Industry news

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."

The WACS consortium and Alcatel-Lucent have signed a contract valued at US $700m to deploy a new submarine cable network that will provide the first direct connection between Southern Africa and Europe.

Named the West Africa Cable System (WACS), this 14,000 km-long submarine network system will bolster Internet and other communications capabilities to and from the African continent.

The 11 parties that form the consortium are Angola Telecom, Broadband Infraco, Cable & Wireless, MTN, Portugal Telecom, Sotelco, Tata Communications, Telecom Namibia, Telkom SA, Togo Telecom and Vodacom.

WACS will open access to faster connectivity to support IP-based services such as video applications for e-education and healthcare. Meeting the needs for increased capacity along the cable route, it will further reduce the digital divide, enabling the landing countries to be served by a new system offering greater capacity and lowering the cost of broadband access. With commercial service expected in 2011, this new submarine cable system will also offer route diversity and bandwidth availability, and the first global submarine fibre connection to Namibia, the Democratic Republic of Congo, Togo and the Republic of Congo.

Kobus Stoeder, Chairperson of the consortium’s Management Committee, commented, “WACS has brought together a multitude of nations and some of the world's most influential telecommunications players in a joint effort to use state-of-the-art technology in linking more people more efficiently than ever before.”

Last week saw hilarious spoofs by the likes of the BBC and Google for April Fool’s day. This week however, has been a little on the quiet side. sourcingfocus.com has a sneaky suspicion that everyone has jetted off to sunnier plains for the Easter holidays (note to ed.; I am not passing any judgment).

This has of course had no effect on the quality of the news that has been pouring into sourcingfocus.com this week. So with eggs, bunnies and other Easter fun aside, let’s see what has been happening in the world of outsourcing.

Another dark cloud looms over the Indian outsourcing industry. According to a Reuters report, three executives at Satyam have been arrested for alleged involvement in the company’s recent accounting fraud.

The three individuals have not been named, but the Central Bureau of Investigation (CBI), India’s main investigative agency, said in a statement that it had arrested the vice president, senior manager and assistant manager in the company’s finance department on Sunday. How deep will the fraud go? Only time can tell…

Moving swiftly on to more positive news; CSC has been awarded a 10-year managed information technology (IT) services contract by the UK Identity and Passport Service, an executive agency of the Home Office responsible for issuing UK passports and ID cards. The agreement has an estimated value of £385m.

CSC will upgrade the existing application and enrollment system with new capabilities to process applications for passports and ID cards. This upgrade will allow customers to apply online; will improve background checking; will provide a new system for reporting lost and stolen passports and ID cards; will provide customer support for updating personal data; and new IT and telephony systems.

This agreement is just one of the many ITO contracts the Weekly Round-Up has reported on in the past weeks. However, Compass Management Consulting has warned that corporates rushing to outsource their software development to make short term savings risk significant long term losses in productivity.

Compass has noted that current economic pressures have created the strongest driver for streamlining software portfolios and replacing aging systems since the year 2000. Nevertheless, studies of operations, where the full life cycle of application development has been outsourced, have shown productivity drops of up 60 per cent, as poor knowledge of the business function affects efficiency of the development. These losses are particularly high when development is outsourced to an offshore location. The message? Do your research and know your objectives!

Nigel Hughes of Compass explained, “Complexity of the application environment is a major driver of overall cost escalation in IT. Top performing organisations are already taking advantage of the economic crisis to replace legacy systems, modernise the application portfolio, streamline operations and reduce costs”. According to Compass, many organisations are overestimating the level of savings that outsourcing or offshoring can deliver. To check out a more in-depth explanation, take a look at, the ‘Outsourcing all IT can lead to productivity drop’ article.

So, it has been a mixed bag of news this week. At least we have a nice four-day weekend to process it all; even if it is sitting in the back garden pretending we are on sunnier shores (can you tell I am not jealous?).

Happy Easter and see you next week.

Current economic pressures have created the strongest driver for streamlining software portfolios and replacing aging systems since the year 2000, according to Compass Management Consulting. At the same time, Compass warns that corporates rushing to outsource their software development to make short term savings risk significant long term losses in productivity.

Studies of operations where the full life cycle of application development has been outsourced have shown productivity drops of up 60% as poor knowledge of the business function affects efficiency of the development. These losses are particularly high when development is outsourced to an offshore location.

Whilst some of lessons in the rush to offshore applications development have been learnt, productivity losses in development activity alone can still account for deficits of up to 20 percent due to staff attrition in offshore locations and other factors, according to Compass.

This means that while the personnel costs may be 40% lower in offshore locations, the decision to migrate development, when you include additional management control, increased infrastructure spend, employee attrition, language, and cultural issues, can end up costing up to 20% more than current in-house operations.

“In particular the loss of functional expertise – people who understand the business function the software is supporting – has a negative effect on the productivity of application development. With lower productivity in many offshore locations and currency movements that are working against UK buyers, it is important to outsource the right type of development project and ensure that business analysis skills are kept in-house in order to make any savings,” said Nigel Hughes of Compass.

Compass points out that the productivity of development is only one element of cost in corporate application management and that current economic pressures are an opportunity to evaluate broader opportunities for streamlining their software environments.

“Complexity of the application environment is a major driver of overall cost escalation in IT and 2009 is the best chance since the year 2000 issue to make radical change. Top performing organisations are already taking advantage of the economic crisis to replace legacy systems, modernise the application portfolio, streamline operations and reduce costs,” said Nigel Hughes.

According to Compass, many organisations are overestimating the level of savings that outsourcing or offshoring can deliver. The firm claims that a more complete analysis of the software estate can often identify opportunities for consolidating applications that have built up after mergers, improving operational productivity through better applications and improved management of support and maintenance tasks. Compass claims that these changes can be cash generative within less than 12 months.

“More than 70% of a typical software budget is spent on maintaining legacy systems. Top performers are clear that they cannot run a 21st century operation supported by 20th century technology. Organisations choosing to effectively rationalise their application portfolios are reducing overall spend by 20-40% within 12 months, which delivers cash to the bottom line or frees up budget to implement modern and cost-effective solutions," says Nigel Hughes.

Compass says that the best performing companies discriminate between different types of development work and do not automatically outsource everything in a bid to make savings. The firm claims that outsourcing can still yield savings if the decision to outsource elements of software development is based assessing criteria in terms of strategic importance, criticality, complexity and stability of the applications and the organisation’s in-house capability to support, maintain and develop them.

“These criteria may seem simplistic but they are effective in synchronising the application portfolio with appropriate sourcing. Non-strategic, non-critical and low complexity application, for example, can readily be developed using outsourced services. For the strategic, complex and business critical applications, it makes more sense to retain the analysis skills that will drive the innovation and value in-house," said Nigel Hughes.

Prague Airport has signed a four-year IT services contract with IBM to implement and maintain its specialised IBM BlueSky system. The new system will allow the Airport to collect and analyse information more efficiently and to set the most suitable strategy for the calculation of airport fees and handling charges.

"The Prague Airport served more than 12.6 million travellers last year and it is our goal to increase the number every year. To achieve this we need effective and flexible support of ICT services," said Executive Director of ICT & Central Project Office of Prague Airport Vladimír Mekota. "The cooperation with IBM will enable us to increase airport operational efficiency and will provide quick access to important data in a real time."

IBM BlueSky is able to automatically generate records to calculate billing charges for the airport's services including: landing; noise; parking; airport usage by passengers; provisioning of airport facilities and resources for individual flights (such as departure and arrival bridges; check-in counters; buses and others) and special handling services.

The agreement was signed on March 17, 2009.