Industry news

Nearly half of leading US technology companies outsource some type of manufacturing or service, according to a new survey by accounting and consulting group BDO Seidman. Forty-nine percent of all respondents said they outsourced key services to offshore destinations; this increased to 64% among Silicon Valley companies.

The findings are from the 2008 Technology Outlook Survey, which examined the opinions of 100 chief financial officers (CFOs) at technology companies located throughout the US. Revenues of the surveyed companies ranged from $100 million to $15 billion.

Of those outsourcing, the most common functions being off shored are: manufacturing (74%), IT services and programming (51%), research and development (49%), distribution (45%) and call centers (35%).

The most common locations for outsourcing are India (60%), Southeast Asia (50%), China (46%), Western Europe (21%) and Latin America (19%). When asked what one location they might consider for outsourcing in the future, the CFOs cited India (30%), China (23%), and Southeast Asia (22%).

“Despite some of the CFOs’ concerns regarding international expansion, nearly 50% of technology companies in the US and 64% in Silicon Valley are feeling the need to source services or production overseas. This shows that the very nature of the technology industry has become international,” said Lee Duran, Partner in BDO Seidman’s Technology Practice.

“These companies are also continuing to outsource their manufacturing, IT and distribution services to India, Southeast Asia and China; despite near-sourcing alternatives in Latin America and Canada."

Other findings in the survey were that CFOs at technology businesses cite currency risk (26%) and uncertain political/business climates (25%) as their main concerns regarding continued international growth in 2008.

Training of international employees (17%), risk to intellectual property (14%) and international business tax regulations (12%) were less of a concern to the CFOs.

Approximately four-fifths (79%) of the CFOs indicated their business has operations outside of the United States.

The survey reinforces the view that 21st century business, especially in areas that focus on innovation and speed, is increasingly about managing an ecosystem of suppliers rather than being an integrated 'soup to nuts' organisation.

It also flies in the face of much US election talk which has identified offshoring as a threat to the US economy; indeed, it appears to be supporting the most dynamic elements of the US business world.

Vietnam's emerging status as an offshoring destination of choice got a boost this week as the Prime Minister of Vietnam and UK Trade and Investment Chief Executive, Andrew Cahn, championed the benefits of doing business in Vietnam to over 250 senior UK business leaders. The forum, hosted by global recruitment consultancy Harvey Nash, highlighted the region’s challenge to India and China for outsourced services.

Vietnam has a young, skilled IT workforce and now produces thousands of English-speaking graduates every year. Staff churn is low, at less than five percent. In recent months Bill Gates and the Bush administration have joined the chorus of voices backing the country's ambitions to be a global player.

In his address, Harvey Nash outsourcing MD Paul Smith predicted that Vietnam will be the most desirable destination for outsourced services by 2012. Smith said: “The duopoly India and China have long enjoyed within IT outsourcing is fast coming to an end – and rightly so. With deregulation, accession to the World Trade Organisation and UN Security Council as well as significant overseas IT investment, Vietnam is becoming the outsourcing destination of choice for international business, not simply the poor relation.

"Vietnam has always offered a highly skilled labourforce and low costs, but this coupled with economic expansion, political stability and diplomatic acceptance means the decision to choose it as an offshore destination has become a no-brainer.” UKTI CEO Andrew Cahn added that Vietnam "offers competitive, high-quality services and is now getting its due recognition as an attractive investment destination for all businesses.

"UK companies such as BP, Prudential and Harvey Nash have led the way into Vietnam, but opportunities exist for all aspects of UK industry, from retail services to infrastructure development and financial services to IT outsourcing.

"Choosing the right offshore destination plays a critical part in shoring up UK businesses’ global competitiveness. UK-Vietnam bilateral trade has enjoyed double digit growth over a number of years and this is a trend we hope will continue and bring benefits to UK based businesses.”

The ‘Discover Vietnam’ business forum took place in London and was attended by Vietnamese trade representatives and senior Vietnamese businesspeople, as well as UK firms who are already successfully operating in Vietnam.

Traveling with a senior business delegation, the Prime Minister of Vietnam outlined the benefits of doing business in a country whose GDP growth is second only to China in Asian economic expansion and is now the third largest offshore software services destination in South East Asia.

Harvey Nash has been working in Vietnam since 2000 and recently acquired Silkroad, a technology and software development company to cement its position in the region further and widen its international reach and service offering. The 2,500-strong business is one of the market-leading IT services companies in Vietnam and the move makes Harvey Nash the biggest single software player in the region.

