Industry news

News that the British government has wasted well over $2 billion on cancelled or failed IT projects since the turn of the century – not including the cost of the abandoned crime-reporting portal in early January – makes for depressing reading as we set foot into a challenging year for the outsourcing industry.

Arguably, that cost of failure represents only a small percentage of the government's $14 billion annual IT spend, as calculated by Joe Harley, programme and systems delivery officer at the Department of Work and Pensions. However, the same Mr Harley is on record as having said (according to The Guardian, 5th January 2008) that "only 30% of our projects and programmes are successful. It is not sustainable for us as a government to continue to spend at these levels."

In a recession, that would be doubly true – $14 billion could be invested in failing schools, to help pensioners meet the cost of rising fuel bills, or to top up ailing pension schemes – but it also begs the question what other large-scale projects might be on the brink of failure if only $4.2 billion is invested successfully each year, and the balance of that $14 billion is wasted money. Perhaps Mr Harley was including overdue and over-budget schemes as 'failed' – those that may not have failed technologically, yet, but which have certainly failed the taxpayer?

Either way, this forms only part of the issue I want to share with you this week. The other element concerns news that the British government has been working covertly with the FBI on a proposed data-sharing scheme to give US intelligence access to personal data on UK citizens, and to track people moving across Europe and using the UK as a platform for jumping continent over the Atlantic (software pioneers and rock stars, perhaps?). This is the same government, remember, that loses data on 25 million households in the post.

The issue is not that any of this is surprising – we live in fearful times and in slow-moving bureaucracies, and both make for healthy software sales – but whether or not government is approaching IT from an outmoded standpoint: that of the 1990s marketing executive.

In the narrowband, client/server 1990s, intellectual property (data with commercial value, or monetised ideas) was king; you gathered it from willing or careless customers and, safe in the belief that it was yours (because you gathered it or patented it), you flogged it to the highest bidder.

Everything in the government's approach to technology suggests this is what they are doing: they believe any data they gather about citizens is the government's property, however personal or accurate the data may be, simply because the government gathered it. But the government is not an advertising agency or a supermarket monitoring shopping habits. It is in the employ of its citizens, and is elected to protect them – and not from themselves.

The truth of the matter is that it's likely that the government is gathering not the raw material to create services, but rather an intellectual asset they can sell and resell. Indeed, evidence suggests they also intend to use personal data as a means to save money by withdrawing services from named individuals rather than providing those services to one and all.

Witness the creep of Citizen Relationship Marketing programmes across the UK, whereby boroughs target named named individuals and withhold benefits from them because they have not parked their cars correctly, for example, or emptied their bins. This has gone unnoticed by the national press, but it is a quietly unfolding scandal – and like all such democratic travesties, it wears a polite and reasonable face.

I believe this way of approaching personal data and public technology programmes is nothing more than witless and authoritarian; it's a 'because we can' philosophy. And with every small step we move further and further away from the kind of society that most of us want to live in; even those of us who sell the enabling technology. Such data is already shared across local county boundaries; clearly it will also be shared across national ones too, if the US gets its way.

The government's zeal for large-scale implementations fails in the real world because it is rooted in the politics of the 1990s marketing team, not of forward-thinking government; it's all about the hard sell and the hard bargain, with scant regard for veracity, privacy, or sophistication. It has little to do with enlightened modernity; it's merely a blunt instrument.

You can picture Whitehall mandarins itching to find a legal way to identify obese people and smokers and to begin withdrawing services and benefits from them, or increase their national insurance contributions, or force them to do physical work in the community. Why would it not happen?

So why use an outsourcing forum such as this to lambast politicians for their approach to large-scale IT programmes?

One, clearly because they have a bleak record of implementing them and wasting staggering amounts of public money in misconceived tilts at modernity (good for our industry, but only in a world of 'me, me, me', rather than the meme-world of the networked century); and two, because much cleverer enterprises than this government – and it is now an enterprise, have no doubt – have realised that sucessful technology programmes are no longer merely about IP and vast data repositories.

