Industry news

Aviva, the world's fifth largest insurance group, has signed-off on a six-year contract with Cable & Wireless (C&W) Europe, Asia & US worth £300 million.

In a bid to reduce costs at the insurance company, C&W will deliver over 70 different services including telephony, data and WAN to support its 35,000 staff in the UK and India.

The contract extension, adding to the companies’ existing 12 year relationship, will see C&W manage connectivity for over 1,000 sites. The company will also implement new BlackBerry services and speech recognition.

Norwich Union Insurance CEO Igal Mayer, said: "It is important to our market success that we are able to respond to business and customer needs promptly and reliably. This contract represents a significant commitment on both sides to ensure cost effective service against the backdrop of a highly competitive marketplace."

A ‘borderless state’ will prevail within the information and communications technology (ICT) industry by 2015, according to Gartner. Analysts predict that organisations, including governments, will increasingly source their ICT from around the globe without regard to the ‘country of origin’ or ‘headquarters’ of the vendor supplying the solution, be it software, hardware, telecommunications, IT services, or people.

“Rapid IT growth in emerging nations is removing borders in business that will impact everyone. Even if you have no direct operations in China, or India or anywhere else in the emerging world, your suppliers are probably there and so are some of your partners and customers,” said analyst Partha Iyengar. “Organisations must learn to trade and compete with these rapidly transforming, highly organised companies, which leverage low-cost, highly skilled labour sources. If they do not, they will be at a significant competitive disadvantage.”

Gartner said that far from being a new phenomenon, the erosion of traditional borders is the latest stage of globalisation that goes back to the industrial revolution and beyond. Today, social, political and financial forces are combining to transform developing nations into economic powerhouses with enormous ramifications for businesses worldwide.

Although there is still a huge gap in the absolute sizes of emerging and mature ICT markets, emerging regions are rapidly catching up with mature markets in IT investments. According to Gartner, the compound annual growth rate (CAGR) from 2006 through 2011 shows that IT spending will represent 8.5 percent of combined total gross domestic product (GDP) in emerging markets. IT spending will be 4.3 per cent of GDP in mature markets in the same period.

As the growth rates of emerging markets continue to accelerate and further expand beyond the current leaders – Brazil, Russia, India and China (BRIC) – the power of these regions in the global IT industry is becoming more pronounced.

Gartner estimates that IT spending in the emerging markets will grow at a CAGR of 9.9 percent to reach $1.3 trillion by 2011, while in the mature markets it will reach $2.5 trillion in 2011, representing a CAGR of 4.6 percent.

In some segments, such as the telecoms equipment market, emerging markets will overtake developed markets, further blurring long-established borders. In 2010, Gartner predicts that IT spending in telecom equipment in emerging markets will overtake that of mature countries, increasing its lead in 2011. By 2011, IT spending in telecom equipment will reach $263.5 billion in emerging countries, while in mature markets it will account for $236.5 billion.

Nowhere is the effect of this more visible than in the IT services sector where Indian ‘mega vendors’ such as TCS, Infosys and Wipro are increasingly considered for strategically important deals, involving multiple services when competing against today’s traditional global leaders.

According to Gartner, the six leading Indian heritage providers, with predominantly Indian delivery resources, have been growing at 35 per cent over the past several years while the top ten global providers have been typically growing under 10 percent annually.

According to Mr Marriott, research vice president at Gartner, “Vendors must consider other emerging markets as a source of future competition and opportunity. High quality vendors will not only be coming from China and India in the future. Regions such as Eastern Europe, Latin America and relatively untapped portion of Asia/Pacific are now viable locations for offshore services.”

“Chief information officers (CIOs) must understand the future growth plan of their organisation into many other parts of the world,” he concluded. “Possibility to access services in these countries, such as Argentina, Vietnam and Romania, will provide opportunities but there will be challenges in developing the governance required to effectively manage this new breed of vendors.”

• The findings echo many of the presentations at this week's FT Outsourcing Conference in London. See News Analysis for more.

The "nice decade is behind us", said Bank of England governor Mervyn King today, warning that inflation will get worse before it gets better, leaving little scope for an economy-boosting rate cut.

In its quarterly Inflation Report today, the central bank predicted that inflation could nudge four percent and the economy could even contract.

