Industry news

The recent research published by Vanson Bourne and Patni Computer Systems which claims that outsourcing confidence remains high has to raise a few eyebrows. While that specific question may have been asked of this sample, the other statistics within the research reveal that an entirely different, and concerning, conclusion is possible, if not more likely.

If 40 percent of respondents are planning to outsource more, which it cannot be denied is reassuring, then 60 percent are either outsourcing the same amount or even less, which surely cannot support the conclusion that confidence in outsourcing remains high.

Indeed, if you consider some other recent research undertaken by Harvey Nash and PA Consulting, polling almost 1500 CIOs across Europe, it appears that confidence is if anything waning as outsourcing spend is being cut by 24 percent, almost double the 13 percent of last year. Additionally, dissatisfaction with offshore outsourcing has grown from 62 percent to 66 percent.

Therefore, the conclusions drawn from this research can be considered to be misleading at best, and hide some important and potentially rather worrying trends – ones that both sides of the outsourcing community cannot afford to miss. “Lies, damned lies and statistics” after all!

Perhaps a more apt conclusion, drawing from both sets of research, is that the jury is still out over whether confidence remains high within outsourcing. Outsourcing has become something of a standard modus operandi for UK business, but given the recession, in order for this to remain a safe course of action, there are a number of areas which both clients and suppliers have to not only concentrate upon, but actively co-operate over.

For instance, we have seen many examples within the last year alone of good outsourcing strategy being implemented with either a single outsourced provider, or a well-managed multi-sourcing programme. However, we have seen at least an equal number of horror stories with massive over-dependence on one supplier, or an entirely uncoordinated multi-sourcing policy, and on many occasions, it has been caused by lack of resource, time and effort being dedicated to managing the relationships.

We are also all aware of national political pressures to bring jobs back into the country, rather than offshoring, meaning that those who do offer an offshore service must prove that they will actively pursue adding business value. Therefore, there is a real need for the development of more equitable commercial models – a move away from a negotiation of manpower levels being provided, to instead ensuring that the contract signed generates business value for both sides, especially through innovation, and that the commercial terms are output not input-based.

Similarly, governance on both sides of many outsourcing relationships has to be improved. Huge numbers of companies are terrifyingly unaware of how much an outsourced arrangement actually costs, or do not fully understand what the end goal of the arrangement is – a state of affairs that cannot be tolerated in good economical times, let alone now.

Sourcing cannot afford to be left as business as usual – it must be about adding business value, and if outsourcing clients and suppliers are confident that this is the case in their outsourcing relationships, I would be very surprised.

I'm always sceptical - but curious - when any location is presented to me as "the new Bangalore". Lately, it seems to be happening more frequently, as various regions of the world jockey for position, attempting to grab the business of companies that might otherwise consider India to be the de facto location of choice for offshoring.

There's plenty of evidence to suggest that some of these new regions will succeed, especially as the cost advantages offered by Indian outsourcers continue to deteriorate.

Earlier this month, consultants at AT Kearney published their research into how the geography of outsourcing is shifting. If you haven't seen the findings already, I'd urge you to take a look. They make for pretty interesting reading.

On the whole, it seems to me that trying to pinpoint the countries or regions that have the best offshoring proposition is a dicey business and raises a whole host of questions for prospective customers. Do these emerging outsourcing hubs have the necessary people, with the right language and skills capabilities, to meet the requirements of multinational companies? Is the technical infrastructure in place (and sufficiently robust) to support the high-volume data flows involved? What financial incentive are outsourcers in that region able to offer its target audience? Can they guarantee the kind of political stability that this audience will expect? What cultural barriers may be encountered?

Prospective customers will expect robust answers to these questions from suppliers in any new offshoring location.

They might also be wise to take a look at the recent performance of that region's currency against their own. In the last year, many companies have been caught out by the volatility of foreign exchange markets when it comes to offshoring their activities - and these shifts have, in some cases, made nonsense of carefully forged cost structures and pricing schemes. Both buyers and sellers of offshoring need to become a whole lot better at hedging against currency fluctuations and, in particular, at calcuating whether a devaluation of the local currency against the pound or dollar is likely to be outstripped by wage increases in that region.

