Industry news

News that Wall Street has enjoyed stock advances for three straight days has made headline news from Baltimore to Beijing, buoyed by Citigroup's announcement that it made a profit for two consecutive months this year.

Only in a distorted media culture where news is valued by the speed at which it moves rather than interrogated and analysed for its truth is such a story received as the first green shoots of spring and economic recovery.

The truth is that the US economy is in fundamental trouble. Unlike in the UK where the government has at least taken a stake in the banking institutions whose toxic 'assets' it is insuring, the US public sector has simply taken on vast amounts of poisonous debt to allow American banks to turn a quick profit.

In the medium term, this means the prospect of Wall Street's cancer being cut out, perhaps, but transplanted instead into US public services where it will remain for years to come.

I have been counting my lucky stars recently. Not that lawyers are ever renowned as in need of sympathy, but I can only feel sorry for some of my profession in the worst hit areas of corporate, real estate and banking who are perhaps somewhat underutilised at present. In contrast, for us in the technology and sourcing world, things continue pretty much as normal.

Part of this is of course driven by outsourcing, given the payoff which it promises to provide in terms of cost reductions. But, for every new outsourcing project which I have been asked to advise on in recent months, there has been at least one re-negotiation of an existing deal.

One might assume that the re-negotiation process is not that different from the original contract negotiation discussions between the parties. But in fact, the dynamic is very different. After all, in the original discussions the customer will usually have the option to simply not sign the contract, which invariably means that it has the whip hand in the negotiations. With an existing deal, however, the supplier has the ability to simply say "no" and to insist upon the existing terms as originally drawn and agreed, no matter how unpalatable that might appear to the customer.

Some of the supplier community (and particularly the larger suppliers) will often take this approach, or at least ask the customer, "what's in it for me?" (e.g. in terms of an extension of the term, additional service scope or other deal sweeteners). The customer can end up feeling that it was held to ransom in order to secure the more short term financial advantages which its re-negotiation efforts were focussed on achieving (at least in the current markets). The process ends up being somewhat counterproductive.

That said, on a couple of recent projects I have been working on, it has actually been the supplier who could justifiably claim to have come away from the re-negotiation table feeling as if they had been somewhat "mugged". In one case, the customer threatened complete contract termination (with only minimal compensation payments) and a "blacklisting" on future contract work if the supplier did not agree to both a cost reduction and an adjustment to the service level regime. Other customers have been a little less blunt about it, but have been equally Don Corleone-like in looking to make the suppliers an offer they cannot refuse, at least if they ever wanted to win any more work from the client in future.

The truth appears to be that in difficult markets, the larger (and financially stable) clients continue to hold all of the aces, and can in extreme cases simply look to tear up existing contracts and start to negotiate afresh, however reluctant the suppliers may be to go along with such a process. I am driven to wonder quite how far down this road we'll end up, as the recession continues to elongate and even deepen, and what implications it may have for the future relationships and negotiations between such customers and suppliers.

The Reader's Digest Association (RDA) has signed a seven-year IT outsourcing deal with HCL Technologies. The value of the agreement is estimated to be approximately US $350 million.

Under the terms of the agreement, HCL will be responsible for supporting infrastructure and development across RDA’s Oracle applications, ‘Open Technologies’ and its mainframe. Services will include infrastructure support for network, security, storage, end user computing and data centers (DC) including disaster recovery. HCL is also tasked with optimising and consolidating existing applications and updating necessary legacy IT to modernize RDA's IT environment.

The global engagement will be delivered from HCL's centres in Poland, US and India and supported by an onsite support network. As part of the agreement number of employees will also transfer to HCL.

Al Perruzza, Senior Vice President for Global Operations, IT and Business Redesign for RDA, commented, "IT is a key enabler to our business. We expect that HCL will bring down cost of operations significantly, while improving services and bringing cutting-edge technology and capabilities to transform our IT functionality and service. We look forward to a long relationship of mutual trust with them."

The Belgian Police Department's Legal Identification Division has chosen Steria’s Benelux division to implement an innovative fingerprint identification system.

