Industry news

The outsourcing industry is not immune to the ripple effects of the widespread economic volatility, however, in an economic downturn, cost will outweigh value considerations, according to Gartner.

“Although things look gloomy for the larger global economy, the outsourcing market represents a dichotomy: on the downside, organizations' cost-cutting outsourcing strategies may negatively impact market growth, but at the same time, the upside is that outsourcing will be adopted by more organizations to help them work through financial and competitive challenges,” said Allie Young, vice president and distinguished analyst at Gartner. “The well-educated buyer and provider will have the advantage. The potential for outsourcing to address immediate cost pressures as well as long-term recovery goals will be unprecedented. However, only organizations that are diligent about understanding and avoiding the pitfalls of cost-focused outsourcing and that apply business-outcome-focused outsourcing will be successful.”

The fifth annual “Gartner on Outsourcing, 2008-2009” report shows that the global economic slump has meant that outsourcing clients are re-evaluating their contracts to improve efficiency and costs. This is affecting provider selection and retention, how services are or will be delivered, delivery location and contract pricing. Beyond the drivers of efficiency and cost, however, many organizations will also experience business change as a result of repercussions of the economic crisis, which will impact current outsourcing or plans for outsourcing.

For organizations that are outsourcing, contract terms may be altered in response to corporate change: some will downsize, others will expand, acquisition and divestiture will impact others, and still others will cease to exist. Many organizations that are not outsourcing will consider or move aggressively to outsource their IT or business processes to focus on their core business. More than ever, buyers and providers must be attentive to contract issues to ensure a certain level of flexibility, since business change is almost certain.

In 2009, Gartner expects competition for outsourcing deals, particularly for standardized IT outsourcing (ITO) services, to be fierce. Some buyers will be lured by low prices from providers trying to make quarterly revenue goals or build market share. In 2008, based on analysis of Gartner’s Outsourcing Contract Database, about 76 percent of announced outsourcing contracts represented new deals; the remaining percentage was a combination of contract extensions, expansions or renewals.

“Almost one-quarter of these contracts were a continuation of outsourcing with an incumbent provider. With the continued uptake in selective outsourcing, a provider can remain a key supplier of services to a particular client, yet potentially lose a portion of its historic contract value,” said Ms. Young. “Key providers are betting their future on forming enduring, long-lasting client relationships. In uncertain economic times, outsourcing relationships can prove (and test) the durability of relationships and the outsourcing value proposition. “

Alternative delivery and acquisition models (ADAMs) will see a net boost in adoption due to the economic conditions in 2009. ADAMs will deliver IT services through new approaches, such as software as a service (SaaS), business process utility (BPU), infrastructure utility (IU), remote management services (RMS) and Web platform/cloud computing.

IU is defined as a key initiative for IT organizations during the next 12 months by many organizations. Providers that de-emphasized IU investment will react to the growing "everything as a service" buzz by refreshing their messages, creating new service bundles and reactivating investments. IU will gain more market share at the expense of traditional data center outsourcing service, which will put pressure on traditional IT outsourcing providers to deal with the pricing pressures that IU services represent and create change in their service portfolios and within their client bases.

“ADAMs are becoming more pervasive in many, if not all, aspects of IT development, delivery and management,” said Ben Pring, research vice president at Gartner. “Market excitement over new delivery methods is intensifying and whetting buyers' appetites for new options and services that promise greater flexibility, speed-to-solution, lowered capital investment, and pay-for-use models.”

“During the next five to seven years, a broad set of new and alternative IT delivery models — already in use by aggressive early technology adopter organizations — will become mainstream,” Mr. Pring said. “Since these models have been gaining attention from enterprises in recent years in relatively benign economic market conditions, they are likely to become of far greater interest to buyers as economic conditions worsen through 2009.”

Additional information on what happened in outsourcing in 2008 and what Gartner expects in 2009 is available in the Gartner report “Gartner on Outsourcing, 2008-2009.”

EDS has secured a BPO contract with the Centers for Medicare & Medicaid Services (CMS). The deal will see NHIC Corp. EDS’s subsidiary, administer Part A and Part B Medicare claims payments for health care providers in five of America’s Northeastern states.

The contract could be worth up to US $176 million if all available options are exercised for the next five years.

The Medicare Administrative Contractor (MAC) Jurisdiction 14 contract will help streamline Part A and Part B Medicare claims processing work done in Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. The contract will serve approximately 1.7 million Medicare fee-for-service beneficiaries, almost 80,000 physicians and practitioners, and 220 Medicare hospitals in Jurisdiction 14.

