Industry news

MPs have called on the government to take legal action against outsourcing giant EDS to recoup the millions of pounds the company still owes over the tax-credits IT fiasco.

In a settlement EDS agreed to pay £71.25m to HM Revenue & Customs (HMRC) due to problems with the tax-credit computer system it designed.

Difficulties with the scheme resulted in HMRC overpaying £6bn in tax credits during the three years after its introduction in 2003.

EDS agreed it would pay £26.5m of the settlement when it was awarded new contracts by the government, but a report by parliamentary spending watchdog the Public Accounts Committee (PAC) has found the IT services company has repaid "little" of this sum — because the government has awarded EDS less work than expected.

Outsourcing is becoming more personal, and large customers will increasingly look to outsourcers to supply their technology innovation rather than just commodity services, claimed Guy Hains, president and CEO European Group, Computer Sciences Corporation (CSC).

Speaking at an Intellect outsourcing event in the opulent setting of Claridges, the Mayfair hotel noted for its Gordon Ramsay eaterie, Hains' words were more measured than those of the legendary restaurateur, perhaps, but no less bullish about the need for quality service.

There will be a “massive shift” and a “speed up”, he said, identifying the surface trends of full scope-outs, the emergence of smartsourcing, and a face-off between nearshoring and offshoring as characterising the year ahead for us all.

Identifying an '-ation' near future of globalisation, commoditisation and consumerisation, Hains pointed to “the reality of market services” and claimed that personal outsourcing was on the rise, foreseeing “a personal gateway into public services”.

Blowing away the mist of rhetoric from Hains' speech, what he was saying is that as Web 2.0 technologies and socially-networked behaviour becomes the norm, this will impact on executives' expectations of their technology systems and influence the way they use them.

This, he suggested, should be a challenge to the industry to provide much greater depth and innovation, particularly in recessionary times when, three years down the line, company structures might have changed radically. “Major players could suppress that supply coming through, or be an enabler for it,” he said.

However, that other major buzzphrase, the green agenda, is not yet a major trend within the industry, he said – at least, not in itself. At present, he claimed, it is merely a catalyst for commodity services in the global and increasingly consumer-led market.

In an aside, Hains identified China as being very much the sleeping dragon of outsourcing. In three years' time, he said, that country will be producing four million graduates a year that have both English language and IT skills.

By contrast, he said, the UK remains well placed in the industry, but “we are not getting the quality of graduates we were five years ago”. The solution is to seek “more right-brained people. We need more creative innovation, and to be living in the Web”. As an industry we need “to be seeking out and working with a new skill set”, he said.

If these are the external market forces at work around our industry, then what of the internal influences within client companies? Security is without doubt the number-one concern for customers, said Hains, and should be considered at every stage of an implementation, including its strategy, the policy climate, and the privacy of all personal data collected. The risk, he warned, is that “if [security] is not addressed, it will slow down executive courage”.

Of course, a concomitant of that problem is that customers will seek to pass risk down the supply chain, which could make smartsourcing less attractive to some enterprises than simply dumping commodity services demand onto a single large supplier. On the other hand, in sectors where technology is a fast-moving and enabling layer, customers will be much more comfortable with smartsourcing.

All of this boils down to one thing for our industry's clients, said Hains: the IT director in the boardroom is on the hook for innovation, especially when 60% of the IT budget moving forward will be spent on outsourced services. In such a climate, suggested Hains, enterprises will increasingly look to outsourcing companies to supply innovation.

• Intellect was formed in May 2002 following the merger between the Computing Services and Software Association (CSSA) and the Federation of the Electronics Industry (FEI). As an organisation, Intellect works in three significant areas: helping member companies to be top performers; providing insights into members' markets and supply chains; and working with Government and regulators to create the most favourable business environment.

Computer Sciences Corporation (CSC) has swum against the financial tide by reporting a 14 percent increase in revenue, along with an increase in net income in its third quarter. In its quarterly earnings call, the company reported $4.16 billion in revenue, up from $3.6 billion in the the same period last year. Net income stood at $179 million, up from $113.5 million in the same period last year.

As with some other companies in the services space, restructuring has played a role in its recent performance. The current quarter included $9.9 million after tax of special charges related to the company's restructuring programme.

