Industry news

Toshiba Corp is in talks with Singapore's Chartered Semiconductor (CSMF.SI) and Globalfoundries Inc about outsourcing production of some of its next-generation system chips to help cut costs, two company sources have told Reuters.

According to the story, Toshiba, which sources have said plans to bid for French nuclear group Areva's (CEPFi.PA) power transmission and distribution unit, is looking to save costs at its loss-making chip division as it seeks stabler revenues from the power business.

The world's No.2 maker of NAND flash memory chips plans to make 28-nanometre chips at its plant in Oita, southern Japan, but is considering contracting out production of chips exceeding its capacity, said company spokeswoman Hiroko Mochida.

But Yuichi Ishida, analyst at Mizuho Investors Securities, said he expected Toshiba to outsource all of its 28-nanometre chip production.

"It makes no sense to go to the trouble of investing in expensive equipment to make these cutting-edge chips if you're going to outsource as well. Why spend money you don't have to?" he said.

The full story can be read here: Reuters Story

Optimation, a top ICT services specialist in New Zealand has signed a partnership agreement with HCL Technologies Limited (HCL). The new partnership will combine HCL's global scale with Optimation's local New Zealand expertise. The HCL-Optimation partnership will provide solutions from SAP, Oracle, Microsoft and EMC.

HCL will work with Optimation to offer IT solutions to New Zealand Government and enterprise customers. The agreement hopes to increase cost effectiveness, industry best practice, global capabilities and specialist skill sets to New Zealand organisations.

Speaking on the partnership, Optimation's Chief Executive Officer, Rhoda Holmes, commented, HCL has developed a very strong reputation in this part of the world. We are looking forward to working with them to extend our global delivery model and our existing capabilities in areas such as SAP services and large-scale application development.

I hope those of you in the UK enjoyed your bank holiday weekend? I know I certainly did. And more good news has ruptured in the UK this week as reports show that the estimated number of Britons who will die this winter from swine flu has fallen dramatically. Apparently health experts have admitted the virus is less lethal than they feared. Yes, that old chestnut again. Perhaps this might finally dampen the media-inspired hysteria and stop people worrying so much. Hopefully a flu and media-respite will take some pressure off those embattled NHS Direct call centres too.

With the weekly bout of media-bashing out of the way that such stories frequently inspire, we can happily proceed towards more closely sourcing-related happenings.

First up, international consumer goods company, Henkel, has signed an outsourcing contract with Accenture. Accenture will provide services in Europe and North America under a seven-year application outsourcing contract.

Amongst the usual cost reductions the program is designed to provide Henkel with a more proactive information technology function (what ever that means!). And of course, Accenture will provide the services through one of its Global Delivery Network centres in the ever mighty Bangalore, India.

Steria has done well this week with netting a contract for the estimated worth of 14 million Euros with the Norwegian National Rail Administration (Jernbaneverket).

Steria will provide local services to Jernbaneverket offices in Norway. This is a big contract and as a state-owned authority, Jernbaneverket reports to the Norwegian Ministry of Transport and Communications. Looks like Europe is climbing its way out of the ever engulfing economic dilapidation.

Finally Optimation, a top ICT services specialist in New Zealand has signed a partnership agreement with HCL Technologies Limited (HCL). The new partnership will combine HCL’s global scale with Optimation’s local New Zealand expertise.

Another company to work with a government body, HCL will work with Optimation to offer IT solutions to New Zealand Government and enterprise customers.

Again another exciting week with contracts being signed in North America, New Zealand and Norway. And in almost totally unrelated news, swine flu ‘ain’t that bad’! It is all good from where I am sitting. Let’s hope I can say the same for next week. I bid you adieu.

Outsourcing is supposed to save you money. Right? This is especially true when it comes to outsourcing mission critical work like software development, typically done offshore, with companies who enjoy very low labor rates. Why pay a software developer $80,000 to $150,000 a year, when you can get one overseas for $40,000 or less? That math gets especially attractive when you need a lot of them. At least the promise of big savings is supposed to be the idea. Unfortunately, the saying “Outsourcing will save you money,” is a lot like the old adage of, “Practice makes perfect.” They’re both half-truths.

