Industry news

On the 29th April, PA Consulting announced the results of its International IT Outsourcing Survey 2009 – research into the opinions, predictions and aspirations of large-scale enterprises across the UK, Europe and the US.

It was practically a given that the biggest item on the agenda was the immediate goal of cost reduction, but there were important underlying themes that were derived directly from it.

Many organisations believe that multi-sourcing is one of the key ‘tools’ to achieve cost reduction. With more suppliers, it is often possible to obtain a lower cost for a specific service. But with more suppliers often comes a lack of integration. Where a single supplier would theoretically perform all the roles in a cohesive fashion, multiple suppliers perform their roles in isolation, placing a large administrative burden of engineering a unified and consistent collaboration on the client organisation. Multi-sourcing is by no means a negative tactic, but it does carry a health warning. If the time, effort and resource are not dedicated to the integration and management of the individual suppliers, when many organisations struggle with just one supplier, the cost savings are soon lost and the inherent risks increased.

Related to this, many organisations still do not understand the importance of relationship management. While integrating all the suppliers is vital, so is the administration of the individual suppliers. In a climate of cutting costs, renegotiation often takes centre stage and there is more scrutiny over performance clauses. There is of course nothing wrong with examining achievements against targets, but cultivating a close relationship where demands, processes and needs are fully understood, by both parties, will typically engender a better outcome than just slashing the monthly fee.

Lastly, innovation is often referred to within outsourcing contracts, but is equally often buried and lost in the negotiations over hard costs. However, starting and encouraging a dialogue on innovation rather than being preoccupied with shaving a percent or two off the contract price is far more constructive. The overall cost benefits will be greater, more sustainable and could actually result in the client company becoming more competitive in its market.

Cutting costs rapidly is a great short term solution, and will result in excellent internal PR for the department involved, but it will inevitably make the contract more adversarial, less sustainable and will damage the overall performance. While suppliers are putting more effort and time into their account management as a reaction to the economy, now is the perfect time for organisations to improve the long term return on investment of outsourcing by targeting innovation as a key goal rather than a nice-to-have and focussing on the importance of improving supplier relationships to help ensure that the business outcomes required are achieved.

Of course the contract is important but it is important to understand the internal capability of the organisation and what can be achieved by working more closely with the supplier. This balanced approach is much more likely to result in both short and long term success.

First, let me start by saying how delighted I am to have been appointed Editor at Sourcingfocus.com and given the chance to contribute to such a vibrant community. Over the coming weeks, I will be looking to that community to steer me in the right direction, so if there are particular issues you would like see covered, please drop me a line at editor@sourcingfocus.com

In considering how to tackle my first blog as Editor, one story from last week leapt out at me. It's a report from advisory firm Roland Berger Strategy Consultants that boldly claims that as many as a third of UK jobs at multinationals will be "shipped abroad" by 2015.

That prediction is based on a survey of senior executives at 200 UK-based multinationals and would appear to spell particularly bad news for IT professionals. Among those companies polled, the IT function is earmarked as the most suitable function to offshore, with 68 per cent of the respondents confirming that they are thinking about such a move. IT was followed by customer service (64 per cent), research and development (61 per cent) and sales management (59 per cent). 

“This trend towards offshoring is markedly different from the international outsourcing we have seen to date, with both knowledge economy jobs and core business functions now being exported to economies that are more competitive in the global environment,” said David Stern, Roland Berger's UK managing partner. “These [jobs] are unlikely to return once the economy picks up, a trend that threatens a permanent rise in UK unemployment, leading to falling revenues and ultimately a decline in GDP."

That's pretty strong stuff and it got me thinking: aren't we constantly told that the UK faces a major skills gap when it comes to IT? According to sector skills body E-skills UK, around 14,000 vacancies a year need to be filled across the IT profession, yet UK universities churn out just 12,000 computer science graduates annually. And in a survey conducted last year by recruitment company The IT Job Board, around a fifth of UK companies looking to recruit IT staff say they find it difficult to attract applicants with the right skills. 

To me, this suggests that, when it comes to IT, it's not really a case of shipping jobs abroad in order to drive down costs. While that might be true in some cases, many UK companies are simply widening the net in their search for the expertise they need to keep vital IT systems up and running. It clearly makes sense for them to look to countries where a career in IT is a highly prized aspirational goal for young people and where the latest skills can be found in abundance, unhindered by the problems of a rapidly ageing workforce seen in European economies. 

