Bridging the gap

Over the past week Lloyds Banking Group has been under fire from the media as a result of a Daily Mail report that said Indian IT contractors were being brought into the UK to work in place of UK counterparts. The article claimed that information from internal documents, seen by the Daily Mail, had revealed Lloyds managers are concerned about knowledge gaps of some computer specialists, hence they were possibly looking to their Indian partners to provide them with the necessary skilled workers.

The Daily Mail’s headline was that Indian IT staff are taking British jobs, perhaps in a bid to stir up more protectionist feelings towards using any form of offshored service, whether Lloyds actually decided to do so or not. However, there is a point to be made with regards to the UK’s ever expanding skills gap.

The offshoring of low level IT jobs has been scrutinised for some time now. Firms excessively offshoring work and not retaining (and training) in house specialists has resulted in fewer graduate opportunities and in turn means that mid level IT specialists are becoming a rarer breed. As India and various other destinations have enjoyed a wealth of low level IT work, IT specialists in these countries will arguably have had better experience and training than their UK counterparts. In turn, those IT workers that have climbed the career ladder in key offshore destinations would have had such a breadth of experience that they may be better placed to manage the IT teams of the future.

With this in mind it is understandable that large corporations are looking to incorporate offshore teams within onshore operations. However, there needs to be a proper balance between onshore and offshore work and UK organisations need to start working with our home grown specialists a lot more.

Why not look at the opportunities for businesses to send their people offshore to get ‘on the job’ training? Organisations sending technical entrants or graduates offshore for the first year would be safe in the knowledge that they have a quality skill set to bring back home. And these staff members would have built up good working relationships with the supplier’s team, too.

By not retaining enough good quality in-house IT expertise, businesses are at risk. They will no longer have the capability to design and run applications or IT systems themselves and will have no choice but to rely upon their offshore service providers. This would leave them in a very vulnerable position; suppliers could essentially charge what they wanted for applications and systems and they would lose their competitive edge because they would have to rely upon the same ‘off the shelf’ package as their competitors.

Offshoring is of course an issue of great debate during times when a poor job market and turbulent economy is prevalent, but companies must think about the long term. Protectionist policies should not automatically be adopted, we are after all in a global economy and the only way to overcome economic instability is by working together however, businesses should not get carried away. If everyone offshored their IT in a bid to cut costs and take advantage of low level skill sets, they will quickly find themselves in deep water after the recession has blown over.

By nurturing and training a good quality in house IT team, businesses can be assured that they will remain competitive once the economy picks up and the UK can be safe in the knowledge that a quality stream of IT specialists are ready to lead the next generation of IT leveraged businesses.

Failure to do so could have serious consequences for the future of the UK IT market. The NOA is doing its bit by backing the first European accredited qualifications in outsourcing, maybe not technical but at least providing companies with the know how of how to structure these contracts so your retain team is in control.

HR outsourcing under the microscope

This week, the Chartered Institute of Personnel and Development has released a report entitled, ‘HR outsourcing and the HR function: Threat or Opportunity’, which focuses on approximately 300 UK HR professionals within a variety of organisations, public and private. HRO has had a mixed reception over recent months; some people believe that the cost savings associated with HRO are over hyped where as others believe that outsourcing is not being used as effectively as it should. The results of the report mimic these industry opinions, with both positive and negative outsourcing experiences.

Every industry has been feeling the pressure over recent years, economic doom and gloom has led to a turbulent and stressful period for all sectors and this is one of the first things that stands out in the CIPD report. 91 percent of respondents felt that they were under pressure to enhance efficiency and a drive for efficiency undoubtedly means that outsourcing will be considered as a possible streamlining strategy, supported by the report highlighting a 20 percent increase in HRO over the last five years.

However, pressurised outsourcing deals very rarely work well. Again, it is not so much about outsourcing but right-sourcing. Companies may panic-buy a service from a third party in order to quickly shift processes and responsibility, but this will almost always lead to a breakdown in the outsourcing deal as end user expectations will be different to supplier capabilities. This breakdown will not only be bad for the bank balance but will also have an impact on morale.

In spite of the possible increase in rushed outsourcing deals, the report does show a pleasing maturity on the outsourcing decision making process, with the majority of respondents citing access to skills and improvement to quality as the two main drivers behind implementing an outsourcing strategy. Cost reduction is inevitably a close third.

Achievement of these drivers has been promising. The strongest achievements were made in improving quality and accessing knowledge and skills and many felt that cost reductions were also being achieved, however access to new technology has had much less of an impact.

