Industry news

Organisations are increasingly building and utilising complex services supply chains to lower costs and address the emerging opportunities and perceived threats of Globalisation, according to EquaTerra’s Advisor and BPO/ITO Service Provider Pulse Survey 2Q08.

The 2Q08 Pulse Survey, a survey of top outsourcing service providers and EquaTerra’s own client-facing advisors provides data on current and projected demand for outsourcing worldwide, plus a unique insight into the impact ongoing Globalisation is expected to have on outsourcing.

“Services supply chains have steadily become both more diverse and more widely distributed, with large organisations forming hundreds of different relationships with hundreds of different service providers worldwide,” says Stan Lepeak, managing director of research for EquaTerra. “Ongoing Globalisation is accelerating that process and adding new layers of complexity.” The 2Q08 Pulse Survey looks at some of the challenges relative to these expanding services supply chains.

Most organisations don’t yet do a good job of arranging relationships with services providers. EquaTerra finds buyers’ overall skills at developing quality outsourcing business cases are mediocre, particularly when it comes to assessing total costs to achieve desired improvements from outsourcing and attendant indirect or shadow costs.

Respondents to the 2Q08 Pulse Survey believe the two most useful metrics for building a solid outsourcing business case are current performance levels (75 per cent) and current direct costs (74 per cent), yet the survey finds many buyers don’t accurately capture even these most important measurements. The ability to optimise and manage global services supply chains on the backend is proving equally challenging.

2Q08 Pulse Survey respondents rate buyers as poor to mediocre across a variety of governance activities, including their ability to measure service level agreements (SLAs) and end-user satisfaction. While these problems are not new, they are exacerbated as organisations do more global sourcing.

Creating complex services supply chains is intrinsic to Globalisation and struggles to develop the tools and skills needed to manage them is to be expected, according to Lepeak. “It took decades for manufacturing supply chains to mature. Now, organisations are steadily migrating from those vertical integration models to horizontal specialisation.”

The 2Q08 Pulse Survey indicates there is accelerating interest in outsourcing’s flexible cost and operating models as Western organisations seek ways to weather the economic downturn and counter lower-cost global competition. The 2Q08 Pulse Survey focus on Globalisation draws on data collected in an earlier study conducted by the Economist Intelligence Unit on behalf of EquaTerra and World 50, which polled more than 200 C-level and other senior executives from 19 industry groups worldwide about the benefits and challenges of Globalisation. In that study, more than 54 per cent of respondents reported the number one response to Globalisation was a greater emphasis on improving business process efficiency and effectiveness.

Almost half, 47 per cent, said their firms were investing in new or existing operations in foreign markets, including third-party outsourcing relationships and the establishment of captive offshore operations. Many, 35 per cent, said they were also investing in IT applications to become more competitive and reduce costs. EquaTerra increasingly sees Western organisations tapping the robust IT talent pool found in emerging markets and turning to IT outsourcing as a way to upgrade and expand IT capabilities without upfront capital investment.Additionally, the survey findings show that:

• Demand for business process and IT outsourcing (BPO and ITO) is expected to exceed 2006 and 2007 levels. Pulse Survey demand projections and pipeline forecasts are indicative of deals that typically close over the next two to three quarters. EquaTerra advisors (38 per cent) indicated demand levels were up for 2Q08, down 12 per cent from 1Q08 but up eight per cent over 2Q07.

• Service providers characterised their Q2 pipeline for BPO and ITO deals as rising 10 per cent to 52 per cent, a 14 per cent increase over last quarter. Projections for next quarter are only slightly less optimistic, with 45 per cent of providers polled expecting continued growth in demand, down from 50 per cent last quarter. Outsourcing efforts with short-term return on investment or that deliver quick cost savings are going forward, often at an accelerated pace. Not surprisingly, efforts focused on complex process transformation or that require significant upfront investment are more likely to be slowed or on hold.