The real opportunities lie in allowing people to connect with each other in new, innovative, and self-selecting ways, and provide services to people who need them. High-street names recognise this; social networking sites have grown wealthy on this simple idea. The fact remains that people form much more stable communities when they are allowed to connect freely and share, than when their every move is logged by a bureaucrat solely from the point of view of being a floggable commercial asset.

Alas, even terrorists understand this better than the government – and you don't tackle issues such as that by trying to reverse the process. The twenty-first century experience shows that technology's great contribution to society is that it connects and mobilises, and will route around any obstacle that stands in the way of communication.

On the rare occasions the government does 'get' this fact, the projects it kickstarts are woefully misconceived, because no one asks the big question: why? For example, why would most people use the Internet to report a crime? If you witness a burglary or a violent assault, your first thought is not 'I must log onto the internet, track down that government website, and spend an unpredictable amount of time grappling with the interface and my browser before typing in the details'. No, you think: 'Dial 999'. If someone had said 'why?', then the online crime reporting site would not have wasted so much of our money.

The challenge for outsourcing providers and their customers in 2008 is to recognise how and why some enterprises have become so successful by facilitating the network – and the network effect – and why other organisations are mired in expensive, slow, old-economy projects, at least partly because they believe there is money to be made once all those billions of pounds have been emptied down the drain in the public's name.

Prove it!

Indian outsourcer Wipro has stated that it has not been in talks to acquire or merge with French IT services company, Capgemini. It had been widely reported that Wipro, India's third largest outsourcer, was considering acquiring Capgemini.

Wipro issued a statement at the request of French securities regulator, Autorité des marchés financiers (AMF).

Capgemini's share price rose in December after the The Hindustan Times reported that Wipro was expected to bid for Capgemini by the end of January. A Capgemini spokesperson denied at the time that there were any talks between Wipro and Capgemini on this issue. It was also been reported earlier in 2007 that Infosys was planning a bid for Capgemini.

As part of plans to create a global delivery model, Indian outsourcers are moving into the European market.

Alsbridge, the outsourcing, shared services and offshoring advisory firm is to partner with iMPOWER to provide practical support to local authorities in managing shared services programmes.

iMPOWER is an independent consultancy, specialising in working exclusively in the local government sector. Alsbridge is a niche consultancy specialising in shared services and business process outsourcing and integration in both the public and private sectors.

By combining both iMPOWER and Alsbridge’s practical experience and skills, the partnership will allow local authority clients access to a team whose focus is entirely on delivering lasting change through shared services projects.

Chris Price, Head of Public Sector Practice at Alsbridge comments: “Our mutual belief is that for shared services to deliver their promise, there is now a need for a different type of consultancy support – one that focuses on design, transition and delivery.”

Giles Piercy, Director at iMPOWER adds: “Our joint independence from delivery solutions and our willingness to provide a framework of transferable skills and tools, will help clients manage their shared services programmes”.

The two companies combine to provide:

• a deep understanding of local government and the issues faced in delivering quality customer service, efficient processes and cultural change, with;

• international expertise in quickly designing and delivering shared service centres and assisting blue-chip organisations in integrating and / or outsourcing business processes

• a proven routemap for transitioning and transforming services

• a range of in-house methodologies and toolkits and have proven experience of skills transfer.

Gartner Says Worldwide Outsourcing Market to Grow 8.1 Percent in 2008.

