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Most companies have either not outsourced or have dismissed BPO as a delivery model for their F&A activities. This can be for a range of reasons, and having been a consultant in shared services and BPO for the last 18 years I have heard all of them. That’s not to say BPO is the right thing to do for all organisations, as with everything it depends on circumstances.

Many of you reading this article will have been involved in evaluating the options for your organisation and rejected (or the organisation rejected) the BPO option. Sometimes for very valid business reasons, other times because there were simply higher priority things to focus on or someone senior in the organisation just did not believe it was the right thing to do.

Remaining objective in evaluating any options which require organisational change, disruptions and a degree of risk is always difficult.

Regardless of the reasons why your organisation has not already considered or adopted BPO as a delivery model (or component part of a broader delivery model), it should never be completely discounted. Circumstances change or new senior managers come along, and before you know it outsourcing is on the agenda. Even if you currently preside over a very successful in-house shared services operation, it is always sensible to keep an eye on the alternatives, even if it is only as a benchmark.

Let’s look at the main reasons most frequently quoted as the drivers for outsourcing business processes, and dispel some of the most frequently quoted counter arguments for rejecting outsourcing.

The drivers most frequently quoted for BPO include:

 Enabler for process improvement or transformation

 Enabler for increased focus on the higher value activities and decision making support

 Lower costs

 Superior flexibility and scalability

 Need for external expertise

Enabler for process improvement or transformation

To be honest, nearly all BPO deals Alsbridge have seen or been involved in are not ‘transformational’. Most companies who have embraced outsourcing have adopted a ‘lift and shift’ model. To be transformational the outsourcing usually needs to be accompanied by a step change in technology. If the reason for outsourcing is to enable transformation then there are service providers out there with transformational capabilities, and it is possible to collaborate with them in deploying new technologies and improved processes.

The most frequently aired argument for rejecting (or putting off) the outsource option relates to this driver. Usually the arguments go…

 we need to fix (or transform) our processes first, otherwise it will fail

 what is the point of outsourcing our mess, if they do sort it out they (outsourcer) will keep the benefits

 we will end up paying significantly more for any changes to processes we make after outsourcing

These outcomes are avoidable and certainly have not prevented many companies from successfully outsourcing. Indeed, it is not advisable to outsource something if it is truly broken (i.e. not working) without fixing it as part of the outsourcing process. This can be achieved by using the skills and capabilities of your service provider, however, this is not transformation.

To avoid failure where transformation is the expectation, then the understanding and agreement with your service provider needs to be clear in respect to:

 what outcomes are expected, and these need to be realistic

 how the desired outcomes will be achieved, e.g. recognising the need where necessary for investment (by you and/or the service provider) in new technology and resources to deliver the changes

 who will be responsible for delivering the change… this typically falls on both parties, the service provider cannot achieve this without significant input from you.

The agreement also need to be clear how the benefits will be reflected in the pricing, which can involve sharing these with the service provider in order to incentives both parties to achieve the changes.

Enabler for increased focus on the higher value activities and decision making support

The arguments against outsourcing in relation to this typically follow the lines… we should be automating these transactional or rules based activities, not giving them to someone else to carry them out in the same way that we do it.

If your main objective is to re-focus your finance people on ‘adding value’ then one option is to outsource on a lift and shift basis those activities which are not perceived to ‘add value’. If your organisation is not prepared to invest further in technology to automate labour intensive activities then why not? More often than not the service provider can do the transactional activities more productively and if carried out in a low cost location, for less cost.

In the same way as the previous driver for outsourcing, to meet your objective of increased focus on higher value activities will require action and change in your own organisation. You will need to educate and motivate your people to stop doing what they used to do and focus on what matters. Often this will involve letting many of them go and recruiting people with the capability and mind-set for business analysis roles in finance.

Lower Costs

These are usually delivered through greater productivity and efficiency enabled by investment in technology and process transformation, and /or through labour arbitrage.