Of course, no-one is saying that offshoring can't provide a very attractive option for organisations looking to make savings - just that they need to think very carefully about the particular region they choose. In June, I'll be blogging from Nairobi, where I'll be asking these questions of prospective suppliers, employees and government supporters of offshoring there. Is Kenya the new Bangalore? We'll see!

Johnston Press, which publishes over 300 newspapers and magazines throughout the UK, has announced plans to outsource the production of certain local glossy magazines to the Press Association news agency.

The deal covers 15 monthly, bimonthly or quarterly magazines produced at Johnston Press publishing centres across the UK.

The Press Association will deliver its production services from its headquarters in Howden, east Yorkshire. The publisher will be tasked with producing over 700 complete pages for Johnston Press each month.

The services provided by PA will include, page setting, advertising placement and some editorial content. However, Johnston Press journalists will continue to provide the majority of the editorial content.

US Citizenship and Immigration Service (USCIS) has signed a contract with CSC to conduct scanning, indexing and file management operations at a records digitisation facility. The new agreement has a one-year base period and a contract value of US $27 million.

USCIS is the government agency that oversees lawful immigration to the United States of America. The Agency establishes immigration services and policies.

Under the terms of the agreement, CSC will support USCIS by providing file maintenance activities and electronic access to various types of records, including receipt, temporary and account files, and imaged data that reside in various USCIS offices. The digitisation of these files, which are stored in the USCIS Enterprise Document Management System, allows USCIS and its customers to electronically access specific digitised A-Files for processing immigrant applications or investigations. The applications include immigrant requests for naturalisation or permanent status in the United States.

USCIS originally signed the contract over to Datatrac Information Systems Inc. in 2006 for a term of five years with an estimated contract value of $150 million. CSC acquired Datatrac in December 2006.

The International Olympic Committee (IOC) has extended its contract with Atos Origin to serve as the IT systems integrator for the Olympic Games for an additional four-year period. After Vancouver in 2010 and London in 2012, Atos Origin will provide IT systems for the Sochi Olympic Winter Games in 2014 in Russia and the Olympic Games in 2016, the host country of which will be announced on 2 October 2009.

"Atos Origin, our long-term partner, is the brains behind the technology operations for the Olympic Games, consistently delivering high-quality services on schedule. The Beijing Olympic Games were spectacular and Atos Origin provided a crucial role in ensuring the success of the event from a technological perspective, and in making sure that the IT systems functioned perfectly. We are confident that Atos Origin will once again deliver an outstanding job for future Games”, said Jacques Rogge, President of the International Olympic Committee.

Under the contract terms, Atos Origin will continue to work on the integration and management of the vast IT system that relays competition results and information about athletes in less than 0.3 seconds to spectators and media around the world.

The agreement represents the largest sports related information technology contract ever awarded, and further entrenches a partnership of more than 20 years between the Olympic Movement and Atos Origin.

In today’s tough economy the telecoms sector has a lot to teach us about outsourcing. The telecoms industry not only represents a large proportion of IT spend (Gartner recently predicted this to be more than 57% in 2009) but the competitive nature of this industry and the consumer demand for service providers to deliver rich applications at lower costs means that the industry experts cannot afford to make the wrong decisions when it comes to outsourcing.

Due to intense cost cutting measures many CIOs are looking at outsourcing as a way to lower operating costs while simultaneously introducing modernisation and integration of systems. In fact, Amdocs recently commissioned a survey which found that 91% of service providers regard modernisation as a key component of operational support systems.

The survey of more than 100 executives with financial and operational responsibility from wireline and wireless service providers around the world highlights how important it is to go beyond simply surviving the current economic climate by cutting operational costs. In fact, increased service profitability improved customer experience, and improved time to market ranked nearly as highly in the survey as a reason to outsource as operational cost savings, demonstrating the expanded business value of OSS outsourcing.

As expected, outsourcing helps service providers to overcome major OSS challenges such as the moves towards complex next generation services and overcoming long delays in launching new services. The survey also found that some two thirds of the respondents would prefer to outsource business support systems (BSS) with OSS to help create a seamless integration between their BSS and OSS— a way to improve the customer experience and give them a competitive advantage.

