Industry news

The number of new outsourcing contracts awarded was down significantly for Q3 2008, according to TPI’s quarterly Index. And, while the third quarter is usually the weakest for new contract signings, the number of ITO contracts awarded fell dramatically compared to the first two quarters.

The index, which reflects commercial outsourcing contracts valued greater than US$25million, also indicated a quarter-on-quarter decline in total contract value (TCV) and annualised contract value (ACV) for the first two quarters of the year.

Q3 also only saw one mega deal (contracts with TCV greater than $1 billion) signing, there was also a dearth of new mega relationships (contracts in which the ACV is $100 million or greater).

However, in spite of softness in the third quarter of this year, the 2008 year-to-date numbers and values of outsourcing contract awards are exceeding metrics of 2007. Compared with last year at this point, the number of contracts awarded has risen almost 5 percent and TCV has grown nearly 19 percent.

“What we are seeing in the third quarter and year-to-date metrics represents the results of outsourcing initiatives begun in more stable times – compared to the anxiety of recent weeks,” stated Brian Smith, Partner and Managing Director, Financial Services Operations, TPI North America. “The continued softness of those numbers reflects early recessionary indicators seen in the beginning of the year. But the uncertainty and unrest of today’s global economic climate has yet to fully affect the outsourcing industry that serves the Financial Services sector.”

In the third quarter, 128 outsourcing contracts valued at $14.4 billion in TCV and $2.8 billion in ACV were signed in the broader market. Compared to the second quarter of 2008, the number of contracts dropped 22 percent. The TCV and ACV both dropped 50 percent quarter-on-quarter. While third quarters are typically the weakest quarter of a year, the third quarter of 2008 was lower than historical average by almost 20 percent.

As I write the credit crunch seems to be tipping over into a near-global recession, with perhaps only China and – ironically – Iraq escaping the worst of its effects. In China growth has fallen by 40%, but that is from several years of double-digit expansion.

Despite all this, business process outsourcing (BPO) analysts NelsonHall says that BPO total contract value (TCV) has grown by 28 percent in the past twelve months.

While Q2 2008 was less profitable year on year, there was an overall 13 percent increase in contract signings in commercial and civil government sectors for the first 9 months of 2008, says the company.

Other findings were also mixed. The number of new BPO contracts has declined, but BPO contracts valued at over $100 million have increased in number, while the average value of the top 20-50 deals has increased by over one third, partly driven by large deals in the insurance sector.

BPO contract value in emerging economies has grown faster, at 31 percent, than the BPO contract value in mature economies (28 percent). However, while BPO is becoming increasingly important to support domestic activity in growth markets, it remains a small portion of overall BPO activity.

The two sectors that usually dominate new contract activity, financial services and government, have increased their share of TCV from 62 percent to 72 percent. Unsurprisingly, government BPO activity in both the US and the UK has overtaken the financial services sector, where insurance remains a strong growth area, but banking BPO has fallen off significantly.

At the moment, the banking sector needs more dramatic remedies than BPO can provide,says NelsonHall. However, BPO is likely to be an increasing part of the solution in the medium-term.

Elsewhere, the telecom sector has been very active in BPO recently and activity is up in both transportation and healthcare.

The manufacturing and retail sectors have recently seen lower levels of BPO activity. These sectors, like the banking sector, face some immediate rethinking of their wider strategies but, similarly, are likely to turn to greater use of BPO in the medium term.

The Paris Chamber of Commerce and Industry (CCIP) has chosen Atos Origin, a leading IT outsourcing provider, and Selligent, a CRM provider, to redesign its Customer Relationship Management (CRM) system.

This strategic project is designed to support the CCIP’s efforts to improve its response to the needs of the companies in its region. The new CCIP system will help to serve the 380,000 companies in the Paris, Hauts-de-Seine, Seine-Saint-Denis and Val-de-Marne départements.

Under the terms of the contract, Atos Origin will manage: implementation of the application; implementation of CRM governance; formalisation of internal processes; change management; implementation monitoring; training of the 650 users; post-development maintenance; transference of skills to the CCIP team on completion of the development.

Guy Scheidt, Deputy Project Manager at CCIP, commented: “In considering the performance and quality of the services offered by the CCIP, we realised the need to focus our efforts on our customers’ expectations. Atos Origin and Selligent demonstrated their ability to listen and analyse and to provide us with a very competitive response, in terms of services (consulting, training, implementation as well as operational maintenance of the future CRM solution) and a rational and progressive implementation according to the requirements expressed.”

Financial terms of the deal and length of contract were not disclosed.