Increasingly, I have heard commentators and organisations considering outsourcing F&A off-shore argue that lower costs from going off-shore are short term and will soon be eroded away from local inflationary pressures. It is true that in Eastern Europe, South America, India and the far East, costs are and will over time increase relatively to Europe (and North America). There are capacity limits in all these locations. However, if you take India as an example, there are over 50,000 English speaking graduates coming into the employment market every year, clearly supply still outstrips demand and will continue to do so for some years to come.

It is true that costs are increasing due to local capacity constraints in many of the off-shore destinations for BPO, and these also contribute to high rates of attrition. However, those service providers with a truly global service delivery footprint have the flexibility and expertise to expand into other cities and destinations… there are at least another 5-10 years worth of labour arbitrage opportunities for those organisations seeking to reduce the cost of support services.

Superior flexibility and scalability

Increasingly in the last 3 or 4 years as the scale and capabilities of service providers has grown these benefits have become reality. Suitable provisions need to be made in the agreement with the service provider setting out parameters which govern notice period, lead-times and potentially scale related adjustments to pricing, however, with these in place changes in your business can be accommodated within the finance function with far more ease than could ever be achieved internally.

Need for external expertise

As with the previous driver for outsourcing, as the service providers have grown their capabilities the reality is that they are able to guarantee access to the skills and experience which your organisation may struggle to attract and retain.

The argument about losing the knowledge and experience of the business is not a credible argument when considering the processes and activities typically outsourced. More often than not, redundant and superfluous activities are eliminated when processes are outsourced… how often have you heard staff say ‘we do it like this because that is how it has always been done’?

The worry and distraction with respect to managing attrition, whether in clerical / transactional roles or in roles requiring scarcer skills, can be avoided.

Increasingly, service providers are developing more specialist and analytical capabilities, often retained in lower cost locations. This can enable access to skills, often at an attractive cost, for ad-hoc pieces of work on a demand basis. For example, in clearing those long unreconciled control accounts, or in more detailed analysis of those debtors or defaulting customers, often with remarkable results.

Conclusions

You may not yet have seriously considered outsourcing as part of your operational model in delivering finance within your organisation, or you may have already discounted it. The drivers most often quoted by those organisations who have outsourced parts of finance are the same as those drivers most finance managers face in meeting the demands of the business, e.g. increased efficiency and productivity, increased focus on business analysis and decision support, flexibility and responsiveness to change, and doing more for less cost. You may already feel that you have already responded to these drivers and have an effective operating model without outsourcing.

Many of the arguments made against outsourcing as a solution for addressing these drivers either have little basis in reality and or have diminished as the BPO service providers have become more established. They are also not borne out by the experience of those many organisations that have already successfully outsourced.

In today’s rapidly changing business and economic environment, even where your existing operations are considered efficient and effective, it would be unwise not to keep an eye on the outsourcing option as a potential complementary solution and model to your finance operations or shared services.

You may be considering where to take your shared services or finance operations model next. Many of the clients we have worked with have been round the cycle of considering outsourcing many times, it only takes a shock to the business or change in senior management for outsourcing to suddenly become the right answer. It would be prudent to always have it in your sights, have a good understanding of the costs, benefits and impacts… so that you are ready to respond if necessary.

Morrisons, the resurgent supermarket chain, aims to create a core retail platform to support its future growth strategies.

The supermarket chain has entered into a strategic outsourcing relationship with Oracle to completely overhaul its suite of core business systems. Oracle will provide packaged solutions from e-tail to middleware and financials in a deal lasting at least five years. The value of the deal has not been disclosed

Gary Barr, Morrisons’ IT director said, "We expect the solutions to offer a breadth of functionality and a level of data that will promote a more accurate assessment of business performance.

"This will help us to turn information into profitable business decisions and deliver an enhanced experience to the nine million customers that walk through our doors each week."

AstraZeneca has put ink to a £25m, five-year deal with BT for it to become the pharmaceutical company’s global network partner.

