Industry news

Back last autumn, admitting defeat, IT services company Accenture called time on the £12.4 billion NHS IT project, terminating the £2bn-worth of contracts it was working on to deliver new patient and GP systems. The decision wasn’t taken lightly, but Accenture was suffering financial losses – the company had suffered a reported 67 percent profits drop after losses incurred on the contract. And disputes in outsourcing are not uncommon – there have been any number of problematic deals over the years.

Outsourcing disputes cost a great deal of time and money and are generally a loss maker for all concerned. It isn’t only cost – it can also seriously damage reputations. Brand damage and loss of shareholder confidence can arise from the perception that organisations are unable to handle outsourcing arrangements effectively.

So how do disputes arise in the first place? Invariably, the fundamental problem is down to money. Often the end user company will be inclined to negotiate very tight terms and conditions, whilst the supplier underbids to win the business. An outsourcing partnership based upon the agreement of unrealistic delivery terms for a price which leaves little profit for the supplier, is a relationship that is almost destined to fail. This combined with the fact that no outsourcing project is cut and dried at the requirements stage and will almost certainly involve change of some sort means that conflict is bound to arise. Understandably, the customer will try to hold the supplier to the bargain, whilst the supplier will need to do everything it can to stay in – or get into - the black. These entrenched positions will ensure the two sides stay at loggerheads, until the dispute can be resolved

These unshakable attitudes to outsourcing that customers and suppliers can nurture, can be seriously detrimental to the success of the project. Both organisations and their suppliers need to be aware they need to have a flexible, positive approach, where there is give and take on both sides. The cost and inconvenience that it causes to change supplier, step in or in-source the business process or IT system, means that it is highly preferable to do as much as possible to make these relationships work.

So how can such conflicts and disputes be successfully avoided or else resolved once they start?

In the past, lots of organisations bent on outsourcing signed up to very long term contracts. Long term contracts can be viable, but in deals of this longevity, the parties need to pay careful heed to dispute resolution clauses. The ways in which disputes are resolved are essential in keeping the relationship on an even keel and making the project a successful one.

The starting point is to use a mechanism that requires the parties to talk to each other. A proper process for escalation is essential. Irrespective of polarised views, people are generally more amenable to seeing the other side's point of view when they meet face to face. Communication restricted to letter or email is a recipe for bravado and threat.

The next is the use of adjudication – a form of rough justice – whereby a dispute is resolved quickly, outside the courts. There is no reason why the outsourcing contract can not specify a number of adjudicators in specialist fields, each of whom has confirmed at the outset their willingness to accept an appointment as an adjudicator if asked. The contract can then provide that particular disputes be referred to one of the panel of specialist adjudicators, who have been pre-agreed. The adjudication can proceed quickly. Decisions are often made within 6-8 weeks of appointment, before the matter has really "festered” between the parties. The decision is binding, unless overturned by some higher authority, such as a court or arbitration, if the parties take it that far. It is a method of dispute resolution used widely in the construction industry and there is no reason why it should not apply to all outsourcing contracts.

Adjudication can also iron out disputes over the scope and interpretation of requirements in IT contracts. Take the example of a local government IT project. The requirements said that if employees were off sick for more than three days, they must be advised that they need to provide a doctor’s note. The supplier decided that it was sufficient for the system to generate an email to the employee's work email address. The council pointed out that not all employees had access to email (cleaners etc) and if employees were absent due to illness, they wouldn't be picking up emails anyway – therefore the system would need to generate a letter to the home address. An adjudicator would decide where the obligation lay. Quick binding decisions can help keep a long term relationship on as even a keel as possible. The contract needs to be capable of dealing with issues, no matter how large or small.

Another means to settle disputes is the use of mediation. This is where all relevant parties get in a room to hammer out the issues, with the assistance of a mediator. This form of shuttle diplomacy tends to work very well. As mentioned, both parties can get very entrenched in outsourcing agreements – and it is much easier to be belligerent on email or over the phone. When sitting down at the table together, or engaged in the same process, it usually becomes easier to move towards a resolution. It can also provide a means of saving face for the different people who are involved – often the mediator is blamed for any concessions that were made in reaching settlement.

