Industry news

China, Morocco and Hungary are the new locations of choice for offshore centres

Of the 21 new facilities opened by the UK's 20 largest firms, four were set up in China, three in Eastern Europe and three in Morocco.

Outsourcers are now looking away from India – where only two centres were opened - because of the rising cost of the rupee and increasing staff wages.

BT Global Services, EDS, IBM and TCS have all opened sourcing facilities in China in the last 18 months due to lower costs and a growing market for IT outsourcing in the country.

Eastern Europe and Morocco are considered good locations for such centres because of high skill levels and low labour costs.

Insurance group Aviva has decommissioned 100 legacy systems as part of the One Aviva cost-cutting programme

Last year Aviva signed an outsourcing deal with Swiss Re, whereby the reinsurer would administrate three million life and pensions policies on its behalf.

As a result of the agreement, Aviva aims to decommission 330 systems from the 550 originally running; 100 of those 330 systems have been switched off so far.

Anglo-Dutch services company Logica (formerly LogicaCMG) is the latest victim of the credit crunch as it has revealed less than stellar results for its UK business, warning that some financial services clients had cut spending.

The UK, which represents nearly a quarter of the company's global business, saw an eight percent fall in sales to £662.5m in 2007, while operating profits were down 60 percent at £30.5 million.

The news was not entirely bad, however. Total revenues for 2007 rose three percent to £3.07 billion, but pre-tax profits fell by 28 percent to £84.1 million.

This is a testing time for new CEO Andy Green, who joined from BT in January, but it also gives him the chance to lead from the front and set out a new strategy in the Spring.

That said, Green has issued a cautious outlook for the year, saying revenue growth will be similar to 2007's three percent rate.

Green needs to steady investors' nerves and outline a positive strategy for his company. As reported last month on sourcingfocus, he recently announced the establishment of a new outsourcing services division under former acting CEO Jim McKenna, but McKenna will leave the company this year.

Logica is planning a new centre in India, and Green is at pains to play down talk of redundancies or disposals of any parts of its business, despite reports to the contrary at the end of last year. “Logica has always been acquiring and disposing of businesses every quarter. But I don't think people should expect the nice headlines of huge divestments or job cuts,” he said.

Two skills stories dominate the industry today. First, news that basic computing skills are on the rise among schoolchildren, and especially among girls.

Seventy-three percent of the 1,000 seven to 16 year-old respondents to a Tesco Computers for Schools programme survey were able to use a search engine and 62% were proficient at editing documents.

Only six percent of girls said they lacked confidence using computers, against 10% of boys. The figures are more impressive when set against the 57% of parents who said they relied on their children for computing advice, which is perhaps the most significant statistic – along with the 40% minority of parents who believed they were more proficient with a PC than their children.

The hidden lesson of the survey is that 70% of the young people surveyed were able to create a social networking profile on MySpace, Facebook, Bebo (the most popular site with young people), and so on – eight percent more than those able to edit documents, and twice the number who were able to manipulate photographs.

This is significant for several reasons: one, social networking sites are, above all, well-designed applications that encourage other application developers and entrepreneurs; two, because they are redefining social and business interaction and the media that surround us; three, because many of these sites, along with Linkedin and a dozen or so other portals, have become multimillion-dollar assets in the space of a handful of years; and four, because they have – along with companies such as Apple, Sony, Google and others – transformed a generation's perception of what technology is for. Children understand this, which is good news for the future.

The conclusion is that technology that is simple, attractive, does not lock you in, and connects people around viable communities of interest is good technology – something that people volunteer to use and spend up to two hours a day enjoying in their own time. That is surely a lesson for all of us who have any connection with customer interaction, service, and application development.

In other words, if you want to reach your customers and provide a service that works and is enjoyable, then design something that allows people to talk to each other.

More in part 2.

The immigration card

The other skills story today is that the Government has changed the rules for non-EU residents wanting to migrate into the UK. Essentially, the UK has adopted the Australian points system, whereby highly educated people with skills the country needs are given far greater preference over less skilled people.