The contract marks the expansion of an existing relationship in which BT provided network services for AstraZeneca in Europe, the Middle East and Asia Pacific. BT will now extend its reach to 33 new sites in the USA and Latin America.

Richard Williams, Global CIO, AstraZeneca, said that the creation of a new “service effect” contract with BT: "will deliver greater agility, responsiveness and collaboration among our global workforce. This in turn, will lead to improved overall business performance.”

Simmons & Simmons has edged out DLA Piper and Eversheds to become the preferred legal adviser for £1bn turnover outsourcing specialist Sitel.

When Sitel merged with ClientLogic in 2007 the group had more than 100 law firms on its books.

Sitel assistant general counsel John Hayward said: "The genesis for this relationship is the fact that there have been a number of different suppliers throughout Europe, the Middle East and Africa [Emea]. The whole point is to get a big European player who can help us rationalise that background."

Simmons had not previously been instructed by Sitel. It will become preferred counsel for Emea and will manage the use of preferred local firms.

According to IT services consultancy Deloitte’s “Why settle for less” report, outsourcing is failing to meet strategic objectives. The report states that although outsourcing suppliers are meeting cost objectives, many of the companies interviewed expressed disappointment with outsourcers’ overall ability to provide continuous process and technology developments.

Firms contracting outsourcing suppliers should be under no illusion that simply by outsourcing a function, innovative changes will manifest. When developing an outsourcing contract, both the supplier and end user need to identify what is expected of both parties. If there is no explicit statement that the end user wants process and technology improvement, the supplier cannot be expected to provide this. Therefore it is crucial to make it clear from the very start if innovation is expected.

The report states that only 37 percent of firms wanted to improve customer service while only 27 percent were hoping to gain a competitive advantage through outsourcing deals. These figures clearly show that the objectives set by these firms were not strategic but rather cost based. It is likely that a high percentage of these contracts have been in place for a number of years, at the start of which cost reduction was the prime driver for outsourcing. If the research was to be conducted five years from now, the results would show a much higher emphasis on strategic objectives being met.

With 89 percent of respondents claiming that their outsourcing contract delivered at least 25 percent return on investment, it seems that the primary focus of outsourcing deals of cost reduction is being achieved. It’s only recently that non-financial benefits have taken a leading role in outsourcing contracts. However, with the looming economic downturn, outsourcing objectives will again shift predominantly to a cost based model as companies are forced to tighten their belts. Given this situation, return on investment that outsourcing is delivering will ensure that it continues to flourish.

Richard Granger, the man in charge of the NHS National Programme for IT (NpfIT) has left the building. The UK's highest paid civil servant announced his resignation last year, but his actual departure was only confirmed on 31 January.

In a letter to staff dated February 6 2008, Granger is praised for the “major success in rolling out technology-enabled change to the NHS under his leadership”.

Hugh Taylor, the Department of Health’s most senior civil servant, said, “Richard has done a great job in leading the National Programme for IT, which has connected every hospital and GP surgery to a common network.” So, the beleaguered former chief of NHS IT gone and history is being rewritten. But what can we learn from his departure?

This week there are conflicting rumours about the latest ambitions for NHS IT. For example, the Department of Health (DoH) press office denies any suggestion that London’s spine is to be separate from the national spine, and that BT was automatically awarded a new contract to develop that – having failed to deliver the original one. Such a scenario would beggar belief and would be an about-turn on supplier management. (BT has announced this week that it will not tender for work on the proposed ID card scheme.)

Granger himself was hard on suppliers and expected to get a great deal for the NHS and taxpayers. Suppliers were held to some very tight deadlines and penalised when they didn’t deliver. Whether or not those deadlines were realistic is a moot point.

Since the original plans were released there have been many cries of ‘foul’, and a great deal of renegotiation has taken place. Some suppliers claimed to have been excluded unfairly, while others were discarded en route.

