Industry news

The Transportation Security Administration (TSA), a US governmental body, has awarded Lockheed Martin a $1.2 billion contract to manage its ‘Integrated Hiring Operations and Personnel’ (IHOP) Program. 

Under the potential eight-year contract, Lockheed Martin will develop a fully-integrated human resources system to support the recruiting, assessing, hiring, paying and promoting of all TSA employees.  Lockheed Martin will develop and deploy an advanced HR system, as well as provide the people and processes to manage TSA's human resource services. 

Elmer Nelson, Vice President of homeland security solutions, commented: "It is a privilege to continue our support to the TSA. Our IHOP solution will allow the TSA to have the right staff at the right time and at the right place to support its critical mission of keeping our nation safe and secure."

The contract will be managed by TSA's Office of Human Capital, who is responsible for hiring and retaining qualified personnel to carry out the agency's critical missions.

Lockheed Martin has supported the TSA since its inception in 2002 on programs such as screener training and checkpoint reconfiguration.  The contract also builds on the corporation's previous experience in managing large federal human capital programs.

We launched sourcingfocus.com in April with a consumer survey that revealed for the first time the full of extent of people's dissatisfaction with offshore customer service. In all parts of the country and across all social groups, offshore contact centres languished in single-digit approval rates, in some cases as low as one percent. That story made the national and international news.

Now two US academics have piled pelion on ossa for the outsourcing industry with bad news from the other side of the Atlantic. In a rigourous, eight-year study they found that enterprises that outsource front-office work, or locate customer services offshore, may save on labour, but will pay a high price in terms of unhappy customers.

Researchers from Michigan University found that offshoring and domestic outsourcing of front-office functions both result in customer satisfaction declines that represent a drop of one to five percent in a firm's market capitalisation , depending on the industry.

However, when it comes to offshoring back-office functions, such as IT, human resources, and finance and accounting, they found found no decline in customer satisfaction with the enterprises concerned. No surprise there, perhaps.

Rather than talk to customers as we did, MS Krishnan, professor of business information technology at Michigan University's Stephen M Ross School of Business, and colleagues Claes Fornell of the Ross School and Jonathan Whitaker of the University of Richmond, analysed the offshoring and outsourcing activities of 150 US enterprises between 1998 and 2006,together with some 50,000 news reports on firms' offshoring and outsourcing activities.

"Firms may have a limited and short-term perspective in their initial decision to outsource – onshore or offshore – based on internal business process performance," said Krishnan. "Our research enables firms to account for customer perceptions in making their decision, and facilitates a more a comprehensive approach to the decision process for offshoring and outsourcing."

So how to redress the balance? As a starting point, firms should invest some of the savings from offshoring to serve customers they previously could not afford to serve, said Krishnan, or to provide additional services to current customers. As a next step, he said, enterprises can use offshoring to access additional innovation in the marketplace for global resources and pass these innovations on to their customers.

So there you have it: from both the customer and enterprise perspective, front-office outsourcing and offshoring are not initiatives that should ever be entered into lightly, or merely to reduce cost.

Customer relationships pay the bills, and so before making that strategic move – or facilitating it for your own customers – consider both your customer experience, and your shareholders or stakeholders.

Indian IT outsourcing body NASSCOM has reduced its forecast cumulative growth rate for the Indian IT BPO sector for 2008-09 to 21-24%, a significant fall-off from the 28% growth reported in its year-end results for 2007-08, released this week.

The reduced growth, while still stellar by US and UK standards, is the first evidence of the credit crunch and soaring energy and food bills impacting on the West's outsourcing partners in the East.

While the local economy in India remains strong and largely immune from the economic woes of the past twelve months, NASSCOM clearly sees the beginnings of an impact of reduced customer circumstances and decision-making on order books.

It's a significant issue for the Indian services market: NASSCOM president Som Mittal said that the estimated slowdown in the growth of IT-BPO spending would translate to revenues of $62-64 billion, with $50-billion of that coming from the export sector. Any real downturn in spending there over the next 18 months to two years would hit India hard.

The report comes at a time when many in the broader outsourcing sector are bullish about prospects of increased spending, while NASSCOM's own summary of the situation sees steady, if reduced growth. Its domestic market remains strong, with full-year growth rates for 2007-08 reported as being 26%, with revenues of $11.6 billion.