CSC's revenue growth was led by its commercial sector, the company said.

For the first three quarters of the financial year, the company reported $12 billion in revenue, up roughly $1.2 billion year on year. The company also reported $362.9 million net income in the first nine months of the fiscal year, up from $143.1 million last year.

This is a period of change for the El Segundo-based company, which announced in January that it would be shifting the majority of its operations to Falls Church, Virginia. President and CEO Michael W. Laphen said of the move, “The co-location of key corporate staff functions including finance with CSC’s global operating headquarters in Falls Church will improve both communications and performance. Don Debuck has been appointed interim CFO while we conduct an evaluation of CFO candidates.”

Of the company's positive results, Laphen said: “The key performance metrics of profitability, revenue, cash and bookings were all solid. As our operating results indicate, our core business profitability continues to reflect a favorable trend.

"Our earnings per share before special items was strong, with a 31% increase over the year ago quarter and well above our guidance. Operating performance improved about 60 basis points in the third quarter over last year on an EBIT basis, excluding special items. <"CSC’s total revenue for the quarter as reported was up over 14%," said Laphen, who added: "Europe provided a meaningful part of this growth, reporting revenue up over 20%.

Of the company's finances compared with its strategy moving forward, Laphen said: “An integral key element of our strategic plan is to achieve market growth through the applications of business solutions within our six industry sectors. During the third quarter all six industry sectors had substantial revenue growth, with five of the six delivering double-digit growth."

Systems, services and technology outsourcing big-hitter EDS has reported a 13% earnings drop on a sluggish two percent rise in revenue for its fourth quarter, in the wake of what some analysts have described as a slump in technology outsourcing. Growth will continue at two percent this year, said the company, but new contracts are in the pipeline.

In reality, any confusion or argument over the results is partly a sign of the company trying to have its cake and eat it: on the one hand, some large contracts slipped from Q4 2007 into fiscal 2008, according to chairman, president and CEO Ron Rittenmeyer. "These are deals that we've already been chosen for,” he said, “we're just in the contracting phases and, quite candidly, it's just that December's not a month where you can always get everything brought to the table and fully contracted.”

On the other hand, however, Rittenmeyer later claimed that figures for the previous financial year, 2006, had been inflated by two major contract wins. “We came in at $19.5 billion [2007], and I know that'll be compared to the $26.5 [billion] in 2006, but I do think we have to consider those two very large mega-deals, both GM and Navy – which are very, very unusual, given their size – so we tried to keep those a little bit excluded so that we were looking at what I call our 'base business' year-over-year, and so our bookings [are] really up two percent on a year-over-year basis.”

In other words, the 2007 results aren't that bad compared with the previous year, as some pipelined contracts didn't make it onto the books in time, while the 2006 figures weren't really that good as some pipelined contracts did.

While all this word-play may be standard earnings-call practice to steady investors' nerves, perhaps companies should institute a new reporting practice: EBIMD (earnings before inflationary mega-deals).

Either way, it's clear that companies such as EDS stand or fall on major contract wins.

Behind the bear-market baiting (and the return of that old sport is the best sign yet that the US is entering recession), Rittenmeyer was characteristically bullish about the disappointing end to the year: “EPS [earnings per share] of $0.55, which is 17% on a year-over-year basis; revenue of $5.8 billion, two percent up. Organic was down three percent... but it is in line with our overall guidance and it really all came in appropriately,” he said.

Rittenmeyer was equally upbeat about a total contract value (TCV) of $6.1 billion for the fourth quarter 07. “The second half turned out actually to be the strongest sales performance period, the best second half really since 2001,” he said. “We did have a slow start to the year as everybody knows.We had a very strong finish in '06, and we came out a little bit slower [this year] because of that. But we ended up, again, very solidly.”

Just as BT's results showed glimmers of hope for outsourcing and services industries while other business arms faltered, the EDS BPO business posted 12% of the company's TCV, said the CEO. “When we look at it from a vertical industry standpoint, we had our strongest fourth quarter performance from healthcare and the financial services team.”