NHIC will serve as the first point of contact for the processing and payment of Medicare fee-for-service claims from hospitals, skilled nursing facilities, physicians and other health care providers within Jurisdiction 14. NHIC will assume full responsibility for the claims processing work that is currently performed by three fiscal intermediaries and two carriers.

“The breadth of skills and experience from EDS subsidiary NHIC will help CMS achieve its goal of consolidating its benefits processing operations while saving money, promoting innovation and realizing operational efficiencies,” said Dennis Stolkey, senior VP of U.S. Public Sector at EDS, an HP company. “EDS has been a CMS Medicare partner since 1965, and this opportunity allows us to provide additional technical support for Medicare.”

CSC has won a contract from the North Carolina Department of Health and Human Services (NC DHHS) to replace the state's current Medicaid Management Information System (MMIS) with a new healthcare administration system that will manage other state agency health services in addition to Medicaid. The contract has a seven year base period and a one-year option, bringing the estimated total contract value to US $265 million.

Under the terms of the contract, CSC will develop a new enterprise MMIS solution for healthcare administration supporting multiple agencies within the NC DHHS. The solution will be enhanced by commercial off-the-shelf products designed for a multi-tiered, service-oriented architecture and aligned with the Medicaid IT Architecture (MITA) business enterprise. CSC led development of MITA, creating the initial architectural framework, and continues to develop standards and enterprise objectives to ensure that clients' solutions meet Centers for Medicare and Medicaid Services requirements. The new system will also provide the department with an information technology platform that promotes efficiency and information sharing across all divisions and programs.

In addition, CSC will be the fiscal agent for the NC DHHS and its divisions, providing operational support to manage provider and recipient call centers, prior authorisation reviews, claims processing, pharmacy operations, medical policy reviews and other administrative activities. CSC also will provide similar support to other health coverage programs offered by NC DHHS.

Virgin Media, the UK entertainment and communications company, has successfully implemented Convergys Corporation’s relationship management software.

A large team of software specialists worked to implement ICOMS, Convergys’ customer care solution, at Virgin Media. The team migrated over four million accounts onto the new platform in the process, bringing the total number of Virgin Media subscribers on ICOMS to approximately five million.

Howard Watson, CTO at Virgin Media, said, “We’re committed to delivering a great service to our customers and our customer care and billing system is an important part of this.”

Continental, one of the top automotive suppliers worldwide, has confirmed a deal with T-Systems and BPO provider, Cognizant to provide application management services to the research and development operations of Continental's tyre divisions.

As part of the three-year contract, the partners will replace Continental’s current service provider of over ten years. Cognizant will provide the bulk of the services from India. The deal is expected to drive significant administration and maintenance costs on Continental’s Computer-Aided Design (CAD) systems. It is hoped the arrangement will also free up IT staff to focus on further IT development for the company’s core business.

"Profitable growth and consistent cost management in all business areas are the basis of our success as a company. T-Systems' business model is another building block of this success," said Elisabeth Hoeflich, CIO of the Continental tire divisions.

Unisys India has been named master systems integrator in support of the infrastructure project to modernise and restructure Delhi International Airport Limited (DIAL), including work on the airport’s new Terminal 3. Terminal 3 will provide much needed additional capacity to Delhi during the 2010 Commonwealth Games as well as serve the more than 34 million passengers per year anticipated by DIAL.

Unisys has been awarded two contracts: the master systems integration agreement to work with GMR, the infrastructure leader at DIAL, and a subcontracted systems integration agreement with Larsen & Toubro Limited, the prime contractor for the project.

As part of the project, Unisys will design, test and commission the overall integration of various disparate airport systems that supply information to the airport community, including airlines, ground handlers, and government agencies such as Immigration and Customs and franchise operators. Unisys will also assist DIAL in defining future operational processes to support its role as a competitive hub airport in the region.

The Indian civil aviation industry has doubled in size over the past four years and is expected to double again by 2010, the year of the Commonwealth Games. Delhi has the country’s busiest international airport in terms of the number of daily flights, with an average of 680 flights landing each day .

Prabhakararao Indana, CEO-Airport Development, DIAL said, “We are happy to be associated with Unisys, which helps us take a step closer to our dream and endeavor of providing world class facilities to our passengers.”

