Industry news

The news that the loveable Twitter was infected by a virus this bank holiday weekend has sent me musing into the world of IT. Do not fear, the damage was limited and so we can all continue Twittering to our hearts content. So in the spirit of all that is IT related lets get on with this weeks News Round-Up…

Big blue has got even bigger this week, having received yet another ITO deal. This time it’s a 10-year ITO contract with Kurmanchal Nagar Sahakari Bank Ltd, one of the leading urban co-operative banks in the state of Uttarakhand in India. The big guns at IBM will now remotely host and manage the IT infrastructure and the disaster recovery site, as well as provide the networking infrastructure for the bank.

This agreement is first-of-a-kind for IBM in Uttarakhand and follows its success with other co-operative banks in different parts of the country. It has been a while since I have seen the words ‘success’ and ‘banks’ in the same sentence. Let’s hope things start looking up for more of them soon.

Another ITO contract came in the form of a five million euro deal for Steria, a current bellwether of the outsourcing industry. The contract is with Seguros Lagun Aro, an insurance company belonging to the Spanish Mondragón Group (MCC).

Under the terms of the agreement, Steria, whose operating margin jumped a whopping 24.7 per cent for 2008, will provide support for all the company’s applications. Steria will also work to create an application development platform using Oracle’s Developer suite.

Amongst many advantages it is hoped that the deal will allow Seguros Lagun Aro’s IT department to focus more clearly on the requirements of their internal business processes, improve the quality of applications whilst achieving a significant cost reductions. It sounds like Seguros Lagun Aro has got the same idea as everyone else when it comes to outsourcing their IT.

BMW, another big name, has signed a five-year ITO contract with IT behemoth, Accenture, to consolidate its information technology processes and applications.

Accenture will help BMW Group consolidate a vendor network of its application operations service providers in areas including production, sales, logistics, finance and human resources. It is hoped that Accenture will also work to make BMW’s overall IT processes more reliable, predictable and efficient. The agreement is designed to help BMW achieve lasting cost reductions by helping the company simplify its processes while improving the overall service levels provided to its business users.

Accenture will deliver the services to BMW Group through its centres in Hyderabad, India; and Munich and Hof, Germany. Sounds like a big job!

Now, back to Twitter…‘Sourcingfocus.com’s News Round-Up successfully completed – rather well if I do say so myself’.

The number of reported outsourcing "megadeals" awarded to a single service provider in 2008 has increased to 12 up from 10 in 2007, according to analyst firm, Gartner. Megadeals are characterised as being worth more than US $1 billion. In terms total contact value (TCV), the total for 2008’s 12 megadeals was US $17.1 billion, compared with US $12 billion for 2007.

However, des[ite the relative increase over the last two years, a recent Gartner report has found an overall decline in TCVs from 2000 to 2006. The average annual TCV of all reported megadeals per year for this period was US $28 billion.

Commenting on the trend, Dean Blackmore, senior research analyst for Gartner, said, “With the increasing popularity of selective sourcing and the trend toward greater control of the buyer, we continue to see both the average value of a deal, and the average duration of a deal decline.”

In all outsourcing deals (not just megadeals), the report shows a definite trend toward a greater number of deals, but for smaller TCVs. In 2008, deals below US $50 million saw a clear increase over 2006 and 2007, but deals over US $50 million saw a collective decline. TVC for all deals in 2008 was US $42.2 billion, which, although an increase over the 2007 figure of US $29.5 billion, can be attributed to the much larger volume of total deals signed in 2008.

“In economic downturns, we closely watch contract reporting as an indicator of the health of the outsourcing market,” said Allie Young, vice president of Gartner. “We have seen some softness in large deal signings, but no catastrophic decline. While economic forces can change priorities, the basic drivers of outsourcing remain intact — organisations still outsource for cost, efficiency, access to skills, focus on core business, innovation, modernisation and even business transformation.”