To avoid disputes, sensible management of the contract is also needed. This may seem an obvious point to make, but it is often the case in public sector outsourcing, that the people who are involved in these deals, may never have been involved in an outsourcing project before. The team that signs up to the contract is not necessarily the same team who runs it. The people who are involved in the management of the outsourcing need to be up to speed on the main contract provisions and understand where the real risks lie. Many an IT project gets delayed through no fault of the customer. It's a natural thing to ask the supplier for an explanation and be presented with a plan B. The client team may not realise that each time they agree to work to the new project plan it often becomes the new contractual timeline against which claims for delay will be assessed – even if by the end the supplier is years behind the original schedule. Risks like this need to be understood. It is one of the reasons why client delivery teams are encouraged to undergo contract management training at the outset of a project.

Despite the conflicts and disputes that arise, there is no doubt that the technology and outsourcing projects that abound in the UK’s private and public sectors are amazingly innovative and essential in the UK’s evolution. But in order for these projects to succeed and to limit potential failure, client companies need to be aware how to limit dispute fall out. They need to sit down at the outset, work out objectives and develop a contract which will form a protective layer around the project. And is must be remembered that all the measures described above – adjudication to mediation – are just a means to an end, not an end in themselves.

Over half of public sector organisations have signed up to or renewed their existing contracts under the Payroll Services framework agreement with OGCbuying.solutions. Logica now provides payroll services to half of Central Government employees. In the last five years, the original membership of 13 organisations has grown to nearly 80 members.

The new public sector organisations to sign up to a fully managed payroll service are the Civil Nuclear Police Authority, the National Lottery Commission and the Office of Rail Regulation. Communities and Local Government (CLG) has also signed a new contract for a fully managed payroll service for 3,455 employees and Government Offices for England has chosen Logica to run a fully managed payroll service for 2,800 employees.

In July 2007 Logica agreed an expansion to its exclusive Catalist framework agreement with OGCbuying.solutions to provide public sector shared services for payroll and related HR processes. Since then the framework agreement has expanded even further, enabling Logica to provide outsourcing services across a number of integrated HR and payroll software platforms including Oracle, SAP and Logica Interact.

The agreement allows public sector and publicly funded organisations to benefit from a best value, proven shared-service, which provides ongoing savings as more organisations participate. Benefits of the framework agreement include reduced costs of the payroll function by as much as 30% using a shared-service model, increased efficiency via automation of processes and the integration of HR and payroll functions through the creation of a single database of employee information and streamlined processes.

Matthew Jones, Financial Controller at OGCbuying.solutions commented: “Since we signed the exclusive agreement with Logica eight months ago, we have been delighted with the level of support and consistent delivery that Logica has executed to make this framework agreement the success it is today. It is a credit to Logica that there are now nearly 80 members of the framework agreement and we hope to boost this to over 100 in 2008. The new members have also helped to drive down the payslip price further, making it even more attractive to those yet to join the shared service.”

Patricia Taylor, Director of Logica’s HR and Payroll business in the UK, commented: “It is really encouraging to see that public sector organisations are taking advantage of this ground breaking and innovative framework agreement and moving to the concept of a virtual shared service centre. The more departments that take up the service the better the price per payslip for all customers, making it a real win-win situation for everyone in terms of cost reduction and efficiency. The high number of renewals and new customers is testament to the solid working relationship we have built with OGCbuying.solutions.

“Shared services will remain high on the agenda in 2008 and will continue to require expert business consideration, ensuring that purposes and targeted outcomes are fully evaluated, costs are realistically assessed, time to delivery established and intended impacts measured against actual results.”

Bosch, the global automobile and appliance behemoth, has extended its relationship with T-Systems by signing a five year, Europe-wide corporate network deal.

The contract, reported to be worth eight-figures (€), will see the business customer segment of Deutsche Telekom controlling the company’s corporate network for the next five years.

With this agreement, Bosch is intensifying its global network strategy and increasingly relying on centralised infrastructure and services from a single provider, T-Systems said.

T-Systems has operated Bosch’s German network for some time whilst providing network-centric ICT services to over 200 locations in the Asian-Pacific region since 2006.

Q: In an economic downturn, some people will undoubtedly come to view the offshoring industry as meaning, in essence, sourcing former UK jobs more cheaply from overseas to a cheaper labour force. Is this any merit in this view? – it is one being whipped up as an election issue in the US, for example. More importantly, how can this be handled internally within companies who seek to offshore parts of their operations?