The global outsourcing market continues to grow at a steady pace, with Gartner forecasting a growth rate of 8.1 percent in 2008. But healthy growth rates for outsourcing do not necessarily mean that user organisations are without challenges. “Although user organisations often have fundamentally sound procurement organisations to initiate outsourcing contracts, for many, their IT sourcing strategies and governance structures are still immature, lacking altogether, or misaligned with enterprise objectives,” said Kurt Potter, research director at Gartner. “Because these organisations lack the basic building blocks for successful vendor management and outsourcing success, expected cost savings and other benefits are difficult to obtain. In extreme cases, the lack of needed trust and control to optimise the outsourcing relationship results in deal failure. Also, more organisations focused less on outsourcing for cost savings than in previous years and more on using providers' global delivery models to access the right skills at a reasonable price, wherever they are.” Although outsourcing continues to grow, publicly reported IT outsourcing (ITO) and business process outsourcing (BPO) contract values decreased overall by 50 percent in 2007. Part of the explanation for this apparent discontinuity is that as the outsourcing market matures and becomes more commonplace, there is less publicity of deals. Companies are simply outsourcing more, but electing to use a multiprovider strategy and more deals are simply smaller in size, with many of these deals not large or ground shaking enough to report. “In 2008, we expect to see some early adopters of multisourcing to consolidate around fewer providers to reduce their service integration costs and harvest the benefits of better relationship management with fewer strategic suppliers,” said Mr. Potter. “Because of multisourcing complexities often associated with handoff points between competing providers and unclarified vendor management processes, some organizations will consider prime-contractor outsourcing models or the appointment of new vendor management roles in their retained organizations.” Buyers increasingly are moving work to lower-cost, offshore delivery centers. Although cost remains a major driver for global delivery models (GDMs), more-mature users are seeking ways to better support their business needs. Indian providers gained traction in Europe in 2007, but faced strong competition from more-established vendors with GDMs. Indian providers are growing approximately 40 percent annually in the U.S. and 60 percent annually in Europe. Although spending on offshore services is three times higher in North America than in Western Europe, the gap is closing. “Other countries will continue to emerge as challenges to India for a number of reasons,” said Ian Marriott, research vice president at Gartner. “Strong demand is putting a strain on the available Indian labor force, while staff attrition and cost increases remain high. Global companies continue to accelerate their demands for a presence in countries other than India, and providers are seeking to expand their geographic footprint of delivery centers accordingly. More-sophisticated buyers are seeking a multicountry strategy to minimize risk and align nearshore and offshore delivery centers with their primary time zones. Although India's offshore revenue will continue to grow, the country's share of total offshore spending will decline slightly in 2008.” Gartner believes that the outsourcing market has reached a tipping point with regard to utility delivery models, and that change and innovation will take hold and accelerate in this area through 2008 and beyond. More providers are developing utility-based offerings across infrastructure, application and business process domains. The trend toward software-as-a-service (SaaS) is gaining the most traction, with major software vendors, such as Microsoft and SAP, and large Internet players, such as Google and Amazon, making announcements about new SaaS offerings and mass-customized software platforms. User organizations need to realize that the utility delivery model is a viable alternative to traditional outsourcing, and they should seriously consider utilities in their sourcing strategies

BNP Paribas, the French bank has signed a five-year, £50m contract with Atos Origin for IT services in the UK and France.

The contract includes the majority of IT services under the control of BP²I, a joint venture between BNP Paribas and IBM set up in 2003, and includes the management of desktop services for the bank's investment banking business in the UK and retail banking in France. The deal is an extension of an existing relationship which was limited to the retail banking business only. Thierry Bjalon, country manager for BP²I UK, said: "IT transformation is crucial to our business success and we have selected Atos Origin because of its position in financial services, its delivery track record and experience of managing desktop services solutions."

A survey by business advisory services provider EquaTerra claims that outsourcing is now a cornerstone of UK business, spearheaded by the services and financial services sectors, which remain at the forefront of growth in the economy.

The survey, UK Services Provider Performance 2007-2008, shows the UK outsourcing market growing and becoming a key part of the executive toolkit rather than a mere “management fad” among 110 of the largest IT spenders in the UK, across both commercial and public sectors. “The UK is continuing to lead Europe, both in the size and maturity of its outsourcing market”, says the report.

In all, fifty-four percent of organisations surveyed said they were looking to outsource more in the future – a finding made all the more likely by the prospect of a downturn in the economy during 2008. Core to this uptake of outsourced services has been global sourcing, with the proportion of businesses using it rising to 57 percent from 47 percent last year.

In four in ten organisations, more ICT services are delivered by external providers than by an internal function, and in 15 percent of companies three-quarters of the IT budget is spent with outsourcing providers.

Seventy-nine percent of all respondents said they will continue to outsource at the same rate or higher. Just over 20 percent said they would outsource less, or were not in a position to say.

Infrastructure management and application management are the most commonly outsourced areas, but the report suggests that there remains a significant opportunity within business processes such as HR and finance.