The largest IT outsourcing (ITO) or business process outsourcing (BPO) contract signed in 2008 was for a TCV of US $2.5 billion. There were two of these size deals, one of which was awarded to TCS. 2008 was the first year that an Indian IT services provider was awarded the largest deal. The two largest deals in 2008 were for the delivery of a combination of ITO and BPO services.

Since 2006 there has been a steady decline in the number of ITO and BPO deals signed in the Americas and a gradual increase in the number signed in the Europe, the Middle East and Africa (EMEA) region. In 2008, EMEA overtook the Americas as the leading geographic region in terms of volume of deals signed. In 2008, there were 162 signed in EMEA and 158 deals signed in the Americas. Deals signed that cover the global IT operations of buyers are also increasing and represented 25 percent of all deals signed in 2008.

“While outsourcing held up in 2008, we expect to see a slowdown in contract signings during the first half of 2009 and possibly extending into the third quarter, largely due to the tightening of IT budgets in the fourth quarter of 2008, and only slow loosening of budgets in early 2009,” said Ms. Young. “Long sales cycles for outsourcing are the norm, depending on the complexity, scale, and scope of the outsourcing deals, which may lead to delayed signings. However, organisations with approval to outsource — and desperate to save money — may seek to move rapidly and shorten some steps of due diligence just to get the deal into place."

Additional information on outsourcing contract trends in 2008 is available in the report “Outsourcing Contracts Annual Review (2008) Shows Outsourcing Growth — But Signs of Change.”

Microsoft has signed a US $170 million ITO contract with India's HCL to support the delivery of its online business productivity suite.

Under the terms of the agreement, lasting five-years, HCL will provide 600 employees to support the contract. 250 employees have already started working on the project.

The online services business is a part of Microsoft’s software-plus services strategy, through which, it provides communications and collaboration software such as e-mail and web conferencing services to enterprises.

Friday the 10th of January went like any other day for Ramalinga Raju – business as usual. His arrest alongside his brother that evening was anything but. From that moment he was the ex-Chairman of one of India's most successful outsourcing companies and exposed as the main perpetrator of the country's biggest ever financial fraud. He and those involved with him had systematically brought Satyam - once a shining paragon of India's outsourcing elite - to its knees. Since the arrest, many more have followed, both at Satyam and their auditors, PriceWaterhouseCoopers, leaving an indelible stain on both companies. The investigation has uncovered over $1bn worth of fraud and the quest to weed out all those culpable and right the wrongs of years of systematic ‘book-cooking’ will continue for some time.

But, emerging from these bleak and embarrassing times for Indian business, comes a ray of light. This week Tech Mahindra, the telecom-focused joint venture between BT and India’s Mahindra and Mahindra, has emerged as the highest bidder in a Satyam centric ‘fire sale’. Instigated by the Government and pushed along by NASSCOM, the industry body for Indian outsourcing, it is hoped the sale will draw a line under the scandal and signal a new beginning for Satyam and the outsourcing industry in general. But will it? Are Satyam’s troubles finally over and can Tech Mahindra, a relatively small fish in the outsourcing pond, make the deal work for the both of them?

“It’s likely the Enron-esque scandal will rumble on for some time. There is still some way to go in sorting out all the problems the company faces,” comments Phil Morris, COO for EquaTerra Europe, a leading advisory firm.

Indeed there is still a big question mark over the company; three more Satyam execs were arrested just last week and investigators are still digging. And, all forward-looking rhetoric aside, there is still no telling just how ingrained the fraud had become and how deep culpability goes. But industry commentators are broadly positive about the move, presumably welcoming a change rather than leaving Satyam to burn slowly to the ground.

None are more positive than Tech Mahindra itself. Preferring not to comment broadly prior to the Company Law Board’s (CLB) final approval [approved this Thursday 16th, ed.], the company issued a gushing press release, “This is a landmark development for Tech Mahindra and I am delighted that we are the highest bidder for Satyam.”