Access to technology should be one of the key selling points for any supplier. End users should expect vendors to have the most up-to-date technology implemented on any outsourced process. If this is not the case, then quite simply the supplier is not up to standard and the relationship should be reviewed. End users should not be afraid to ask for technology credentials, it is as vital as well trained staff.

With virtualisation, remote working, social networking and improved IT security all adding value to outsourcing in recent years, one thing that is inexcusable is a vendor with poor take up of modern technology. However, regardless of how good a vendor’s technology is, end users should never overlook the knowledge and skill base a vendor can bring to the table; these are as valuable as the latest gadget or software.

Recession sparks sharp drop in offshoring

The FT this week released a report highlighting a sharp decline in the offshoring of jobs from Britain to cheaper locations in eastern Europe as a result of the recession.

The NOA predicted that 2009 would be the year where we see a drop in businesses offshoring, so the FT report into the reduction of offshoring comes as no surprise. There are a number of factors at play that have led to the drop in UK companies offshoring.

Despite the cost reductions associated with offshoring services to locations such India and China, the initial cost of setting up these relationships can be significant. As a result many companies aren’t willing to invest in offshoring in the current economic climate.

India has also suffered a backlash over the last 12 months. The appreciation of the rupee and the significant drop in value of the pound has driven the cost savings down for outsourcers. Team this with increased competition from other locations such as eastern Europe and there can be no surprise that their economy has taken a hit.

The high unemployment rate in both the UK and US is putting added pressure on the current governments to take a protectionist stance on offshoring. US President, Barack Obama has been very vocal about keeping jobs in the US and not offshoring to countries like India. It’s not just the US, earlier on in the year the French government announced that any car manufacturer that took a share of the £5.5bn bailout plan had to guarantee that the jobs and factories were kept on home soil.

In this global economy governments and organisations need to look beyond their own boundaries and avoid fencing off the outside world. Offshoring is an integral part of the rising tide of globalisation, the recession is a global issue and can only be overcome by businesses and governments working together.

Companies need to take a long hard look at their overall business strategy and avoid knee jerk reactions. Although bringing offshored operations back home may feel good, whether this is economically right entirely depends upon each situation. Companies still need to take their time and consider all their sourcing options before acting, otherwise they may end up with increased costs, poor processes and ultimately a worse situation.

China’s growing strength

Shanghai is set to become the new Bangalore according to a recent report released by KPMG. The report entitled, ‘A new dawn: China’s emerging role in global outsourcing’ has China down for outsourcing greatness over the next few years. The main reason for this? The fruition of the Chinese government’s 2006 plan to develop 10 cities within China specifically for the outsourcing market.

The Chinese government has given great support to the outsourcing industry. China’s International Institute of Multinational Corporations (CIIMC) is a government initiative with the scope of providing services to assist the building up of a bridge for exchange and contact between Chinese and foreign enterprises and the government. The NOA has been supporting its members interested in the opportunities in China since 2005 when we presented at the first Chinese global outsourcing conference in Guanzhou and we have had a number of study tours there since.

Services include the provision of technology, legal consultation, professional training & advertising and general assistance to both Chinese and foreign investment enterprises. This will enable Chinese companies to compete in a global market place and also help western companies interested in setting up captive operations in China, which it seems more and more companies are inclined to do.

This huge government backing is undoubtedly the main catalyst behind China’s progression in the outsourcing industry. However, the report cites that a shift in corporate perception has also boosted interest in the Asian superpower. Businesses are looking to a variety of destinations to achieve their outsourcing needs. China has a sufficient supply of qualified low-cost labour and offers favourable conditions for foreign investment. Organisations whose belts have been tightened over the past year, will also find distinct cost advantages by outsourcing to China.

Meanwhile, skilled workers are encouraged to undertake more training and education to meet the requirements of foreign investment in the hi-tech industries. China’s educational and social training system is increasing the qualified labour force in the service sector.

This increase in skilled labour, improvement in language capabilities and fruition of government investment points to a maturing outsourcing destination. Beijing and Shanghai are both featured in IDC’s top 10 outsourcing destinations and with the government investment not about dry up, we may see these cities rise to the top of the table.

Of course China is not without its problems. The country got a bloody nose from poor quality control within the manufacturing industry last year and some of the confidence damage would have seeped into other markets. Intellectual property (IP) is also a concern for the country. Very few intellectual property law suits have held water in China and companies looking to outsource processes that involve product/software development may find that China’s IP regulations a worry.