Inevitably, it fell two the second of the Two Rons – chief finance officer Ron Vargo – to provide a more granular and extensive assessment of the company's sums, here reported verbatim. “Just a brief word on our new share repurchase programme,” he said. “The board authorised a $1 billion programme in December of 2007. We got off to a modest start to that programme, and we purchased a little under $60 million worth of shares – a little under three million shares – and expect to continue to repurchase shares during the 18-month program from December [2007].

“Now for just a brief update on that early retirement offer,” he continued. “As you recall this was a US-only programme. It was principally a non-cash charge because the funding will come from the US pension plan. The financial impact in the fourth quarter was a pretax charge of $154 million relating to the approximate 2,400 individuals who took early retirement, or $0.18 per share on an EPS impact.

“Cash flow, again immaterial due to the funded status of our EDS US retirement plan. And as we look out into 2008 and beyond, we expect to backfill approximately 25% of those positions, and that should generate savings of greater than $125 million annually and obviously help offset some of the Verizon impact in 2008,” he concluded.

“On a full-year 2007 basis, you know, [we made] significant year-over-year progress in financial metrics,” said the CFO. “Revenue is $22.1 billion, up four percent and flat organically. Adjusted earnings of $1.56, up 58%. Our full-year operating margin was 5.8%, and we fell a little short of our own goal of six percent or greater in part due to some contract weakness and in part due to some of the signings that occurred a little bit later in the year rather than earlier,” said Vargo.

“And again, I think as we look out in 2008 we would expect the turnaround in that contract weakness as well as benefits from strong signings in the second half of 2007. We generated $892 million of free cash flow, and signings were $19.5 billion.”

Finally, Vargo turned to the all-important fiscal 2008 for the company's guidance: “Top-line growth, we expect approximately a two percent year-over-year increase in revenues as growth should more than offset the impact of the Verizon termination and higher runoff and pricing impacts compared to 2007 versus 2006.

“And again, we expect TCV to be greater than $20 billion in the year, and we're targeting a 1:1 book-to-bill ratio.

”Operating margin, we're looking to expand margins before the impact of workforce management charges. And again, we do have the impact from the Verizon termination and runoff as well as workforce charges which we have told you would be in the range of $200 to $250 million.”

So 2008 currently looks like 2007 for EDS in terms of single-digit growth, but with one exception: those all-important contract wins will be shoe-horned into the year come hell or high water.

India's National Association of Software and Services Companies (Nasscom) has reasserted itself as a major player on the world stage with a variety of new initiatives in 2008, headed by new president, Som Mittal.

First, the organisation hosted a conference in London exploring the vital issues of security in global sourcing – both identified as the number-one industry talking points by CSC's Guy Hains this week (see separate report). Speakers included deputy information commissioner David Smith – who has had his hands full in the wake of widespread public- and private-sector data scandals in the UK – plus representatives of the US Treasury Department and the banking community.

Full marks once again to this ever-proactive organisation, which remains so publicly committed to local and global excellence. Congratulations especially for coming to the UK and telling us how to do it.

The UK has been battered with a number of widely reported and lesser-known data-loss and data-sharing scandals: the HMRC, the Driving Standards Agency, and Marks and Spencer, of course, as reported by Ovum in its coverage of the event, but also the Ministry of Defence's haemorrhaging security procedures, various primary healthcare trusts, and even much more technology-savvy companies such as Carphone Warehouse.

(The latter mixed up many customers' details, sent detailed account information to the wrong people, and cashed cheques for customer data access under the Data Protection Act, but neglected to provide the requested information.)

It is certainly an irony that Indian offshoring is often negatively portrayed by a partisan media in the UK at a time when many Indian businesses put UK enterprises to shame in terms of their security policies; at least, that was the prevailing view of many at the event. The Nasscom conference demonstrated that many IT buyers now see India as an equal to Europe and the US in terms of data security.

So what else has Nasscom been doing lately? First, Som Mittal has taken over as president of the organisation. Mittal, who heads the services business of Hewlett-Packard for the Asia-Pacific and Japan regions, replaced Kiran Karnik in January.

At the time of his appointment, Mittal said: “I am honoured to take up this role at this exciting stage of the industry’s lifecycle when the Indian information technology and IT-enabled services sector has established its position in the global landscape and is continuously defining newer benchmarks. I look forward to leading 'Team Nasscom' in these interesting times, to enable both continuity and change to happen.”

