Industry news

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."

The new team numbers 13 partners and is pooled from fee earners in the big four Scots firm’s London, Edinburgh and Glasgow offices. The group was set up last month and is being led by Glasgow-based intellectual property partner Laurence Ward.

Dundas said the move had come in response to client demand, with the team set to target a broad range of work including IT, human resources and facilities management in both the public and private sectors.

Commenting on the move, Ward said: “A dedicated outsourcing team of this size is unique in Scotland and also allows us to compete on the UK outsourcing stage. Our experience means we can work seamlessly with known consultants, streamlining the supplier selection and contracting process and maximising the chances of securing attractive deal terms for clients.”

He added: “If a business is ill-prepared going into an outsourcing contract or on its renegotiation, the exercise can become massively inefficient and time-consuming and difficult to exit.”

The firm has advised on outsourcing deals for clients including financial services heavyweights Standard Life and RBS on the outsourcing of regulated back-office functions, as well as local authorities including Glasgow City Council, which it advised on shared services initiatives.

A customer of IBM has cited the computing and services company in its bankruptcy declaration in a Delaware court, blaming a failed enterprise resource planning (ERP) application for the company’s inability to complete orders. American LaFrance (ALF), a US maker of firefighting equipment, developed a standalone ERP system when it was spun out from previous owner, Freightliner. Almost immediately upon the changeover to the ERP system from Freightliner, so ALF claims, problems with the new system had a devastating impact on its operations, including an inability to reconcile data, and missing financial information. ALF claims that IBM is responsible for the IT problems that precipitated its bankruptcy, because, essentially, alleged deficiencies in the system prevented it from customising orders for individual customers.

See Editor's Blog for more on this story.

As we reported in Industry News this week, a customer of IBM has cited the computing and services company in its bankruptcy declaration in a Delaware court, blaming a failed enterprise resource planning (ERP) application for the company's inability to complete orders.

American LaFrance (ALF), a US maker of firefighting equipment, developed a standalone ERP system with IBM when it was spun out from previous owner, Freightliner.

Almost immediately upon the changeover to the ERP system from Freightliner, so ALF claims, problems with the new system had a devastating impact on its operations, including an inability to reconcile data, and missing financial information.

ALF claims that IBM is responsible for the IT problems that precipitated its bankruptcy.

Whatever the merits or otherwise of this particular case – which it is for the courts to decide – such a comprehensive blaming of financial collapse on a technology and services supplier is not that unusual, and has lessons for us all.

• First, suppliers must manage a project properly, including by running new systems in parallel with the old and conducting extensive pre-deployment testing.

• Second, customers must also take responsibility for the project: outsourcing a project does not mean outsourcing responsibility for it, and close management of the supplier prior to, during, and after the go-live is essential.

• Third, business objectives must be mapped onto technology requirements at the most granular and detailed level – often the level that differentiates one company or product from another, in other words.

• Fourth, mergers, acquisitions, spin-outs and demergers swiftly become massive administrative, management, cultural and financial burdens, which means the inherent technology challenges are often relegated to being minor considerations.

This is important to understand, because an IT system is simply a networked and virtual representation of a company's business processes – nothing more, nothing less. If those business processes are in a state of transition or flux, then technology cannot accurately model them or represent them, and it should never be called upon to do so.

However, all too often internal pressures and financial imperatives force IT systems to the forefront and expect them to somehow fill the gaps in the administrative, managerial, cultural and financial processes the systems should be serving. The result is usually failure. It is vital that both supplier and customer recognise these risks from the outset.

The world of social networking has led many people to believe that technology is always something quick, easy, accessible and easy to implement. If only it were always that simple.

In other words, technology failures – like security failures – are often really failures of management, culture or policy, either at the customer end, the supplier end, or both. Many companies mistakenly see technology as an end in itself, and are quick to blame it for management failures; indeed, they sometimes expect it to replace good management.

Equally, project failures often arise when non-technical business executives do not fully understand the business ramifications of technical decisions made by the technology supplier, in tandem with the internal IT function. Clear and structured communications across each of these areas, coupled with strong project management, is always essential.

We wish all sides in this dispute the best of luck – that elusive quality which, so often, alas, stands in for good judgment.

Paris-based services group Atos Origin joins a select list of outsourcing and services players announcing respectable results this month. For 2007, the company has announced that it is back in the black to the tune of a €48 million net profit on revenue of €5.86 billion, compared with a €264 million loss in 2006. Organic sales growth was 4.3 percent, a rate that is set to continue in 2008.

The company has partly achieved this turnaround by an improved operating margin of 5.4%. The UK arm reported a 7.3% operating margin, up from 2.3% for the previous year.