Steria will act as "prime contractor" to implement the system which is based on Cogent Systems' "Automated Palm Print and Fingerprint Identification System" (APFIS). Steria will implement the technology required for the capture and transmission of finger and palm prints and traces, and will also be in charge of all necessary integration services.

The new system will replace an earlier version which was installed 10 years ago. The new system will provide more precise results with a shorter response time and be prepared for future additional functionality. The system will also offer increased search precision, significantly improved response times and a palm print search option.

"For Steria, this is a strategic project in systems integration and security. Our expertise in biometric systems integration unquestionably played an essential role in the final phase of evaluation. This project illustrates our ability to offer our public- and private-sector customers innovative solutions delivered by our biometrics expertise centre," says Steria Benelux CEO René Luyckx.

Long gone are the days when clean air targets and reducing environmental impacts were viewed as the concerns of flower power, tree hugging liberals. The buzz words of 2008/2009 have most definitely been international climate change. Every company seems to be conveying their allegiance with controlled carbon emissions and Corporate Social Responsibility targets. It has become cool to care.

This week saw climate change move further up the scale with NASA partnering with Cisco to develop an online global monitoring platform called the “Planetary Skin”. This platform will capture, collect, analyse and report data on environmental conditions all around the world.

Everyone can get in on the act as the data will be made available for the general public, governments and businesses to measure, report and verify environmental data. The aim is to allow access in near-real-time to help detect and adapt to global climate change. Take a look at the NASA and Cisco develop climate change monitoring platform article to hear what the director of NASA’s Ames Research Centre had to say about the partnership.

Another unlikely collaboration has come in the form of the University of Cambridge and Infosys. They have signed an agreement to undertake research in engineering, management and business, architecture and pharmaceuticals (that should keep them busy).

Both the Vice-Chancellor of the University of Cambridge and the Chairman of the Board at Infosys Technologies have been quoted raving about the partnership and its benefits. Though nothing as yet has been said about what they hope to get out of the research…

And finally, after the controversial launch of 2009’s Outsourcing Black Book last week, this week the Ukrainian Hi-Tech Initiative has launched research entitled the “Central and Eastern Europe IT Outsourcing Review 2008”. This time Central and Eastern Europe will be under the spotlight with the research looking at the state of the IT outsourcing market there.

The report will cover market volume, number of professionals, number of IT companies providing outsourcing services and individual labour costs to end users. This research will also look at the expert opinions about the impact of economic recession on global outsourcing development, particularly on the development of outsourcing in CEE region. All round, a pretty informative study in an area largely lacking relevant data.

See you next week, same time, same place.

Aon Benfield, one of the world’s premier reinsurance intermediary and capital advisors, will extend its contract with Xchanging and transfer further operational work to the BPO provider. The new seven-year contract is an extension of an existing contract for insurance broking services.

Stewart McCulloch, Head of Xchanging UK, said: “This agreement confirms the significant attractions of our Broking processing platform established in 2006”.

Swedish logistics company Green Cargo has signed an agreement with Capgeimini France to implement the latest SAP transportation management applications. Green Cargo expects the software will help it to better monitor shipments and maximise customer relationships.

CSG Systems International, a leading provider of customer interaction management and billing services, has entered into a multi year contract with Infocrossing, part of Wipro, to provide outsourced infrastructure services.

Under the terms of the agreement, Infocrossing will consolidate CSG’s servers and manage their mainframe and information storage environments, which will be migrated to Infocrossing’s data centers. Infocrossing will provide the data center computing environment for the delivery of most of CSG’s customer care and billing services, allowing CSG to remain focused on its core business.

“We selected Wipro Infocrossing because of its deep data center expertise, rigor and proven process and methodologies,” said Bret Griess, CIO and SVP Operations, CSG Systems. “This agreement is aligned to our IT initiatives and supports CSG’s business goals of expanding our market and extending our reach into new verticals. We are excited to work jointly with Wipro Infocrossing to modernize, improve and expand the IT functionalities supporting the core business of CSG Systems.”

Outsourcing is an industry which thrives in a recession. Now more than ever end users are focusing on the bottom line, making slashing costs a decisive factor in the procurement process. However despite this ‘cost is king’ approach, we are seeing the rise of a particular outsourcing model that treats suppliers as strategic partners rather than external cost cutters.