India remains “the undisputed champion of UK offshoring”, with 100 percent of all participants that source globally using India as a location. Indian providers “frequently outscore their established global counterparts in the rankings for customer satisfaction”, says the report.

Among other locations, Eastern Europe is a distant second to India, used by just 25% of respondents. South Africa, Malaysia, China, Spain and the Baltic states are each being used by less than 10% of organisations.

Rapid globalisation, facilitated by high-bandwidth communications, are helping drive the acceptance of outsourcing as an established business aid. “The message is clear,” says the report, “offshoring has moved beyond acceptance to become a given when it comes to sourcing the elements needed to support a business.”

As the market matures, cost is no longer the only impetus for a decision to outsource, says EquaTerra, with quality, innovation and flexibility coming increasingly to the fore and, ultimately, influencing the level of customers' satisfaction with their service providers. True dissatisfaction with contracts is low – reported by only 14% of respondents.

One of the report's more controversial findings is that multi-sourcing leads to higher satisfaction rates, which suggests that the days of the big, 'marquee' contract may not continue indefinitely.

Implicitly, then, the ones to watch this year may be smaller, more nimble specialist providers who are carving out niches of their own. Of course, these will become acquisition targets in time, and a flagging economy might encourage the outsourcing giants to pick up a bargain or two should there be a flight to the big names in uncertain times.

EquaTerra advises the outsourcing industry that "in a rapidly changing world outsourcing providers not only need to provide a service that meet immediate customer needs today, but must be able to flex service at high speed to suit the customer's needs tomrrow".

A survey by business information services provider EquaTerra has found Indian companies vying for dominance of the Top 20 customer satisfaction league for outsourcing contracts, but paints a less rosy picture for several of the established major global suppliers.

The report, UK Service Provider Performance 2007-2008, presented a top five customer satisfaction placing of TCS, Wipro, Satyam, Unisys and Infosys, in terms of general satisfaction with a contracted provider. TCS scored 78% overall in terms of customer satisfaction, followed closely by Wipro and Satyam (both at 75%), Unisys (71%) and Infosys (68%).

Fujitsu Services, Computacenter, Capgemini, Siemens, and Atos Origin all scored above 60%.

At the bottom of the industry top 20 for general satisfaction were a number of established services giants: EDS (53%), CSC (55%), BT (55%), and IBM (56%), although each of these companies were still showing a majority satisfaction score.

One measure of its success in the current rankings is that, despite its excellent rating this year, top-placed TCS did not have sufficient customer contracts last year to even merit inclusion in the 2006-2007 survey table.

The biggest riser in this year's chart has been Unisys, up from 61% last year, while HP has fallen from 75% general customer satisfaction last year to just 58%, one percent lower than Accenture.

Overall, said EquaTerra, the implication of the General Satisfaction ratings is that "a group of providers at the top of the rankings have devised and implemented a process for effective service delivery; one with which those towards the bottom are struggling to keep pace." The report goes on to say that it may also be significant that the Indian providers competing for dominance in the upper reaches of the satisfaction table are often involved in outsourced development work. "This type of contract is re-let frequently and requires constant selling, helping to focus the supplier's attention on keeping the customer happy".

The detailed report sets out satisfaction levels within such categories as Quality, Price, Shouldering Risk, Relationship Management, Identifying New Cost Savings, Innovation, and Flexibility. In most categories many of the established outsourcing and services giants fared comparatively badly, with the exception of the Innovation category, which saw Accenture leap to the top of the rankings above TCS, Computacenter, HP, and Capgemini, which suggests that dollar might and a large industry footprint can still be synonymous with innovation in this fast-maturing industry.

Research giant Gartner Group has forecast a growth rate of 8.1 percent for the global outsourcing market in 2008. However, this healthy, if unspectacular growth does not necessarily mean that user organizations are without challenges, analysts warned.

“Although user organizations often have fundamentally sound procurement organizations to initiate outsourcing contracts, for many, their IT sourcing strategies and governance structures are still immature, lacking altogether, or misaligned with enterprise objectives,” said Kurt Potter, research director at Gartner. “Because these organizations lack the basic building blocks for successful vendor management and outsourcing success, expected cost savings and other benefits are difficult to obtain."