But the industry in general also seems convinced that this really is a new beginning for Satyam. “The fact that this move has been concluded (relatively) quickly is good news for Satyam's customers. The Indian government and the offshore and outsourcing industry in general has operated effectively to make certain that the sell-off off Satyam does not become a protracted experience. The hope of the Indian Government must be that the sell-off draws a line under the Satyam scandal,” commented Alistair Maughan, a Partner at Law Firm, Morrison & Foerster.

However, despite the fact CLB approval has now come through, there is still a long way to go. Mergers and acquisitions are notoriously troublesome for those unprepared and questions still remain over exactly how Tech Mahindra will tackle the numerous challenges to come.

“The merger will stretch them (Tech Mahindra) quite a lot because M&A’s are not something most companies are geared up to tackle. Executives will be challenged and will definitely need outside help to make things work,” commented Phil Morris.

He added, “But it will help them address the limitations of the company and its having been tied into and reliant upon BT. Tech Mahindra has been limited in scope and delivery capability and Satyam gives them a great leg-up.”

The Chairman of Tech Mahindra, Anand Mahindra, sounded confident that the company can fix things, “The Mahindra Group is known for its good governance and the Tech Mahindra team has demonstrated its outstanding customer centric focus over the last many years. I am sure that Satyam’s customers and employees will welcome this news. Looking forward, we are confident that this will lead to a positive transformation in Satyam’s business.”

If Tech Mahindra can make the acquisition work well, it will be a giant leap for the previously telecom’s centric provider. Satyam is an impressive animal delivery-wise and will open Tech Mahindra to clients and delivery capabilities in numerous new industries.

But there is still the matter of customers to consider first. As you would expect during a huge scandal such as this, Satyam has lost a reported 46 customers since the news broke including the lucrative National Australia Bank (NAB) contract. While many larger clients will be weary of risking the upheaval that changing large contract suppliers entails, Tech Mahindra must act fast to placate worries and prevent further client exodus.

“If I was Tech Mahindra or Satyam I would want to rebrand the company as a rebirth and new start. This would mark an end to the affair and I think the market would really understand and get behind such a move,” commented Phil Morris.

A rebrand is certainly an option to address Satyam’s severely damaged brand. But there is more that needs to be done directly to help keep customers on side.

“Once Tech Mahindra takes over, the main focus will be on the customers. Tech Mahindra will need to ensure that it targets the highest profile and highest revenue generating customers with the best prospect of continued relationship and focus absolutely in locking them in and keeping the vultures at bay. TM needs to convince Satyam's key customers that it is big enough and experienced enough in the right sectors to continue to deliver great quality services,” commented, Alistair Maughan.

According to Phil Morris, those customers that decide to stick with Satyam either out of necessity or good faith will also need to do their part to keep things on track during the merger process. “Customers need to work to drive communications going forward and make sure they get Tech Mahindra and Satyam to sit down and talk about continuity of skill and service while changes are taking place.”

It is clear Tech Mahindra’s move is broadly welcomed by the industry but equally certain that there is still a long way to go. Learning from the past and making sure the M&A process is completed as smoothly as possible will be central to the success of the venture. The most important thing, however, has to be transparency. The lack of clarity that has almost been Satyam’s undoing will also make or break it in the future.

Phil Morris succinctly summed it up, “The company must display complete openness and transparency going forward; if they can’t do this, the problems they face now will continue to haunt them for a long time to come.”

From the moment we wake, to the moment we shut our eyes for the day, our ears and senses are bombarded with the buzz of new media, web 2.0 and now virtualisation. The stats machine that is Gartner, recently announced that they (along with the rest of the world) expect virtualisation to grow over the next couple of years.

Despite economic doom and gloom virtualisation software revenue is expected to increase by 55 percent, in 2009, in the EMEA region. Gartner highlighted Europe as leading the way in adopting virtualised platforms, with UK, Germany and France representing 89 percent of the total EMEA revenue in 2008.

So, what does virtualisation mean for the outsourcing industry? What structural changes will end users have to go through? Do virtualised platforms carry with them a new breed of security risks? sourcingfocus.com spoke with a variety of industry experts to find out what the virtual market has in store for the outsourcing industry.