While this will undoubtedly wring some positive headlines from the more arid and nationalistic tabloids (who seem unaware that the entire history of the UK is one of immigration), the legislation has some worrying elements in the long-term. Graduates with good English, on £40,000 or the local equivalent, will be able to seek work, while skilled workers in shortage occupations will need a job offer prior to arrival. For everyone else, the door is closing.

Put another way, your skills are no more important than your ability to support yourself in the short term – not the most progressive, positive, or enlightened message to send the world, and certainly not the hallmark of an economy as strong as ours.

This is worrying for a number of reasons: first, it excludes people from poorer countries who may be equally highly skilled – which would include workers from emerging outsourcing destinations; second, because we already have a very successful programme for attracting skilled graduates and overseas students – it ain't broke, so why fix it?; third, because the financial bar is far higher than the earnings of average UK residents; and fourth, because it ignores our own recent, very successful history.

Many of the most skilled people in the UK today in technology, engineering, medicine, law, pharmaceuticals, finance, design, business and the media are the second or third generation children of less skilled migrants from India, Pakistan, and many other parts of the world.

Those parents and grandparents might not have had degrees or a record of academic excellence (like many parents of similar age), but they nevertheless helped regenerate countless towns and cities with their ambition and innovation.

Proponents point to the success of the Australian model, but Australia is a very different place to the UK: aside from its many attractions, much of it is uninhabitable, and it lacks the UK's stronger record of cultural and multi-ethnic diversity, despite its Asian populations and the recent government apology to indigenous Australians.

Can we really afford to say to the world: come to the UK, but only if you are European – or already more successful, more highly educated and wealthier than the average citizen? That will store up problems for our future prosperity, and people with the ambition to succeed will begin to look elsewhere for a place to establish themselves.

For many in the sourcing industry, that may also begin to undo relations with those emerging countries with whom our future prosperity lies. Ambitious people are attracted to countries such as the UK and the US because they can make a name for themselves in a vibrant economy, and because those opportunities do not exist at home – not because they want to retire to the beach.

If you thwart ambition and diversity for the sake of importing wealth, then you are either a fool, or 18 months from an election.

Fears have arisen that foreign IT workers are taking mid-level IT roles in the UK over skilled UK professionals.

The Home Office has said that UK work permits issued to foreign IT staff rose 14% in 2007 from 2006 with Indian applications making up approximately 83% of all approved permits.

Indian IT workers filled roles including analyst programmers, software engineers and system analysts numbered 31,765 (83%) of all approved applications in 2007 and 26,835 (79%) in 2006.

Under Home Office rules, companies recruiting staff from abroad must prove that there are no suitably qualified or experienced resident workers available in the UK first to get a permit. However, critics argue that this system is open to abuse using a process called intra-company transfers.

Successful 21st century business is guerilla warfare, outsourcing is at the heart of it, and the old integrated 'dominate, control and beat your competitors' model is a thing of the past. This was the thesis of the most popular speaker at Vanco's AGM in Barcelona last week. The secret is to employ your competitors, outsource risk, and reap the benefits of a 'disintegrated' organisation.

Professor Michael G Jacobides is associate professor of strategic and international management at the London Business School, and he treated delegates to a fascinating, passionate and entertaining seminar on 21st century business models, prowling the conference floor on the lookout for anyone who might be doodling – or Googling (as indeed some were – though not for long).

Drawing apposite – if tasteless – comparisons with the West's big-budget, big-iron military campaigns of shock and awe in the East, which have been picked apart by the guerilla tactics of their opponents, Jacobides might have been offensive had he not been so amusing and gently iconoclastic.

Disintegration is happening across broad sectors of the economy, he said, and is reshaping products and services from finance to the automotive and pharmaceuticals sectors where the global division of labour is changing the competitive dynamics.

Once you start breaking organisations apart – actively 'disintegrating' the business – then new players enter the game and participate as sectors open up, bringing innovation and excellence in their wake. For Jacobides, outsourcing is at the core of the successful, disintegrated organisation.

The reason for breaking things up is that the separate parts of a large, 20th-century-style, integrated organisation – which might include its knowledge base, managerial culture, design teams, manufacturing capacity, financial structure, internal services, and so on – are not a natural fit within a large single entity, unless it is an inflexible and didactic monoculture.