Before the ‘credit crunch’ hit, it was estimated that the amount spent on public sector outsourcing would grow to £65.2 billion by 2009, largely due to pressure on the public sector to control costs and improve service delivery. Following the crunch, some doubt has crept in as to whether this growth rate is possible, not because the public sector has lost its appetite, but because the credit squeeze may limit outsource providers’ ability to take on major new capital investment projects.

A huge change has undoubtedly occurred in the past six months. Straight debt facilities are not as readily available as they once were, making it more difficult for outsourcers to raise the necessary funds that in the past provided the up-front capital injection that many projects in the sector require.

This has to be a big worry for Healthcare Trusts who have become used to the many benefits of outsourcing. First and foremost of these is direct access to services and technology without the associated risk or capital expenditure exposure. This enables patients to get the healthcare they need, when they need it, allowing staff to concentrate on the job in hand; caring for patients.

Following the tightening of the credit markets and the resulting limited availability of cheap debt facilities, it can only be a matter of time before outsource providers are forced to rein in their offers.

On the face of it, this may sound bleak for the Healthcare sector, however, outsource providers needn’t become ailing patients themselves. Firstly, it is important to state that not all outsourcers will be affected, and certainly not in the same way. Catering and cleaning outsourcers, for example, may be relatively unaffected simply because they are less likely to have major capital investments to contend with. On the other hand, high tech medical equipment providers could find the current credit climate more of a challenge.

The real question will be: how will the outsourcers, and ultimately the Healthcare Trusts, cope? Some outsource specialists will be cash rich, and therefore in a good position to fund capital expenditure direct from their own balance sheet. Others will have contracts already in place, but without specific project related funding. In these circumstances, there is the potential to free up normal banking debt lines to be used for other capital expenditure or other operating expenditure. In order to do this the banks would have to assess and conclude that there is a proportion of a payment in a service contract that is isolated from the majority, if not all, of the service delivery related payments due from the Healthcare Trust.

Similarly saleable, structured or asset-based financing can be set up at the outset of the contract that allow for the long-term value of the end customer’s service payments to be taken into account as a financial asset, so that in times where funding liquidity is a more scarce resource, outsourcers can open up additional avenues of financing. In this circumstance it is clearly in the mutual interest of the Healthcare Trusts and the Service Providers to work together. In doing so they will be in a better position to arrange funding secured on the payments in the service contract, helping to widen the funding sources available to the Service Provider, which in turn allows them to continue offering a service based solution to large capital projects.

However, the longer the current credit climate continues, the more likely it is that outsourcers will have to consider new ways of raising debt to overcome the reducing availability of banking facilities. As a result, it is entirely feasible that Healthcare Trusts could find it an increasing challenge to identify outsourcers with sufficient funds to take on new large capital projects.

So does this sound the death knell for the outsource industry? Well, no, but it may lead to a new era in which outsourcers and Healthcare Trusts need to work together in a rather different way.

Whereas in the past many outsource providers would have swallowed the cost of investment, tighter margins combined with lack of cheap debt means that outsourcers may now need to consider how they can reduce the impact of significant expenditure at the start of a contract. As a result, Healthcare Trusts may need to work closely with their potential outsource partners to help them realise value in their contracts on which banks can then lend money to cover the cost of the up-front capital investment projects.

The good news is that there are a number of solutions available, ranging from structured loans to receivables based funding solutions, which can be used by outsourcers to raise funds. In both these cases the financier will look to the value of the contract over its lifetime to identify the underlying payment streams within the outsource contract from which they can generate a pool of cash which can be used to fund capital expenditure immediately and in the future.

One way of managing the working partnership between outsource provider and Healthcare Trust is to look to an external financier who can fund the ongoing expenditure by identifying value in the underlying contract. The terms of the payment stream in the contract are key in this respect as they need to provide recognition for the recovery of set-up costs in such a way that enables the funder to attach value. If funders are unable to identify future payments with a degree of certainty they are less likely to be in a position to provide front-loaded finance, so it is very much in the interest of the Healthcare Trusts to find ways that they can include an element of recurring payment to assist the outsourcers in their contracts. One way to do this would be to include minimum guaranteed throughput activity related payments, reviewed on an annual basis. The certainty around this element of the future service payment would allow it to be discounted and provide a present-day value funding sum.