If service providers don’t succeed in transforming their OSS/BSS systems as we move out of downturn, they miss the opportunity to re-define their cost base and position for growth ahead. Transformation of OSS/BSS systems in conjunction with managed services will ensure that service providers are ready to capitalise on market opportunities now and into the future, as we move beyond these turbulent times.

Budget cuts and job losses may be at the forefront of people’s minds, but there are some ways in which the downturn could be good for business. With organisations wary of spending any extra money at all, IT departments are finding it increasingly difficult to gain approval from the Board on new investments. Instead, they’re having to look at what they already have: many companies are using this period as an opportunity to rationalise existing infrastructure and extract maximum value from current systems.

And those who follow this strategy will reap the rewards – not only will it impact the company’s bottom line in the short term; it will prepare the business, and the staff, for the upturn.

Right now, it’s a good time for IT leaders to get to grips with the real needs of the organisation. IT departments can support their company through the recession by aligning themselves with the business’ priorities. They must establish a strong IT strategy which will ensure operations across the business run smoothly, staff work efficiently and teams are truly collaborative, so the organisation can increase profits, retain customers and gain a greater share of its market.

But this doesn’t necessarily require additional investment. At the moment, most companies are experiencing large budget reductions, with any increases relatively modest compared to previous years. Consequently, many organisations are shelving any non-essential projects and working with what they have in place already. By following three simple steps, businesses can sweat their assets, making the most of the technology, systems and resources they already have in place:

1. Re-organise, re-structure and automate

IT budgets are almost always spent in full, but all too often this just means people are buying technology for the sake of it. This results in complexity and additional management headaches, when what the business really needs is speed, reliability and ease of use.

IT managers need to establish what technology they have, what they need, and what they can manage. They may find they are over-subscribing to certain software programmes required for the number of the workforce that needs access, or it could be a case that some systems are no longer essential to the business’ operations.

A full audit of what is in use and what is of use will help rationalise the business. Any excess should be stripped out to avoid unnecessary complications and expenditure, making the whole company run more smoothly, more efficiently and more cost-effectively. It will also provide an accurate indication of areas that could make the best use of any future investment, as IT directors will be able identify outdated programmes or business critical tasks and systems.

2. Have your cake and eat it

Very often, organisations find they have invested in technology but failed deploy it. They end up wasting hundreds of thousands of pounds and losing out on increased staff productivity.

For example, Microsoft Office SharePoint Server has been around for some time, but there’s still widespread misunderstanding about how it works. It’s not like the Office suite, which is basically ‘plug and play.’ To take full advantage of its toolset, you need a fairly sophisticated installation, so many organisations are simply casting it aside.

But those who snapped it up and not utilising it are effectively sitting on money mountains. SharePoint provides the building blocks for gaining control over your unstructured data, moving towards effective enterprise content management. Once it’s up-and-running, it can improve workforce productivity exponentially. Organisations need to start realising the benefits of technology like this and stop wasting their investment by not using it.

3. Work smarter, not harder

Many organisations are already finding greater efficiencies through adopting different working practices that while reduce expenditure while supporting top-line growth. Shared services centralise back office functions, while remote and flexible working cut down on travel and office costs.

Another initiative that can be achieved quickly and has immediate return on investment is collaborative information management. Unlocking the value of information assets is vital to an organisation’s success in a downturn, whether this information is stored in IT systems of people’s heads. And for any organisation shedding jobs, greater collaboration and better information management is vital. When workers leave, they take their knowledge and experience with them; but those left behind need not suffer.

By consolidating information centrally, staff are saved from ‘re-inventing the wheel’ and can access, find and view the content they need immediately. Instant messaging and collaboration enable employees from across the business to work together more effectively, sharing and exchanging information wherever they are. This will improve overall workplace productivity and create a more integrated business.

By following these three steps, any money the organisation does need to spend on IT will be a long-term investment, not a short-term expenditure. In this way, the company can feel confident that it will outgrow the competition rather than just stay in business.

Everest, the international research institute, has recently released its 2009 Q1 Market Vista report. This report gives an overview of the global sourcing industry and highlights in particular the transaction trends within the outsourcing world. sourcingfocus.com takes a closer look at the report’s findings and explores just where the outsourcing market is heading.