One of the critical issues raised by many CIOs within the health service is the way the NHS has approached the whole NPfIT programme. There has been a lack of stakeholder and clinician involvement.

The other main issue is the name. This programme is called the National Programme for Information Technology. So IT is not an enabler for all those good things like change, transformation and people engagement – those things that get CIOs a ticket to the board and buy the right to participate in massive change programmes. No, it's another tech programme.

By settling on a name as mundane as NPfIT, the perception by clinicians and patients was that this is simply an IT programme and (predictably) people switched off. Why? Because no one outside of the IT department wants anything to do with IT. The recruitment problems that beset innovative CIOs are testament to that problem.

So, come February 2008 we see a familiar lack of stakeholder and clinician engagement. It beggars belief that as the rest of world is looking at engagement and relationship management, the largest transformational change programme in the world decides to do exactly the opposite.

So what are the consequences? Firstly, the programme signed contracts centrally without any true understanding of what was required at a local level. Healthcare needs are very complex, and by trying to get to 'one shoe to fit all', people at the centre have not taken account of the regional and local challenges faced by the NHS.

Then the centre decided that it would be a good idea to compound this initial error by insisting that clinicians take backward steps with their current systems to move to the centralised solution. Many clinicians refused. Why should they move to a system which provides only some of the functionality of their legacy applications? (This type of after-the-fact approach whereby technology dictates management needs is typical of projects that ultimately fail – as Chris Middleton explores in his blog this week.)

The NHS CIOs we’ve spoken to about the current farrago made several recommendations that the new incumbents would do well to take onboard.

• Don’t run before you can walk. New systems need time to be designed and properly implemented. Take the time for discovery, and make sure that the needs of the business are addressed. It’s not too much to ask.

• Communication, communication, communication: At the moment, a lot of good work is not communicated to the public or to stakeholders. Sing praises, acknowledge mistakes and explain how those will be fixed. Indeed, there are lessons there for the entire outsourcing industry.

• Set realistic timeframes. Whitehall meddled time and again and tried to deliver the majority of the programme in a very short timescale. The programme is slated to run until 2014, so there is no need to drive everything forward at once (except, perhaps, electoral necessity and party politics, neither of which are conducive to public programmes such as this). Getting the major thing right – delivering a national spine – would be a massive advance.

• Engage your partners. If this had been a true partnership with the suppliers, as opposed to a firm and fixed contract of deliverables, there would have been a great deal of scope to deliver what was required. A basic working agreement between all parties to seek to work towards a final connected solution for the whole of England would have been better than lines and lines about which product functionality would be delivered when, and the relevant penalties for non conformity. Penalties are important, but then so are deliverables.

• Stop changing your mind! As is so often the case with the public sector, once a project is started, we cannot leave well enough alone. Goalposts are constantly moved and criteria changed (Inland Revenue, anyone?). This leads to escalating costs, changed timescales, demoralised staff and – eventually – sloppy processes and procedures.

Something else we have learned is that Granger will not be directly replaced. The DoH is to appoint a chief information officer for health, who will focus on delivering an overall IT vision and report directly to NHS CEO David Nicholson.

The CIO will have the status of director general who will be the head of development and delivering the overall strategy for information on health and social care. Until an appointment is made, Matthew Swindells, policy adviser to the Secretary of State for Health, will act as interim CIO.

This is all very well, but that sounds like an awful lot of Whitehall.

Meanwhile, a report in Health Service Journal quotes the DoH's informatics review manager Tom Denwood as saying current “chaos” surrounding the NHS IT strategy will be resolved within weeks, with a major shake-up at the DoH to establish “unified governance” and clear decision- making, as well as to try to integrate strategic management of health and social care information, and establish clear responsibility for IT strategy and information within the DoH.

Speaking at a conference, Denwood, previously head of the Choose and Book, said NHS IT bosses have said there is, “a complete absence of a function that translates policy into business requirements”.