A: This is not entirely fair. Offshoring does not necessarily mean that UK jobs are being directly replaced and domestic workers are being made redundant. It is true in some cases, but the IT skills shortage in this country has been well documented by the likes of the British Computer Society, and many UK organisations are using offshore resources to fill in the gaps in their labour requirements. These gaps are appearing around both high-end skills – around high demand areas such as SAP and SOA – and also around legacy programming and management positions, where some senior workers are being lost through retirement.

It is also worth noting that offshoring is not just something that UK companies turn to when the economy starts to bite. The country has enjoyed a strong period of economic growth during the last five years, during which time the leading Indian outsourcers have enjoyed annual growth of 40% or more from their UK operations.

The decision to source skills from an offshore location is something that must be communicated clearly as soon as possible to all interested parties: management, shareholders and most important of all, employees and relevant workers’ unions. Even if the move will not lead to internal redundancies, it is much better for the board to be up-front about the decision and engage directly with the relevant groups. Recent history tells us that news of the decision will leak out soon enough anyway, and this will have a potentially damaging effect on the morale and productivity of the existing internal IT team. Unions and the UK business press will be quick to criticize those companies that try and push offshore programs through under the radar. It is much better to be open and to explain the thinking behind the strategy.

Q: Can the UK still compete on skills, given that IT graduate numbers are apparently falling here, whereas destinations such as India, China, and Vietnam, are producing more and more skilled graduates with good English skills. Skills were a problem at the turn of the millennium in the UK. They are surely a greater problem now...

A: Yes, the UK can remain competitive, but it will have to pick its battles more carefully. For example, there is little point in UK colleges and universities churning out thousands of entry-level legacy programmers in the future as India and China have a big cost advantage in handling the maintenance of ageing systems, and the risk of managing this type of work offshore is relatively low.

Where the UK needs to concentrate is on producing the type of skills that cannot readily be offshored, such as project managers and vertical industry experts – people who really understand the requirements of SAP or Oracle for the UK banking or transport sectors, for example. To illustrate this point, many of the larger Indian services vendors are currently recruiting these skills locally in the UK.

Q: As technology costs fall, the relative cost of technically expert staff rises, is it inevitable that many types of companies will become more widely distributed globally, with smaller strategic teams located in the UK, and technical and production departments increasingly located offshore. Is remote infrastructure management a likely major growth area, for example? What are the risks of this?

A: Yes – most large UK organisations take a global approach to IT sourcing, and it is no longer about simply using a partner in India to handle some small projects.

Large UK organisations want to offset the risk of relying solely on the overheating Indian labour market by tapping into emerging offshore sourcing locations such as China, Latin America and Eastern Europe. The disruptions caused to some of the Indian services vendors last month by faulty undersea communications links in the Mediterranean also highlighted the potential risk of solely relying on India.

Remote infrastructure management is definitely going to be one of the big growth areas in the IT services space in the next five to 10 years. We are going to see a lot of UK companies that have realized cost savings in sourcing applications management and development work from places like India, look to apply the same delivery model to supporting their datacentre infrastructure.

Functions such as remote network and security monitoring and infrastructure helpdesk support can be readily offshored, but one of the challenges that customers will face is to make sure that these remote services are seamlessly integrated into the functions that need to be handled onshore such as onsite break/fix services.

Q: UK executives will gradually become extremely expensive relative to other parts of the organisation. What might the implications be of this? Surely if countries such as India will be able to supply good management as well as technology expertise, then offshore executive power is also likely to be sought from overseas?

A: The CIO at most UK-based multinational companies is already one of the best-traveled executives within the organisation, racking up a huge number of air miles to check on the status of offshore sourced projects and overseas partner relationships.

While we are unlikely to see the location of the UK CIO’s office shift to a permanent base in India or China, we will certainly see end users look to attract some of the best management talent from these locations – particularly as the successful management of global sourcing becomes an increasingly key component to the role of the CIO.

The power of Government spending must be harnessed to create demand for new innovative products and services, concludes a Government white paper published today.

Innovation Nation sets out the Government's aim to make the UK the best place in the world to run an innovative business or public service. It argues that innovation is essential to the UK's future prosperity and the ability to tackle major challenges like climate change.

The announcement comes after chancellor Alistair Darling's first budget budget, in which he said he would look into the practicality of setting a goal for small and medium enterprises (SMEs) to win 30 percent of all public sector business in the next five years.

The paper spells out how the Government creates demand and new markets through £150 billion in public spending on goods and services each year alongside its regulatory responses to global challenges such as global warming.