The real truth is: “Only perfect practice makes perfect.” If you repeat the same mistakes again and again, practicing something wrong for any amount of time won’t make it right. Similarly, only outsourcing with the right partner will save you money in the long run. Pick the wrong one and you’ll pay dearly for that decision.

The Parable of the New House

Once upon a time a man wanted to build himself a new house. He had a good idea of what he wanted, how many rooms, the style, basic space requirements, and specific amenities. However, when he talked to a few builders, he was shocked by how much they wanted to charge him to build his new house. He only wanted to spend $100,000, but the lowest bid he received from a reputable builder was well over $300,000 to get exactly what he wanted.

He theorized that the real problem was that all of the builders’ workers were probably union workers and union wages were sure to be the basis of the high construction costs. So he decided to attempt to “save some money” and go another route. He bought his own “Home Architect” program for his PC and designed the house himself. The program produced blueprints and a materials list. He shopped for the cheapest materials he could find, and even “recycled” some materials he was able to “find” here and there in the neighborhood. He tore down his old house with a rented excavator. He moved his family in with a relative while the project was going on. He hired his brother-in-law who was recently out of work, but used to be a general contractor many years ago to actually oversee the construction. Cheap labor was actually pretty easy to come by – i.e. his brother-in-law would pick up a crop of day laborers in front of the Home Depot every morning, and off they’d go to work on the new dream home.

Needless to say, several months later, far longer than the man thought it would take to build his house, he didn’t get exactly what he’d imagined in his mind. He’d spent far more than the $100,000 he’d budgeted—why, he spent almost as much as the builders he had originally spoke with told him it would cost. Most of that was attributed to going back and fixing problems that arose, redoing work that wasn’t right, correcting mistakes. And it looked a mess.

To this day he and his family still live with a relative, saving money to try and rebuild later. You see, the city had the house he built condemned and torn down, and he was heavily fined for lack of all the proper permits and violations of building codes.

When asked by a friend why he was so foolish to waste so much money and put his family through such terrible inconvenience, he replied: “Well, the guys building my house only cost $5.00 an hour! I was saving money!”

The Short-Sighted CIO

Once upon a time a CIO needed a mission critical software application developed. It was going to revolutionize his company and give it a powerful competitive edge. He knew he didn’t have all the resources he needed to pull it off in-house, so he sought third-party help. The top outsourcing companies quoted him bids far in excess of what he’d budgeted. He was getting frustrated and stressed. Then one day, a friend told him to look into the idea of outsourcing the project to an overseas firm, somewhere in Asia. The friend made a point to tell him, “Just make sure you never pay more than $40,000 a year or $20.00 an hour for offshore work.”

Hey, those numbers fit into his budget perfectly! So he initiated a vendor search, instructing his staff to find a short list of offshore firms, but with the explicit instructions to make sure that developers didn’t cost him over $20.00 an hour. In practically no time, he was able to find several offshore development shops that would write code for him for only $16.00 an hour! That would even bring him in under budget by almost 20%. He was going to be a hero – and save money.

And so contracts were signed and the project began. Needless to say, many months later, far longer than the CIO thought it would take to develop his software, he didn’t get exactly what he’d imagined in his mind. He learned the hard way that $16.00 an hour developers aren’t System Architects, Business Analysts, and Project Managers that are critically needed to ensure that requirement are well-defined, the software gets architected and designed properly, and processes are set up to ensure project success.

He learned $16.00 an hour also didn’t get him senior developers, only very junior ones, many with barely a six-week certificate in basic programming to their credit and spoke little to no English. That hourly rate also didn’t afford him the best Quality Assurance testers to ensure the application was built right and functioned properly. In fact, when bugs were found, it took even longer to go back and retool the product to fix them. Some pieces had to be completely redone. What was supposed to take only six months took well over a year and still didn’t work right.