Mark O’ Dell, Director of new technology at IT outsourcing provider, Connect, gives a brief summary of why companies are turning to virtualisation, “Virtualisation is on the increase due to a need to save money, save space and go green.”

All companies are tightening their belts and it is more than likely that money and space are much more of a catalyst for switching to virtual platforms than a burning desire to go green.

Ashish Gupta, Associate Vice President of HCL’s European Infrastructure Services Division, pointed out that the streamlining of IT managers work is also a driving force behind virtualisation’s growth, “It [virtualisation] is one of the main factors enabling IT managers to remotely manage and trouble shoot distributed or fragmented resources within the enterprise.”

So, the benefits associated with virtualisation are evident; cost savings, streamlining and consolidation are all words which would put a smile on the face of the toughest CFO. So what does this mean for the outsourcing industry? Adrian Polley, CEO of Plan-Net, an IT transformation provider, commented, “Outsourcing should become a much simpler proposition as hosting desktops from a central location and deploying to a wide variety of devices becomes commonplace.”

Companies looking to outsource aspects of the infrastructure will find it far easier on a virtualised system, good news for the industry surely? Cloud Data’s (a provider of hosting and business continuity services) MD, Karl Robinson, thinks so, “As more companies strive to make cost savings by embracing virtualisation, there will not only be an increase in companies outsourcing their IT infrastructures but also in the management of these infrastructures.”

Suppliers have cottoned onto the fact that virtualisation could lead to easier management of end user’s infrastructure and are now incorporating virtualisation in many of their ITO solutions, Mr Gupta comments, “More and more it is the case that outsourcing, at the infrastructure level, includes elements of virtualisation as standard. 30 to 40 percent of customers require virtualisation as part of the services HCL supplies.”

Mr Polley also supports the idea that vendors are turning to virtualised offerings, ”Hosting companies which would typically have just offered rack space in their data centres are now offering to run customer servers in virtualised environments. Also, typically managed service providers who take over the running and operations of a company’s servers are looking at virtualising those servers as part of the package.”

This all seems like a win-win situation for suppliers and end users, however, data loss and IT security is more of a concern to CIOs than ever before. Do these virtual platforms pose a bigger security threat to companies? Mr Robinson feels that “security in a virtualised environment is no more of an issue than security in any traditional IT department”. This may seem a little over zealous, it is true that virtual platforms make disaster recovery processes a lot more efficient however there are still significant threats.

“A quarter of a million malware threats are virtual aware” says Mr O’ Dell, these malware threats will certainly grow and become more sophisticated, it is therefore up to IT management to ensure that security measures are in place that deal with virtual threats and all staff are well trained on protecting the virtual environment.

Data loss is also a concern as Mr Polley highlights, “In theory, staff from the hosting company may have access to the systems – is this appropriate? Is this being adequately controlled? Often customers make assumptions that the hosting company has implemented strong security measures to protect data and systems, but this may not be the case.”

This comes back to the age old issue of setting strict SLA’s, security requirements and responsibilities at the procurement stage. Outsourcing of any kind needs SLAs in place, end users will end up getting their fingers burnt if they find out mid way through a contract that a supplier is inadequately monitoring the security of their new virtual platform. Better to sort this out at the start, if the supplier cannot replicate in-house security measures then they may not be the right bunch for the job.

Virtualisation is set to grow, there is no doubt about that. The outsourcing industry is responding and evolving to accommodate this trend and virtualisation may even spur on growth in an already booming outsourcing market. End users looking to switch to virtual platforms will need to make sure that they choose the right supplier for the job, or have the right team in house.

If outsourcing the virtualisation process, the same best practice principals must apply. Users have to ensure that vendors can replicate any security protocols they have in place. Vendors, ultimately, must provide a more efficient and cost effective infrastructure than the one the end user already has, there is no point in going virtual just for the sake of it. However, with the ongoing growth of virtualised services, it seems that it won’t be long before we see the majority of companies (from SME’s to large corporates) using some form of virtualised platform. The future could be closer than you think.