The better approach is to place each task where there is the greatest cultural fit – design with a design company, services with a services company, and so on – and make the central organisation, essentially, the manager of the brand.

The impetus might be simple market dynamics, suggested Jacobides, or even regulatory pressure. “We need to shift our perception of competition from tactical to guerilla warfare,” said Jacobides. “As sectors disintegrate [by which he meant blurring the boundaries of a sector and bringing about a convergence of needs, services and products] forget niche distinctions between profit and suppliers; profit and power shifts to different parts of the value chain.”

Like many business analysts talking to an IT audience, Jacobides brought up the familiar subjects of Dell, IBM, and Apple. Dell succeeds in an unpromising sector by carrying no stock, outsourcing manufacture, and making each PC to order, he said. The old Apple, he said, was too closed, and the old IBM too open, which was why both hit the buffers of the Microsoft/Intel alliance.

The new Apple, Jacobides rightly explained, has learned the lessons of the past and created a third-party peripherals industry around the iPod and iTunes, and had outsourced all the risk of its business to companies who might previously have been its competitors. (I'd argue it still remains 'closed' via its DRM lock-in.)

This is all very well, and a solid and familiar argument, but IBM is a much more agile and nimble company than people give it credit for – today's services giant (Big Spectrum?) bears little comparison with the Big Blue of old – while Dell is not the success story it once was.

That said, Jacobides' appraisal of 21st century business remains largely on the money: it is no longer about margin but about strategic business model redesign: manage the value chain, rather than own it. A bullish message for outsourcing, indeed, and perhaps one with an implicit warning to the US: close your doors to global sourcing at your peril.

If Jacobides' thesis is correct, then outsourcing is the underlying support structure of many successful 21st century businesses. It is not a threat to jobs, but actively supporting them.

Virtual network operator Vanco celebrated twenty years as a managed services supplier at its AGM in a mild and foggy Barcelona this week, barely five hundred yards from tens of thousands of Catalan football supporters who cheered the home team to a famous draw at the 'New Camp' stadium.

The event was attended by most of the company over several days – at the same hotel as the Barcelona football team. The conference was also, perhaps, a score draw, with one major customer (Vesuvius) saying Vanco's invoicing was "a nightmare" (subsequently blamed by Vanco's CEO on an Oracle accounting system), but others praising the company's disintegrated managed service approach.

Vanco has undoubtedly built a business on its knowledge of the global telecoms market. Its knowledge base – accessible in a cutdown version via vanconetdirect.com, minus the company's value-add services – is a virtual map of the global telecoms network, and plugs Vanco into some 700 asset-based carriers (ABCs) and suppliers worldwide.

From those offerings Vanco picks and chooses technologies and services for its customers. In short, Vanco has positioned itself as the asset-light, technology-neutral sourcer for telecoms and networking expertise.

Wayne Churchill is MD of Vanco Direct (formerly the VNO division), and he claims that for any town or village in the world, his company can list available carriers and map their services, literally, onto customers' needs. They both work for, with, and compete against major carriers such as BT and AT&T, and reprice and rescope their offerings.

Surely with such a valuable intellectual asset at their disposal, for which a variety of front ends can be built (such as the company's global telecoms network map), Vanco must be tempted to move into consultancy? "We might provide a price to a client, but we don't give them the underlying data," said Churchill. "We have a unique resource, but consultancy is not a strategic direction or model for us."

But surely the company must be an obvious acquisition target for the major consultancies – particularly as the intellectual property aspect of their business is a solid hedge against the commoditisation of telecoms services? "We've been approached. I can't say [by] who at this time," said Churchill.

CEO Allen Timpany rejected the suggestion: "We've had that discussion," he said, "but we don't wish to monetise it [the database]. We would do a 'white label' service through the web portal [vanconetdirect.com], but minus the services and at a lower margin and a lower price.

"Our consulting team's value is in landing a multimillion-dollar contract, not in offering a consultancy service at a few thousand dollars a day."