It also strikes me that when a company decides to use software-as-a-service (Saas) applications from salesforce.com and the like, we don't see the nearly the same fuss. Yet the implications of this model of computing are often much the same as offshoring, putting systems management and software development jobs in the hands of third-party providers, often overseas.

The fact is that today's CIOs aren't just under pressure to cut costs - they're also expected to invest in innovative new projects that will give their organisations a competitive edge when economic conditions improve. And if the talent and skills to help them do that aren't available at home, doesn't it make perfect sense for them to look abroad? I'm all for keeping jobs local where it makes good business sense, but when it comes to IT, we need to 'mind the gap'. UK businesses cannot rely on local skills alone in order to compete.

The US Army has awarded CSC a task order to provide systems engineering, technical and program support for the Project Manager, Defense Communications and Army Transmission Systems (PM DCATS). PM DCATS provides the Department of Defense with communications transmission systems such as satellite, wireless, fiber optic and microwave.

Under the terms of the task order, CSC will provide a broad range of support services, including project and technical management; research, design and development; systems engineering; and training. CSC will support a range of PM DCATS projects at various locations worldwide, such as the United States, Iraq, Afghanistan, Kuwait, Germany and Korea.

The task order will run for three years and has a value of $226 million.

Starbucks, the largest coffee retailer in the world, has signed a CRM contract with Convergys Corporation. The deal is a two-year extension of an existing contract.

The new deal was signed in response to its internal contact centre’s inability to provide cost-effective and efficient facilities for North American stores.

Convergys and Starbucks have worked to develop a powerful facilities support tool to track every piece of equipment in each company-owned facility, follow repair orders, and support invoicing from approximately 1,300 service providers. The companies also collaborated on the development of specialised training to help Convergys agents provide contact centre services for facilities support. Convergys agents now assist Starbucks retail employees in complex troubleshooting and equipment repair, as well as in identifying appropriate service vendors, issuing repair orders, and tracking repair work.

“Transferring an essential management function like contact centre services for facilities support to Convergys was a first for Starbucks,” said Badger Godwin, vice president, Store Development – Global Real Estate & Facilities for Starbucks. “Our decision has been more than validated, with Convergys proving to be a true, collaborative partner to Starbucks. We have worked together on agent training, scaling to meet our growth, and the creation of software tools to drive cost savings and improve the efficiency of our facilities support operation.”

Landis+Gyr, a provider of integrated energy management solutions, has awarded Unisys Switzerland a five-year multi-million dollar extension to its IT outsourcing contract.

Building on the existing relationship, Unisys will continue to provide end-user support and data centre services, SAP solution management and a range of additional IT services to more than 5,000 Landis+Gyr employees. Unisys will deliver the services from its global services centres, as well as on-site.

“The difficult global economic situation has reinforced how important it is to have long-term partners who add value to the business,” said Dieter Hecht, Executive Vice President & Chief Procurement Officer at Landis+Gyr. ”Our decision to renew our contract with Unisys is based on the quality of the company’s services and the return on our investment they provide. With Unisys driving forward the implementation of our global IT strategy, Landis+Gyr can respond effectively to the business challenges we face now and in the future.”

The services provided by Unisys under the contract extension include, round-the-clock system management and SAP operations, virtualisation and consolidation of IT technologies and international service desk outsourcing.

Companies are now well aware that they must account for the environmental impact of their business decisions. Existing European legislation, impending national programmes such as the UK Carbon Reduction Commitment and educated, vocal end-users all add to this pressure.

Consequently, many companies have begun to ensure the green promises they make are upheld throughout their supply chain. This is not just to maintain brand integrity. Pushing suppliers to uphold green standards mitigates the costs and risk involved when making changes to meet environmental commitments.

Whilst in-house technology departments have often led the way with green initiatives, outsourcing partners – especially those offshore – have escaped serious scrutiny. This is, however, beginning to change. Offshore partners now realise that they must measure up to the green mission statements being made by their customers.

So how do you go about ensuring your service provider, based thousands of miles away, is adhering to policies created locally?

Firstly, it is crucial that considerations such as environmental “track record” are included as part of the selection criteria for an outsourcing partner. Does the history of the supplier match the programmes and aspirations in place for your organisation?

The actual tactics in place for a better offshore green profile may include the physical facilities and offices used by your provider (locally as well as offshore). Practices such as recycling of IT equipment, energy conservation programmes and green procurement are good indicators. The critical point is do they fit with the culture already in place within your organisation?