The Indian Government’s Ministry of External Affairs (MEA) has a signed a deal with TCS to deliver its Passport Automation Project - the largest mission-critical E-governance project valued at over Rs 10,000 million (almost £12 million).

Under the terms of the agreement, TCS will be responsible for the digitization of passport services including: online filing of applications and intelligent character recognition; biometric capture; photography, payment and verification and issue of passports. A call center will also be established to help applicants in the process of dealing with a passport transaction.

On completion of the project, the Ministry expects the process of issuing a new passport to be completed in three working days, while passports issued under the Tatkal scheme will be dispatched on the same day.

Shivshankar Menon, Foreign Secretary, Ministry of External Affairs, commented: “The Passport Seva Project, based on a public-private partnership model, aims to provide passport-related services to Indian citizens in a speedy, convenient and transparent manner. The sovereign and fiduciary function of granting and issuing passport remains with MEA and TCS will be our technology and operations partner in this project.”

But it TCS expects to have the system ready for pilot operation within 19 months. The countrywide roll-out of the Passport Automation Project will take place within six years and the Government will open 77 Passport Filing Centers across the country in a phased manner. TCS will have end-to-end responsibility of implementing this project.

Telstra, Australia’s largest telecommunications provider, has awarded Accenture five-year, multi-million-dollar IT outsourcing contract to maintain its customer care and billing platform, which Accenture helped design and deploy.

Under terms of the contract, Accenture will be responsible for the ongoing management of the platform and ensuring that it operates effectively through further migrations and software releases.

Steve Willis, managing director of Accenture’s Communications & High Tech practice in Australia, said, “Telstra has a relentless focus on customer service and required care, and its new billing platform will provide the company with a competitive advantage now and in the future. This agreement is the opportunity for us to continue our work as a key transformation partner with Telstra, helping introduce new products, training techniques and advanced technologies.”

Accenture led the development and implementation of the customer care and billing platform as part of Telstra’s business transformation program. Telstra has migrated more than 5 million consumer customers and 8.5 million services to a new platform, processing hundreds of thousands of orders and millions of bills, with no increase in complaint volumes.

Co-operators General Insurance Company, the largest Canadian-owned private sector property insurer, has extended its data centre outsourcing contract with CGI until 2015. The seven-year contract is valued at approximately US$110 million.

Under the contract, CGI will continue to provide data center services which include help desk support and application hosting services for applications critical to The Co-operators. CGI has served Co-operators General since 1997 and provides a number of services and solutions to several companies within The Co-operators group, including The Sovereign General, l’Union Canadienne, and HB Group Insurance Management Ltd.

“CGI has worked closely with The Co-operators for more than a decade to develop a responsive and flexible relationship to meet our evolving needs,” said Vivien Fong, Senior Vice-President and Chief Information Officer, The Co-operators Group. “ The renewal of this relationship represents a commitment by both organizations to work collaboratively in the spirit of partnership to achieve our mutual objectives.”

Infosys will not submit a revised offer for Axon, the SAP consultancy group. Infosys' bid currently stands at 600 pence per share but it is competing for the company against a 650 pence per share offer from HCL, a competing ITO provider.

In light of HCL's more attractive offer a statement was released from Axon announcing the withdrawal of its recommendation of Infosys’ offer and its intent to unanimously recommend the higher offer when made.

Infosys replied with its own announcement stating that "After careful consideration, the Board of Infosys has concluded that it will not increase the price of its original offer," The statement continued, "Infosys has a fast-growing and profitable SAP - led business transformation practice. The company is confident that its decision will have no material impact on its strategic plans."

NASA has renewed its contract with CSC for its work on the Hubble Space Telescope Program. The agreement has a three-year base period and two three-year options with an approximate total contract value to US$50 million. The nine-year contract extension marks more than 25 years of continuous CSC support for the program.

Under the contract terms, CSC will continue to provide project management; mission preparation; development and maintenance of ground systems; science operations; computer, network and database operations; education and public outreach; and scientific research. Science operations activities include science planning and scheduling; instrument characterisation and calibration; development and maintenance of science instrument software instructions; data processing and archiving; and archive operations.

“For more than 45 years, CSC has supported numerous NASA missions for exploration of our solar system and beyond,” said Tom Anderson, president of CSC’s North American Public Sector Civil Division. “We look forward to continuing our scientific support and technology services for NASA’s premier scientific project, the Hubble Space Telescope, which has revolutionised astronomy by providing unprecedented deep and clear views of the universe.”