The company never was revolutionized. In fact, their biggest competitor beat them to market with a product very similar to what they were trying to build, but did it six months faster and captured a leadership position. The CIO was summarily encouraged by his CEO and board to “seek other career opportunities,” which he did, deciding to take his brother-in-law up on a request to help him build a new house. He’d been a general contractor earlier in life, and figured he could apply all of his expert business acumen to turn over a new leaf in home construction.

Life Imitating Art?

These two characters described above are just fools, right? A real CIO or other senior technology executive would never be that stupid, would they? Unfortunately, it happens every day. Many senior executives make incredibly myopic decisions on the vain promise of saving a buck, which usually ends up costing them dearly—and often in more ways than one.

Which is cheaper? A software developer that costs $16.00 an hour, but who takes a year to complete a project; or a software developer who costs $25.00 an hour, but who can complete the same task in six months? Let’s see: 52 weeks in a year, times 40 hours a week, times 16 equals $33,280. But 26 weeks, times 40 hours a week, times 25 equals, $26,000. Wow, the developer that costs 36% more per hour actually was 28% less expensive when it came to the actual deliverable price. How is that possible? Oh, yeah, productivity matters, not just activity.

Quality matters, too. Why did it take the cheaper guy twice as long as the more expensive guy? Is he just a slower typist on the keyboard? Probably not. More likely, the more expensive guy had greater experience, needed less time to solve problems he’d encountered in the past, made less mistakes, and therefore eliminated a lot of extraneous QA and bug fix time. Ergo, guys who know exactly what to do and get it right the first time can be far less expensive in the long run.

Process and tools matter as well. Is the cheaper guy using a mature development process and state-of-the art tools like the more expensive guy? Does the cheaper guy have access to proper revision control, regression testing, integration, and all of it overseen by seasoned technical leads and project managers? And if he’s working offshore, how are his communication and language skills? Is he getting ongoing training like the more expensive guy? Not likely.

But don’t misunderstand – there’s still good money to be saved with offshore firms. A US-based developer might cost from $50.00 to well over $100 an hour to employ. So finding a good offshore development firm who charges even in the $30.00 to $40.00 an hour range can still represent a dramatic savings over hiring domestically. Plus, “renting” instead of “owning” development resources can represent a much lower HR and management burden, and be especially convenient if a large team is only needed for fixed window of time, not long-term.

The point is that when you’re comparing US labor costs to offshore, the savings will always be pretty dramatic. But when you start comparing offshore to offshore, you must realize that the less you pay in terms of an hourly or monthly rate for a resource, the more you’re not getting. What are you giving up to get the better rate? What hidden compromise are you making? Productivity? Quality? Expertise?

These are but a few of the factors that can cause many a senior executive to be “penny wise and pound foolish.” When it comes to choosing an outsourcing vendor, the idea of “Total Cost of Ownership” (TCO) is paramount. What does it really cost for the project to succeed and the ultimate deliverable to be fully realized? And what’s the cost of product failure after it’s been delivered in terms of ongoing support? TCO requires a lot more for you to consider than just underlying labor rates. And there’s one more thing to keep in mind.

There an old story told about Henry Ford and his assembly line. Allegedly, he had an engineer who had designed a very important machine and who faithfully maintained it for many years. After the engineer retired, one day the machine stopped working. The engineers on-hand tried in vain for a long time to repair it, but had no luck. It is said that Ford himself ended up calling the old engineer out of retirement to come in and try to fix it. The old man agreed. He came in, opened a covering on the machine, and being a small man, he physically crawled inside it, tinkered for about ten minutes and then reemerged. The machine fired back to life to everyone’s delight. The man then proceeded to present Ford a bill for $10,000, a fortune for that period in time. Ford was outraged. “How can you charge me this much for ten minutes of work?” he demanded. To which the old man replied, “I charged you one dollar for my time, Mr. Ford. And $9,999 for knowing what to fix.” Ford paid the bill.

