Industry news

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”.

French IT services group Capgemini finds itself the subject of yet more takeover rumours as it this week reported full-year profits well up.

According some reports, the firm has held early-stage talks with Reliance Communications, of India. If true – and neither party is commenting – this could result in the first acquisition of a significant Western IT house by one of India's fast-growing competitors.

It's not the first time that Capgemini has been the subject of such speculation. It was rumoured last month that the firm had held talks with Wipro, but a merger was eventually deemed to be “not viable”. Earlier this month we reported that Infosys or Wipro were reportedly considering a partial acquisition, which was flatly denied by Capegmini CEO Paul Hermelin, who claimed these were attempts to destabilise the company.

According to most analysts, no Indian company yet figures in the global top ten IT service providers in terms of market share, and so the first company to create a big enough presence would attract a great deal of attention. Gartner concludes that it will take India's largest IT firms “a number of years to challenge the top service providers… unless they make a major acquisition".

Capgemini itself acquired Hyderabad-based Kanbay International in late 2006 to increase its presence in India. It hopes to have 40,000 people in India by 2010. Hermelin is on record as saying that he did not see the situation occurring the other way around. "It doesn't make any sense," he said. "The big Indian firms have a formula that works. They are not going to ruin it by bringing in 60,000 Europeans."

The latest rumours surfaced as Capgemini reported full-year profits for 2007 up from €293 million to €440 million (£327 million), but warned that the sub-prime crisis in the US could yet damage its prospects. “It is not inconceivable that the difficulties of the banking sector will end up spreading to the whole economy and reach our own disciplines,” warned Hermelin although he remained upbeat about organic growth for 2008.

The strongest growth in 2007 came from technology services, with revenue up 11 percent. Outsourcing services grew 7.8 percent and consulting services by 4.5 percent. The UK and Ireland grew its consulting and technology services activities by more than 10 percent, though overall revenue for the region was only up 4.4 percent thanks to a restructuring of the flagship HM Revenue and Customs (HMRC) contract.

“During the year, HMRC has made a 'lower contribution' – i.e. margins are being squeezed,” noted Kate Hanaghan of analyst firm Ovum. “The Aspire contract is hugely important for Capgemini, and for the UK business in particular, because more than 50 percent of its revenues come via this deal.

”Yes, Capgemini has been able to pick up other bits of work with the client to counter the revenue drop (which we estimate to be around £45m per annum), but this clearly represents a significant challenge for the firm.” There are other areas of concern as well. “Growth throughout the year has declined - and that's largely due to the performance of the outsourcing business,” noted Hanaghan. “For the year, outsourcing growth was 7.8 percent and, while the operating margin has improved, this is still slim.

“But what has really caught our eye is what Capgemini is predicting for future growth: just 2-5 percent in 2008. Given concerns around the macro-economic climate, this is perhaps not altogether surprising. Suppliers, and not just Capgemini, need to be thinking now about what they need to be doing to prepare for a worst case scenario.”

It's certainly true that many CIOs will be jittery, as Hanaghan believes, as they try to prepare for that most difficult challenge – uncertainty. “Against this backdrop, firms need to consider how to appropriately incentivise their salesforces,” she advised. “The key message to customers must be focused on cost-savings. However, it is equally important that suppliers keep pushing their message around global sourcing, industrialised services and innovation in order to help customers understand the longer-terms benefits of outsourcing.”

Rising star of Indian offshore business services, Genpact (once part of General Electric) has announced that it is on the acquisition trail in India and Europe, offering the intriguing prospect of a small number of Indian companies stepping in to acquire depressed stocks as the economic chill spreads across the West and the rupee rises against the dollar.

Genpact president and CEO Pramod Bhasin said: “While captives are an interesting proposition, we would like to acquire in the verticals of finance and HR." The company will be eyeing acquisitions in India, US and Europe, he added.

Bhasin used the platform at this year's annual Nasscom conference to say that his company is also ramping up operations in China, where the company experienced growth of some 40 percent last year.

On the economic gloom elsewhere in the world he had this to say: “Business is as usual. We are sharpening our skills. There is a general uncertainty in the US market, and there might be a dip in the short-term but US will remain the largest economy.”

Genpact is one of several business process outsourcing (BPO) specialists in India that are also planning a move into keeper into knowledge process outsourcing (KPO). Genpact, in particular, is now pushing the idea that talent, skills, and expertise will become the true currency of the outsourcing industry, as client companies focus less on short-term cost-cutting measures and more on sourcing creatively to complement local services.