Let us hope for the world economy that Mittal did not mean "interesting times" in any popular-proverbial sense – although, it must here be noted that there is no such Chinese curse as "May you live in interesting times", as many people believe. Its real origin is unknown, but it is almost certainly an American pulp fiction confection.

Since taking over, Mittal has presided over another Innovation in IT Forum – which, in India, makes a point of rewarding the previous year's achievements by calling this year's ceremony the 2007 Awards.

Mittal said, “Over the years, the Indian IT industry has made many rapid strides and has now established itself as a mature and credible player in the global IT industry. The next wave of growth for the Indian IT industry will be innovation-led and hence possessing an innovation capability will be sine qua non for Indian IT firms, regardless of their size.

“2007 marks the fourth edition of the awards, and in this edition we have introduced a special focus on start-ups.”

Award categories for 2007 include Market-facing Innovation, Process Innovation and Input Innovation.

Nasscom has also unveiled a wide-ranging study of the Indian BPO industry, in tandem with Everest Group. The study, Nasscom-Everest India BPO Study – Roadmap 2012 – Capitalizing on the Expanding BPO Landscape, provides “a comprehensive, fact-based view of the capabilities of the sector, opportunities and growth imperatives for the Indian BPO industry and its key stakeholders. It sets the stage for the next wave of the industry’s growth”.

Speaking at the launch, Mittal said, “The Indian BPO sector has evolved tremendously since its inception, not only in its size but also in terms of maturity – service lines, service delivery capability, and footprint. This $11 billion industry today employs more that 700,000 people across 25 countries and accounts for approximately 40 percent of the global BPO offshore market, thereby creating huge job opportunities and impacting the economy. The future potential is even larger. This study not only estimates the opportunity ahead but also lays down specific agenda for all stakeholders to help achieve this.”

The survey presents a detailed and far-reaching analysis of the Indian BPO industry, including buyers, suppliers and BPO organizations, covering over 60 percent of the Indian BPO market.

Among many things, the report outlines the need for collaboration between industry, government and other stakeholders on a range of initiatives including education, infrastructure, the country's competitiveness, and domestic BPO.

”From a talent perspective,” says the report, “while the number of people required to capture a five-fold growth are available, there may be a requirement of employable talent, of which approximately 50 percent of the additional talent requirements will have to be met from tier-two and -three cities in India, necessitating the creation of physical and social infrastructure in these cities”.

Of the domestic market, the survey has this to say: “The domestic Business Process Outsourcing market with a growth rate of ~50 percent over the last five years has grown faster than the overall Indian BPO market to reach nearly US$1.6 billion by FY2008.

"Tapping significant opportunities for domestic businesses, such as, Banking, Retail, Insurance, Media, Telecom and Government provides an additional US$15-20 billion opportunity for the industry”.

The study also identifies key “action themes” for stakeholders. These include:

• Protect India’s cost advantage to ensure that buyer interest, adoption and growth are sustained.

• Create ‘BPO hubs’ with enabling physical and social ‘eco-systems’ to drive BPO-led growth broader and deeper within India.

• Increase employability and access untapped talent pools by creating greater linkages between the current education system and the needs of the BPO industry, and facilitating the development of BPO-specific education models.

• Encourage the growth of domestic BPO to enhance the competitiveness of Indian industry, create additional employment and facilitate development.

• ‘Up-shift’ the third-party and captive value proposition to effectively deliver against changing buyer expectations.

• Shape an ‘integrator’ role for the Indian BPO industry in the emerging global services supply chain.

• Communicate the true performance and potential of the industry to a broader set of stakeholders, including buyers, employees and government.

• Help buyers embrace the overall opportunity of India’s BPO industry in a more meaningful way.

The report will be discussed in detail at the forthcoming Nasscom India Leadership Forum 2008, to be held in Mumbai between February 13 and 15, 2008.

The BT Group has reported a fall in pre-tax profits in its latest results, with a third-quarter drop of some 30 percent year on year – £447 million compared with £639 million in Q3 last year. This year's figure was hit by restructuring costs of £76 million as BT swept away a middle-management layer. Last year's near £1 billion tax credit has also muddied the waters for some less than canny analysts.