It sets out a number of practical measures to ensure that businesses and people in the UK are best placed to benefit from the new opportunities and prosperity created by the demand for innovation. Immediate steps include a commitment for each Government department to publish an Innovation Procurement Plan as part of its commercial strategy. This will set out how departments will embed innovation at the heart of procurement practices encouraging them to engage with businesses at an early stage.

The white paper also initiates work to review the role regulation can play in promoting innovation by the Department for Innovation, Universities and Skills (DIUS), the Department for Business Enterprise and Regulatory Reform (BERR) and the Business Council for Britain.

The paper considers how Government and society respond to changes in innovation across the public, private and third sectors. Other key themes are further supporting innovative businesses and research; increasing exchanges of knowledge; boosting the supply of skilled people; supporting innovative towns and regions and promoting innovation in the public sector.

Headline commitments include:

• Supporting businesses in tapping into the demands of new markets in the UK by bringing forward five new 'innovation platforms' to co-ordinate Government support and funding to firms and organisations involved in developing new products and solutions to global challenges - this builds on the innovative approach developed by the Technology Strategy Board (TSB) to successfully co-ordinate Government support for the development of low carbon cars, for example.

• A new initiative to provide at least 1,000 'innovation vouchers' every year by 2011, helping support and fund small and medium-sized businesses to work with a university, further education college or research organisation of their choice to develop a new product or service.

• Doubling the number of Knowledge Transfer Partnerships between businesses, universities and colleges to boost competitiveness and productivity alongside a greater exchange of innovation expertise between the private sector and Government led by DIUS and the TSB.

•Piloting of a new Specialisation and Innovation Fund to boost the capacity of further education colleges to unlock workforce talent and to support businesses in raising innovation potential.

• Expanding the network of National Skills Academies with one academy for every major sector of the economy.

• Piloting a new Innovation Index in 2009 to measure UK innovation managed by the National Endowment for Science, Technology and the Arts (NESTA) in partnership with the Office for National Statistics (ONS), the Design Council, the CBI and others. A fuller system will be in place by 2010.

•Sponsoring new Partnerships for Innovation bringing together venture capital with universities, business and other local partners to jointly develop innovative solutions to local and regional challenges. DIUS will publish a prospectus in the autumn.

• Establishing an Innovation Research Centre in partnership with the Economic and Social Research Council (ESRC), NESTA and the TSB. •

Boosting the ability of small firms to exploit their intellectual property by training Business Link advisors in IP management by the summer of 2009.

• A new Annual Innovation Review to provide a comprehensive annual assessment of promoting innovation in the public and private sectors. The first of these will be published this autumn.

Launching the white paper, John Denham, Secretary of State for Innovation, Universities and Skills, said: "We must make the UK the best place in the world to run an innovative business or public service, where innovation can flourish across every area of the economy.

"It is the British people who will create a world-beating innovation nation and that is why we must unlock talent at all levels by investing in skills, research and the exploitation of knowledge. But we can achieve much more if we harness the power of Government as the UK economy's biggest customer to create new markets and demand to benefit innovative businesses and people in Britain.

"Innovation will be the key to some of the biggest challenges facing our society, like global warming and sustainable development. We need to ensure that Britain contributes to the innovative solutions and that British business and the British people benefit from the new opportunities and prosperity they create."

The paper outlines how the nature of innovation, defined as the successful exploitation of new ideas, is changing. Traditionally, the UK's innovation policy has been concentrated on high-tech manufacturing. While this will remain vitally important, it is argued that increasingly innovation applies to a wider range of products, services, business processes, models, marketing and enabling technologies used by companies, organisations, industries and sectors.

Innovation Nation makes an assessment of the UK innovation system highlighting the UK's many strengths such as its research base, open economy, excellent universities and good levels of business innovation. However, it also outlines areas in which improvement is needed, for example in increasing business demand for skills, boosting skills to successfully innovate and increasing business investment in research and development and in non-technological innovation.

Iain Gray, CEO of the Technology Strategy Board, said: "This white paper presents a huge opportunity to address challenges through innovation, and for Government to be an exemplar of innovation across all Departments, in turn stimulating innovation and R&D investment throughout business.

"The Technology Strategy Board has a key role to play in addressing these opportunities and accelerating innovation. Working closely with partners, our initiatives and investments will make new connections and act as a catalyst for new areas of business innovation, making a real difference to the prosperity and global competitiveness of the UK."