Mark Thompson, CEO Vanco Solutions added: "It is an asset but you don't sell the crown jewels." Despite that, Thompson said he liked the idea of "Amazon thinking for the telco marketplace".

Multimillion-dollar deals are certainly the focus of Vanco's business, which is targeted at Fortune 1,000 companies, of which customer base they own a small, but growing, percentage – the largest in the VNO field.

That said, Frost & Sullivan analyst Sharifah Amirah, head of research ICT EMEA for the analyst firm, identified the SME market as being the source of 80% of telecoms growth in Europe over the next few years – surely a sign of the commoditisation of the supply. Does Vanco see the SME market as a viable option?

SMEs: Fool's Gold

CEO Timpany slammed the idea: "The SME market is a fools' gold thing. The numbers look impressive if you listen to the analysts, but doing it effectively and making money is almost impossible, as they can get a better service from local suppliers."

Vanco Direct's Wayne Churchill added: "The SME market is incredibly hard to address. Every major company has pulled out of that market. If you're selling into it, then the people time and design time and the costs are the same, but the return is much smaller. We haven't solved it yet, We need a salesforce to address that."

Like many companies both inside and outside their space, Vanco sees wireless technologies as sweeping away the monopoly of the fixed line providers. Although Vanco is neutral about the technology, as those decisions are based on customer needs and supplier portfolios, presentations from the conference floor suggested the company is betting on WiMAX winning out over 3G.

In conversation, Vanco UK MD Andy Sumner said: "It doesn't matter to us which ones win."

Vanco Direct's Wayne Churchill was more forthcoming about the technologies: "We think WiMAX will dominate access to core networks. It's inherently more flexible and robust. The problem is the investment. A lot of big players lost their shirts last time [Churchill is referring to the purchase of 3G licenses]. But WiMAX isn't reliable in the sense that you'd bet your company data on it. In the UK it's good. In California it's amazing."

"We don't need to understand how the carrier architects it, we just need to know what it can do," countered Sumner. "I just want to know what infrastructure I can buy, which carriers operate where, what their points of presence [PoPs] are, and what their quality of service [QoS] is."

For such a company as Vanco, QoS and service level agreements [SLAs] are everything. With such a complex supplier network of 700+ companies spread across the globe, surely each carrier's SLAs must impact on the quality of service that Vanco can promise customers with its own SLAs? "Every other part of the telecoms world is about the data asset," said Vanco Direct's Churchill. "For us, some of the service is a utility, the rest is a service. We buy it like a commodity.

Vanco slams suppliers

"SLAs don't tell you anything except how brave the marketing people are," continued Churchill, "they don't tell you about the strength of the [carrier's] infrastructure. Verizon's infrastructure is crap [sic], but they have a great SLA. T-System has a Rolls Royce of an infrastructure, but no SLA. We build our own SLA across actual data we know we can measure."

Vanco Solutions' Thompson added: "You can have a supplier whose service level deteriorates; they lose interest in a company, or their business model changes. We certificate our suppliers. We have short-term contracts.

"For example, when the WorldCom thing happened, our recommendation to our customers [at the time] was to move off WorldCom. We tailor our SLAs to the business aspects, not to the technical. It's about how you drive that through the company.

"It's easier to buy everything from one supplier, but we don't because it's not the right answer. It is harder."

One market that is driving Vanco's business with customers in the UK is corporate home users. The company revealed that most of its client base in the UK is now geared towards home corporate working, where employees are connected to the corporate network from within the home for heavy, rather than occasional, use.

Sumner explained that by far the prevalent trend in the UK is for companies to integrate their corporate networks with employees' home hubs and domestic broadband connections. This could have implications for the future of customer call centres, he said, such as the uptake of 'homeshoring' (the building of virtual call centres of home-based employees as a competitive, locally based alternative to offshore services).

“[Homeshoring] does make sense,” said Sumner. “An inhibitor to that would be the ability of DSL to deliver class of service. It would need to be of sufficient quality for call centre work. We've integrated voice and data across standard DSL and the results have been good. The barriers are falling away.”