The group's profit drop was combined with missed revenue targets for Q3 in the wake of intensified competition in the broadband market, not to mention the 'Richard and Judy factor' of reduced premium-rate call volumes. Group revenues, however, were up one percent year on year at £5.15 billion. This was broadly in line with analyst expectations.

Specific items reported in the results included a charge after tax of £96 million, compared with the massive £992 million tax credit last year – which has led some people to report the results as a catastrophic year-on-year performance, rather than merely an unimpressive one.

The worst performer of the group was BT’s wholesale division, where revenues fell 11 percent to £1.2bn – no great surprise, given the increasingly commodity status of many of its services in a highly competitive market, and the spread of so-called 'local loop' services.

Amid the gloom there was good news for the market in terms of outsourcing and services. BT’s high-margin Global Services division reported revenues up six percent to £1.97 billion, and operating profits of £22 million, compared with £2 million in the same period last year.

Here the all-important margin on earnings before interest, tax, depreciation and amortisation (EBITDA) increased to 10.9 per cent. (EBITDA can be used as a financial dip-stick, in effect, into the underlying health of a company's cashflow, because those sometimes unpredictable changes in working capital have been stripped out.)

BT has set a bullish margin target of 15 percent for the services division, to be hit as early as 2009. "We expect continued growth in revenue, EBITDA, earnings per share and dividends, and a significant free cash inflow in the fourth quarter," said CEO Ben Verwaayen.

So where does all this leave the company? In some ways, the former national telco faces a problem analogous to that of our ailing railways. The company would love to build a super-fast network on a par with the broadband networks emerging elsewhere in the world, but it has a massive legacy infrastructure.

Creating fresh broadband connections around new-builds and brown-field sites as they are developed is easy and cheap – but replacing the legacy is not. It is rather like building the high-speed Channel Tunnel link versus maintaining our Victorian commuter lines. Virgin, meanwhile, is promising to supply 50 MBps broadband connections by the end of the year.

With revenue from the group’s traditional businesses declining by three percent, we can see a future shaping up for the British telecoms stalwart in diversified new media and technology services, but building a supporting infrastructure – in the UK, at least – will be massively expensive, and may compel the Government to step in an demand that it does so.

BT is certainly telling itself, and the market, that its future lies in services and new media. However, the group's BT Vision arm has so far pulled in only 150,000 subscribers, a long way short of the (vague) target of hundreds of thousands of customers that BT had predicted by the end of this financial year – now little over one month away.

So a mixed bag of results, certainly, with the promise of solid performance ahead for Global Services.

That said, there remains another lurking problem in the shape of potential changes in pensions accounting rules. Last week, the UK Accounting Standards Board published proposals on how pension schemes could be accounted for in future. These included putting pensions investment returns and changes in liabilities through companies' P&L accounts.

If these proposals are adopted, BT would be one of the worst affected because its £36.9 billion pension liability is much higher than the firm's current market capitalisation of £21 billion. A tough pill to swallow as interest rates are lowered by another 0.25 percent and analysts report more definite signs of a US recession.

As we reported in our exclusive news analysis last week, the severe winter storms have battered the Chinese economy just as much as its stranded people. The immediate financial costs of the storms to the sleeping dragon of outsourcing and technology skills – not to mention their long-term implications – are now becoming clear.

Investment banks Goldman Sachs and Merrill Lynch have both issued research notes warning that the sluggish government response to the crisis, stalled transport systems, and workers left queuing at railway stations in their thousands may be evidence that China is not spending enough on its infrastructure to be a credible economic superpower.

While there may be an element of international politics at play here – weather devastation and failed transport links are hardly unknown in the West, after all – it is certainly true that China has until recently been regarded as a paragon of inward investment, albeit one flawed by what I like to call the 'push-me, pull-you' nature of its party politics versus its market ambitions.

Figures released by Merrill Lynch, however, suggest that infrastructure spending has actually slowed since 2006. Meanwhile, three-quarters of a million homes have been damaged or destroyed, power outages have left millions stranded, or simply without power, and the effect on crops can only be guessed at for now.

Some median estimates have put the cost to the Chinese economy at $4.5 billion, but that seems a conservative figure. Other statistics are not in doubt: China is home to one-fifth of the world's population, and when combined with India, to nearly 40% of the population.