In practical terms this may mean that amendments to financial schedules and contractual terms become more commonplace over the next year. But if Healthcare Trusts are to keep capital costs off their books, a new way of viewing value in outsource contracts may indeed be on the cards. Talking to specialist financiers will smooth this process enabling Healthcare Trusts to focus on the important decisions – such as identifying which outsourcer is best placed to provide the service required and how the relationship with the outsourcer should be managed over the life of the requirement – rather than being concerned about exactly where the cash will come from to finance service critical assets.

Islamic codes make traditional finance and outsourcing difficult in many cases. Here Accenture presents an overview of the key issues, opportunities and challenges in the growth of Islamic finance and products compatible with Muslim beliefs.

The tables are turning on the suppliers of goods and services.

The web and penetration of broadband allows tools, previously only available to large public and private organisations to publish RFIs and RFQs to their preferred supplier list, to be developed to provide SMEs and individual Consumers to ‘pull’ relevant marketing information and quotations from potential suppliers.

Until now CRM, in its many forms, has been used to capture data about customers and prospects with the commendable intention of understanding their ‘needs’ and pushing appropriate marketing messages. This data may originally have been provided voluntarily and in good faith in exchange for a specific purpose (convenience) or reward (loyalty card). Unfortunately this has got so out of hand that today data about an individual, including personal and sensitive information, is being harvested, collected and stored on 1,000 data silos around the globe.

Some of this data is 10 minutes old - some of it 10 years old, much of it is out of date and inaccurate and organisations are making decisions which could, for example, affect the credit rating of an individual or SME based upon this erroneous data. It certainly wasn’t provided to be shared, sold or stolen without the individuals’ knowledge or permission resulting in an increasing avalanche of spam and junk mail. It also wasn’t provided for organisations, public and private, to treat identifying information in such a cavalier manner as to expose a company or individual to the risk of identity theft and fraud.

Never forget that the ‘R’ in CRM stands for 'Relationship' and, to make that worthwhile, the supply chain needs to participate in a two-way conversation between buyer and seller. There is no need to ‘guess’ what a customer or prospect may want when we now have the ability to let them tell a supplier precisely what they want – RFIs and RFQs for everyone right down to the all important consumer.

The reciprocal to CRM is VRM (vendor relationship management) which allows the individual to enter, store and maintain their information in their own data silo. From this they can anonymously ‘publish’ their wants and needs (RFIs) for suppliers to respond and correspond (RFQs) only revealing their relevant identity details at the appropriate time in the conversation/transaction.

The benefits for both parties in this scenario include:

• Both seller and buyer can be authenticated by a trusted third party;

•Only relevant information provided by buyer, with their permissio;

• data, if relevant, can be verified and certified by the trusted third party;

• the ability to ‘write once, use many’ reduces repetitive effort by the buyer and ensures consistency of information when comparing responses from suppliers;

• The communication channel, email address/phone number, can be unique to a supplier (unrelated spam to that address will immediately identify the source of the information breach);

• There is an audit trail for buyer of what data provided to whom, when and why;

• The data feed can be one-time or persistent so that suppliers are always up-to-date;

• The data feed can use machine-readable code to synchronise (two ways) with the seller's CRM;

• The data feed can be turned off at the end of the relationship;

• Unsuccessful potential suppliers are not able to ‘spam’ a prospect or to share, lose or sell data;

• The seller reinforces the relationship with the buyer by demonstrating respect for sensitive data;

• The seller demonstrates compliance with Data Protection Act.

The key issue here is that the buyer is now able to ‘pull’ relevant information rather than surfing, searching or filtering.

A buyer's ‘invitation’ could be specific and temporary (e.g. replacement double glazing) or more general and persistent (promotional gifts). The more ‘granular’ the invitation (let's say, the supplier has to be within 50 miles of your location, the maximum price is £5,000, and after-sales service capability is essential, and so on) then the more relevant the responses will be.

This ability to ‘invite’ relevant email marketing messages will result in spam becoming a sales inhibitor rather than a cheap, albeit increasingly ineffective, sales enabler. Spam used to be merey irritating (and you don’t want to irritate your customers and prospects) but it is now out of control. Reputable suppliers will want to distance themselves from such intrusive tactics – after all, customer relationships are at stake.