Two growing areas of KPO are actuarial and analytical services, where there is a considerable skills base in India. However, local wages remain at a relatively low percentage – albeit a rising one – of similar positions in the US and western Europe, so cost clearly remains a major part of the attraction for potential clients in the US and Europe. India is doing healthy business selling knowledge-based services and expertise to US-based and other client companies.

On the second day of the Mumbai Nasscom event, Bhasin took part in a forum on 'Making Corporate Boards More Effective'. There he said that he believed boards are “overwhelmingly burdened with governance issues, they’re automatically tuned to think about risks and compliance issues more rather than focus on strategy.”

Salil Parekh of Capgemini, who is acting CEO of the company's India operations, said: “Managing the boards is a challenge. We need to make the board members more active. One of the way to do this is to make them accountable," which is a very different take on the governance question.

Francois Enaud, CEO of Steria (which recently acquired Xansa) said that companies on the acquisition trail should not put money and time into small acquisitions.

Indeed, it may be that we are about to see some big acquisitions this year, as India begins extending its presence and expertise deeper into the West.

Here is a challenge from this blog to you, the people who make our industry work: Let's work together to formulate the total cost of outsourcing; a new TCO for the 21st century.

Why do I make this challenge? First, because there has been some good news this year for one part of the massive NHS IT programme. The final rollout of the Pacs project, which involves digitising medical scans and patients' x-rays so they can be examined on computers by specialists, was completed on time earlier in the year.

That this is news for perhaps the wrong reasons – the shock of a technology project for the NHS being completed as it was envisaged, and within the promised timescale – shows how far some public sector outsourcing projects have fallen in a public psyche already troubled by data privacy issues and a collapse of confidence in the Government's ability to handle personal information.

This got me thinking about the total cost of all large outsourcing projects. What are the real metrics for measuring the success or otherwise of an outsourced service, apart from the total contract value (TCV) of deals, whether they be in sterling, rupees, or dollars? Or the amount shaved off the bottom line by sourcing expertise and services from outside the walls of the local enterprise?

Genpact is one of many companies saying that skills and expertise should now be our industry's real currency, rather than the ability to lower costs. But how do we measure the hidden costs of seeking skills from outside of our own enterprises, for example, or from an offshore destination?

Beyond that, what price can we put on the undoubted damage to our industry of the public's shattered confidence in the public sector – which, after all, should be serving them, not mishandling or losing their data? Or of the debacle over the wider NHS IT project? Can this impact be measured – in an equation that factors in missed deadlines and over-budget costs and gives us a calculation of the real cost ? Surely this should be something that can readily be calculated?

And what of other hidden costs?

It's a sad fact that for many people outside of our industry, the public face of outsourcing is the call centre or help desk staffed by people who have little or no local knowledge of the caller's location. These are everyday experiences for many people; these are real examples – not of poor service by the outsource service provider, but of poor management and training by the client. But what are the costs of this to the client, and to the outsourcer – the cost of the customer who feels let down, and who has no interest in the money that his credit provider might be saving?

Over to you.

The good and the great of the Indian outsourcing industry gathered in Mumbai this week under the gathering storm clouds of a US-led recession. But delegates at the Nasscom (the National Association of Software and Service Companies) event were remarkably upbeat, confident that European business would compensate for any shortfall coming out of the US.

Certainly there were optimistic noises coming from the trade body. The Indian technology industry is expected to generate around £32 billion in revenues in 2008 – a 33 percent year-on-year growth, according to Nasscom's 2008 Strategic Review. Services and software exports are expected to contribute around $41 billion, with the domestic market generating more than $23 billion.

"The Indian IT industry has been rapidly evolving, the growth is on track to achieve, if not exceed the targets for 2010. The trends indicate that the domestic market is poised for growth with IT spends trending upwards, particularly by the government," said Nasscom President Som Mittal.

As a proportion of national GDP the Indian technology sector will hit 5.5 percent in 2008, up from just 1.2 percent in 1998. It is also expected to contribute a net value to the economy of up to 3.9 percent. The Nasscom study found the technology industry also fuelled a 36 percent increase in direct exports and boosted direct employment by a compound annual growth rate of 26 percent over the past decade.

All of this has a beneficial knock-on effect on the Indian economy with every rupee earned by the Indian technology-business process outsourcing (BPO) industry leading to an additional rupee being spent in the economy.