Anne Glover, chief executive of Amadeus Capital Partners Ltd, who has been asked by the Chancellor to look into what barriers can be removed to allow SMEs to win more public sector business, said: "I'm excited to take on responsibility for advising Government on the greater involvement of SMEs in Government procurement. Many small businesses are highly innovative and by taking account of innovation in the public procurement process the Government can achieve both value for money and greater engagement with SMEs."

The strategy builds on themes around innovation raised in Lord Sainsbury's Review of Government's Science and Innovation Policies, published in October 2007. The Government has just published a progress report highlighting that the Government has or is in the process of implementing the review's recommendations.

The new IT systems in the NHS are on course to deliver better care and an estimated £1.14 billion in savings by 2014, according to the first annual benefits statement published by the Government.

It shows that since its introduction, the National Programme for IT has already delivered a total of £208 million in savings by providing quicker, more efficient and convenient patient care.

The report summarises information from one in five Trusts who have implemented new IT from the National Programme. It found that, of the £208 million in savings to 31 March 2007:

• £192 million had been saved through the delivery of the National Network for the NHS.

• £14 million had been saved from the use of digital imaging and scans (plus an additional £35 million per year of forecast recurrent savings now the system is fully implemented).

• £617,000 savings on software licensing and hardware maintenance costs had been achieved (plus a forecast £1.6 million of annual savings using evidence from 2006/7).

This provides a forecast of £120 million a year in annual savings based on information for 2006/7.

Health Minister Ben Bradshaw said: "Our use of computer technology in the NHS is becoming the envy of the world. It is saving lives, saving time and saving money. If you talk to health and IT experts anywhere in the world they point to Britain as example of computer technology being used successfully to improve health services to the public."

Chief executive of the NHS David Nicholson added: "This report shows that we've made really solid progress against delivering an integrated IT system for the NHS, which is not only making us more efficient, but is helping our clinicians and staff deliver better, safer services for patients."

A copy of the report can be accessed on the NHS Connecting for Health website from today:

http://www.connectingforhealth.nhs.uk/

A week is a long time in politics, as the creaking old adage goes, and this week has thrown together a number of stories that may or may not be related.

First, Mr Darling's debut budget was something of a winter bear: chilly, cumbersome, mysteriously black-browed, aggressive (in a honeyed sort of way), and covered in venerable white hair. Darling downgraded growth forecasts (most commentators felt not enough), while offering the drowsily optimistic outlook of a bear who has woken from hibernation, only to be buried by a snowdrift .

Darling's uniquely ambivalent brand of optimism may come back to haunt the Chancellor, as if a mild recession hits next year, then his election-year budget speech will have to be a miracle of figure-juggling and face-saving PR. Of course, optimism becomes academic should further financial institutions run to the Bank of England with their bowls empty. But I digress.

We also found out that Darling is a fan of the SME sector – as are we, but major IT suppliers are not, as it is so difficult to sell into. The Chancellor said he would look into the practicality of setting a goal for small and medium enterprises (SMEs) to win 30 percent of all public sector business in the next five years, which must be good news for businesses hit by the credit crunch here and in the US.

Next, a brace of reports found the UK brimming with innovation as the key to future prosperity, in the Government's estimation. Innovation Nation was the blue-sky thinking, while Implementing 'The Race to the Top' was Lord Sainsbury's review on the progress of Government science and innovation policies to date (good – according Sainsbury).

Once again SME innovation is fanfared as the great and golden resource.

The Innovation Nation white paper spells out how the Government creates demand and new markets through £150 billion in public spending on goods and services, and goes on to set out a number of practical measures to keep innovation at the heart of the UK.

Jumping into bed with innovation

Included here is a commitment for each Government department to publish an "innovation procurement plan" as part of its commercial strategy. This will specify how departments will 'embed innovation' at the heart of procurement practices, encouraging them to "engage with businesses at an early stage".

(Politicians and business executives now sound so alike it is hard to avoid the impression that many MPs see politics as a stepping stone into a lucrative consultancy career. Presumably many will jump sooner, now the public has got wind of all the free John Lewis kitchens and soft furnishings they have been able to claim for.)

Innovation Nation was published with the input of, among other industry figures, Anne Glover, the Brit-American CEO of venture capitalists Amadeus Capital Partners Ltd, and Iain Gray, CEO of the DTi's Technology Strategy Board (which Glover is also a member of).

Gray said, “Working closely with partners, our initiatives and investments will make new connections and act as a catalyst for new areas of business innovation, making a real difference to the prosperity and global competitiveness of the UK.”