Accenture confirmed it has signed a seven-year, multi-million dollar outsourcing contract with Van Lanschot Bankiers, the oldest independent bank in the Netherlands, to develop and maintain the bank’s overall core banking applications, including credit services, asset and risk management.

Hervé Auchère, a senior executive in Accenture’s Financial Services group commented, “By outsourcing its application maintenance and development to Accenture, Van Lanschot Bankiers will be able to create a simpler and more agile IT function which will help the bank deliver business value and achieve high performance.”

This contract is part of an IT transformation project that the bank launched under its business transformation program, which seeks to grow its business through enhanced operational efficiency and improved customer service.

Accenture will provide development, implementation and ongoing maintenance services for Van Lanschot Bankiers’ new and existing applications, including customer relationship management, internet, management information systems and back-office applications. The services will be provided through Accenture’s Global Delivery Network, which includes more than 50 delivery centres across five continents.

The Phoenix Companies, has renewed its agreement with EDS to continue managing technology infrastructure and software applications for Phoenix Life Insurance Company.

The seven-year, $78 million agreement replaces a previous contract from 2004. Phoenix’s total investment in business technology with EDS, including the value of the new agreement, will be $129 million from January 2009 through 2015.

John LaGrasse, executive VP and CIO The Phoenix Companies, commented “EDS has helped us manage and transform our technology to support our business growth and enhance our insurance services.”

With a record low in property sales last month, the British Chambers of Commerce (BCC) have added to the UK's woes by reporting the worst economic survey results on record and a “frightening deterioration” in the UK's performance.

Covering the last quarter of 2008, the BCC said the survey results contained “no positive features... Domestic demand is plunging, exports are falling, and confidence is plummeting”.

The BCC has carried out its quarterly survey of more than 6,000 firms for more than twenty years.

While retail and manufacturing performance have been in the public spotlight, the bad news also concerns the services sector, said the BCC, in which home sales and orders were “particularly disturbing”. Manufacturing and services together showed negative results across enterprises of all sizes in every UK region.

”Interest rates will have to be reduced to almost zero early in 2009,” said the BCC's chief economist. Others predict that the base rate may hit half of one percent by Christmas 2009.

However, interest rate cuts are no longer adequate on their own, warned the BCC. “New and more far-reaching measures like a further fiscal stimulus and quantitative monetary easing should be introduced,” said the report.
 Quantitative easing is the modern equivalent of printing money, which some political commentators view as the last option facing a bankrupt nation.

Some of those same commentators believe the UK may have to turn to the International Monetary Fund for aid. If that happens, then Brown's days must surely be numbered.

“If the risk of deflation worsens, businesses will face new threats, and the authorities must be ready to introduce emergency policies," continued the report. Deflation might seem attractive to counterbalance last year's hike in food and energy prices, but as we've seen from the property market it can undermine consumer demand as people wait for prices to fall.

”The smooth flow of finance to businesses must be sustained at all costs, and business taxes will have to be cut,” concluded the report.

The British Retail Consortium also reported the worst high street performance since it began its own regular survey fourteen years ago.

With the government debating a loan guarantee scheme and offering golden hellos to companies taking on the long-term unemployed, it's clear that 2009 may prove to be a dark year indeed for business.

This is no ordinary recession like the one we experienced in the 1990s: the credit crunch means that even long-established, generation-spanning businesses are unable to secure lines of finance to ride out the downturn.

So let's get some feedback from sourcingfocus.com's readers and NOA members: what has your experience been, and what lessons must we learn? Sourcingfocus.com is your forum. Let's make it a thinktank for innovative ideas.

George W. Bush has used his last press conference as president today to air his views on the economy.

The outgoing 43rd president, who leaves office next Tuesday when Barack Obama is sworn in, said a protectionist stance on trade would be a huge mistake for America and the world, and that global trade was the way to end countries' isolation.

Asked what mistakes he made in office, he said he regrets working people's money finding its way into Wall Street bankers' pockets in the wake of the multibillion dollar economic cash injection last year.

In a long press conference, during which the President seemed relaxed and jovial, he took the time to poke fun at himself, repeating the 'misunderestimated' gaffe that, for many, characterised his time at the White House.

On a more serious note, he said that he inherited a recession and was leaving office in a recession – which he said he had been warned could be as serious as the Great Depression that followed the Wall Street Crash in 1929. Thanks for that note of optimism, George.

Next Wednesday he is getting off the stage and out of the spotlight, he said, and said he wished President Elect Obama “the best of luck”.