Once this fit has been established the next element is to ensure a consistent method of green reporting runs throughout the SLA. Account meetings should take account of environmental metrics as well as operational delivery and financial savings.

Integrating this information to see where green practices are delivering savings or efficiencies is the ideal here. However, such a level of sophistication is still quite rare.

As the recession bites and cost savings once again take centre stage for outsourcing, it is important not to neglect issues such as green. They are the source of future stability and the commitments made now in the name of the environment will continue to reap financial benefits throughout the supply chain and across geographical boundaries.

Companies are now well aware that they must account for the environmental impact of their business decisions. Existing European legislation, impending national programmes such as the UK Carbon Reduction Commitment and educated, vocal end-users all add to this pressure.

Consequently, many companies have begun to ensure the green promises they make are upheld throughout their supply chain. This is not just to maintain brand integrity. Pushing suppliers to uphold green standards mitigates the costs and risk involved when making changes to meet environmental commitments.

Whilst in-house technology departments have often led the way with green initiatives, outsourcing partners – especially those offshore – have escaped serious scrutiny. This is, however, beginning to change. Offshore partners now realise that they must measure up to the green mission statements being made by their customers.

So how do you go about ensuring your service provider, based thousands of miles away, is adhering to policies created locally?

Firstly, it is crucial that considerations such as environmental “track record” are included as part of the selection criteria for an outsourcing partner. Does the history of the supplier match the programmes and aspirations in place for your organisation?

The actual tactics in place for a better offshore green profile may include the physical facilities and offices used by your provider (locally as well as offshore). Practices such as recycling of IT equipment, energy conservation programmes and green procurement are good indicators. The critical point is do they fit with the culture already in place within your organisation?

Once this fit has been established the next element is to ensure a consistent method of green reporting runs throughout the SLA. Account meetings should take account of environmental metrics as well as operational delivery and financial savings.

Integrating this information to see where green practices are delivering savings or efficiencies is the ideal here. However, such a level of sophistication is still quite rare.

As the recession bites and cost savings once again take centre stage for outsourcing, it is important not to neglect issues such as green. They are the source of future stability and the commitments made now in the name of the environment will continue to reap financial benefits throughout the supply chain and across geographical boundaries.

This week we find that Obama plans to clamp down on the overseas earnings of US corporations by making a variety of amendments to the US tax code. His statement earlier this week certainly had some offshore service providers a little nervous, “That [old tax code] says that you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.”

Eyebrows were certainly raised in the outsourcing world, evident through a host of sensational headlines in India’s Economic Times such as, ‘Obama torpedos Bangalore again’. But what do these proposed tax revisions mean for US companies and their offshore partners?

Essentially the tax code system, which Obama is attempting to change, allows US companies to defer paying corporate tax on income earned overseas, until that income returned back to US soil. A tax credit for tax paid overseas is also given to the businesses and the US Government will take whatever is left.

Obama’s revisions will mean that US companies will have to pay the US corporate tax immediately, although the tax credit will still apply. This revision will see US companies having to pay more tax however, will we see a significant drop in offshoring as a result? Will this bring the big players of the global offshoring market to their knees?

Mark Kobayashi-Hillary, NOA Offshore Director and industry expert, thinks not, “This is not a big threat to the outsourcing industry. Obama pledged these tax reforms in the election campaign so they should not come as a surprise to anyone. He is simply trying to stimulate future investment on home soil and in turn generate more jobs.”

A rational response, however, are these protectionist policies a determent to free trade? Emerging outsourcing destinations such as Kenya, Vietnam, Sri Lanka and Egypt have previously been unable to compete within global markets, however with a booming outsourcing market, these regions are now able to step up to the plate and engage in business with the rest of the world.

“It will be difficult for the Obama administration to be harsher on offshoring. If Obama does try to implement tougher sanctions then he would be going against international free trade laws that the US have signed up to.” Mr Kobayashi-Hillary responded.

So, can US companies and overseas service providers breathe a sigh of relief?

Peter Ryan, head of offshoring analysis at Datamonitor, believes that there is some cause for concern, “President Obama's recently announced changes to the tax code for US firms doing business abroad, could have significant implications for US firms with offshore sites. Should Obama’s new tax plans become law in 2011 as planned, the initial impact for contact center outsourcers selling offshore delivery will be increased price points. In an era of ever-tightening margins, not only will this option be unpalatable for many prospects looking to work with an outsourcer, it could also force existing clients to examine other business models for customer-facing work.”