Glover, a longstanding and successful expert in private equity investments, has been asked to investigate SMEs' potential role in the strategy. She added: “Many small businesses are highly innovative, and by taking account of innovation in the public procurement process the Government can achieve both value for money and greater engagement with SMEs.”

Is the Government playing venture capitalist?

So what does all this mean? There are several possible explanations, and like many of this government's most ambitious plans, many seem to risk making perilous ethical and strategic back-flips in the pursuit of 'modernity' and inclusiveness.

For example, should Government contemplate becoming a test-bed for 'hot' new ideas and technologies, influenced by an investment culture that is driven by fad and fashion? E-procurement was touted as a cure-all a decade ago, but where are all those companies today?

Alternatively, is the Government actually suggesting it backs or even underwrites innovative start-ups – a strategy that sounds similar to the many venture capitalists in the market who back start-ups, run them at a loss, and then sell off the IP to the highest bidders?

Or is it contemplating informal alliances with (unnamed) venture capital funds with a promise to be a customer of any idea it likes – providing the capital is pumped into the company by private backers? I know the Government is now running a bank, but...

Of course, anyone who writes about Government and bureaucracy knows that for every conspiracy theory, the more likely explanation is simple incompetence and bureaucracy. This begs the question as to why ambitious SMEs and intelligent start-ups might want to become the innovation arm of a slow-moving Victorian bureaucracy (not that lucrative Government contracts would be anything to sneeze at – but what strings might be attached in a new SME-centric procurement model?).

Nevertheless, this possibility does remind me of a paragraph in the recent book The Shock Doctrine, by journalist Naomi Klein. This is Klein's exposé of Milton Friedman-esque 'disaster capitalism' (her description), within which she sets out her belief that like-minded governments are increasingly becoming small, profit-generating enterprises exploiting opportunities (war, terrorism, natural disasters) around the world to pursue private-enterprise expansion.

One of the hallmarks of this form of "fundamentalist capitalism", she writes. is that: "The role of the government... is not that of an administrator managing a network of contractors but of a deep-pocketed venture capitalist, both providing its seed money for the complex's creation but also becoming the biggest customer for its new services."

NHS savings?

Which brings us to the next major story this week for our industry: the NHS. The new IT systems in the NHS are on course to deliver better care and an estimated £1.14 billion in savings by 2014, according to the first annual benefits statement published by the Government.

Excellent news again, but I imagine the Government's new VC advisers might baulk at the prospect of £1.14 billion savings in 2014 from a system whose overall cost is estimated to be £12.4 billion by 2012.

Could this be why the Government is now so fond of the SME sector?

The other story that caught my eye was UK business leaders saying (I paraphrase) “we're going to hell in a handcart, but we don't know how to work the brakes”. You'll find that little gem in our News analysis section.

Consulting and business process outsourcing (BPO) specialist Cognizant has announced the official inauguration of its 35th global delivery centre in Buenos Aires, Argentina.

The new centre will support Cognizant’s North American customers in a similar timezone, and, says the company, “leverage techno-functional and lingual capabilities available in the region to service global customers, and provide a base with deep local insights for Cognizant to service customers in South America”.

Argentina has become one of the fast growing economies due to increased local business demand and government support. The country has high standards of education and many business and technology students. In addition to cost advantages, and a sound IT and telecoms infrastructure, the country has a rich IT talent pool.

Cognizant's association with Buenos Aires began in 2007 working with Kimberly-Clark Corporation (K-C), jointly working with their local teams.

With the association with K-C growing rapidly, and with other marquee customers in vertical spaces such as consumer goods, retail, financial services and insurance all showing interest in same-timezone support, Cognizant has set up the new facility, which has the capacity to accommodate approximately 250 professionals.

“Cognizant has delivered on its commitment to provide Kimberly-Clark with a suite of global IT services and has high standards of customer satisfaction and demonstrated capabilities in driving transformational outsourcing programs,” said Ramon F Baez, Kimberly-Clark CIO.

“We are pleased to have been instrumental in helping Cognizant become a major presence in Buenos Aires, while taking our IT function to the next higher level. Argentina is a key location in K-C’s global sourcing mix.”

“Our DNA of having a strong local relationship management with global sourcing capabilities will be strengthened by our new Argentina delivery centre,” said Francisco D'Souza, president and CEO of Cognizant.