• Demand and supply increased for emerging knowledge process outsourcing functions such as engineering, research and development, financial modeling and analytics, legal process work. There was also growth in areas like document services, facilities and real estate management and logistics services.

EquaTerra estimates there were more than 150 outsourcing deals in 2Q08 with an average total contract value (TCV) of $270 million. This compares to 120 deals in 1Q08 with an average TCV of $120 million. These numbers exclude deals not publicly announced or announced without publishing deal details.

Find out more about the pace of ITO and BPO and how Globalisation is impacting outsourcing by participating in EquaTerra’s 2Q08 Pulse Webcast Thursday, July 24, at 11 a.m. EDT USA/4 p.m. BST EU. To register, please contact Allison.Norman@equaterra.com. Free copies of the 2Q08 Pulse report will be available for download immediately following the Webcast from: http://www.equaterra.com/webcast072408.aspx

Tyre manufacturer Michelin has signed off on a three-year contract with ITO provider, Logica for the provision of systems development and IT consulting services.

Logica will handle IT services for the company across its Finance and Purchase Reporting Group, supply chain management, marketing and sales (CRM) across Europe and North America.

Michelin hopes the new deal will deliver enhanced operating efficiency and more responsive, flexible information systems whilst driving cost and quality efficiency. 

Logica will implement the deal using a blended delivery model which allocates the optimal IT resources from its global service centres.

Kent County Council, one of the largest local authorities in the UK, has awarded Unisys an ITO contract worth approximately £32 million.

Under the terms of the agreement, initially lasting until late 2012, Unisys will create and manage a public information network and security service for the Council.

The contract, signed for an initial four years, forms part of the ongoing shared services initiative that has been spreading across the public sector since late 2006. It is hoped that the new system will enable cost-effective communications and collaboration among local government agencies, while providing new information services to residents.

The network will initially connect approximately 1,100 public sector establishments, including schools, council offices and libraries. The extra bandwidth the network provides will also mean that many primary schools’ capacity for internet access will double and there will be improved capabilities to support home, flexible and remote working within the county. The network will also be available to all public service bodies within the Kent boundaries wishing to join the alliance.

Paul Carter, leader of Kent County Council, said: “We expect that the benefits the network will bring in terms of collaboration, governmental linkage and common shared infrastructure will in turn result in enhanced public services for the people of Kent”.

Banco Espírito Santo (BES), one of the major financial groups in Portugal has awarded IBM a seven-year outsourcing deal for the management of the bank's IT infrastructure.

As part of the agreement, IBM will manage the entire BES server infrastructure in Portugal including administration, management and operation of the midrange infrastructure.

The agreement forms part of an ongoing BES' strategy to improve its IT efficiency, as well as management processes, elevating service quality and assuring products and processes innovation.

The deal, signed in June 2008, expands the scope of a previous contract signed in 2006.

South Tyneside Council has signed a 10-year outsourcing deal with BT for the provision of back-office IT services.

The contract, estimated to be worth around £300m, covers the human resources, procurement and financial services functions of the authority. It is thought that the deal could lead to provision of similar services to other councils across the UK in the future.

As a result of the contact 450 South Tyneside Council employees will move to the new BT local government services division.

Indian IT systems house HCL Technologies is to acquire the fixed assets of UK life and pensions outsourcer Liberata Financial Services for US $2 million.

LFS manages over three million policies on behalf of clients including AXA, Barclays, Resolution, Chesnara and Save and Prosper. The company will earn revenues of about $60 million this year and has an order book of $540 million to be executed over the next few years.

As part of this transaction, HCL will acquire four delivery centres in the UK and 800 staff. The Indian company says it will invest $24 million in the business over the next three years.

Ranjit Narasimhan, President and CEO of HCL BPO, said: "This strategic acquisition of LFS enhances HCL's ability to become an end-to-end provider of business process outsourcing services in the financial services space."