That said, the shadow of a US economic downturn was never far from delegates thoughts. With unfortunate timing, Forrester Research this week cut its outlook for US and worldwide information technology purchases in 2008, citing a downturn in the US. The market is expected to grow 2.8 percent, down from an earlier forecast of 4.6 percent. In the UK, meanwhile, the Bank of England has also predicted a slowdown in growth, and suggested that further interest rate cuts are unlikely in the short term as inflation is rising.

In India itself, the pressures have been showing of late with three leading firms – Tata Consultancy Services (TCS), Infosys and Wipro – posting uninspiring quarterly earnings. "These are challenging times," warned Nasscom chairman Lakshmi Narayan. "There's a new world order. The current belt-tightening is not temporary. The industry will have to operate at a new performance level. Those who cannot keep pace with this will be driven out.”

But he added: "The robust growth of the Indian IT-BPO [business process outsourcing] industry by over 33 percent in the current fiscal year reinforces the confidence of global corporations in India. As we move towards 2010, trends indicate that the industry is firmly poised for broad-based growth across industries and service lines.” Nasscom will tomorrow (Friday 15th) release the findings of a study carried out with Deloitte entitled Indian IT Industry: Impacting the Economy and Society . The report is a follow-on from Nasscom Foundation's annual research publication titled Catalysing Change , which highlights the state-of-play of corporate social responsibility (CSR) within the IT and ITES industries. This year, the report has looked beyond the boundaries of CSR initiatives, and has undertaken a more comprehensive study for identifying and assessing the overall social and economic contribution of the IT and ITES industry in India.

The study finds that IT is now the largest employer in India's organised public sector. and that IT has made socially relevant products and services available as well as involving itself in the training of workforce for technical and non-technical jobs. The technology sector has also made a contribution towards education, employability and health, as well as encouraging better working opportunities for women.

"While the IT / ITES industry has made a promising start, there is indeed a long way to go,” said Saurabh Srivastava, chairman of Nasscom Foundation. “With the encouragement and support of its member companies, the application of its best practices, innovative strategies and the entrepreneurial spirit, it is on track to set an example that would encourage others to emulate and help positively change the face of India.”

As part of efforts to keep the momentum going, Nasscom is lobbying the Indian government to extend its Software Technology Park of India (STPI) scheme beyond 2009, especially for the benefit of small and medium-sized firms. Among other benefits, the STPI scheme which is set to expire in 2009, provides a 10-year income tax exemption for units situated in software technology parks. "We have sought a blanket continuation,” confirmed Narayanan. "Extension of STPI will also encourage smaller companies to move to Tier II and Tier III cities.”

The scheme is at the centre of a turf war between two arms of the Indian government. The finance ministry thinks the IT sector is now so large that it should not expect to keep getting tax breaks beyond March 2009, when the STPI scheme ends; the department of information technology, on the other hand, is pushing for a two-year extension of the tax concessions.

The odds seem to be in Nasscom's favour based on remarks by A. Raja, Union Minister for IT and Communications who told the conference that he was hopeful that they would be extended beyond 2009. “We have received feedback from the industry players for the continuation of the STPI scheme,” he said, adding that his ministry is asking for a dedicated incentive package for the Indian IT and BPO industry in the forthcoming Indian budget. “We are looking into the issue of extending the STPI scheme on a priority basis. We feel there are many start-ups and small and medium enterprises for whom special economic zones may not be a viable option.”

Raja also said that a new Information Technology Act with additional cyber security muscle, IP protection and steps to combat piracy effectively will be passed in the next session of Parliament.

“We are hopeful of tabling these changes in the next session and the revised IT Act will be a reality,” he said, an announcement that was met with cheering by delegates. “We will be strengthening the IT Act 2000 based on the feedback we’ve got from the industry. Besides, we also feel that there is a need to launch many more schemes along with the human resources ministry to create a better employable talent pool.”

All this was important in order to keep India ahead of the game in the global economy, he said. “I am deeply impressed that the IT industry is on par to reach $60 billion in revenues by 2008 and provide employment to two million people, an increase of 370,000 over the previous year,” he said. “Eighty percent of the population is bereft of Internet connectivity and the IT industry should come with affordable products and services so that the fruits of IT revolution will reach the masses.”

Outsourcing firms are still running into conflict with their customers as a result of lack of planning with the result that both sides are having to settle for less out of the relationship.