There is no rationale for pouring more taxpayers’ money (£12 billion and counting) into anything that doesn’t translate into, and meet, business requirements. So much for a national service; it’s more of a national scandal.

French services group Steria has reported year-end 2007 revenues of €1.46 billion, up more than 12% year on year. Domestic revenues were up by 1.3% at €534.3 million. The company sees overall growth in line with the French services sector, but with improved profitability.

The recent acquisition of of Xansa has already contributed revenues of €110.5 million – eight percent of Steria's revenue – in two months of business. Steria has announced it will migrate fully from the Xansa brand in the next few months.

The company's UK market saw growth of six percent to €305.8 million. Steria claims the results now put it at number four in the UK public sector, but Ovum analysts rate it as being just outside the top ten.

Steria is rumoured to be one of a number of companies expected to tender for elements of the proposed ID card scheme, along with EDS, IBM, CSC, Fujitsu and Thales.

Like Atos Origin, Steria has been going through a business transformation programme, in this case aimed at a strategic move into smaller numbers of valued-added business deals, of which any services element of the ID card scheme would be a signature win.

Chairman and CEO Francois Enaud used his platform at the recent Nasscom conference in Mumbai to say that Steria plans to significantly grow its Indian operations, which account for more than one quarter of the group's total workforce.

Enaud said: “The Indian presence afforded to us by the acquisition of Xansa not only adds an important dimension to our blended delivery model, but also provides a considerable boost to our integrated solutions and services offering, including IT and BPO [business process outsourcing].”

Computing and services giant Hewlett-Packard has surprised some financial analysts by reporting a strong set of first-quarter results for fiscal 2008, and raising its outlook for Q2.

Net income was $2.1 billion on first-quarter revenues of $28.5 billion, with revenues up 13% year on year. Looking at revenue by region, Asia-Pacific grew 22%, EMEA grew 15% and the Americas increased by a much smaller margin of eight percent.

HP generated $3.2 billion of cash from operations, which includes the payment of an annual employee bonus, and returned $3.3 billion to shareholders through share repurchases.

HP's chief finance officer Cathie Lesjak explained the strong quarter by pointing to the company's manifold revenue sources: “We generated 69% of total revenue outside of the US, with emerging markets driving significant growth. First-quarter gross margins were 24.5% compared to a year ago. Gross margin was up 80 basis points, driven by a generally favourable commodity environment, disciplined pricing and improvements in warranty and attach [sic].”

But thereby hangs a tale, to misquote the Bard. US revenues have not been separately itemised, which means that the Americas figures may be pumped up by business from outside the US. However, we can infer from Lesjak's percentages that US-specific revenues were in the region of $8 billion.

There was good news for the outsourcing sector, which has seen promising figures by other leading players this month. Services were a strong performer for HP – a company that is widely seen as a bellwether stock for the health of both the enterprise hardware and services markets. Revenue was up $4.4 billion, or 11% year on year.

Outsourcing and integration revenues led from the front, increasing 15% and 13% respectively, while technology services revenue was up nine percent. Operating profit for the quarter was $489 million, or 11.2% of revenue.

Said Lesjak: “We remained focused on balancing margin expansion with revenue growth. Our services results reflect improved focus on services attach [sic], combined with operational improvements from our ongoing efficiency initiative. We've made progress reducing our cost to service delivery, but we still have considerable work to do.”

CEO Mark Hurd was equally forward-looking: “HP delivered a strong first quarter. We had balanced growth and profitability across all regions and gained share in key market segments.”

Hurd claimed that the company's performance was driven by three key factors: “[First] Significant cost savings to both fund our growth and expand our earnings; two, our deployment of additional sales resources to capture incremental opportunities in the enterprise and mid-markets; and three, diverse global customer base and a broad portfolio that's aligned with the growth areas of the market.

“Let me be clear, our cost savings are significant and ongoing,” he concluded. HP has projected second quarter revenues of $27.7 billion to $27.9 billion, compared to estimates calling for $27.4 billion.