Just realize that if all you’re paying for is someone’s time to build something for you, and yet you choose to do so with no consideration of productivity, quality, process, tools, and ultimately knowledge and expertise, then that’s probably all you’ll get—a lot of time spent with very little to show for it.

About the Author

Robert E. Gelinas has been a senior executive in the IT industry for over twenty years, and in addition to his extensive technology background is also an internationally published novelist and public speaker. His most recent works include The Mustard Seed and Anticipation (ArcheBooks Publishing).

The article was first published with ExecutiveBrief, a technology management resource for business leaders. Visit ExecutiveBrief at http://www.executivebrief.com

The Norwegian National Rail Administration (Jernbaneverket) has signed an application management services contract with Steria, worth an estimated 14 million Euros

In addition to providing local services to Jernbaneverket offices in Norway, Steria will implement an emergency management and new communication system for Jernbaneverket. Steria already supports Jernbaneverket with consulting and system development services.

Knut Frækeland, ICT Director at Jernbaneverket, commented,. "Steria will be responsible for ensuring that all Jernbaneverket employees in each of our offices in Norway always have access to the tools and services they need to complete their job. This is vital in enabling us to concentrate on our core activities," says Frækeland.

As a state-owned authority, Jernbaneverket reports to the Norwegian Ministry of Transport and Communications. The public rail network in Norway currently covers over 4,000 kilometres.

As part of a major transformation project on its mobile IT system, SFR, a French telecommunications company, has outsourced the entire system to Steria. SFR hopes the deal will improve operational performance whilst optimising costs.

The contract, signed for four years and worth almost € 100 million, involves Steria taking on the overall management of the IT production of this operator, covering all the front office applications (sales and subscriptions, CRM tools, marketing, invoicing) and the back office.

"We chose Steria for its ability to assist and speed up our transformation, while making considerable commitments for an entire area and in a standardised manner. This should enable us to increase our agility in managing our IT system and make real economies of scale, which are vital for our future investments. This partnership is a major asset to support our continued innovation policy for the benefit of our clients and thereby improve our attractiveness in an ever more competitive market," commented Emmanuel Erba, Purchasing Director for IT Systems and Services of SFR.

International consumer goods company, Henkel, has chosen Accenture to provide application development and maintenance services in Europe and North America under a seven-year application outsourcing contract.

Under the terms of the agreement, Henkel will outsource to Accenture its application development and maintenance activities, including all SAP applications, business intelligence solutions, customer relationship management programs and Web applications.

Accenture will provide the services through one of its Global Delivery Network centres in Bangalore, India.

Dr. Peter Wroblowski, Chief Information Officer (CIO) at Henkel, commented, “We are delighted to have reached a solution with Accenture that is based on state-of-the-art technologies and work methods and allows us to satisfy the demands of our IT users even more efficiently and cost-effectively.”

When it comes to payroll outsourcing dissatisfaction outweighs satisfaction in many vital areas. This is revealed in new research by HR Access that, for the first time, demonstrates the extent to which existing UK providers are getting things badly wrong. Although many of the businesses interviewed were satisfied with the impact and value of payroll outsourcing, the devil is in the detail. For instance, only 25% agree outsourcing had increased employee engagement and there was 100% consensus that current arrangements could be significantly more cost efficient.

Organisations reported five key areas of disappointment and if current vendors wish to improve their customer relationships, they really need to take this feedback on board. These five areas are failure to properly scope services, weak account management, inadequate handling of change requests, the absence of continuous improvement initiatives and poor communications.

Whether taken individually or collectively, these shortcomings have the potential to derail an outsourcing relationship. Without rapid reversal of this worrying trend, dissatisfaction will continue to grow and fester. The genuine threat is that clients will vote with their feet and select an alternative vendor; one with the philosophy, capability and vision to deliver the promised benefits of outsourcing. Surely this threat alone is sufficient for vendors to up their game?