There are also still barriers in terms of language. English Language capacity is improving in China, especially as almost all fresh graduates study some form of English during their undergraduate years. However, China is still far behind nations such as the Philippines and India when comparing language capabilities.

China will of course need to address these issues, however, as the KPMG report highlights, they are certainly improving their presence in the outsourcing market.

We may find more big name businesses looking to China to provide larger scale operations than their Asian neighbours and everyone should be prepared to see the country with the largest population in the world becoming a dominant force.

Obama’s first move

Obama has revealed his first move at reducing the amount US companies offshore. He has proposed a tax revision which will mean that US companies, earning income overseas, will have to pay US corporate tax on that money immediately, rather than deferring payment until the income is returned back to US soil. Obama complemented this announcement with a comment on how old tax codes have supported job creation in Bangalore, India rather than Buffalo, New York.

We all knew that Obama had his sights set on reducing offshoring, so this latest tax change should come as no surprise to vendors and end users. However, it is not the blow to offshoring everyone was expecting from the new administration. In fact, the tax change will probably not have any significant effect at all.

The change will undoubtedly mean US organisations who offshore will have to pay more tax. However, businesses make huge savings from offshoring IT and business processes and unless there are rules put in place that specifically prohibit offshoring then the act of setting up shop in foreign locations will continue.

The outsourcing market is too mature to have its momentum hindered by announcements such as this. The cost savings associated with having an offshored process are just too good to be ignored. Of course, there are going to be protectionist attitudes towards offshoring, especially during a recession, however we are living in a time where global trade and investment is common place and essential.

If companies are pushed too far by financial penalties, sanctions or unreasonable directives then they will simply move headquarters to a location that is cheaper and easier to work within. If big IT companies (I can think of a few) begin to flirt with the idea of relocating overseas, then the US government will be finding themselves with a significant loss to their GDP and ultimately a worse job market.

It is refreshing to see a government moving forward with election promises and Obama has done this without disrupting the business world, whilst at the same time keeping voters happy. The fact is, US companies will happily take this tax increase on the chin without bringing processes back home. As a Business Week article stated, having 80,000 staff in India perform work for a fifth of the cost of their US counterparts, to the same quality, is simply too attractive a proposition to ignore.

So for now, service providers all over the world can breathe easy. However, we need to keep an eye on what else emerges from the new US administration, I don’t think Obama has finished with offshoring just yet.

The Budget – what does it mean for outsourcing?

The announcement of the budget is something which always generates interest from the public as well as businesses. However, this year’s announcement was particularly poignant. Everyone has been affected by the recession and the new budget dictates how the UK will address this turbulent global economy, consumers and companies alike all kept a sharp eye on what came out of the famous burgundy briefcase.

The business market seemed to have pity taken upon it in this year’s announcement. Loss making businesses were offered life lines and £2.5 billion has been put forward to encourage business investment in industries of the future. This would undoubtedly be a relief for those struggling to keep afloat, those fortunate enough to be looking to invest will be pleased to see some government backing.

However, the public sector may not be feeling such relief. In fact, the pressure on public sector managers will be even greater than before. The UK chancellor announced an increased savings target of £15 billion of ‘efficiency savings’ per year to be reached across the public sector by 2013 to 2014. Procurement staff in organisations such as the MOD, notorious for projects haemorrhaging cash, will certainly be wary of a greater weight on their shoulders.

So what does this mean for the outsourcing industry? With such ambitious saving targets for the public sector, these organisations will be looking to outsource even more. Shared services between departments/authorities will increase, as streamlining and consolidating repeated processes will be one of the first areas looked at within their management boards and IT outsourcing will also be stepped up.

This sounds like good news for the market. After all, more outsourcing means more contracts for vendors. However, this increase in demand may have some hidden pitfalls that all parties need to be wary of.

As the public sector is having their spending wings clipped, the various organisations will be looking to renegotiate contracts or push vendors to give a lot for the smallest fee. This may mean that vendors will have to grit their teeth and reduce their price; however it could also mean a reduction in service, something that the NOA warned against at the start of the year. Both parties need to reach a contract agreement amicably. Pushing a vendor to continuously cut back on costs will only leave a bitter taste in the supplier’s mouth and may even result in added value services being scrapped or offered at extra cost. Being open and honest during contract negotiations and thrashing out how good service can be maintained at the best price would be the best way forward.