The Monetary Policy Committee is facing its most difficult challenge yet," King told reporters. "We are travelling along a bumpy road as the economy rebalances."

In a marked contrast to the interventionist policies of the US administration, King said that "monetary policy cannot, and should not try to, prevent that adjustment".

The economic downturn coupled with the “vast number of new providers” means that outsourcing is a buyers' market, while the provider landscape is moving towards companies finding their niche.

Speaking at the FT Outsourcing Conference in London this week, Elizabeth Buckley, director of Arete Research said “The entire market is driven by the clients. In the last downturn we saw the number of outsourcers increase; we saw many players enter the market. [Now] if you go back to what clients want, these large, mega outsourcing relationships... we are seeing fewer and fewer of those. For example, EDS and GM was broken up; ABN Amro are also doing the same, bringing in lots of new providers. Whenever project work came up during the contract the actual provider would be chosen from [a number of] incumbents.”

“Lots of new, niche providers mean that the balance of power is very much in the client's space. [Niche providers] need to differentiate themselves to win new business.”

Meanwhile, the large outsourcing providers are layering on new levels of business process outsourcing (BPO), she said, which she claimed remains an immature market outside of the CIO space.

“We've seen BPO become more mainstream and in horizontal areas such as HR,” she continued. “The big thrust now is very much toward vertical BPOs. If you look at horizontal BPOs, we're seeing a lot of the remote, offshore providers moving into horizontal areas – for example, TCS moving into HR globally with an SAP platform.”

Niche players have an advantage in the uncertain economy, said Bruce Keith, director growth capital at 3i plc – a view not shared by some other speakers at the conference, who saw the momentum coming from the big, established players. “The FD has taken more control of what's going on in businesses. I think [the economic downturn] will force FDs to consider whether captives should form part of the organisation. New people coming through will be the niche guys who will do something dfferent.”

This assumption of greater control by finance executives suggests that many clients are indeed are now feeling the economic pinch – for example, Vanco has recently lost its CEO to be temporarily replaced by the finance director (see News Analysis).

Keith said that in the current climate, fortune favours the brave – and the innovative mid-sized player: “A lot of the captives that have been built up in the past few years, have been because Bangalore is cheaper than Birmingham or Berlin. They have delivered on [service] being cheaper, but they haven't delivered on the next stage [innovation]. I don't think it will be the bigger players; it will be the medium players.”

Arete Research's Buckley added: “You can imagine the problems of retaining quality staff when working with only one client; that will be one of the big challenges for Indian captives. Clients want to see their own dedicated teams; so the real challenge [for outsourcers] is being able to leverage a platform across other clients to get the kind of profitability you expect.”

Asked about the next hot outsourcing destination – that interminable watercooler topic for the industry – both speakers felt that “geography” (location – why do analysts insist on using the wrong word?) is irrelevant. “It's about a global delivery mindset; you should be able to attract the best talent so that clients in New York, the Cayman Islands or London can have a 24/7 service,” said Keith, reeling off a choice selection of some of the wealthiest regions on earth as though low-cost destinations were, indeed, an irrelevance.

Arete's Buckley was more on the money, topic-wise at least: “Regional players who lack differentiation are going to be in trouble. The challenge for Indian SIs, for example, will be having centres in Brazil or eastern Europe."

Questioned about the consumer backlash against offshore call centres – as highlighted in sourcingfocus.com's exclusive research last week – 3i's Bruce had a solution for a US that believes it is haemorrhaging jobs overseas: “The Dollar is now so weak there is an opportunity for voice-based services [in the US].”

The outsourcing market should be all about building a viable global delivery model, and no longer thinking about 'offshoring' and 'outsourcing', believes Cognizant VP and UK country manager Sanjiv Gossain.

“We believe the future of the market is the fourth-gen, global delivery model, where there is strong collaboration between client and service provider; a joint planning process; insight into what's happening in the client's business, and dynamic commercial models,” he said.

At the FT Outsourcing Conference in London this week, Gossain said that while people still consider pricing when signing a deal, that is shifting towards business alignment, innovation and transformation.

He added: “It's not about people to revenue, but about value delivered to the business. That's what's important about this fourth-gen model, and it will be delivered from multiple locations. Where doesn't matter to the end customer.” Transaction-based pricing will become more dominant, he said.