HP has recently inked a seven-year outsourcing deal with Unilever to manage parts of its IT infrastructure outside the US. The deal is valued at $675 million, and suggests that technology companies with a huge international footprint can weather the storm, but the immediate future for smaller US technology companies may be less easy to divine from major-league players' results.

News that a Government enquiry has issued a call for evidence on the efficacy and efficiency of outsourced services is a sign that Whitehall sees outsourcing both as a vital strategic weapon in the coming years, and also as a potential means of shooting itself in the foot when services are poorly managed.

The new enquiry, set up by business secretary John Hutton and headed by economist DeAnne Julius, is perhaps long overdue, given that the total value of government outsourcing is estimated at £40 billion a year and encompasses a growing range of public services being taken on by the private sector. It's likely that in the coming year outsourced services could represent over 20% of all government services spending.

The enquiry will report in June and is looking now at how the market can be made to work more effectively in terms of procurement models and barriers to entry. I think we should help.

Surely, however, this is a classic case of putting the cart before the horse: the real question is why some public-sector schemes are poorly conceived, specified and managed by the client.

The 451's Janice McGinnn reports this week on the ramifications for the National Programme for IT (NPfIT) now that Richard Granger has finally, as someone once said of Elvis, ‘left the building’ (leaving his work mobile behind in the press office, apparently).

This is the same Richard Granger who once famously lambasted "privacy fascists”, as he described them, for criticising his tenure at the head of the scheme – just a few months before a series of public-sector data privacy scandals revealed just how important data privacy is to successful government provision.

Granger's managerial style notwithstanding, one of the signature failures of the massively ambitious – and perhaps largely misguided – NHS programme that he headed has been its hard focus on IT, rather than service, and letting technology dictate and drive medical staff’s behaviour and working regimes.

This type of error unfortunately typified the ambitious and idealistic Blair regime – technology for technology’s sake; modernity for modernity’s sake. It was as though macho-budget technology spending somehow equated with powerful government; an old-fashioned arms race, in other words. But on the client side, no one outside the IT department wants anything to do with IT – unless there is a security breach, or a project is over budget and over schedule, at which point it is in the media spotlight.

Imagine the public support that has been squandered by all the mass-media public discussion about databases and technical specifications.

Gordon Brown, once paymaster of NPfIT, would do well to lose his Tory-crafted reputation for dithering by single-mindedly abandoning that focus and taking the programme back to the people who use it, and to its publicly stated aims (rather than its technical specifications).

When IT schemes go bad, whether they are in the private sector (like the IBM litigation discussed in my previous blog) or the public sector, the warning signs are almost always the same. If it’s for the people, but all about the technology, then it’s not going to work.

I suggest that this is what the enquiry should really be focusing on, otherwise it may (like some of the public schemes it investigates) be misconceived from the outset. The outsourcing industry as a whole, which employs hundreds of thousands of people within the UK alone, can only supply what it is invited to tender for.

I hope all the readers of sourcingfocus.com will put themselves forward to, in those immortal words, help the (industry's) police with their enquiries. Let's get involved and challenge the enquiry's assumptions. It will be better for our industry.

Indian IT services outfit HCL Technologies has acquired CapitalStream, a US provider of front office automation technology to North American banks, in an all cash deal worth around $40 million.

CapitalStream's product range includes software for prospecting and sales, credit analysis, due diligence, documentation and portfolio monitoring.

CapitalStream's flagship product, FinanceCenter, is a Web-based multi-tier application designed to automate front office operations. HCL says the product is used by over 20% of North America's top banks and customers include Bank of America, National Bank of Canada and Scotiabank.

Commenting on the acquisition, S Premkumar, corporate officer and global head, financial services, HCL Technologies, says: "This will enhance our capability in the Financial Services sector to deliver large scale enterprise solutions. The modular architecture would also help HCL to localise the platforms across various global financial centres."