The group paid some €98 million in restructuring costs in 2007, plus a €57 million charge following the termination of an NHS diagnostics contract.

Although transformation plans are now bedding in, analysts are advising the company to err on the side of caution, given the uncertain market conditions.

One challenge is the falling profitability of the Dutch business, says Ovum principal services analyst Phil Codling. Another is the group's consulting arm, which saw revenues fall 11.2 percent year on year to €360 million.

Atos CEO Philippe Germond believes that the company has “good visibility” for 2008, being less exposed to the risk of a US recession than some of its competitors. Germond says he is also confident about the ongoing transformation of the group, which has increased staff numbers in emerging countries to 3,000.

"We have now established the foundations that will allow us to improve competitiveness, and to increase substantially our profitability. More than ever, I am determined to develop the group's full potential and accelerate value creation," said Germond.

Nevertheless, behind the scenes investment funds Centaurus and Pardus have increased their combined stake in the group to over 20 percent, and may increase their holdings further.

A likely suitor in the investors' sights would be Capgemini. Germond admitted recently that the two funds had approached the rival French services group with a proposal to take over some of Atos' activities.

Of course, in the wake of its own positive results this month, Capgemini itself remains an attractive target, principally for a number of potential Indian suitors, who may see any future deal with Atos Origin as impetus for an aggressive takeover, or as a catalyst to acquire the operations investors were using to attract Capgemini.

It's certain that the next few months will see a small number of services companies that are weathering the post sub-prime storm making some strategic acquisitions in a depressed market. Conceivably, investors could be the brokers of a marriage between east and west.

Glasgow City Council has agreed a £265.5m, ten-year outsourcing contract with services company Serco.

Through a strategic joint venture – the first of its kind in Scotland – Glasgow City Council and Serco will improve services for citizens through joined-up, efficient and higher quality property and information and communications technology (ICT) services. As a result, Glasgow City Council hopes to save more than £70 million over the ten years.

Services will be improved by driving innovation – modern, flexible ICT and property services, reducing city centre office capacity, improving employees’ skills and resources and providing a single point of contact for ICT and property services. To support delivery of the partnership, 280 council staff will be seconded or transferred to the joint venture.

The council is developing a broad range of transformational programmes as part of its strategy to increase efficiency and improve service quality and over time Serco will develop further proposals to support this strategy.

George Black, Chief Executive of Glasgow City Council said: “The partnership will bring real benefits to Glasgow’s citizens by allowing us to build our front line services around their needs. We will now move towards developing community hubs where staff will deliver the services people want as near as possible to the heart of their local area. As a council we want to find new and radical ways to deliver value for money services to our customers and this new company will do just that.”

Christopher Hyman, Serco chief executive, said: “We are totally committed to supporting Glasgow City Council in its ambitious programme to improve the efficiency and quality of its services. This partnership is a significant step forward for our Solutions business and we will work with the council to develop innovative ways to further transform their services.”

Frost & Sullivan release research saying that companies in Europe, Middle East and Africa are warming to the concept of hosted contact centre operations

Revenues at hosting firms topped €277.9m in 2007 and will reach an estimated €1.45bn in 2014, according to figures from the leading analyst firm. The biggest factor driving growth is the ability of companies to shift contact centre costs from capital to operational expenditure.

This reallocation, combined with reduced maintenance costs and ease of provisioning multi-sourced contact centres, makes hosted platforms an attractive proposition.

"Leasing contact centre technology allows organisations to deflect high upfront capital expenditure," said Kunal Kakodkar, a research analyst at Frost & Sullivan.

"This is an attractive business proposition for small and mid-sized enterprises that seek contact centre technology but do not have access to the capital expenditure required for expensive premises equipment."

"Hosted contact centre suites have matured to a point where several technology vendors offer robust, secure multi-tenant solutions with tenant self-administration and enhanced data security," he said.

"The market can grow further once these technology advances are communicated to end users."

Almost 90% of outsourcing agreements achieve more than a 25% return on investment (ROI) but there is more to be gained, according to Deloitte.

In its Outsourcing Report for 2008 the business consultancy revealed that a massive 89% of outsourcing deals achieved an ROI of more than 25%.Cost reduction was cited as the biggest motivation but just 37% said the reason they outsourced was to improve customer value and only 27% said they hoped to gain competitive advantage through it.

Peter Moller of Deloitte said, “Companies that view outsourcing in a broader strategic context, and implement it systematically can gain advantage over competitors that still take a more procurement-oriented view. In an ever more competitive world companies need to take full advantage of every tool at their disposal and outsourcing is a significant one”.