than half of telecoms companies reporting lower customer spend, and over a quarter of telcos said that they have witnessed a rise in customers delaying payment of their bills. Telcos are also experiencing increased customer churn due to the search for better deals from competitors.

Those telecoms companies surveyed that already outsource reported substantial cost savings: 67 percent said that they had cut their costs by up to 40 percent through outsourcing, and nearly 20 percent reported cost savings of more than 40 percent.

Matthew Vallance, Firstsource's President Telecoms & Media and Financial Services, said: "Telecoms companies must continue to take cost out of their businesses, as we can expect consumers to take a cautious approach to spending for some time, in spite of evidence that the recession might be bottoming out. Outsourcing is a proven strategy for cutting cost directly and for transforming fixed costs into variable costs."

Although cutting costs will continue to be the main catalyst for outsourcing, telcos reported other important drivers, such as improving the quality of customer service (through tapping into a larger pool of experienced customer management staff) and lengthening the customer service day.

Nissan North America, Inc. has signed a multi-year information technology (IT) managed services contract with CSC.

As part of the contract CSC will provide service desk and end-user support covering desktop computers, personal digital assistants (PDAs) and wireless hand-held devices. CSC will also provide overall service management across all IT providers for approximately 40 Nissan facilities throughout the United States and Canada.

Xerox Corporation is acquiring Affiliated Computer Services, Inc. (ACS) in a cash and stock transaction valued at $63.11 per share. Under the terms of the agreement, ACS shareholders will receive a total of $18.60 per share in cash plus 4.935 Xerox shares for each ACS share they own. In addition, Xerox will assume ACS’s debt of $2 billion and issue $300 million of convertible preferred stock to ACS’s Class B shareholder. On an adjusted earnings basis, the transaction is expected to be accretive in the first year.

As a result of this acquisition it is hoped that Xerox will increase its global standing and establish client relationships to scale ACS’s business in Europe, Asia and South America.

The transaction, which has been approved by the Xerox and ACS boards of directors and ACS special committee, is expected to close in the first quarter of 2010. ACS will operate as an independent organization and initially will be branded ACS, a Xerox Company. It will be led by Lynn Blodgett, who will report to Ursula Burns.

Lynn Blodgett, president and chief executive officer, of ACS commented: “We’re proud of our significant profitable growth over the past 20 years and our ability to manage our clients’ operations with a global infrastructure and workforce.” She continued “We also know that for ACS to expand globally and differentiate our offerings through technology, we need a partner with tremendous brand strength and leading innovation. Xerox offers that and more to bring our business to the next level while strengthening theirs.”

Many SMEs have simply not read or understood the service and support level that their IT contract provides. In many cases the in house IT department has not shared the risks with the business or, even worse, is unknowingly jeopardising the business through a lack of understanding and insight. Whilst most organisations now recognise that good technology is key to business success, from 24x7 access to email, to robust storage of sensitive customer data, many have no idea that such core functions will not be immediately restored in the event of a disaster under their existing arrangements.

IT Delusion

Most companies blithely assume that an IT support contract covers all the major issues – from email failure to data loss. But that is simply not the case. Look more closely at the not so fine print and organisations will be stunned to discover just how vulnerable the business is to server failure, severed connections and software glitches.

How many organisations recognise that failure of an email server could result in the business losing access to all email for up to five days? Most assume that restoring the server within hours is part of the service contract – but is it? If the hardware fails, the onus is likely to be on the hardware provider, not the service company, to repair the fault or provide a replacement, a process that could take days.

Failure to read the contract means that when problems do occur, organisations put the blame firmly on the IT department or support organisation, whilst suffering significant business loss. But has anyone asked the right questions of the IT support team – whether internal or external? Getting the right IT support contract requires a real understanding of the business risks associated with IT and demands technology service delivery and remediation is prioritised to match business needs.

Failure to do so adds significant business risk. Take a busy city centre bar. A brief power outage at 9am will have limited business impact: there are no customers and the till is not in use. Should that same failure happen at, say, 10pm on a Friday night, when the bar has perhaps as much as £10,000 in customer tabs, a loss of till functionality will result is massive financial cost as the organisation has no way of checking customers’ charges and payments.