Whilst the solutions to these five key issues aren’t complex, they do require careful planning and a change of mindset by vendors, plus a level of urgency and energy that isn’t particularly evident in the research. Such a change of mindset is arguably the sternest test for vendors that are somewhat set in their ways.

Of course, in an ideal world these issues would have been eliminated at the contracting stage and this is the key learning point for any organisation currently considering their first payroll outsourcing arrangement. Yet for existing clients there is a real change management programme to force onto the next review agenda.

Vendors need to buy into and adopt a few simple, yet vital principles. Thoroughly scoping prospective clients’ service requirements from the outset is an obvious change. And once clients’ payroll has been outsourced, vendors must maintain focus on responding promptly to change requests and driving through a proactive, continuous improvement programme. Furthermore they need to invest quickly in better and more effective account management, and in continuous, high quality, two-way communications.

These changes, if deployed well and with the right client-centric mindset, will enable vendors to begin building a reputation for delivering exactly what they bid for when it comes to cost, quality, change management and overall strategic value to the customer.

To download a free copy of the research visit http://www.hraccess-uk.com/payroll-solutions.html

Further to my blog last week on the difference between traditional outsourcing and cloud computing, I've received a deluge of comment and information. I couldn't possibly hope to include it all in one blog (or even two or three), but I'm passing on many of your emails to my colleagues at sourcingfocus.com, who hope to cover the subject in more depth in the coming months.

But I'd still like to share with you a sample of the insights I've received. Perhaps the most useful discussion came via an email 'chat' with Gary Barnett, partner and chief technology officer at research and consulting firm, the Bathwick Group. My thanks to Gary for his thoughts on this issue.

Part of the problem with cloud computing, he says, is that currently, it means "everything to everyone". Instead, it helps to think of cloud computing as a spectrum. "At the one end, you have full service provision; then software-as-a-service (SaaS); then utility computing - companies like Amazon with its EC2 platform that offer 'computing cycles' as a utility service," he explains.

But whether it's SaaS or utility computing, he says, the 'cloud' element implies a level of automation and virtualisation that hides the complexities associated with scaling usage up and down - a capability that he refers to as 'elasticity of supply'.

Outsourcers should be very interested in the whole spectrum, says Barnett. "At the service provision end, Kris Gopalakrishnan [of Infosys] is right to see both threats and opportunities. SaaS is the best way to reach down into the mid-market when it comes to offering services like managed email, customer relationship management (CRM), enterprise resource planning (ERP) and so on."

"At the utility end of the spectrum, meanwhile, outsourcing providers can exploit the technical elements of cloud (automation, virtualisation, elasticity of provisioning and so on) to deliver more cost-effective computing services to their clients, or more importantly, to provide clients with a clear idea about how the outsourcer is going to get all the efficiencies they promise."

"Most of my end-user clients won't be 'going to cloud', in the sense of moving their apps/infrastructure to cloud-based services," he adds. "Instead the cloud will 'come to them' - they'll buy in services that are delivered on the cloud, or an outsourcer will gradually transition their infrastructure to cloud as part of an outsourcing deal. Sure, some new apps will be developed for cloud - but there's a heap of legacy equipment in End-User Land that isn't going to shift to the 'cloud' any time soon."

In human years the offshoring industry as we know it is getting close to the prime of its life. It has grown from bouncing baby when doting customer service managers and CIOs looked on, excited as their costs fell thanks to those happy offshore agents and developers. Then came the unruly teenagers as vendor attrition rose, customer service levels fell and those at the other end of the line rapidly became unhappy with their new far-flung customer service people. Data blunders and security leaks then worried executives about their sourcing decisions and some publicly advertised their UK sourcing credentials. But outsourcing still continues apace and most would say the mature providers have overcome their early bugbears to become a ‘safe pairs of hands’. Offshoring is now 'fully grown' and is out there looking for new challenges, developing new ideas and new services. As a natural progression of this, the offshore outsourcing industry continues to clamber up the value chain into more highly skilled pursuits.

“The approach of only outsourcing "non-mission-critical" processes has become dated,” comments Stan Lepeak, Managing Director of Research for EquaTerra.

