Industry news

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.

The OUT Group is the only specialist PR and marketing provider dedicated to the outsourcing community. As the commercial arm of the NOA, it has a wealth of specialist expertise concerning the specific issues affecting outsourcing providers and their clients. The OUT Group can deliver a broad range of marketing and consultancy programmes including media relations, internal communications, event management and tender development. The OUT Group is comprised of the NOA’s secretariat and board members and calls upon the network of NOA members for the fulfilment of additional services. For further information visit www.outgroup.co.uk.

The National Outsourcing Association (NOA) is the UK’s only outsourcing trade association. Advocating best practice, the NOA represents outsourcing end users, vendors and other companies which support outsourcing, such as legal firms, consultancies and HR. The NOA is involved in research, events, education and public affairs. The vast quantity information that the NOA has collected is referred to as BOOK (the Body Of Outsourcing Knowledge).

For more information on the NOA please go to: www.noa.co.uk

IT directors are set to head to non-traditional outsourcing destinations such as Morocco, Mauritius and Venezuela to make the most of low labour costs and specialist skills.

Analyst firm Gartner has identified 35 countries where IT directors could consider establishing their own development and shared services operation, or where local service providers are beginning to sell services beyond their domestic market.

With immaculate timing the Department of Health (DoH) kicked off 2008 by announcing that the first patient electronic records have been uploaded to the new NHS online database, just as news of more data security breaches in the public sector was breaking.

Details of the first 100,000 patients have been uploaded to the controversial NHS database. Around 20 GP surgeries have added 110,000 individual records to the scheme, which will contain details on patients' medical history, current medication and allergies.

The £20 billion National Programme for IT (NPfIT) is intended to store more than 50 million patient records when it is complete, providing access to doctors anywhere in the NHS.

NHS chief executive David Nicholson insists that the new system will be more secure than internet banking. "We are listening to what people say about data security and we have a level of security built into the system which is way above industry standards,” he said. “Clinicians, professionals and people like myself take this sort of thing very seriously. This is a very high level of security.”

But 80 percent of UK medics have no confidence that the NHS is a fit custodian for electronically-stored patient data. According to a study carried out by www.doctors.net.uk – which has over 151,000 registered doctors as members – only 20 percent expressed any confidence that the electronic records would be secure. Even more alarmingly, only four percent expect local NHS organisations to maintain data privacy.

This lack of confidence appears justified after nine NHS trusts were forced to admit losing hundreds of thousands of health records late last year. Eight trusts in England are reported to have lost 168,000 patient details in total, while a ninth lost staff details. Some 168,000 people are thought to have been affected by the data protection breaches.

In a further blow, all deliveries of patient information in London were halted in December after a CD containing details of 160,000 children was lost in transit from BT to St Leonard’s Hospital, Hackney in an incident that occurred on 14th November. The disk was protected using 256k encryption and sent by secure courier by BT to St Leonard’s Hospital IT dept. It was signed for by hospital staff, but never reached the person in the IT department it was destined for. "We take any breach of security very seriously,” said Ruth Carnall, chief executive of NHS London. “I have asked for an independent review of all NHS data transfer in London and procedures are in place to stop this from happening again."

BT, the local service provider for NHS IT in London, insists that because the disk failed to reach its destination, the pass phrase key needed to decrypt the disk was not issued and, as such, there was no risk of the information entering the wrong hands. Ironically, BT is the provider of the secure NHS N3 data network but said that the NHS Trust in question – City and Hackeny PCT - had asked for the data to be sent by disk. This calls into question whether or not whether some NHS trusts have the basic technical competence to handle electronic data, rather than written records.

Opposition MPs are demanding a rethink of the NHS plan in the light of the recent data security scandals in the public sector. Data breaches to date include 25 million records lost from HMRC child benefit database; 6,500 records exposed from the Northern Ireland Driving Agency, and three million records lost from the Driving Standards Agency. "This is further evidence of the Government's failure to protect the personal information which we provide,” said shadow health secretary Andrew Lansley. "Following the HMRC and DVLA failures we will need further steps on the part of the Department of Health to show how their planned electronic patients' database will protect our medical records."

Lansley called for the national database to be replaced by storage on “local servers with interoperability between them”. “You have to look at the risks as well as the benefits… unfortunately, the government only appears to have looked at some of the benefits and has not taken advice on the risks,” he said. “What worries us in data security terms is if you create an enormous database you not only create opportunities for catastrophic data loss, you also create real opportunities for people all across the country - if they have access and proper passwords – to access other people’s data.”

However, the DoH appears intent on ploughing on with the centralised system. Some senior medics have advocated a campaign of disobedience against the database by supporting a campaign to urge patients to opt out and producing a letter that people can send to their GP to stop their records going onto the database. To date, more than 200,000 people have requested this. "Some doctors are actively encouraging their patients to rebel,” said Dr Paul Cundy, chairman of the British Medical Association (BMA) general practitioners IT committee, who helped compose the protest letter. "This letter is an easy way for patients to express the rights that the BMA feels they ought to have by default."

The letter can be downloaded from the website of the Big Opt Out campaign at www.nhsconfidentiality.org.

Following a hold-up while it investigated accounting errors from prior years, CSC has finally reported on its Q1 and Q2 performance, which sees Europe coming out well.

The delay was due to the discovery of certain accounting errors related to accounting for income taxes and for the effect of foreign currency exchange rates from previous financial years. The corrections in accounting for income taxes resulted in a cumulative charge of $303 million for fiscal years 1995 through March 30, 2007, the company said.

CSC reported it swung to a first-quarter net profit of $108.1 million, or 61 cents a share, from a restated net loss of $59.9 million, while revenue for the quarter came in at $3.84 billion versus $3.56 billion the previous year. For the second quarter, the company posted net earnings of $75.8 million, while revenue for the period came in at $4.02 billion versus $3.61 billion.

European revenues grew 18% during the quarter and 17% for the half year. In constant currency, second quarter and year-to-date revenues increased 9%, making Europe the firm's strongest performer. “The really pleasant change in the company's FY08 performance is in Europe,” said research house Ovum's Phil Codling.

“While CSC as a whole stalled in FY07, in H1 Europe grew by 17% to $2.20 billion, with constant currency growth of 9%. CSC's expanded NHS commitments account for some of this improvement, but CSC Europe is proving it is no one-trick pony. Growth appears to be more broad-based, with higher revenue from consulting and SI business in Europe, reflecting CSC's hiring efforts in these areas.”

CSC CEO Mike Laphen conceded that Europe was outperforming the US. “The European environment, I am pleased to say, has picked up for us quite nicely both in France and Belgium and in what we call our 'central market', with the exception of Italy – we are still struggled a bit there.”