The first thing that the report summary states is that the volume of outsourcing transactions has decreased by seven percent when compared to Q4 2008. This can hardly come as a surprise as many organisations would have been reluctant to shell out the initial investment associated with new outsourcing deals, instead opting to review their internal strategies first.

Anand Ramesh, research director at the Everest Institute, commented on the dip in transactions, “There is a significant amount of caution about new spending or new initiatives. Organisations are in a wait and watch mode.”

The actual cash value of transactions also dropped by 16 percent. Does this clarify the theory that end users are taking a cost is king approach to outsourcing? Suppliers might be having to offer lower rates in order to entice new business. In turn, end users who are renewing their contracts will inevitably be looking for a reduction in price.

Martyn Hart, chairman of the National Outsourcing Association warns end users of the risks associated with excessive bartering, “The recession will prompt end users to pin suppliers to the ground on price, heavy bartering will be taking place at contract negotiation meetings across the world. However, suppliers will make up their money somehow, probably through pricey change requests and we may find end users regretting their initial price busting tactics.”

Mr Ramesh also pointed to the fact that organisations are taking a piecemeal approach to outsourcing, “Organisations are hesitant to sign long contracts. They are not putting their eggs in one basket and are [instead] engaging in smaller transactions for small ACV.”

As a result Mr Ramesh believes that multisourcing is increasing. Big transactions mean big upfront costs, something which no organisation is very keen on doing.

Despite a slump in transactions, the outsourcing industry is growing. The amount of transactions are up from Q1 in 2008 and all involved in the market can rest assured that there will be a continued upward trend. Mr Ramesh believes that by Q4 of 2009 the market will be significantly more positive.

One area of particular interest is the large amount of outsourcing activity within the Banking Financial Services and Insurance (BFSI) sector. Transactions within the BFSI sector have grown by 40 percent compared to Q4 2008, this indicates that an extensive review of resource allocation is taking place within the sector. All those involved in financial services outsourcing have certainly had to look at efficiency.

Large mergers and acquisitions within BFSI will mean a duplication of roles, higher overheads and costly IT infrastructure. It is therefore understandable that outsourcing within that industry has grown.

Within the BFSI sector, ITO was reported as being by far the largest growth area with a 38 percent increase in the number of ITO transactions. This has amounted to a massive 120 percent increase in ACV for ITO transactions in the BFSI space, bearing in mind, this is only an indication of deals for which contract value was disclosed. BPO however was reported as staying pretty much the same as the previous quarter.

2009 was supposed to be the year for BPO. Research from organisations such as the London School of Economics predicted BPO to be racing ahead, even overtaking ITO in speed of growth. Well if that is the case, then the Market vista report shows BPO as a late starter, because in Q1 of this year the value of BPO transactions was down by US$530 million. This did not surprise Ian McGowan, a Director at ADEC, a provider of BPO solutions, “Revenue losses in the banking sector last year and the Lehman Brothers collapse would have had a direct affect on BPO.”

While BPO appears to be stalling, the report points to an increase in captive investment, with areas such as the Philippines enjoying particular growth. “This is a clear indication of large global corporates investing in captives rather than third party suppliers. There is more risk involved, however results can be seen within 12 months”, commented Mr McGowen.

So, this report brings a mixed bag for the outsourcing community to digest. There are certainly no signs of a long term slowdown, however there appears to be significant changes in end user strategy. Suppliers will need to be wary of cost, which in this economy is a given. However, vendors will also need to be prepared to deal wtih smaller, quick turnaround contracts, rather than mega-deals. Captives look set to gain more traction in 2009 and locations such as the Vietnam and Turkey will also be looking ahead with great optimism.

The recession has not significantly slowed down the industry, it has just catalysed a change in strategy. All those involved in outsourcing should take note and prepare for a dynamic 2nd half of 2009.

The SaaS undercurrent is growing at a rapid pace and looks on course to confirm its place as the true future of enterprise software delivery. The worldwide market for virtual IT delivery is forecast by Gartner to reach $9.6 billion this year and grow to $16 billion by 2003. The tide is clearly turning for IT and companies are investing more and more in virtual IT delivery. But what are the options in SaaS and how is it changing the delivery of outsourced IT?