Numerous applications based upon consumer-driven VRM principals will be launched starting in 2008. Many of these will be simple, light widgets in the social networking space expressing an interest in, say, Chardonnay and requesting marketing information. Others will be heavier, providing highly secure personal digital safe deposit boxes from which an individual can confidently manage their health, wealth and happiness.

I often recall the classic marketing poster, spotted in a New York print shop window some years ago, which all buyers would do well to keep in mind. It read “Quality, Speed, Price – Choose any two”.

The outsourcing market offers a vast opportunity for regions that are able to capitalise on it. Business process outsourcing (BPO) is estimated to become a $90 billion market worldwide over the next six to eight years, and Egypt is well positioned to take a good share of that. India continues to lead the outsourcing market, both in IT outsourcing and BPO. Our aim is to position Egypt as the India of the Middle East. Indian IT outsourcing firms, including Wipro and Satyam Computer Services, and global IT companies such as Teleperformance, Cisco, Google, IBM, Microsoft, Valeo and Oracle have already recognised Egypt’s potential and invested here, but why should other companies follow suit?

Egypt has some unique advantages as an outsourcing destination, such as a broad talent base, lower labour costs than in surrounding low-cost regions, time zone proximity with Europe and relative familiarity with Western culture over traditional outsourcing destinations like India and China.

An abundant talent supply

Our large annual graduate talent pool of over 300,000 graduates, including a 20,000 strong specialist workforce with engineering and computing degrees, has excellent multilingual capabilities in English, French, German, Italian and Spanish, in addition to Arabic. This positions us favourably amongst other emerging outsourcing destinations thanks to the diverse regions we are able to support with local language outsourcing services. In fact, a global study carried out by Global Services-Tholons ranks Cairo 11th in its list of the top 50 emerging outsourcing cities, citing our multilingual skill set and government-led initiatives amongst our strengths1.

This talent pool is something that the government is keen to cultivate, and has set up a number of initiatives to support it. These cover training and best practice sharing, for example through our Information Technology Institute (ITI, www.iti.gov.eg) in Cairo, which trains up to 1,000 people every year. Also, these initiatives include curriculum reform in five universities with the aim of producing more than 5,000 people annually, thus preparing our workforce of the future. Almost half of Egypt’s 74 million inhabitants are aged between 15 and 39, meaning we have a talent surplus for the next five years, and government-led initiatives such as the Egyptian Education Initiative (EEI, www.eei.gov.eg), E-Learning Competence Centre (ELCC, www.elcc.gov.eg) and Mobile IT Club (http://mitc.ictfund.org.eg)will enable us to support the outsourcing industry in the long term. This is in stark contrast to many other outsourcing destinations that suffer from high levels of attrition within their talent base.

Investing in a world class infrastructure

The Egyptian government has invested heavily in achieving world class infrastructure facilities to support the booming outsourcing market. We realised the need to establish a specialised and modern business park to be the flagship hub for ICT. The Smart Village in Cairo stretches over 600 acres and accommodates multinational and local telecommunications and IT companies, financial institutions and banks, together with related government authorities. Currently, over 13,000 professionals run the operations of more than 100 local and international companies and institutions at the Smart Village, and the number is expected to exceed 40,000 by the end of 2014. A second park is under construction in Cairo – the Maadi Contact Centre Park – which will house a further 45,000 employees specialising in serving the call centre industry.

Egypt also has the potential to become a multi-city outsourcing location. In addition to the excellent infrastructure, services and talent pool provided by our capital city Cairo, other cities will ultimately support our outsourcing market. These include: Alexandria, the country’s second largest city, which benefits from excellent connectivity thanks to its two airports and two ports; El-Mansura, an important commercial and industrial city; and Asyut, the home of the University of Asyut, one of the largest universities in Egypt.

Providing cost-effective outsourcing services

Despite our world class infrastructure and talent pool, Egypt remains a cost-effective destination for outsourcing services. Our structurally low cost of operations is at least 20 percent lower than other leading locations in Eastern Europe, North Africa and Asia, and we also have the world’s lowest telecom costs. In addition, our low wage inflation of just 5 per cent annually, compared to 10-15 percent in other locations, and low currency fluctuation of the Egyptian pound with respect to the US dollar, means that the costs of operating in the region will remain stable.