Risk Assessment

To mitigate the risk associated with technology delivery, organisations need to identify the single points of failure across the IT infrastructure. Yet while businesses routinely assess the single points of failure in core operations, from manufacturing to distribution, they are patently failing to apply the same robust operational practices to IT. Take as an example a manufacturing company with 12 machines on the production line and, as a result, two machines – at £100,000 each – on system stand-by at all times in case of failure: a massive £200,000 investment that is rarely used.

Meanwhile this same organisation, with 150 employees, has only one email server. The company is sending 1000s of emails daily both internally and externally to customers and suppliers, yet there is absolutely no email resilience. If the single email server, or any one of its key components, goes down the business will stop until it is fixed. It is clear that no-one in the organisation has asked the right questions about IT risk.

So why are SMEs failing to take steps to understand IT risk? In part the problem is one of culture: individuals within the IT team are neither encouraged nor, to be frank, have the skills to map business needs with IT risks and availability. But continued failure to consider IT requirements in isolation from business need will compromise business stability and undermine the value of IT investment.

IT Insight

Mid-market and SME businesses face a real challenge: for any organisation with less than 250 employees, it is simply not possible to justify one full-time IT Director role. Yet far too many organisations of this size not only have an IT Director but also a team of up to three staff. More often than not these IT Directors are long term employees who have progressed to senior status through longevity and loyalty. As a result they may not have the strategic skills required and it is unlikely that an IT team of this size has the breadth of skills needed to manage today’s complex network and application infrastructure.

This expense of full-time employed, in-house IT staff is really not the best approach. Organisations should be considering best practice above all other factors. That means accessing the best skills as and when required in the most cost effective and efficient manner – from strategic direction to network support.

Organisations, of every size, need a team with the ability to deliver real risk assessment and strategic IT decision making. By opting instead to promote long term IT staff to a Manager/Director role, organisations probably end up with an individual who is overpaid to undertake the mundane day to day tasks associated with a small IT team, from plugging in cables and manning the help desk. In addition, the organisation is highly unlikely to have provided the support for this individual to have the resources, time or expertise to assess business risk or undertake strategic planning and long term IT budgeting.

This is simply not a viable model and is adding untenable risk to SMEs. Furthermore, unless organisations continue to invest in new technology, in-house skills will rapidly become out of date. In this fast changing technology environment organisations cannot possibly attain the breadth of skills required to support today’s complex IT requirements – from online order taking, to 24x7 email services, local and wide area networks, as well as business continuity – within a one or two person IT department.

So just what value are these individuals providing to the business? They are not generating revenue nor providing an essential administrative role. Indeed, combining a lack of skills with the organisation’s inability to accurately define ongoing requirements, internal IT departments are incapable of effectively managing third party service and support contracts, adding both further risk to the business and unnecessary cost.

Business Focus

As the recession looks set to continue towards the end of 2010, SMEs need to maintain and win as much business as possible, and can therefore not afford to take any risk at all. Businesses cannot continue to waste money on unfocused technology investments that fail to support short or long term business needs or mitigate operational risk. Nor can they justify third party supplier service contracts that fail to reflect true operational requirements.

A simple, but frank and honest IT infrastructure audit from a competent professional can provide immediate insight into the single points of failure. Now you need to translate that into simple statements, in business terms, that the board can comprehend. Put it plainly and clearly with real timelines. From the risk of how many hours or days of email downtime, to the implications of the loss of access to data and premises? This enables directors and management to determine and prioritise IT needs and investment based on real business requirements.

With this understanding, it is far simpler for an organisation to attain an IT service and support contract with a relevant and, critically, measurable Service Level Agreement. And, once in place, SMEs can look to build on this relationship to attain quantifiable technology value, including advice on strategic investment and long term budgeting.

It is this shift in emphasis away from a grudge purchase towards a demand for value that is essential for mid-market and SME businesses. All IT service and support contracts are not the same. Cost is obviously a key consideration but too many organisations are actually spending too much money on contracts that are failing to reduce operational risk. The objective must be an effective solution that reflects the organisation’s appetite for risk based on real, in depth understanding.

It is only by taking a step back, assessing and understanding the current levels of risk associated with existing IT deployments, that an organisation can truly determine its ongoing IT requirements and then put in place the technology, skills and resources to reduce operational risk and transform IT from a cost centre to business enabler.