Cognizant is certainly evidence that captives can take up the challenge of becoming fully fledged outsourcing businesses: the company was formed as a captive of Dunn and Bradstreet some 40 years ago, and now boasts 35 delivery centres in India, Brazil, eastern Europe, Shanghai, and elsewhere.

Gossain claimed that the economic downturn is an opportunity to – essentially – slash internal IT functions and move the responsibility elsewhere – a bold claim given that many enterprises baulk at the uncertainty and upheaval of building a new relationship during a credit crunch, especially to a provider that promises to innovate more than reduce costs.

“There are a lot of opportunities in tight economic times for customers to transition their IT footprint,” he said, advising clients to “reduce the amount spent on keeping the lights on and more on adding value. The customer focuses on 'core', the provider focuses on 'context'”.

“Cost reduction is not the primary driver anymore,” he continued. “Decisions are not just based on financials and the quantitative aspect. Beyond that it is about cultural fit. It is about how you as customer and provider get along. That is a more and more important part of the due diligence process.”

Gossain said that the reasons for outsourcing relationships failing on the provider side are a lack of flexibility, cultural misunderstandings (both business and regional), and not understanding the business. “There is an increasing emphasis on relationship. You don't live and die by the contract. You have to be in it for the long haul. Think about the outcome you want to have; establish a joint vision and come up with measurable objectives. It's about defining and documenting processes; strong sourcing governance, and cultural fit.”

“Go the extra mile if need be,” he advised providers. “You live and die by the way you work with the customer.”

The best way to avoid recession is to be working at a world-class level, said Julio Ramirez, managing partner and practice leader, globalization and outsourcing, for the Hackett Group.

Leaving aside for a moment the points that the Hackett Group's all-too-visible brand message at the event was 'world class defined and enabled' and that recessions are only observed in retrospect (ie when it is too late), Ramirez did offer some practical observations about outsourcing trends away from the subliminal advertising.

There are two approaches to globalisation, he said at this week's FT Outsourcing Conference. The first is the '"lift and shift' move from a high-cost to a low-cost geography” (I suspect he meant 'location' – business people, please note: geography is the study of the earth and its features), or the better option: “fix it, and then move”.

“We at Hackett believe that transformation and globalisation should be embedded into a company," he announced. "Very few have achieved world-class [that brand message again] performance levels from mere 'lift and shift'.

“You won't find world-class companies using the 'lift and shift' approach,” he added (in case you hadn't got the message, or thought he was advising against a cosmetic procedure).

To be fair to Ramirez, his presentation did eventually suck out the fat and tighten the buckle in the general direction of a notch. “The challengers [to world-class companies] are catching up very quickly,” he conceded, “pushing the envelope of globalisation... large transactions... and BPO models.” The rest of the market Ramirez dismissed as “the incrementals”, characterised by a silo mentality and a disjointed, non-strategic approach to outsourcing. Such companies are attracted by the 'lift and shift' model to get some level of labour arbitrage, he said.

So how to recession-proof the business? “There are vast opportunities for taking cost out of the back office, he began, enticingly. “Nothing can get you into worse trouble in this type of recession than an outdated back office! The typical global 1000 company is sitting on $3 billion of excess working capital, and yet there is a massive liquidity crisis," he warned, gearing himself up for the knockout.

And yet just as I was munching on a gratis mint and leaning discretely towards the underpowered soundsystem for the answer, Ramirez concluded: “World-class [kerching!] companies are there already! They've got captives built out, they have established relationships and so the upfront investment is already there and the work can be increased rapidly!”

So there you have it: if you're not already world class (can you think of a company that might be, readers?), then it's already too late. Sorry.

• The title of the presentation was "Will a Global Recession Drive More Offshoring and Outsourcing in the Future?

The cost to serve customers is increasing, competitive pressures are intensifying, and the customer care industry needs to strike a new balance between cost and customer experience. That was the view of Sukant Srivastava, Convergys MD and country manager, India, at this week's FT Outsourcing conference.

Srivastava said that cultural change is required in the shift from human voice to automation, and the associated move from reactive care to predictive/analytic care and continuous improvement – both of which changes he seemed to suggest were inevitable.

Indeed, he painted an immediate future for customer care outsourcing of multichannel self-care technologies and virtual/secret agents, which he described as “the next level of self service, remembering customer preferences, correcting the experience in real time”.