Rob Lovell, CEO at Think Grid, commented, “Whilst these new models transform the way that business purchase and manage IT, the point is that there should be no need to change actual working practices. Employees must be able to continue to work in exactly the same they gotten used to and remain completely ignorant of the fact that behind the scenes, virtualisation and SaaS is making their company that much more efficient.”

But SaaS is definitely changing the way companies think about implementing new IT. The possibility of cutting infrastructure investments, accessing constantly up-to-date systems and taking the weight of maintenance off an organisation’s shoulders is a highly attractive prospect for end users.

Gartner’s research into SaaS found the market for SaaS in ‘communications and collaboration’ to be approximately $2.5 billion with CRM close behind at $2.1 billion. Applications like Salesforce.com and Sugar CRM are of course at the forefront of driving adoption of SaaS in this area. However, the adoption of ‘core IT’, those systems that pertain directly to the central operation of the business, is proving a harder nut to crack. The predicted market for ERP, though a seemingly large figure at $1.4 billion, only represents a $100 million growth on 2008. Likewise, Springboard Research expects the Asia Pacific SaaS ERP market to reach just $193 million by 2012. Either of these figures would quickly be overshadowed by some of the IT infrastructure outsourcing deals that are still being signed on a daily basis.

Though the Asia Pacific region is clearly looking at SaaS, it appears that it is mainly smaller companies and smaller deals. And the fact ERP is not leading the total market value in Gartner’s index suggests a similar trend worldwide. News of large core IT SaaS deals are still hard to come by and the market is still dominated by Salesforce.com’s CRM system as the shining example of SaaS success.

So what is putting the larger companies off looking at more integral IT through SaaS? A lot of the reticence seems to come from current perceptions of SaaS IT.

Sharon Mertz, research director at Gartner, commented “Certain factors can work to impede adoption of SaaS including: concerns about data security, a perceived lack of competitive differentiation, increasing concerns about scalability, questions about vendor longevity, and the fact that existing investments in applications capital and organisational expertise limit SaaS growth.”

However, industry feeling indicates that many of these concerns are becoming less valid as the industry evolves. “The Impact of virtualisation on outsourcing IT services in general and alternative delivery models actually causes an increase of offerings created by different providers,” said Claudio Da Rold, Vice President of Gartner.

The security question is also put down by vendors on the reasoning that they can be more foolproof in an outsourced capacity. They evidence the fact that through economies of scale, their back-up, physical security and business continuity offerings are much comprehensive that can be maintained in-house. Indeed, SaaS could ultimately prove more secure than maintaining an in-house datacentre.

However, due to differing revenue models, cost bases and development priorities it seems unlikely that SaaS vendors will be able to match their offerings to a company’s needs as effectively as a custom-developed IT project would.

Mikhail Bykov, Managing Director of Manufacturing and Enterprise solutions at Luxoft, a large Russian ITO player, commented “SaaS may not support unique business process of an organisation that may be achieved with custom solutions. This needs to be considered if your core IT supports critical and unique business processes.”

So for some end users, trying to implement core IT over SaaS, may simply be unfeasible due to lack of customisation.

The fact that many larger companies are tied into long-term, high-expense outsourcing deals is another factor hindering SaaS adoption identified by Gartner. A certain amount of the growth over the next few years then is likely to come from outsourcing deals ending and companies looking at new delivery and billing models.

Rob Lovell, CEO at ThinkGrid, commented, “In essence, gone are the days where IT needs to be a heavy, upfront Capex investment.”

The attractiveness of SaaS to larger companies is also likely to increase as the big IT players get in on the act. Springboard Research’s report on the Asia Pacific market found that: “Growth in SaaS ERP market is also constrained by the limited presence of large, well-established SaaS ERP vendors in Asia and the lack of robust and mature solutions that cater to the specific needs of the market.”