“Our investments in newer global, regional and local delivery centres will help our clients seamlessly harness optimal talent globally for providing differentiated value to their end customers.

“It is truly an exciting time to be in Argentina as the country continues to grow its technology exports, and with our strong talent base in India, we look forward to being a part of the growing relations between India and Argentina as well.”

Cognizant's Buenos Aires regional delivery will make use of the Cognizant 2.0 platform, which enables all of Cognizant's global, regional and local development centres to virtually collaborate through a central platform using Web 2.0 technologies.

Cognizant has more than 35 global delivery centres and over 55,000 employees.

The BPO market

In our current economic climate, enterprises are vigorously looking at ways to retain their core talent and processes while containing costs on routine, tactical functions such as administrative finance, HR, customer management, and procurement processes.

The industry for BPO (the transfer of management responsibility of these routine business processes to a third party) has been enjoying steady growth the past decade and we anticipate this will accelerate with current economic conditions. BPO is a logical direction for many. Service providers can offer companies cost efficiencies and improved process rigor using appropriate low-cost offshore talent and standardized processes underpinned by the latest technology tools and platforms.

The Asia-Pacific region has been crying out for more comprehensive shared services and outsourcing structures for years. Singapore and Hong Kong have been the regional hubs for most multinationals the past 20-plus years, but are now far too costly for running shared services or outsourced operations. And many Pan-Asian businesses, or regional hubs of global multinationals, have shied away from shared services or outsourced models because they didn't have low-cost options available. The Asian business culture has also favored in-house models for its administrative support functions like HR, finance, and procurement.

Enter China?

Chinese BPO firms can perform well in the medium term, delivering knowledge-based services to Chinese speaking, and some Japanese and Korean speaking businesses, but breaking into the global market to deliver services to Western enterprises will be much more difficult. Consider the following:

China is in a time-crunch. China is already touting its Tier 2 cities, such as Xi'an and Chengdu, as the mainstays Beijing and Shanghai already suffer from chronic job attrition (30%) and wage inflation. India and other offshore locales, such as the Philippines and Eastern Europe, have enjoyed a stable period of several years to develop their BPO infrastructures before these issues crept in.

China is moving into BPO with little breathing space to establish its infrastructure and build critical mass. It is easier for BPO firms to combat attrition and wage inflation once there is a critical mass of staff and infrastructure available.

Wages and attrition for knowledge workers in China are already high and are not much lower than in India, which has more experience in BPO and much better English language skills. We are also seeing attrition rates as high as 30% in the major cities of Beijing, Guangzhou, and Shanghai.

Vendors wary of the 'India experience' all over again

With all the initial teething problems firms endured sending out BPO services to India, why would they want to go through all this again with China?

Some outsourcing giants, such as Infosys and Tata Consultancy Services (TCS), have only established a token foothold in the region, in the hundreds of employees, as opposed to the multiple thousands in India. This seems to indicate these firms are still hedging their bets on China. Only IBM has surpassed 1,000 employees in China for BPO services.

Latin America is a compelling alternative for US businesses. We are already seeing strong competition for BPO services from Latin American countries such as Brazil, Argentina, and Mexico for the following reasons:

* Wages rates are comparable.

* There is little need to relocate staff into the United States

* There is no need for bridge teams, which spend their time overlapping development work with onshore and offshore teams

* Staff travel costs are far lower for nearshore.

* English competency is strong.

* Staff attrition is lower in Latin American countries than in India or China.

The strong competency for Latin American workers to deliver English and Hispanic voice-based services and their ability to administer routine business services makes the region an attractive location for services providers to develop BPO service delivery centers. For example, companies can now source administrative accounting tasks for comparable rates in Mexico as compared to China or India. See “Time Zones Do Matter: Rediscovering the Americas and Nearshore Delivery” for a more detailed discussion of Latin America as a nearshore location for North American operations.

China's core competency is engineering

China is more of a manufacturing/industrial powerhouse and it is adept at performing administrative business services. Rather than BPO, R&D services are much more in the Chinese DNA and a direction it will likely go. China could do very well pursuing outsourced industrial design work, contract manufacturing, biotech services, etc.

The trend is away from mere labor arbitrage. BPO services are increasingly moving away from the body-shopping game and more toward the provision of value-added business services and innovative products. Most of the offshore BPO providers increasingly prefer to price their services by transactions, for example invoices produced per day or reports per month, as opposed to cost-savings per employee salary.