At last year’s NOA Global Offshoring Day, the general consensus was that public sector organisations only ever consider big name suppliers. This needs to change. There are now innovative bespoke vendors offering tailored solutions to meet specific needs, these vendors may well provide specific services at cheaper prices and possibly with better results. It is therefore imperative that the public sector adjust their tendering process to cast their net wider. It is not always the best option to go with the biggest names and all will benefit from a more open tendering process.

The budget appears to have added to the belief that the outsourcing market will continue to thrive. However, as the nature of demand changes to focus back on cost, vendors and end users all need to ensure that cost cutting does not come at the expense of service quality.

The Virtualisation Boom

The NOA predicted that 2009 will be the year that virtualisation bursts into the outsourcing industry. Top business/technology insight company, Gartner, has added further confirmation that this will be the year that virtualisation booms as its recent research predicts that virtualisation will grow by 55 percent over 2009. Europe is leading the way in adopting virtualised technologies with Gartner figures showing that the UK, Germany and France represent 89 percent of the total EMEA virtualisation revenue.

So, what doe these figures mean for the outsourcing industry? Have the major suppliers kept a finger on the pulse and adapted they in which they work?

Virtualisation could actually act as a catalyst for new outsourcing contracts. If a company operates on a virtualised platform then their IT admin can easily be outsourced. Simply backup the virtual servers, and pass them onto a competent service provider. This will have vendors rubbing their hands together and we may see a decrease in initial setup costs, if virtualised platforms are so easy to move about why should there be a hefty setup price tag?

This doesn’t just fall into the realms of ITO. BPO providers will also be able to work off a virtualised system much easier than on a proprietary client server based network. For example, payroll providers could just upload their tailored application onto the virtual server and then start working away, the data should be already there so transition times are heavily reduced.

Suppliers are more than aware of the benefits that virtualisation provides to their industry. As a result we will see many suppliers offer virtualised platforms to new clients as standard. The likes of HCL, Infosys and Wipro are already incorporating virtual technology into their new and existing outsourcing contracts, it is a certainty that all suppliers will follow suit, we may even find small virtual specialist service providers taking on bigger contracts and standing toe-to-toe with the big players.

This all sounds fantastic and I am sure that there are end users very keen on switching to virtual technology. However, there are key issues that users must take into account when considering going virtual. Outsourcing is never a simple matter. End users still need to follow best practice and develop thorough contracts and schedules and within these, outline SLAs, roles and responsibilities, transition plans and disaster recovery.

Security issues also need to be addressed. Internal IT security protocol has to be replicated or even stepped up when choosing a supplier. There is continuous and growing concern about data security, especially in this modern age of social networking and cloud computing. Organisations using a supplier to provide their virtual platform must realise that the vendor will probably have access to all their data as possibly other clients might have too. Is this right?

End users must ensure that the supplier they choose has rigorous data control procedures in place. Setting strict SLAs and outlining exactly what security measures are expected of the supplier, will go a long way to preventing a serious data breach.

The growth in virtualisation is inevitable. The outsourcing industry is certainly ready and probably eagerly anticipating this growth. However, with these virtual platforms comes added responsibility. Suppliers will have even more access to client’s core systems, it is therefore imperative that a thorough procurement process is undertaken and that the right supplier is found for the virtual job.

BPO: shaping the future of outsourcing?

A recent report by the London School of Economics predicts that BPO will eventually take over ITO as more companies look to outsource back office processes. This increase in BPO has allowed fledgling outsourcing suppliers to get a foot hold in the market.

The Beyond BRIC study, authored by Professor Leslie Willcocks and his team at the LSE’s Outsourcing Unit, looks at how the growing demand for BPO and other outsourcing services is fuelling a new generation of outsourcing hotspots. Locations such as Egypt, the Philippines and Kenya are all amongst the locations that have the potential to chip away at India’s BPO grip.

The NOA has been regularly commenting on the speculation that India’s BPO market share will drop, allowing new players to enter the market. This latest study takes a rational view of the situation, stating that high attrition rates combined with increased wages and higher costs means that India’s offering is less appealing than it once was. India’s unstable market, twinned with companies looking at suppliers that are either nearshore or have similar cultural touch points, means that emerging destinations are capitalising on an evolving outsourcing market.

Patriotic sentiments have also added to the increased interest in new destinations. Obama’s administration always stressed the importance of keeping jobs on American soil; a great-election winning line but an unappealing prospect to US businesses keen on keeping costs low. Instead, companies are looking to suppliers that give the appearance that work is kept on home turf (or at least near home turf). US businesses will be looking to countries such as Costa Rica, Philippines and Brazil to provide them with nearshore outsourcing services, something which the ‘Beyond BRIC’ report and the NOA identified as a key trend in 2009.