Deutsche Telekom’s enterprise customer division, T-Systems, and global IT services provider, Cognizant have announced that they have entered into a global systems integration alliance. The alliance is primarily aimed at catering to European corporations with global delivery requirements for system integration services.

The partnership combines the onsite and offshore expertise of T-Systems and Cognizant across industry segments with an enhanced geographical footprint, a broader range of service offerings, and greater access to the best global talent. The new alliance will draw upon a combined talent base of over 110,000 employees worldwide, comprising more than 40,000 employees working offshore.

Expanded operations in key geographies – Europe, Americas and Asia – are expected to augment the growth of the two companies.

As part of the new business partnership, T-Systems India and its approximately 1,150 employees will be transferred to Cognizant, subject to appropriate regulatory clearance.

By harnessing the onsite, nearshore and offshore strengths of T-Systems and Cognizant, the partnership will facilitate the adoption of a global services delivery model in and beyond Europe that will enable the customers to save costs through labor arbitrage. "This new alliance will make global delivery a reality in Europe. Strategically we are the first to give our customers unprecedented access to a new service and delivery model,” said Reinhard Clemens, management board member for business customers at Deutsche Telekom and CEO of T-Systems.

"In partnership we can deliver truly unique global IT services, bringing together our complementary strengths with the goal of dramatically increasing the value provided to customers,” said Francisco D’Souza, President and CEO of Cognizant. “Both Cognizant and T-Systems have a long heritage of partnering with clients, and our joint capabilities will deliver a powerful combination of scale and agility in the key markets serviced by both companies.

We also look forward to welcoming the T-Systems employees in India to the Cognizant family. We believe that this alliance will provide our joint customers with a world-class combination of deep local knowledge and market-leading global delivery platform.”

T-Systems has announced the forming of a partnership with Cognizant, for providing system integration services to meet the global delivery requirements of European corporations.

This partnership combines the onsite and offshore expertise of T-Systems and Cognizant across industry segments with an enhanced geographical footprint and a broader range of service offerings. The new alliance will draw upon a combined staff of over 110,000 employees worldwide, comprising more than 40,000 employees working offshore, expanding operations in key geographies Europe, Americas and Asia.

As part of the new business partnership, T-Systems India and its approximately 1150 employees will be transferred to Cognizant, subject to appropriate regulatory clearance

US and European financial institutions will look to shift more technology operations offshore as budgets are squeezed following last year's credit crisis, according to the head of India's Infosys Technologies.

Kris Gopalakrishnan, Infosys CEO, told The Times that he expects offshoring to be allocated a greater proportion of budgets this year as banks look to keep budgets and wage bills down. He says many banks have kept budgets flat or even cut them from last year.

Bank clients have told the vendor not to reduce hiring levels, says Gopalakrishnan, because they will need "more support".

But Gopalakrishnan goes on to paint a bleak picture of the market and says banks are delaying budgetary decisions as they tighten spending. Some firms - particularly those hit hard by the credit crisis - are also being more cautious in deciding whether technology upgrades are needed.

The report says that service providers such as Infosys are also "re-visiting" plans to move away from low-margin work such as call centres and towards high-margin consulting services.

Gopalakrishnan's remarks chime with research conducted last year by European outfit Pierre Audoin Consultants.

The consultancy says, as a result of the crunch, banks will be seeking to do more with the same resources and budget, which will lead to increased demand for offshoring services.

Banks will look to lower costs by outsourcing horizontal processes such as finance and administration and human resources, as well as more core areas like mortgage and loans processing. Sepa payment processing may also be outsourced as some banks may not find it profitable to keep the process in-house, says Pierre Audoin.

EURIM, The European Information Society Group, has waded into the debate on public sector data and issued a report on information sharing. Documenting the experiences of data sharing, says the organisation, “allows for an understanding of how these arrangements can be supported and developed and thus embedded in confident future service delivery practice”.

The report, Information Sharing Protocols was produced by EURIM”s Personal Identity and Data Sharing Group, and highlights the following points:

• Information assurance is vital to maintain citizen confidence.

• The reasons for, management of and limitations of, information sharing must be clearly described to citizens.

• Where appropriate, protocols must permit citizens a single point of access to data that is shared about them – information sharing and information access go hand in hand.