Approximately 50 scientists, systems engineers, software developers, information technology administrators and operations engineers will continue performing the work at offices in Baltimore and Lanham, Md.

These are strange times for the IT sector. The ICT skills which its people boast are in constant demand. Vast IT workforces sit in regional skill centre hubs around the world. At the same time, the demand for skilled IT people ‘on the ground’ has seen huge recruitment surges in numerous countries. Behind all this though, there lurks the growing, nagging suspicion that a very real skills shortage may be starting to open up.

A number of factors lead me to think this. Rapid globalisation has heightened the need for specialists who can work with, and connect, any number of different systems globally. The flow of mathematics, engineering and computer science graduates into the sector has started to slow down. And people who had left the sector are having to be tempted back into employment to work on the older systems which newer graduates are not being taught how to use.

Unless all relevant parties come together to address this looming skills shortage, I believe that the industry could have a significant problem on its hands over the next few years. This is no trifling HR issue; this is a very real Board level concern which should be acted on now.

The reduction in the inflow of graduates into the industry is a worrying development. For sure, our industry may have had its peak — in terms of career attractiveness — at the turn of the century. Thousands of young graduates poured into the industry as the millennium bug and the dot com boom made ICT skills attractive and profitable. Several years on though and the industry may be paying for that peak as many of the ICT skills which it made popular now appear commoditised. I’d suggest that many parents in mature economies may even be counseling their children against a career in the industry because the profession appears so commoditised; thousands of people with the same skills and with the constant threat of offshoring hanging over their heads.

This is misleading. While the perception may be of a commoditised industry, the reality is far from it. For sure, the more straightforward, back office ICT skills are being outsourced and offshored on a regular basis but the front end, high value skills such as systems architecture are not. These are the skills which are increasingly in demand yet they are tarred with the same 'commoditised' brush. The net result is a generation of graduates left unconvinced that ICT is for them; at a time when the industry is crying out for their abilities. Yet for those people able to offer high level, strategic advice and exhibit the combination of business and ICT skills now required, premium salaries are on offer — but I wonder whether this message is getting through.

If the industry is worried about people coming in, then it is becoming just as concerned about the people leaving. The skill base which those people represent is not being replaced. However, the IT systems which they trained with remain in place — but with an ever dwindling pool of professionals able to work with them.

Progress and technology wait for no man and I predict a very real explosion in the new kinds of ICT skills required as businesses embrace yet more new technologies. The lucky few who have those high-end skills may find themselves very much in demand around the world. With that in mind, it’s worth noting that those countries with rather more open-minded immigration policies may really be the ones to benefit here, enabling the rapid delivery of IT professionals to where they are needed the most.

I would suggest it is now beholden of all relevant bodies — companies, trade associations, governments etc — to come together and address this skills issue. Together, they should be actively lobbying to get more young people into the industry. Otherwise, all IT users face a double whammy — having insufficient people with tomorrow’s ICT skills coming into the industry while other vital skills are lost as older employees leave the workforce. Boards which promptly take the initiative in this area may be able to benefit from an aggressive talent management programme which adds real value to their business. Whatever happens though, after several years of feeling like we were on ‘easy street’ with so many people desperate to come and work in the industry, it’s time for an urgent reassessment of where we stand.

The purchase of Citigroup Global Services by TCS, the captive BPO delivery arm of the Citigroup bank, is likely to be the first of many, according to Tony Rawlinson, MD of Financial Services at EquaTerra. In a statement Rawlinson hailed the acquisition as a ‘fantastic move’ and predicted that the purchase will be replicated by other banks and service providers.

“In one fell stroke, this makes TCS a strong player in the banking BPO market with an acquisition on attractive commercial terms”, he said.

“Even before the credit crunch and then the global market meltdown, there was a definite trend developing in this area” he explained “Banks were asking themselves ‘are we in banking or running back office captives?’. They weren’t helped by the fact that they were looking to cut their costs due to losses sustained through investment in the sub-prime market. At the same time, service providers have matured enough to be able to take on the types of services which the financial services sector were looking to offload quickly. Although there will be a limited window of opportunity for offloading captives, I suspect we will see a few more sizeable deals like the Citigroup / TCS one done”, he explained.

In the same statement Rawlinson highlighted other likely trends for the industry, such as the shift in power from banks to service providers in terms of what services are actually outsourced. He also expects service providers to develop “utility” services across multiple banks using their scale to develop common platforms that can be leveraged by numerous banks.

While Rawlinson highlights the trend towards banks selling their captive operations, he adds “others will elect to keep certain process sets depending on their view of competitive advantage”.