Pressed by sourcingfocus.com about whether there is any hard evidence to suggest that customers see automation as representing an improvement in customer experience, Srivastava was not able to supply any research; indeed, he seemed to suggest that more technology was the answer to the question – a form of self-perpetuating and -fulfilling market cycle. This suits relationship management, customer care and employee care specialist Convergys, which has 75,000 employees. $2.8 billion revenues, and a claimed one billion customer interactions annually.

The flaw in the customer experience, conceded Srivastava, is when customers receive different experiences across different channels, adding that “when technology is employed in a very static and mechanistic way [it] creates a negative experience”. Many companies have not kickstarted any investment in creating the much sought-after 'single view' of the customer (the Holy Grail of the CRM world), because it requires an overhaul of their IT systems. Inevitably that would entail a significant upfront investment, which is hardest to do in an economic downturn when people look for the short-term certainty of the slashed cost base.

Nevertheless, “the biggest thing” for clients, he maintained, is still “how do we become more proactive in anticipating customer needs? Our conclusion is that the global customer care companies are going to have an edge,” he said.

Srivastava finished by saying that “an agent is going to become an advisor”, and that self-care technologies will do the donkey work of managing customer interactions.

Knowledge process outsourcing (KPO) will help the Indian market move up the value chain beyond mere processing, said Anish Nanavaty, CEO knowledge services at WNS. “We believe the industry is at a real watershed point; there is an opportunity for us to add a lot of value to our customers,” he said in a challenging presentation to the FT Outsourcing conference in London this week.

So far, the definition of KPO has been driven incrementally by the many small ways in which people have been exposed to the industry, so what is it? Nanavaty claims it can be explained as the creation of knowledge-based shared services centres for solving a full range of business problems, within which issues are broken into analytic building blocks and solved by specialists with what he described as “factory-like efficiencies”.

In the developed world some of this knowledge is currently aggregated within the major consultancies, as this is fundamentally their product. “These companies are now trying to outsource the lower-end steps towards gathering information and knowledge,” he said.

The opportunity for outsourcers, he concluded, was to move further and further up the value chain and “democratise the consumption of analytics”. In other words, to lay open business information to all parts of the organisation and not just those with the most need, or which have historically “owned” the data.

If Nanavaty is correct, then the challenge for companies is twofold and obvious: management, and business culture, both of which often leave knowledge lying in silos of accounting, marketing, communications, and so on. A possible future for KPO, then: helping companies who are unable to communicate internally. The client's CEO and CIO might approve, but I hear middle-management rebellion on the horizon...

The other (linked) issues moving forward, are security, due diligence, and regulation. As more and more intellectual property-driven industries, such as big pharma and IT, move to a KPO model, then providers are going to need an almost obsessive security and anti-corruption regime embedded within their own organisations to ensure all those 'Chinese walls' are not paper thin.

'India Inc' is moving from services to innovation, and both it and China are becoming world intellectual property (IP) hubs, believes Prof. Phanish Puranam of the London Business School. According to Puranam, if research and development can be done in a distributed, outsourced environment, then there is no limit to what can be delivered offshore.

The global IP picture is changing, and measuring “innovation as an outcome” is something that can now be quantified and explored in a statistical model, the professor told delegates at the FT Outsourcing conference this week.

So do the facts support this claim? Today, China and India account for two percent of the world's IP activity, and that figure will soon increase to five percent – arguably low for countries representing perhaps 20% of the world's population.

That said, the picture is, of course, massively distorted by the 'elephant in the room' of the rampaging US patent machine. So the fact that Indian inventors, designers and engineers are developing and registering so many patents, whether for domestic or international companies, is a significant and encouraging development. Dozens of US companies now figure strongly in the client list for India Inc's innovation, including IBM, HP, Texas Instruments, GE, and Intel.

Nearly every patent that has come out of India in the past five years has been in such lucrative areas as organic chemistry, IT, pharmaceuticals, and telecoms, said Puranam, and these are often developed locally with global cooperation – what he called “the globalisation of knowledge production”.

Unsurprisingly, the picture in China is different: domestic firms are dominant in Chinese patenting activity, and in areas that complement their Indian counterparts. However, Puranam claimed that Indian patents have greater impacts relative to Chinese work in terms of forward citations – a claim that may itself be distorted by India's more open outlook to, and cooperation with, the West.