This chimes with a growing view across many industry sectors that the underlying theme over the next few years must be solid governance and sound management, particularly in a time of economic and political uncertainty across the globe. "In extreme cases, the lack of needed trust and control to optimise the outsourcing relationship results in deal failure," continued Potter. "Also, more organisations focused less on outsourcing for cost savings than in previous years, and more on using providers' global delivery models to access the right skills at a reasonable price, wherever they are.”

Despite the apparently healthy 'big picture' in terms of overall growth, Gartner sounded further notes of caution about key aspects of the industry. For example, publicly reported IT outsourcing (ITO) and business process outsourcing (BPO) contract values decreased overall by 50 percent in 2007, said the report. One explanation for this apparent discontinuity is that as the outsourcing market matures and becomes more commonplace, there is less publicity about deals, according to the report's authors. However, more likely is the fact that greater numbers of companies are using a multi-provider model rather than a single, large outsourcing partner. Within a multi-sourcing environment, individual deals are often too small to attract publicity – it's not a market that is regarded as sexy when looked at through the greenback-tinted spectacles of the traditional IT industry.

Potter confirmed this suspicion, and added: “In 2008, we expect to see some early adopters of multi-sourcing to consolidate around fewer providers to reduce their service integration costs and harvest the benefits of better relationship management with fewer strategic suppliers."

Gartner's report indicates that buyers are increasingly moving work to lower-cost, offshore delivery centres. Although cost remains a major driver for global delivery models (GDMs), more mature users are seeking ways to better support their business needs.

This tallies with the findings of a recent EquaTerra report (see separate story), which identifies several emerging themes within companies' decisions to outsource, including innovation, risk avoidance and flexibility. Like EquaTerra, Gartner also saw Indian providers gaining traction in Europe in 2007, but Gartner believes they are now facing strong competition from more-established global vendors. (EquaTerra's report, however, found very high satisfaction levels with many Indian companies.) Indian providers are growing approximately 40 percent annually in the US and 60 percent annually in Europe, according to Gartner's research.

Although spending on offshore services is three times higher in North America than in Western Europe, the gap is closing, continued the report. “Other countries will continue to emerge as challenges to India for a number of reasons,” said Ian Marriott, research vice president at Gartner. “Strong demand is putting a strain on the available Indian labour force, while staff attrition and cost increases remain high. Global companies continue to accelerate their demands for a presence in countries other than India, and providers are seeking to expand their geographic footprint of delivery centres accordingly. More sophisticated buyers are seeking a multi-country strategy to minimise risk and align nearshore and offshore delivery centres with their primary timezones. Although India's offshore revenue will continue to grow, the country's share of total offshore spending will decline slightly in 2008.”

Gartner believes that the outsourcing market has reached a tipping point with regard to utility delivery models, and that change and innovation will take hold and accelerate in this area through 2008 and beyond. More providers are developing utility-based offerings across infrastructure, application and business process domains.

Gartner has thrown its weight behind the idea that outsourcing in its purest form is far from the only means of minimising risk and moving non-core and service functions away from the centre of the organisation. The trend toward software-as-a-service (SaaS) is gaining both credibility and significant enterprise customers, with major software vendors, such as Microsoft and SAP, and large Internet players, such as Google and Amazon, making announcements about new SaaS offerings and mass-customised software platforms. However, Gartner does not acknowledge that the SaaS market is one sector in which a number of influential smaller providers punch above their weight, with companies such as Salesforce.com gathering large, and highly vocal corporate supporters. Indeed, Salesforce.com is very much the long tail wagging a large industry dog. "User organisations need to realise that the utility delivery model is a viable alternative to traditional outsourcing, and they should seriously consider utilities in their sourcing strategies," advises Gartner.

Royal Dutch Shell has the awkward distinction of being the first multinational of 2008 to cut a swathe of redundancies through its internal IT function and offshore more than 3,000 jobs worldwide, in the wake of a review of its 2005 financial results.