BMW has signed a five-year ITO contract with Accenture to consolidate its information technology processes and applications.

As part of the agreement, Accenture will help BMW Group consolidate a vendor network of its application operations service providers in areas including production, sales, logistics, finance and human resources. Accenture will also work to make BMW’s overall IT processes more reliable, predictable and efficient. The agreement is designed to help BMW achieve lasting cost reductions by helping the company simplify its processes while improving the overall service levels provided to its business users.

The contract covers more than 500 applications that BMW Group uses around the world in its automotive and component manufacturing plants and within its sales and distribution business units. The agreement extends an existing collaboration between Accenture and BMW, as Accenture has been helping BMW Group enhance its application management services over the past four years.

Richard Spitzer, managing director of Accenture’s Automotive practice, commented, “Top companies such as BMW are continually refining their distinctive capabilities, including those related to lean enterprises and efficient back-office services. BMW’s application management strategy will enable the company to take advantage of significantly improved services and processes, all from a single provider.”

Accenture will deliver the services to BMW Group through its delivery centres in Hyderabad, India; and Munich and Hof, Germany.

Celesio AG, one of Europe’s leading pharmaceutical service providers, has signed a seven-year infrastructure services contract with HP.

Under the agreement, HP will provide standardised services and hardware across Celesio’s 14-country operation. This includes managing Celesio’s data centre environment, including storage and server management for approximately 4,500 servers.

Additionally, HP will manage a full range of network and voice services that connect Celesio’s employees with each other, partners, customers and vendors. HP will also standardise and manage Celesio’s employee computing environment, which includes global helpdesk, end-user support, incident and problem management, as well as asset and change management for 23,000 workplaces in more than 100 locations.

Christian Holzherr, Chief Financial Officer and management board member responsible for Information Technology at Celesio, commented, “A standardised technology infrastructure is critical since we operate in several European markets and cover the entire spectrum of pharmaceutical distribution.”

Under the terms of the agreement, approximately 200 employees will transfer from Celesio to HP.

Tech Mahindra, the joint venture between Britain’s British Telecom and Indian automobile firm, Mahindra and Mahindra, has emerged as the top bidder for fraud-hit Satyam Computer Services. The company has confirmed plans to purchase a controlling stake in the ITO provider for £370 million pounds.

Tech Mahindra outbid engineering firm Larsen and Toubro Ltd’s, private equity firm WL Ross and Co. and the US-based Cognizant Technology Solutions to seal the deal.

The deal is expected to receive full approval early this week.

Seguros Lagun Aro, an insurance company belonging to the Spanish Mondragón Group (MCC), has signed a 5 million euro ITO contract with Steria.

Under the terms of the agreement, lasting an initial four years, Steria will provide support for all the company's applications. Steria will work to create an application development platform using Oracle's Developer suite.

It is hoped the deal will allow the company’s IT department to focus more clearly on the requirements of their internal business processes, improve the quality of applications whilst achieving a significant cost reductions.

Juan Manuel Egia, Lagun Aro's Information Systems Director, comments: "Steria has a large number of customers working on an Oracle platform. Its flexibility and its highly specialised experts guarantee a rapid response to our changing needs."

Kurmanchal Nagar Sahakari Bank Ltd, one of the leading urban co-operative banks in the state of Uttarakhand in India, has signed a 10-year ITO deal with IBM. As part of the agreement, IBM will remotely host and manage the IT infrastructure and the disaster recovery site, as well as provide the networking infrastructure for the bank.

Signed in Q1 of 2009, this agreement is first-of-a-kind for IBM in Uttarakhand and follows its success with other co-operative banks in different parts of the country.

Mr. Manoj Sah, CEO of Kurmanchal Bank, commented, " We believe their [IBM’s] technology expertise and focus on delivering cost-efficient solutions will help us achieve our growth strategy and higher levels of customer satisfaction."