Because the Egyptian government understands the importance of the IT industry to the health of its growing economy, we offer tax breaks and other financial incentives to attract international companies to set up call/service centre and BPO operations in the country. Our commitment to economic reform makes Egypt an increasingly attractive prospect financially. The recent economic reform programme has seen corporate tax rates cut from 42 percent to 20 percent, and thanks to our tax, customs and financial sector reforms, Egypt was named as the leading global economic reformer by the World Bank in its ‘Doing Business 2007’ report.

A leading outsourcing destination

The national ICT sector is emerging as a role model of deregulation and privatisation as well as a catalyst for reform in other sectors. The sector has managed to maintain growth rates of up to 20 per cent, and attract local and foreign investments of more than $8 billion over the past three years. In a study by AT Kearney, Egypt is ranked 13th in providing IT offshore services worldwide, above Eastern European locations such as the Czech Republic, Hungary and Poland, as well as other Middle Eastern and African locations such as South Africa and Tunisia.

Local, regional and international companies, including Unilever, Orange, Vodafone, Proctor & Gamble and Sun Microsystems are already investing in outsourcing services in Egypt. These provide valid evidence on the capabilities of the Egyptian outsourcing sector. With Egypt’s IT sector forecast to grow from $889 million in 2006 to $1.3 billion in 2013, we are confident that we will be able to cement the country’s position as a leading emerging outsourcing destination.

The Information Technology Industry Development Agency (ITIDA) is a government body affiliated to Egypt’s Ministry of Communications and Information Technology. It was established to encourage the development of Egypt’s IT industry, with a particular focus on outsourcing services. It is tasked with attracting foreign direct investments to the IT industry and maximising the exports of IT services and applications.

The adoption of shared services programmes among European governments is going to accelerate over the next few years, according to new research by Ovum, a global advisory and consulting firm.

"While the market is still in its early days, certain forward-looking governments in Europe are tackling the issue head-on as a means to both cut costs and improve public service delivery to their citizens," says John O'Brien, senior analyst at Ovum.

According to the consultancy, European governments are under real pressure to perform. "For many governments there is a growing need to respond to new socio-economic challenges," says O'Brien. "These include finding solutions to the impact of an ageing population, increased international competition and now a more difficult economic environment."

Opposition is starting to recede among the more forward-looking Western European governments of Germany, France, the Netherlands and the Nordic markets of Sweden, Norway and Finland. Ovum believes these governments will present greater potential opportunities for suppliers of shared services over the next few years as investments are made in governmental modernisation and transformation programmes.

But considerable barriers remain, which could restrict progress. Some European governments for example still remain resistant to change, and most have yet to develop coherent strategies for shared services adoption. Consequently, there is much to be done to raise awareness over the next few years. This will provide suppliers with an early opportunity to consult, educate and advise government organisations on future shared services investments.

Software and IT suppliers with prior experience in implementing successful programmes will be at an advantage to help shape the opportunity. However, the cultural challenges will also present opportunities for consulting suppliers that can offer the softer skills to help shape the right environment for shared services. These include:

· local knowledge and local customer relationships

· knowledge of the target market and its drivers

· an understanding of the customer's specific pain points

O'Brien concludes that "before shared services can really take off in the European public sector, governments must establish the right environment and remove long-standing organisational blockers. Departments that have traditionally worked in silos will need to change their working practices and begin sharing information and resources."

A copy of the report is available to subscribers here: The future of shared services in the European public sector.

Recruitment process outsourcing (RPO) is growing rapidly and has the potential to be a multibillion dollar market, taking advantage of the trend towards single process deals in human resources outsourcing. This is according to the latest report by independent market analysis firm Datamonitor. The report Opportunities for Recruitment Process Outsourcing in a Changing HRO Market estimates the global RPO market in 2007 was worth $720 million and forecasts it will grow by 22% in 2008 to $880 million, and surpass the $1 billion level in 2009.

According to the report, demand is predominantly from Fortune 1,000 companies in the US, but the market is growing rapidly in the UK and continental Europe and is beginning to gain traction in the Asia Pacific region.