Thompson of Vanco's Solutions division, added: “Corporate home users are a big uplift for us. A very big uplift. Most of our 200 global networks have a reasonable degree of home corporate users.

“It won't be long before the traditional call centre ACD will come together with IPT technology. That's maybe five years ahead. The impetus would be both cost and quality of service.”

However, Vanco founder and CEO Timpany poured cold water on the idea that the spread of wireless technologies will deliver free internet access in major cities. “I don't think it's going to happen. I believe it will go the other way,” he said.

“Chicago canned it because it didn't pay. It's a case of who pays and how do they pay. When the [telecoms] business became deregulated and more competitive companies had to start charging for the local loop. In Scandinavia they are looking at increasing the cost of internet access for high-bandwidth users.”

Virtual network operator (VNO) Vanco has provided details of some big-name customer wins and contract renewals. The managed services company, from whom clients source network specification, provision and management from a detailed knowledge base of the global telecoms network, used the platform at its AGM in Barcelona this week to fill in the details of the recent deals.

In March, supermarket Somerfield will be going live with a WiMAX-accessed wide area network (WAN) specified by Vanco in preference to a DSL solution. The network will give Somerfield access to 50 cities in the UK, and was delivered with zero modification to the company's datacentre.

Vanco claims to have been the first company in the world to deliver WiMAX access to a corporate WAN.

Vanco also announced a three-year deal with pan-European sports channel Eurosport to connect a dozen sites around the globe, including France, the UK, Germany, Italy, Spain, the Netherlands, and China.

"It was customised to our needs combining different carriers' solutions and unique technical offers, such as the usage of several backbones and local xDSL access," said Stéphane Gaudé, Eurosport infrastructure manager. "From a financial point of view, the solution will allow us to considerably reduce the cost of our network."

Vanco is asset-light and technology- and carrier-neutral, meaning that it can pick and choose services from up to 700 asset-based carriers (ABCs) and suppliers worldwide, using data it has amassed over more than two decades in the industry.

Vanco also announced a five-year, £4.5 million deal with high-street opticians Specsavers to design, manage and implement its global WAN, using DSL across more than 800 sites in six countries. The opticians giant plans to expand and has sourced networking expertise to help it build for the future. Ruskin Snow, Specsavers' IT operations manager said, "We have the freedom to carry on growing and evolving. This combination of services allows us to concentrate on what we do best."

Also signed and served up from the Catalan table was a deal with UK food giant Premier Foods. The parent of brands such as Hovis, Mr Kipling, Bisto, Branston, Batchelors and Quorn has a turnover of £2.7 billion and employs more than 20,000 people in the UK alone. It sourced the design, implementation and management of a highly resilient MPLS network connecting some 83 sites in the UK from Vanco.

However, not everything was plain sailing for Vanco, which was celebrating 20 years of its business model. Pierre Combemale, CIO of Vesuvius, a manufacturer of high-end refractory products for industrial applications, was openly critical of parts of Vanco's business– despite being given the floor to praise the company, not to bury it. Combemale said Vanco was "not perfect" and that its invoicing was "a nightmare" – not the most glowing terms for a company sourced to lessen the pain of networking.

In an interview with sourcingfocus, Vanco CEO Allen Timpany was as upbeat and robust as his surname might suggest, and blamed a new deployment of the company's Oracle accounting system for the complaints.

Other executives, however, acknowledged that having such a vast supplier base meant that it was not always possible to hide complexity from the customer. (See separate news analysis).

Despite visibly rattling the Vanco board, the Vesuvius eruption did not stop the company from signing a five-year extension of its WAN upgrade and management deal.

Change is the only constant; we live in a continuously shifting state of reality, where the only predictable constant is the inevitability of more change.

With globalisation geography has become history! Organisations are under increasing pressure to maintain their competitive advantage. Today, organisations have understood that manufacturing alone does not enable differentiation and that although they may manufacture their product, the art of manufacturing is merely a process they follow to bring their core product to market and not the core product itself.

Following a similar theme, software product companies, most commonly known as ISVs (Independent Software Vendors), have begun to look at outsourcing their product development, labeling the activity as “non-core" while concentrating on product innovation, marketing, financing, and customer relationship as their core activities.