This is still largely true for the Western world too. The SaaS market is currently dominated by best-in-class, single-function products where many large companies will be looking for a more complete enterprise product. When the larger players manage to modify their offerings to the on-demand world, there is likely to be a big leap in the takeup of such services. SAP, as one example, is still struggling with the concept as it attempts to get its Business ‘ByDesign’ SaaS suite ready. The company is also struggling to make money from SaaS as it has been built on the ‘large upfront cost, implement, leave and update’ model of software management.

Also, in a recent interview with Information Week Bill McDermott, SAP CEO and president of global field operations, said that large organisations would ‘never’ be able to run their core business IT using SaaS. This kind of comment from one of the biggest IT vendors in the world has to affect the way larger companies look at SaaS.

If the larger players like SAP take longer to develop SaaS than expected, the profusion of high quality specialist SaaS packages is likely to continue and this could lead to different management models for SaaS products.

Martin Banks from Bloor Research recently described his vision of ‘reintermediation’, where end-users will purchase an end-to-end service from a single service provider with the different components delivered by a number of companies. This new SaaS intermediary will manage the relationships necessary to deliver the end-to-end service that a business signs up for. This model certainly seems plausible if larger vendors do not make the grade. It also negates worries over integration over various important business SaaS IT services. Any intermediary would naturally want to work with its preferred SaaS vendors to make sure their products worked seamlessly together. For example if a CRM system cannot integrate with financial IT to feed projected sales into financials data, its utility is much reduced.

The third possibility is of course that of a mega vendor rising from the younger 21st century IT companies. Google, for example, is always a threat to the bigger, less agile players. Salesforce.com’s ‘Force.com’ cloud computing platform also has much potential for delivering a wider reaching service. CODA, a UK based financial software specialist has developed CODA 2go, which offers full SaaS accounting capability represents the first cloud accounting application built Salesforce.com’s cloud computing platform. The likelihood of end-to-end ERP offerings being built through such platforms is high and could prove an attractive option for many companies in the future.

Maria Cappella, CEO of Vialtus Solutions, commented, “With the rise of new uses of technologies like cloud computing, virtualisation and SaaS, procurement professionals will increasingly look for a single provider to provide an end-to-end service, rather than using one provider for their hosting, another providing security (as a service), a third for the connectivity and network provision, and fourth that provides applications like CRM, e-financials/payroll, ERP and e-HR etc.”

Amid the bustle of what is still a very nascent market, It seems the SaaS world is ripe for experimentation by end users. However, it is still geared largely for the smaller IT user. Indeed, the SME market can take advantage of various benefits by implementing SaaS such as: subscription based pricing taking the initial financial liability away and the ability to access world-class software at a relatively ‘young business stage’, enhancing growth as a result.

However, due to the fact the market still has a lot of growing to do and maturity is low, many signal a word of caution.

Andrew Heather, General Manager EMEA from Tripwire, commented “We must remember that management will always be responsible for protecting company and customer data. It is therefore essential, when moving towards cloud computing that businesses consistently ensure the health of the cloud-provided services. This includes gaining complete confidence that the cloud provider is a viable, stable business with assurances and protections, such as comprehensive risk and security defences in place, to safeguard business data.”

It is clear that, as with anything new, companies must conduct appropriate research and due diligence into the problem, concept and provider before diving in. The movement towards SaaS however, seems set only to increase. But Gartner predicts that “through 2011, fewer than one-third of investments that vendors are making in the cloud will pay off, causing further market consolidation and forcing some providers to go out of business”.

The message is coming across loud and clear. Until the market matures to a greater extent, end-users should keep their wits about them when entering the world of SaaS.

The Australian Government has signed a US$61 million (AU$96 million) agreement with EDS for the management of technology infrastructure for the the country's Department of Agriculture, Fishery and Forestry.

Under the five-year agreement, EDS will provide desktop, server, storage and architecture services. EDS will manage and provide help and service desk support to approximately 5,000 employees across the department’s 300 locations, as well as provide the overall storage and IT architecture and design services in a multi-vendor agency environment.

“This agreement will help the Australian federal government meet its business and policy objectives and deliver better return on investment to the Australian people,” said David Caspari, managing director for Australia and New Zealand at EDS, an HP company. “It builds on existing services we provide to the government and strengthens EDS’ position as the No. 1 government supplier in the country.”

The contract was signed in March 2009.