• Over time a significant body of legislation regarding information sharing has developed, and case law is often required to demonstrate ‘legality’. As well as the complexity of the legislation this also creates uncertainty within practitioners.

• There is a great deal of guidance on information sharing already in the public domain. Some of this guidance is complicated and not all of it is consistent.

• There are many examples of successful information sharing that can be used as examples to learn from by authorities embarking on new information sharing projects.

• There is more work to do to ensure authorities make consistent and good decisions around information sharing projects.

The report also acknowledges that 'emergency situations' will be a challenge to established information sharing protocols.

EURIM makes the following recommendations:

National government

• Regional Centres of Excellence, through the Ministry of Justice, should incorporate a feasibility study into their programme of work that considers the whole of England or a regional approach to an overarching information sharing protocol model. One regional centre should be asked to take the lead in undertaking this work, working with the Ministry of Justice to ensure that the output will be appropriate to both local and central government. This work should include examining ways to reduce, simplify or in other ways improve the guidance pertaining to information sharing protocols, and build on the Information Commission’s framework code of practice for sharing personal information.

• The Ministry of Justice, in association with relevant departments, agencies and private sector organisations in each sector, should commission further work to map enabling legislation against citizen’s needs so as to inform the above work in each sector.

The Information Commissioner

• The Information Commissioner's Office (ICO) should endorse a common standard on information sharing that draws on those standards developed and in development by the Local e-Government Standards Body (LeGSB) group. This should be done in consultation with the Local Government Association (LGA) and other stakeholders.

• ICO should provide further guidance outlining in practical terms, using common language and terminology that enables organisations to make good quality decisions regarding information sharing. This would not be prescriptive but would stress the importance of using professional judgement in making these decisions.

General recommendations

• EURIM will produce an impact study to evidence the effect existing exemplar protocols have on the efficiency agenda.

• Citizen access to their own information, ability to change their information and knowledge of information sharing initiatives, is vital to the acceptance and smooth operation of information sharing schemes.

• An equally important aspect of security is ongoing training of all staff with permission to access databases containing personally identifiable information. Training should discriminate between legitimate and unacceptable use, and there should be electronic audit trail capability that enables all access to databases to be tracked back to the individual gaining access.

• Meaningful penalties should be enforced for misuse.

Research commissioned by Oracle, which surveyed 1,500 consumers and 250 contact centre managers across Europe, reveals a huge gap between consumers’ expectations of customer service and the way businesses are equipped to meet them. The findings reveal that ineffective information systems play a central role in the poor levels of customer service received by the European public.

Key findings include:

• Despite almost unanimous acknowledgement of the importance of keeping customers happy, more than half of European consumers do not judge customer service operations to be effective.

• Customers’ principal complaints include enduring long call queues, having to continually repeat their queries to different members of staff, and receiving inconsistent answers.

• More than half of businesses have no plans to introduce a self-service portal despite a clear preference among customers for using the internet to resolve queries.

• Contact centre managers view better quality of information and staff training as the two prime requirements for improving customer service.

• Consumers believe that financial services companies offer the best customer service, and telecommunications companies the worst.

• British consumers are the most critical in Europe of customer service operations, having suffered with more ineffective service than their European counterparts.

Loic le Guisquet, senior vice president, Oracle CRM, EMEA, commented on the findings: “The research show us that the majority of European customer service operations are failing to keep pace with the demands of today’s consumers. Businesses need to go beyond the simple retention of customer information, and start to apply intelligence to the vast amounts of data they hold in order to meet the public’s expectations. Turning information on customer behaviour and their life events into actionable intelligence enables the business to sense and respond to their needs. Systems need to be flexible and draw information from across the business to empower staff in their dealings with customers and their decision making.” The research questioned 1,500 consumers and 250 contact centre managers in the UK, France, Germany, the Netherlands, Belgium, Luxembourg, Sweden and Denmark.

The research revealed that the key objectives for European customer service operations are very much focused on keeping the customer happy. Contact centre manages rated the importance to their organisation of a number of operational objectives:

• More than eight out of ten (83%) viewed dealing with customers to their satisfaction as highly important.

• Two thirds (66%) viewed keeping customers for as little time as possible in call queues as highly important.

• Objectives governing operational efficiency (such as the number of calls dealt with or minimising staff numbers) were low on the list of priorities.

However, although the contact centres may have the right focus in serving their customers, the research revealed that they come up very short in delivery.