The offshore concept started with the globalisation of product development, not IT services, and will return again to its roots. The massive growth and widespread adoption of offshore IT services have created a foundation of maturity in quality and process that will attract smaller software companies unable to expand globally without an outsourcing partner. Indeed, technology product life cycles will continue to mature, and global resourcing will become a critical success factor in embracing the full dimensions of product architecture, development, and deployment – META Group

During the early 1990s product development drove initial investment in India with companies such as IBM and Hewlett-Packard developing system software and operating system kernels in India.

Slowly other product companies decided to explore offshore outsourcing opportunities. iflex (which was initially part of the Citigroup US and now majority owned by Oracle) and Kindle Banking Systems of Ireland, initially used the offshore staff augmentation model, where low cost resources were used for product implementation at client locations.

After this model became tried and tested, organisations moved to set-up their own captive centres for product development. The primary reason for this at the time was the lack of vendors with product development expertise. As offshore capabilities have expanded and the market has matured this scenario has changed considerably and there now exists a vast array of suppliers and services competing in a rapidly expanding market place

Initially ISVs were less inclined to outsource activities that involve intellectual property, such as research and development, today this resistance to outsourcing R&D is decreasing. According to a recent survey by the Economic Intelligence Unit the number of companies with at least some R&D activity occurring overseas is set to increase from 65 percent to 84 percent. The number of companies outsourcing R&D to third parties is also expected to grow from 64 percent to 75 percent.

ISVs will continue to use outsourcing and offshore outsourcing as a strategic initiative. The factors affecting this are increasing customer demand and ever increasing pressure to reduce cost of delivery and time to market – in short to remain competitive ISV’s must:

• Reduce Product Lifecycle

• Preven a product from reaching the stage of technology obsolescence

• Build modular, tightly integrated products and add on functionality

In today’s environment, product development is not just about developing a product but also involves watching competitors, defining the product road and the product technology road map, planning early releases, testing through different approaches, targeted industry trends, trends in technology usage and acceptance, pricing, marketing and promotion, finding add on features and so on. Applying the 80:20 rule, in the entire value chain of product development, "core product development" execution contributes less than 20% of value but takes away as much as 80% of management time. That is where the profitability of companies still concentrating on developing products in-house can take a real hit.

According to a recent study profitability is directly proportional to time to market and number of release and indirectly proportional to the number of bugs.

Product Profitability = K *(Shortened time)*(Number of release)/(Number of error)

By outsourcing product development, companies are able to shorten time to market, increase the number of releases and decrease bugs.

K becomes the value factor that the outsourcing service provider can bring to the table.

The emerging best practice for product development outsourcing is to develop a solution that is modular – this is a similar model to the automotive industry, where manufacturers have decoupled the product design and development elements of the value chain. Separating the development process enables organisations to understand the value proposition of each stage — and potentially the return on investment (ROI). The life cycle of product development is increasingly being divided into phases that require internal expertise (and value-adding) as well as steps that are highly commoditised:

• Value functions

o User specification

o Technical requirements

o Product design

• Commodity services

o Development

o Testing

o Support

With ISVs, there is usually a greater feeling of “comfort” in retaining “value capturing” services within the organisation. They find that defining user requirements, designing the technical specifications, and ensuring alignment with existing data and application architectures are best done in-house.

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The general trend with ISVs is to leverage outsourcing (especially offshore) for commodity development work. Though initially offshore outsourcing was regarded as a cost reduction initiative, today the benefits include higher quality and development standards. Many ISVs who are currently outsourcing software engineering, product development, testing, and support have seen benefits resulting from improvement in efficiency and productivity levels that are often far superior to their in-house engineering teams.

According to analysts, product development outsourcing will no longer be an optional business strategy by 2008. It will become standard operating procedure. With offshore outsourcing increasingly accepted as a key competitive strategy in the global economy, the production cycle for technology-centered products will require global resources and global delivery.

Akshay Upadhye is a Senior Consultant with Alsbridge plc, the award winning advisors on outsourcing, shared services and offshoring. The article represents his personal views.