However, the predictions come at a time when many businesses are facing the prospect of redundancies, as the 'perfect storm' of the combined credit crunch and soaring food and energy costs are hitting many sectors hard – in some cases, very suddenly.

While RPO vendors claim to reduce costs by up to 40% in some cases, it is the lure of recruiting a higher quality workforce that has been driving growth, says Datamonitor. Nevertheless, the growth forecasts themselves are extrapolated from 2007 data and presumably do not factor in the effects of a precipitous decline in the Western economy.

Although the strategic importance of recruitment means quality will remain of utmost importance, says the analyst firm, it is likely in an economic downturn that it is those who can deliver on both quality and price that will succeed.

“Despite the expectation that outsourcing will thrive as companies search for ways to cut costs, increased unemployment will result in lower business volumes which will be reflected in the variable price nature of RPO contracts. But, this will be mitigated by the increasing demand for RPO from new clients,” says Patrick O'Brien, IT and BPO analyst at Datamonitor and author of the report. “For RPO to continue its rapid growth in the near term, vendors may have to go to market by pricing more aggressively as recruitment will need to be seen as a primary function for easy cost reduction among company processes.”

RPO vendors are split over the use of offshore provision. Many players have little experience or understanding of how to derive the fullest benefits from RPO, while others see it as unworkable in recruitment services which require constant contact with both the client organization and, using the client’s brand, with candidates.

Approximately half of RPO vendors have some offshore workforce, mainly carrying out tasks around name generation, sourcing, early screening of resumes and other administrative duties. A few have moved tasks which involve contact with the candidate offshore as per customer demand.

“While there is a lot of resistance from vendors, the increasing competitiveness of the market and the growing focus on cost cutting in the economic downturn will push vendors into examining ways in which to begin to increase the use of offshore delivery,” says O'Brien.

The first half of 2008 has seen a wave of acquisitions as vendors attempt to build out their recruitment expertise, technology capabilities and geographic footprint. A number of competing vendors still need to broaden their capabilities, and many of the larger vendors are looking to expand further overseas.

Some companies have put forward global request for proposals (RFPs), but these have subsequently been split into regions and handed to different vendors. The one-vendor global deal has not arrived yet, but a number of vendors believe that a breakthrough will occur in the next 12 months. The key reason for the break-up of global RFPs has been the fact that vendors do not have the capabilities to deliver on an international basis. Many have taken heed and are busy investing in international expansion, acquiring companies, building a global set of processes and forming partnerships with vendors in other regions.

Despite awareness of the information security risks associated with outsourcing projects and well publicised cases of data loss or theft, many companies still ignore the potential problems until it is too late. That is the warning highlighted by the Information Security Forum (ISF) – an independent organisation with some 300 major business and public sector Members from around the world.

“The potential to cut significant costs and increase speed to market clearly make outsourcing and offshoring an attractive proposition,” says Simone Seth, author of a new report published by the ISF. “But without the right level of security expertise from the outset to fully identify information risk, there will always be important gaps in the business case. If the necessary controls are not budgeted or put in place to mitigate the risks, it can have serious consequences and even threaten the long term success of the outsourcing project.”

The ISF’s research shows that information risk management is often integrated as an afterthought, and information security professionals become involved too late in the lifecycle. This can often be explained by a lack of awareness at the highest levels and a failure to understand the importance of information risk management through all stages of an outsourcing project.

“Failure to involve information risk managers at the start of a project and through its lifecycle increases the enterprise’s exposure to risk; whether it’s data theft, information leakage or disputes that may arise from questions of ownership of intellectual property,” says Simone Seth.

Information mangers need to identify all outsourced processes, operations and technology and agree business criticality levels through all four steps that comprise an outsourcing lifecycle: Prepare, Implement, Operate and Review. Information risk managers are also able to add contractual clauses that relate to information security regulatory requirements and offer additional protection from a legal standpoint. It is also important to understand regional compliance requirements and regulations as well as the wording of contractual terms to prevent future disputes over the ownership of intellectual property and the transfer of data.

Typical risks at implementation and operational stages that can occur if the right controls are not effective, include fraud, data theft or hacking that can lead to data loss and confidentiality breaches.

The ISF is a not-for-profit international association of some 300 leading international organisations, which fund and co-operate in the development of practical, business driven solutions to information security and risk management problems.