More than half of European respondents did not judge customer service to be effective – a quarter viewed them as ineffective with a further 29% judging them to be neither effective nor ineffective. The British public was even more critical with four in ten British consumers (40%) rating contact centres as ineffective.

This is not surprising as the research revealed that British respondents are more likely to suffer with ineffective contact centres than their European counterparts.

Customers’ principal complaints are:

• Enduring long call queues (European average – 77%, UK – 88%).

• Having to explain their query anew each time they speak to another representative (European average – 75%, UK – 87%).

• Being passed between too many departments (European average – 55%, UK – 70%).

• Customer service agents not understanding their employer’s business (European average – 43%, UK – 53%).

• Receiving inconsistent answers each time (European average - 43%, UK – 62%).

Of particular concern was that forty-three percent of contact centre respondents maintained that customers never have to repeat queries, which serves to highlight the size of the gap between their aspirations and their actual delivery on customer expectations.

Loic le Guisquet said: “The technology exists to remedy each and every one of these failings. Along with the right business processes and systems, it’s a matter of gathering intelligent insight from across the business and placing it in the hands of customer service staff as and when they need it.

"Providing employees with accurate, relevant and timely information boosts their understanding, decision making and the quality of their responses. And effective call-routing systems can help to reduce queues and get customers quickly through to the right departments.”

When customers were asked what they considered to be the most likely cause of dissatisfactory service, the most popular answer was ineffective customer service staff, identified by 43% of respondents.

Yet responses from the contact centre managers revealed that staff are being let down by inadequate tools, training and processes.

When asked what would most improve levels of service, respondents identified the following measures:

• Almost six out of ten (58%) said providing better quality of information to customer service staff [UK – 70%].

• Over half (52%) said more staff training [UK – 68%].

• Forty-five percent selected improved customer service procedures [UK – 64%].

• Forty-four percent said effective call routing [UK – 56%].

• Thirty-eight percent said empowering staff with more responsibility to make decisions [UK – 44%].

• Thirty-five percent said advising callers ― while they are waiting ― of alternative ways of resolving their queries (for example, email, internet, etc) [UK – 56%].

Given that British consumers were the most critical in Europe of contact centres, it is interesting to note that contact centre managers in the UK were the most likely to acknowledge measures which would improve their level of service.

Loic le Guisquet said: “The findings illustrate the direction businesses should be taking with their customer management strategies. Things have moved on from simply modernising the back office to a stage now where the entire organisation, and the systems supporting it, needs to be connected in their focus on the customer.

"Yet again, we see a demand for getting the right information into the hands of the right people. And with modern systems, it is extremely simple to advise callers on steps they can take to address their queries. Effective service procedures, regular training sessions and quality customer information should run throughout the company.”

The survey revealed that businesses are also failing to capitalise on the internet as an efficient and cost-effective means of serving customers.

European consumers viewed the internet as by far the most popular means of dealing with a business. Just under half of respondents (47%) identified it as their preferred option and 71% placed it in their top two. Email was the second most popular channel with general favourability of 60%.

In comparison, 48% disliked call centres and 49% disliked visiting a local branch. The British were the exception to this, rating a branch visit as second to the internet in their preferred methods of dealing with business.

Despite a clear appetite among consumers for using the internet to resolve queries, more than half of contact centre operations said they had no plans to implement a self-service customer portal.

Loic le Guisquet said: “Businesses are not only missing a trick here, they could find themselves left behind by their competitors. At their most basic, self-service web portals are an extremely effective means of keeping customers happy and at the same time improving the business’s efficiency. However, firms at the forefront are way beyond this now – for instance, providing tools for customers to explore different scenarios and find the best tariff or minimise their carbon footprint. The wave of innovation that’s currently sweeping the web will raise customers’ expectations even higher.”

When asked which industries were getting customer service right and which were getting it wrong, four out of ten (37%) thought financial services companies provided the best level of service, with a similar number (39%) viewing telecommunications companies providing the worst.

Loic le Guisquet said: “With a wealth of options available to them at the click of a mouse, people are unforgiving if companies fail to deliver on their expectations of good service. What’s more, their expectations are the same across industries. Positive experiences in one sector – be that with airlines or retailers – become the benchmark by which they judge others. The success of price comparison websites is an indication that customers are voting with their feet if they’re not happy.”

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.

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

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

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

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

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

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

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

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