The ‘service effect’ model is being used by end users in an effort to detach themselves from how a supplier delivers their services, which allows the user to focus on end objectives. This outsourcing model has become prominent enough for the National Outsourcing Association, the UK outsourcing trade association, to hold a seminar dedicated to the topic.

So what is service effect? How can end users feasibly sit back and let the supplier work their magic? Essentially the service effect model boils down to end users identifying exactly what their strategic outcome should be in an outsourcing arrangement. The supplier’s job is to then meet the outcome using whatever tools are needed. Srikanth Iyengar, Global Head of Business Development for Strategic Global Sourcing at Infosys, summarises, “In service effect models, customers focus on an overall outcome which helps us run our operation in a very efficient way.”

It seems like an interesting way of conducting an outsourcing deal and it means that both supplier and end user must, above all else, trust each other to work towards the agreed objective. Mr Iyengar highlights the importance of the end user trusting the supplier and adds that “setting clear expectations and objectives for the supplier to work to is essential” he also goes on to say that the supplier becomes much more of a “strategic partner” rather than just simply a vendor. This strategic partnership is salient for both user and supplier. Suppliers will need to ensure that teams working on the end user account are fully briefed on the way the user operates and well versed on the market the user operates in. End users will need to incorporate the supplier in key board-level decisions in order to properly align the strategy or modify objectives.

This level of trust and partnership surely would not be obtained over night. Mr Iyengar reinforces this by saying that “prior relationships help”, so do service effect models fall into the realm of contract renewals rather than brand new outsourcing contracts? Suppliers and end users would certainly be taking a bigger risk entering into these contracts. Suppliers could be left with a bloody nose if objectives are not met, end users could face a situation where money has been ploughed into a partnership with nothing to show for it, so surely a prior relationship is essential rather than helpful; And what of ongoing communication to ensure things are going to plan?

Service effect models have the potential to work well. However, as with any outsourcing deal they need to be thrashed out properly in order to reap the benefits. George Wheeler-Carmichael, partner of law firm NABARRO LLP, warns end users that only focusing on outcomes can lead outsourcing deals into trouble, “Contracting for an outcome or a ‘service effect’ puts a new perspective on an old issue with outsourcing contracts, rather than creating an entirely new challenge. Whether a customer is starting out on a new outsourcing relationship or is renewing an existing one, if the aim is to achieve a business outcome, scoping the service requirements is still as important as ever. Focusing on the end point of the journey and allowing the supplier greater flexibility in the technical means of getting there must not distract the parties from setting out required characteristics of the journey and from contract and service management in general.”

Mr Wheeler-Carmichael also commented that there needs to be regular ‘touch-points’ where users can monitor the progress of the outsourcing arrangement, he also commented that key milestones should be set and reached in order to properly maintain the relationship.

What does the future hold for service effect models in outsourcing? According to Mr Iyengar, clients switching to service effect models with Infosys are in their tens rather than hundreds suggesting a gradual change rather than a sharp shift. While Mr Iyengar expects these types of contracts to be more prominent in the future, it remains to be seen which vendors have built sufficient trust with clients to make such a strategic leap.

So the service effect model is one to keep an eye on as a trend for the future. It appears that there are those who have felt comfortable enough to adopt this strategy with their suppliers; however, the model may not be for everyone. Those in multi vendor relationships may find the service effect model very challenging and possibly not the right solution. The model does add another dimension to outsourcing and it will be interesting to see whether those that begin their outsourcing journeys through downturn cost cutting, find themselves in a service effect relationship a few years down the line.

Infineon Technologies AG (IFX), one of the leading semiconductor manufacturers has signed a deal with TCS to operate and maintain software systems within Infineon’s supply chain management landscape.

Infineon CVP IT & CIO, Michael Schmelmer commented: “By focusing on cost effectiveness and customer satisfaction, TCS brings to the table a very compelling delivery model which meets Infineon objectives and provides an excellent opportunity for being a long term strategic partner for IFX”.

The Infineon operations will be delivered out of Munich, Germany and Bangalore, India.