In many ways we can use the Shell announcement as a benchmark for how 2008 may pan out, as the company has been lambasted by trade union Amicus, not for the act of outsourcing, but for the way it has handled the redundancy packages, which currently stand at about 25% of the value of severance packages for its oil rig workers. With Rolls Royce announcing 2,300 job cuts worldwide, including in support services, 2008 could be a year in which many multinationals look to offshore providers to replace central functions at much reduced costs, particularly when those companies, like Rolls Royce, are pricing in a much-weakened dollar against the pound.

As we have explored in recent Editor's Blogs, the key skills to acquire and deploy over the next few months when inking large-scale offshore deals, which carry widespread redundancies in their wake, are solid governance, sound management, and a constant awareness of the PR implications of mishandling announcements at a time of economic and political uncertainty.

• NOA has produced some best-practice guidelines for dealing with a strategic decision to go offshore:

Unions: the rule of thumb is to involve unions right from the start. Working together and keeping communications as trouble free as possible will provide the best results.

Watertight PR and HR procedures: These disciplines have to be well planned. If the flow of information is stemmed, staff will be left wondering and will draw their own conclusions. This can be detrimental to employee relations, especially with staff whose jobs are not outsourced.

Transparency: intentions have to be crystal clear from the outset. Rumours about intentions can be hopelessly off the mark and can cause widespread unease about job security.

Retained staff: there are often issues with retained staff, those left over in the wake of an outsourcing. How will they be feeling now that the vast majority of their colleagues have gone? The remaining workforce needs to be treated carefully and companies must ensure they have the right skills and that they have the right number.

Recent studies by Gartner Group and EquaTerra into the state of the outsourcing market show our industry showing greater maturity than ever before, but also some positive underlying trends that could be threatened should 2008 suffer the economic cold snap that many fear.

The January 2008 EquaTerra survey into UK outsource service providers finds that the rationale for outsourcing is changing; once it was principally about cost reduction, but increasingly client companies are looking for other strategic benefits from moving non-core or large, expensive functions out of house. Prime among these are quality, innovation and flexibility. This is encouraging, as we, as an industry, do not like to be thought of as merely a means to hack away at companies' cost bases without adding much in the way of value.

As I have mentioned previously in this blog, with India still the offshore destination of choice for most, the quality and expertise of the Indian workforce is becoming ever more important, especially as rising wages there and greater competition for jobs in the local market mean that the attractions of low cost will ebb over the next few years and will need to be replaced by increased skill and knowledgeability.

However, should the economy in the UK and elsewhere dramatically weaken or enter recession, it seems inevitable that more and more enterprises will seek to outsource 'in anger' solely to slash costs in the short term by moving jobs out of the UK to the cheapest offshore destination. With India slowly becoming more expensive, that could mean enterprises beginning to look elsewhere in the world for a quick economic fix, rather than a solid strategic move that can be governed effectively from corporate HQ.

For our maturing industry, that could be a retrograde step in terms of the quality and manageability of outsourced services. As the EquaTerra survey found, about half of customers rate their own ability to manage outsourced services as 'weak' to 'medium'. Should they be forced to seek cheaper and less tried and tested locations than India, the existing management structure – and its quality – could be stretched to breaking point in the quest for those elusive savings.

In times of recession, few enterprises have the presence of mind to invest strategically in new management positions, especially if they are laying off workers en masse in the UK (and rising unemployment will only darken the national mood). In such a climate, it will be a difficult proposition for any board to create a new Chief Outsourcing Officer position, and yet such an appointment might be essential to maintain solid governance and good communications with offshore services, especially in more 'risky' locations.

The lesson for 2008, then, will be that boards may face a significant PR battle with the enterprise's customers in terms of maintaining service quality, and also with the workforce should they create expensive board positions at the perceived expense of local workers. This year must be the year of the steady executive hand on the tiller should that 'perfect storm' materialise in the economy.

The upside of EquaTerra's findings remains that the outsourcing market is growing year by year, spearheaded by the UK in Europe, and that real dissatisfaction with outsourcing contracts is rare, occurring in only 14 percent of the deals evaluated in the study. The risks are that those figures may rise if customers outsource as a quick or desperate fix rather than as a properly evaluated and managed strategic decision.