Barclays will move up to 1800 IT jobs offshore over the next two years to access skills and cost savings around the world.

The bank is expected to send the work to ‘centres of excellence’ in India, Hungary and Singapore.

700 of the jobs will be outsourced by September, with the remaining 1100 due to go by 2010. It is estimated that around 1000 existing Barclays IT jobs will stay in the UK at centres in London and Cheshire.

Barclays says it needs "centrally-managed technologies in centres of excellence in key locations around the world" in order to become a fully global bank.

"These changes are about putting in place the technology and systems to support Barclays in achieving its ambitions," says a statement.

Financial services provider, MGM Advantage has awarded a £1m managed services contract to ADA Technology Services, an ITO supplier.

The agreement covers a comprehensive range of strategic technology solutions including disaster recovery, data communications and support services.

ADA has worked with MGM Advantage for several years and this latest contract will consolidate and enhance the broad range of business solutions offered by ADA into a single master service agreement.

Convergys has announced a planned merger with Intervoice, a leader in the CRM, software-based interactive voice response, contact centre and mobile messaging technology and applications markets.

The deal, worth an estimated $335 million in cash, represents a premium of 24 percent to Intervoice’s closing stock price on July 15, 2008. Convergys expects the acquisition to be complete by the start of 2009.

Companies are responding to the effects of a tough economy by expanding their use of existing outsourcing agreements and awarding new contracts, according to the latest market data from TPI, the sourcing advisory firm.

TPI data reveals that 282 outsourcing contracts totaling over €39 billion have been signed so far this year – the strongest half year performance in 10 years. This represents an increase of 24 percent on the total value of contracts signed at this point last year. Demand for outsourcing is being driven by companies looking to cut expenditure and deliver variability in costs in the current economic climate. Corporate strategies that were growth-driven during more prosperous times are becoming profitability-driven in response to the economic challenges.

EMEA leads the way

Growth in the outsourcing market is taking place predominantly in Europe, Middle East and Africa region (EMEA). TPI data shows that the EMEA represents 61.5 percent of the outsourcing market to date in 2008 compared with 51 percent a year ago. So far this year. 126 contracts totaling €25.5 billion have been signed – up 58 percent on the value signed at this point last year.

Duncan Aitchison, partner and president, TPI EMEA comments, “European companies are expressing their concerns regarding the softening business climate by taking steps to reduce operating costs, and restructure the nature of their business-support functions to have a more variable cost profile. They are doing this to gain the benefits of near-term cost savings, but also to position themselves to respond more effectively when the economy strengthens and growth is once again at the top of the agenda.

“While I wouldn’t call today’s corporate attitude towards cost-reduction ‘desperate’, there is certainly a tone of urgency in play.”

Reflecting the increasing adoption of outsourcing by large European corporations, 10 of the 13 mega deals (contracts valued at €800 million or greater) signed so far this year were in EMEA. The average value of a contract in EMEA is growing in contrast to declining contract values in the US and Asia Pacific. This growth in contract values in EMEA is being fueled by this rise in mega deals.

What does the future hold?

TPI’s data shows unprecedented market momentum in terms of new outsourcing contract awards – the best sequential nine months in the history of outsourcing. To date in 2008, 237 new scope outsourcing contracts have been signed globally totaling €32.6 billion – an increase in total contract value of over 25 percent from 214 contracts totaling €26 billion a year ago.

Considering this strong start to the year, TPI estimates that global annualised revenue from outsourcing contracts will grow by around 10% to over €70 billion by the close of the year. This would surpass the €64 billion in 2007 and 2006.

“This surge in new scope outsourcing contracts indicates healthy market demand and underlines the fundamental momentum in demand for outsourcing,” explains Duncan Aitchison. “We could well see a record sum for the total value of outsourcing contracts signed in 2008. While third quarters are traditionally the softest for outsourcing contracts, we see little to disrupt the current momentum.”