Pricing services by employees provided as opposed to services delivered expose the service provider to increases in wage and currency appreciation, which is threatening to erode the offshore service models of today’s BPO providers. With China’s prime attraction for BPO services being low-cost workers, moving work over here could be a regressive step for many enterprises, with the current wage appreciation and employee attrition dynamics. Having said that, experienced outsourcing providers delivering Chinese-based BPO services can claim to have learned from past mistakes and seek to rectify them.

China's English competency is a major minus for BPO. While Singapore and Hong Kong adopted English as their mother tongue many years ago, China is still a good decade away from being able to boast decent English-speaking competency. Beyond the Chinese-speaking languages and some surrounding Asian languages, such as Japanese and Taiwanese, it is difficult to see China becoming more than a local hub for its domestic economy and some neighbors.

To run truly pan-Asia-Pacific services, not having a strong English-speaking competency is a major issue with BPO. When running the vast majority of BPO services, there needs to be elements of close interaction between the outsourcer, or offshore worker, and the mother company outsourcing the services.

A shaky legal system, lax data privacy, and patent protection remain a problem. BPO services rely on sensitive employee, customer, and financial data being sent to remote locations and adhering to a multitude of industry regulations, data privacy, and compliance standards. China does not have a good track record on these issues.

China's 'Great Firewall' could inhibit its knowledge services industry

Just last month, there were 868 arrests made of people providing “unhealthy” content over the Internet. Google reports that the most searched for words in China are related to money and technology, which indicates that this unhealthy content probably wasn't all pornography.

People talk a lot about how China will be changed more by the Internet than the Internet will change China. However, if the Chinese government manages to keep most Western sites from being accessed and persists with stepping up attempts to block this unhealthy content, then surely there will be a limit to the level with which China can be changed.

One of the reasons India and the Philippines, for example, have been so successful delivering outsourced services, such as application development, insurance services, and accounting services, is the ability for their workers to learn and assimilate with Western business culture. Interaction with Western staff is vital and so is the ability for offshore workers to research information from the Web. If the Chinese middle classes are continually blocked from integrating their online culture with the rest of the world, won't this affect their ability to assimilate, understand Western business culture, and deliver knowledge services for customers outside of the Great Firewall?

The constant attempts by the Chinese government to keep China sectioned off from the rest of the world could substantially hold back the country from delivering knowledge-based business services, such as BPO services, for Western companies. If their development is stifled through restricted access to information and people outside of China, they could be left performing knowledge tasks that require very limited critical business thinking, like data-cleansing services, digitization, data entry, and forms processing.

Reality check

China has potential to develop a compelling BPO industry, but many obstacles stand in the way before it can offer anything beyond serving a sub-region.

It’s tempting to get overexcited about anything China-related these days, but a look beneath the surface may offer a reality check of what you’re really getting.

Harvey Nash outsourcing has announced the signing of a two-year call centre services contract with Prudential plc’s Vietnamconsumer finance business, Prudential (Finance) Vietnam.

The contract, which was signed in the presence of Prime Minister Nguyen Tan Dung at the ‘Discover Vietnam’ business forum, will see Harvey Nash outsourcing become the largest BPO and call centre provider in Vietnam with close to 400 staff. With its VoIP-based telephone infrastructure, Harvey Nash outsourcing will support the sales drive for Prudential’s range of personal finance products via 250 call centre representatives based in Ho Chi Minh City and Hanoi. Commenting on the contract, Kalidas Ghose, Chief Executive Officer, Prudential, said: “We have been working with Harvey Nash outsourcing in Vietnam on a much smaller scale for the past nine months, and the team has really exceeded our expectations. As such, we were delighted to extend and expand our contractual agreement with Harvey Nash outsourcing.” Harvey Nash outsourcing Vietnam will support Prudential by generating leads, pre-screening potential customers, and providing them with information about Prudential’s products and services. Marc Voss, Vice President, Harvey Nash Vietnam, added: “Prudential is the market leader for financial products in Vietnam and we are very excited to continue our strong partnership. Our experienced and dedicated team at Harvey Nash outsourcing, together with our state of the art telecom infrastructure, will enable us to deliver value-added services to Prudential. Prudential’s decision to expand its partnership with us reinforces our belief in the potential of BPO outsourcing in Vietnam.” Harvey Nash outsourcing has been working in Vietnam since 2000 and recently acquired SilkRoad, a technology and software development company, to further cement its position in the region, and widen its international reach and service offering.