So how does distributed knowledge work happen in terms of R&D? Puranam discussed research carried out by the London Business School across 17 firms and 120 projects, saying that the fundamentals are the same whether you are looking at call centres or high-end knowledge process outsourcing (KPO).

One model is so-called 'black boxing', where companies partition work into independent modules that can operate intensively with very little interaction, reducing the need for coordination – by implication, a hothousing approach. Puranam was critical of this model for many types of work: “You can't really run an assembly line model with creative work,” he said.

The other, more effective strategy, said Puranam, is rooted in strong communication, where the main driver is not technology, but common knowledge and a shared mindset.

Certainly this year's conference seemed to showcase a dialogue between two – unshared – mindsets: first, technology solutions solving technology problems (minus the hard evidence of their efficacy for human beings) versus a softer, more people-focused approach (which seemed, paradoxically, to be more grounded in fact and technological innovation). Needless to say, it is the latter that tends to suffer in a recession; a lesson our industry sometimes signally fails to learn.

Puranam's presentation was one of the most interesting and challenging ones from the conference platform, but it did beg a question in this delegate's eyes: if something as core as research and development to any (traditional) business is joining the ranks of manufacturing, customer service, back-office processes, marketing, communications, technology infrastructure management, knowledge process outsourcing, and applications development as a potentially offshored, third-party function, then what will the client company of the future consist of – and who will pay the CEO's wages?

You?

They said the days of the outsourcing megadeal were dead, but news that services and hardware giant HP is acquiring EDS for $13.9 billion (£7.13 billion) suggests that a tier one deal on the provider side can still take place, even as IT stocks rally against a downward market.

EDS with its deeply embedded links with the public sector may have exceeded guidance in its latest results, but its accompanying earnings call suggested a need to hide a less than stellar underlying performance with wordplay and semantics.

EDS boasts depth of experience in huge, complex deals, while HP brings a range of service and software offerings for which that is an ideal shop window and sales floor.

However, while analysts such as IDC's Douglas Hayward have been swift to roll out all the usual, predictable comments about the cultural and practical challenges facing them as they merge (surely that happens when any company buys or merges with another?), none of this provides much insight into the repercussions for the outsourcing industry.

It goes without saying that HP is embarking on the deal during a highly unusual US recession that sees both a lack of capital liquidity combined with sliding property prices, soaring commodity prices, inflationary pressures, and fears over job security.

The truth is that while the deal will doubtless shake up the market (in Ovum's analysis) and hand HP a tranche of governmental deals, for example, there are risks lurking in the shadows.

First, big-ticket government deals have seen many a global name damaged locally by the very public backlash that follows whenever such deals overrun and/or overspend; that will play very badly with HP shareholders who treasure the company's long-held reputation as a solid and reliable brand. No one was entirely convinced by the Fiorina-fronted vision of HP as the flexible, innovative service company rather than the offspring of two men in a shed.

The public sector is just that, and sector failures lodge in the public consciousness. EDS might not be a name on the lips of the average consumer, but HP certainly is.

Second, however, is the most important factor: the emerging topography and geography of outsourcing over the next five to ten years. That landscape that will lie in front of HP very swiftly after the months and years it will take to digest another mega-deal. By then, of course, a number of Indian service providers will have snapped up smaller, nimbler European services players and made themselves an attractive alternative to any giant that lumbers into view.

Knowledge process outsourcing (KPO), R&D outsourcing, and even legal process outsourcing (LPO) will soon become essential offerings for any global outsourced service provider – the latter on the back of deregulation in the legal services market and cost pressures within a highly litigious US. It seems unlikely that HP could even be in the frame to compete with the Accentures of the world in offering such a portfolio.

Mere marketplace muscle-flexing coupled with cost and labour arbitrage are gradually taking second place to skills, innovation and local knowledge, and you can't just buy the market presence of, say, IBM off the shelf.

The emergence of software as a service (SaaS) offers both great opportunities in the mid market along with a shift in the role of the CIO towards innovation and away from mere systems management, so again the deal, while impressive, seems a little old-fashioned. The stockmarkets might – fleetingly – crack a Bolly or two, but it may be over the bows of the Titanic.