Indeed, it seems a natural progression of globalisation that offshore locations and providers will seek to provide higher level services. The larger providers become and the better local educations systems become, it is logical that staff originally happy to tap out mundane code or sell low level products, will require new challenges.

“Individuals in these offshore locations are hungry to learn, grow and be promoted and will switch organisations to gain this exposure if they do not receive it with the providers they currently work with,” says, Kulvinder Reyatt, MD of Europe and Asia, for RR Donnelley.

Local skills gaps are also a big issue. In the UK for example the lack of domestic IT expertise is a very real problem. Recent research by Vodafone found that more than a fifth of companies say they lack the IT skills needed for their businesses to thrive.

“Domestic talent pools are not big enough and they need to focus more on performing higher value added activities. For example analysis not processing and decision making not paper shuffling,” said Lepeak.

Offshore vendors have spotted the obvious opportunities and are continuing to offer new services to their customers. It is almost impossible to find an outsourcing company that still offers only low-end, high-volume outsourcing. Providers want the specialists processes and want the extra kudos, business and income that comes with it.

RR Donnelly, an age-old printing specialist, is one company that has captured the BPO zeitgeist, moving originally into low level print 20 years ago but now taking on more traditionally in-house or on-shore tasks. Creative communications, legal processing and research and analytics all fall under their offshoring menu, delivered from India, Sri Lanka and the Philippines and many European locations. The company has also developed offerings in financial management such as accounting, credit card applications and insurance claim management. The company even offers ‘Pitch assistance centres’ for large corporate, investment banks, consultancies and the like

While many of the ‘new’ services being offered by outsourcers might not have always been done in house previously, it is the offshore element that is new. So are buyers ready to offshore their PowerPoint presentations or legal documentation for example? Clearly some are otherwise the companies would not be offering such services, but the offshoring of such processes is still not widespread. So should companies be weary of sending their high-end processes off-shore?

“As an outsourcer I can confidently say no. However, in some cases there is a longstanding hostility between customers and suppliers, with the gap widening in the current recession,” said Dr Roger Newman of Mahindra Satyam. “The reality is that businesses need greater intimacy with their suppliers and for the supplier to be integrated with their business models if there is to be the mutual benefit required for long term success,” he adds.

The subject of management in high-end offshoring is something not to be overlooked. The switch-on, switch-off mentality of large scale outsourcing no longer fits with the often close collaboration now required. For example, imagine trying to refine an important presentation being developed offshore without numerous phone/video conferences. Likewise management of financial processes and data requires new in-house responsibilities, procedures and security measures.

“To successfully manage multiple BPO providers, companies need to take a number of sophisticated and often culturally challenging steps. Companies that successfully manage offshoring core or mission-critical processes look to create collaborative management models that share responsibilities, risks, and rewards, enabling both sides to reach their objectives,” comments Lepeak.

Assessing the possibility of outsourcing high-end processes begs the question how far should one go. Obviously you cannot outsource everything so surely there needs to be a balance. “You can't outsource everything - you need something on which to base competitive differentiation - but nothing should be "off the table" when it comes to considering outsourcing options,” says Lepeak.

The advice from providers is of course speak to them to gain a better understanding of what and how processes higher up the value chain can be effectively offshored. Even amongst old-hands at the outsourcing game, a reassessment of possible suppliers is likely to be a first step.

Sukhendu Pal, Principal Consultant at Centrix Consulting, comments, “All companies need to rigorously assess each of their functions to determine in which they have unique skills and sufficient scale and in which they don’t. Better assessment of competencies can improve a company’s strategic position by reducing costs, streamlining the organisation, and improving quality. Finding more qualified BPO service providers to provide critical functions usually allows companies to enhance the core capabilities that drive competitive advantage in their industries.”

The outsourcing industry has clearly come of age so end users must adapt to keep pace. However, in current economic circumstances, it will not take much to encourage executives to investigate what is now on offer.