Ironically, all this may be good news for volatile global stock markets in the short to medium term, even if it is a blow to businesses working in China (not to mention governments concerned with keeping a lid on carbon emissions).

Just as the US has been the engine of the world economy in terms of dust-bowlers, high-rollers and super-bowlers spending the dollars in their pockets, so China is now the engine room driving global demand for energy and raw materials for its super-heating economy.

If Beijing takes seriously the international pressure to redouble its inward investment on transport, energy and utilities, that's a massive amount of buying power released from international isolation.

The long-term environmental impact of this is something that must be urgently considered and planned for in the West and elsewhere, just as China is learning the economic imperatives of crisis management and scenario planning in its centrally driven efforts to be the 21st century economy to watch.

Northgate Information Solutions, a leading provider of innovative services to the public sector and utilities markets, has signed two contracts worth a total of £1.2 million to promote efficient, effective and environmentally-friendly services.

Northgate will support Places for People, the leading housing and development organisation, and Service Birmingham, the strategic partnership between Birmingham City Council and Capita, to take their services out to local communities.

At Places for People, it will provide around 1,000 housing officers across the country with the ability to improve services for residents whilst out in the field. Maintenance requests can be logged on-the-spot, queries answered immediately, and residents receive help with completing housing application forms or amending payment schedules in their own homes. Staff will also benefit through reduced travel and the ability to work from home through removing the need to collect and return case files.

As part of its wider transformation programme, Service Birmingham has now selected Northgate as its preferred supplier for mobile services across the city. It will be used primarily by the housing department to find more innovative ways of delivering services that benefit both employees and citizens, particularly in the most vulnerable communities.

Tony Hayes, Head of Information Management & Technology at Places for People, said today: "Places for People focuses on creating places where people choose to live – whether that means providing brand new communities or transforming existing neighbourhoods into vibrant, popular areas to live and work. Our partnership with Northgate will enable us to deliver improvements to our services quickly, right at the point of need, through empowering our staff to take action in their communities.”

Oracle has launched its Data Integration Suite to combine traditional data-integration capabilities with an array of middleware and tools for constructing a service-oriented architecture (SOA).

Data Integration Suite costs $60,000 per CPU for a package that bundles Oracle Data Integrator and Oracle/Hyperion Data Relationship Manager with the company's BPEL Process Manager, enterprise service bus, application server, business-to-business engine and business rules engine, according to a statement.

"This is really Oracle attempting to go a long way toward providing a credible alternative to IBM Information Server," said James Kobielus, an analyst at Forrester Research Inc.

The Co-operative Group continues to strengthen its green credentials with the launch of a night-time energy-saving programme for the IBM Electronic Point Of Sale (EPOS) operations in its 2,200 food stores.

The launch marks a further green innovation for The Co-operative following the switch to renewable sources for the electricity for its mainland food stores. The introduction of the “Wake-up on LAN” programme will enable tills, receipt printers, customer and operator screens, chip and pin devices and barcode scanners that are currently left on overnight to be switched off automatically when stores close and to be powered up again the following morning before they reopen for business.

These include 7,500 till units, 7,500 receipt printers, 15,000 customer and operator screens, 7,500 chip and pin devices and 7,500 barcode scanners. The Group says it will save 1.68 million kilowatt hours of energy per annum by using the system, which has been developed by the Group’s in-house IT team who worked in collaboration with IBM to re-engineer the Group’s InControl store end-of-day batch process system.

Savings on its energy bills are expected to be around £120,000 per annum along with a reduction of 722 tonnes of carbon dioxide.

The introduction of the programme will also significantly prolong the life of the hardware, and therefore reduce the environmental impact still further by less frequent renewal. Implementation starts this month and is expected to be completed by the summer.

Mark Hale, Director of IS Food Retail, said: “The re-engineering of the EPOS system so it can be shut down at night clearly underlines The Co-operative Group’s continued commitment to the environment and to finding new ways of saving energy.”

Janine Cook, Director of Retail Store Solutions, IBM UK Ltd, commented: IBM has a commitment to developing products that reduce consumption of energy, and working with The Co-operative Group we’ve helped them release savings they can plough back into their business.”

The Co-operative has set itself a target of reducing energy use at all its premises by 25% by 2012.