Increased prices in difficult times may indeed have an impact on the market. However, as Mr Kobayashi-Hillary commented, “The savings made by offshoring work far outweigh the tax increases.”

Lower wage costs, lower infrastructure fees and government incentives all combine to make offshoring an attractive proposition. Tax adjustments, such as the ones planned for 2011, will not significantly impact the outsourcing market and in all probability will not enhance the job market in the US. Businesses don’t set up shop in Bangalore for tax relief. They set up shop in Bangalore because it costs significantly less to produce the same work than if they stayed on home soil.

Voters will be pleased that Obama appears to be coming good on his pre election promises. However, this is not the assault on offshoring that some were expecting. Obama may still have things in store for the offshoring community, but it is unlikely that the impact will be great. We are on the cusp of true globalisation and I can’t see any entity halting the progress. Outsourcing and offshoring is just too integrated into modern business to suddenly stop.

Channel 4 has selected Logica, to support its employees with an outsourced HR administration and payroll service for the next five years. Channel 4 made the decision to outsource its HR administration as part of a company-wide programme to reduce costs and streamline its operations. The contract builds on an existing 17 year relationship with the company.

Under the terms of the agreement, Logica will implement Oracle’s payroll application and integrate it with the company’s existing Oracle HR system to achieve a single and unified HR system. Logica will also manage the transition from the current bureau payroll service it provides to Channel 4, to a fully managed service. The new contract will also see Logica manage approximately 25 of Channel 4’s transactional HR processes such as joiners & leavers, employee changes and absence administration.

Commenting on the contract, Gemma Dowson, Senior IT Project Manager at Channel 4 said, “Logica has a proven track record in delivering new and innovative ideas to improve our processes and achieve greater efficiencies that align with our business and technology strategies. We believe that with Logica’s consistent level of support and delivery we will achieve our business aspirations and look forward to further strengthening our relationship.”

Last week saw the news Round-Up all in fluster about the state of Indian outsourcing. This week it is the US’s turn…

The business press reported heavily on Barack Obama’s controversial offshore tax avoidance crackdown. The US president, who campaigned relentlessly on the issue of closing offshore loopholes, said the steps he announced would raise $210bn (£140bn) over 10 years and "make it easier" for companies to create jobs in Buffalo, New York, rather than in Bangalore, India.

LEAVE INDIA ALONE, I hear you cry!

Corporate America also reacted with dismay, saying the rules would put US companies at a disadvantage to foreign rivals.

The steps announced would include closing the "check box" loophole that enables companies to avoid US and foreign taxes by shifting income to subsidiaries based in offshore tax havens.

Okay let’s be honest, this wont be top of most of the world’s lists when tracking Obama’s policies. However, for the elite few, like the Round-Up and you, the readers, this is a hot topic (elite or easily excitable – I can’t decide).

TPI has also been looking at the US this week with a comprehensive new look at the nation’s outsourcing escapades. This week the research firm released a new report entitled ‘TPI Momentum 2009 Market Trends & Insights Vertical Industries’ The report presents a comprehensive look at outsourcing activity across 26 key sectors of the US economy.

The sectors covered in the report correspond with the widely used Forbes categories. For each vertical, the report documents information on 20 different IT outsourcing (ITO) and business process outsourcing (BPO) functions, providing analysis on each area. Within and across these segments, it shows how client buying patterns have shifted over time, by region, scope and service provider.

Take a look at some of the findings and check out a summary of the report at TPI through this article.

In accordance with the upsurge of interest in outsourcing USA (and everything American with the continued popularity of Obama), Time Warner Cable Inc, a leading US television company, has extended its existing e-Care contract with Convergys. Time Warner Cable has worked with Convergys for over a decade in various lines of business including billing solutions. The company will now extend its agreement in order to create a superior customer experience.

Convergys will work with Time Warner Cable to offer ‘e-Care alternative customer contact channels’ including both email and online chat in both English and Spanish. Through these channels, customers can receive account information and support, digital phone technical support, and answers to queries about billing, browsing, connectivity, and email issues.

Another North American giant also got in on the outsourcing act this week. Xerox Corporation, the worlds largest printing company, signing an IT outsourcing agreement with CSC, the US outsourcer. The contract, which has a seven-year base period, is valued in excess of US $100 million.

CSC will provide mainframe processing and application support to Xerox’s North American business.

So although Obama has shocked the outsourcing world with his less-than outsourcing-friendly tax plans, there is still lots going on across the pond and that’s a good thing for us all. You always know where to come for a bit of positivity during uncertain economic times.