According to a study by Deloitte, Why Settle for Less , while some 83 percent of companies achieved an ROI of over 25 percent on their outsourcing projects, 49 percent would have defined service levels that aligned better with their companies' business goals if they could start their outsourcing projects again from scratch. A disappointingly small 34 percent of respondents felt they had gained important benefits from their service providers' innovative ideas or transformation of their operations.

But the complaints don't just run in one direction. By a three-to-one margin, outsourcing service providers said that their client companies did not have a solid outsourcing plan, lacked the operational data needed to make sound decisions and did not understand how the to-be organisation would really work.

The purpose of the survey was to document respondents’ experiences and uncover insights that could be applicable across all industries when undertaking an outsourcing programme,” said Paul Robinson, principal, global leader, technology. “A much larger than expected level of company/outsourcer conflict was reported, and many of the companies expressed disappointment with the outsourcers’ overall ability to provide continuous process and technology improvements.”

There are certainly some depressing conclusions to be drawn from the report. Strikingly, 39 percent of the 300 respondents reported that they had terminated at least one outsourcing contract and transferred it to a different vendor in their careers and, of those who reported that they were “Dissatisfied” or “Very Dissatisfied” with their largest contract, half had brought the function back in house. In addition, 61 percent reported that they had escalated problems to senior management in their contract’s first year, with 15 percent reporting five or more such escalations.

"Outsourcing is working financially for a majority of companies in this survey, however, executives' propensity to lead with cost reduction and labour arbitrage without emphasising the need for overall optimisation stymies their companies' chances to realise the full benefits of outsourcing," said Peter leader of Deloitte's Outsourcing Advisory Services group. "The themes of unrealised potential and lost opportunities to use outsourcing as an opportunity to innovate echo throughout this report."

To improve the situation, executives should look at cost reduction as a basic requirement in an outsourcing arrangement and then look beyond this. Most companies are foregoing the much greater benefits that would be generated with a more transformative approach which is not occurring. Only 34 percent of executives surveyed reported significant benefits from innovation/transformation, and just 28 percent of executives had seen benefits from business process reengineering as a result of their outsourcing contracts to increase market share, and turned to outsourcing.

Outsourcing needs to be considered within the context of five other aspects of the business:

• Operational Strategy. Given their focus on cost reduction, most outsourcing initiatives are designed to support a company’s operational strategy. But companies should also think about other aspects of operational strategy beyond cost, such as productivity, the quality of services or products, and time to market.

• Competitive Strategy. Companies need to examine how outsourcing will affect their competitive position. Outsourcing initiatives need to be designed carefully so that they don’t undermine the company’s strategic positioning.

• Financial Strategy. Companies should consider items such as financial engineering, financial risk management, allocation of capital, evaluation of project financing options, financial leverage e.g., debt/ equity ratio), and working capital.

• Marketing Strategy. Examine how outsourcing can support its marketing of products and services, pricing strategy, pace of product or service introduction, and customer service.

• R&D Strategy. Outsourcing can support a company’s efforts to develop innovative products to meet current and anticipated future customer needs.

Deloitte argues that there are a number of questions that companies need to ask before they embark on an outsourcing initiative. These include:

• Did you clearly define the strategy? Companies need to ask themselves if they are outsourcing the right things for the right reasons. Transferring a dysfunctional operation to a vendor in hopes of saving costs through economies of scale or arbitrage can be a case of "your mess for less."

• Do we have a solid foundation? Companies need to ask if they have defined and quantified what they expect from outsourcing. The creation of a business case and the establishment of effective service level agreements (SLAs) should not be given short shrift; but in practice this is too common.

• Vendor selection now means something different. Companies need to select the right service provider, one that is capable of delivering strategic process improvements as well as cost reductions. When things do not go well in outsourcing, most companies automatically scrutinise the service provider, but do not recognise that their decision to select a vendor on cost alone may be the actual root cause of their problems.

• Striking the deal. Companies need to ask if their contracting process is mutual and flexible. Contract negotiation is a pivotal point in the outsourcing process. After the deal is signed, are you getting what you paid for? It can be tempting to think the signing of the outsourcing contract is the culmination of the outsourcing process. But in reality, effective performance management, especially the insistence that service providers actively search for, develop and implement strategic improvements, is the crowning component of an effective outsourcing initiative.

The Deloitte survey included more than 300 senior executives at mid-size and large companies. Interviews were also conducted with senior executives at 31 of the largest outsourcing providers and with senior partners and partners at several legal firms. The executives and legal firm partners came from the United States (42 percent), the United Kingdom (25 percent) Germany (25 percent) and Canada (eight percent).