The UK is also exploring destinations a little closer to home. In Northern Ireland, suppliers are thriving in this current market. gem, a contact centre service provider based in Belfast, announced a huge expansion in order to service its growing client base. Eastern Europe and South Africa are benefiting from greater UK interest, especially when looking at contact centre opportunities.

Egypt was the main focus of the ‘Beyond BRIC’ report, especially as the research was commissioned by ITIDA, the Egyptian IT development agency. Obviously Egypt has been flourishing in the outsourcing world, winning the Outsourcing Destination of the Year award at the last NOA industry awards, however, it does face stiff competition when it comes to BPO. There are other locations, previously mentioned, that offer a more Westernised BPO service. The introduction of fibre optic broadband into Kenya and other African areas will increase the value of the services they offer and pose a real challenge to Egypt’s BPO offering. This, combined with accent free English and a workforce educated to the equivalent of the British based-system, will mean that previously unconsidered locations will start to offer very competitive services.

In essence we are seeing the true globalisation of an industry. Outsourcing is no longer limited to a select few countries and the big players should be prepared to face some stiff competition in a vibrant, global, market.

There is still one area that the big two destinations can lead on, that is the capacity to do the actual work. At one NOA meeting, where a representative from an emerging destination (interestingly not covered in the report) spoke about what they could offer. Another delegate enquired as to how many people they had to offer. When emerging destination representative answered the delegate said, “Well that’s enough for the London Borough of Brent but what are the rest of us going to do?”

The growth in BPO has opened up opportunities for non-BRIC countries. However, they may be better off if they specialise in a particular area. This will allow them to focus all their skills and capacity on one service, rather than spread their resources across the whole BPO offering, which may reveal a skills shortage, especially if they are compared to the bigger players.

The Price War Begins

At the start of the year the NOA predicted that vendors within the outsourcing industry may find themselves in a price war, both with each other and with end users. It appears that this prediction is now coming into fruition.

Gartner has released its report, “Potential Impact of Economic Downturn on IT Infrastructure Outsourcing Prices, Q109”, which forecasts that IT outsourcing services will drop between 5% – 20% through 2010. The recession has led to IT budget constraints, intense competition and contract renegotiations, which are all factors that Gartner believe are contributing to the reduction in prices.

In 2007 the NOA commended the growing trend of end users shifting their focus from cost to service quality and added value. It appears that, as the recession deepens, cost will once again become king.

End users are looking to renegotiate their contracts and the focus is firmly on reducing prices. Suppliers will end up caught in a price trap. If they reduce costs significantly the users will question the supplier’s current/initial rates, if they stand firm then they risk being significantly undercut by competitors.

Indian outsourcers, still recovering from the Satyam debacle and Mumbai attacks, may be worst affected by this competitive price war. Emerging destinations will capitalise on an unstable rupee and look to offer more westernised services at better value. Recent reports of Indian service providers looking to relocate to cheaper destinations due to rising costs, may also fuel speculation that India will not be as best placed to compete in a price war as it once was.

Despite the lure of driving down costs for end users, this can be a dangerous game. By focusing solely on reducing costs rather than maximising the potential benefits the supplier can provide, end users are putting additional pressure on suppliers to lower their bid to an unprofitable level in order to secure the business. However, it should come as no surprise that suppliers attempt to claw back their initial losses as time goes on. No supplier wants to sell like this, but competitive bidding processes such as these leaves them with no alternative. Suppliers will use constant change requests and other variations to extract extra revenues from the contract without the scrutiny of a procurement process or comparative pricing mechanism.

The outsourcing relationship may also be in jeopardy. The NOA has always stressed that suppliers should be treated as business partners and not just cost cutting entities. Pushing suppliers to reduce costs significantly could result in a bitter feeling for both parties. Vendors will be concerned and shrinking profit margins. Users will become increasingly frustrated at a reduction in service.

Despite this, a competitive market is always a healthy thing for everyone involved in the industry. It will push suppliers to develop innovative service offerings, which give value to the end user without sacrificing large chunks of revenue. However, it is imperative that users don’t push suppliers too far. By all means, end users should look to renegotiate a contract that works well for both parties. But they should not simply demand vast price reductions; after all, it will ultimately be the end user who will be in their client’s firing line if standards are not up to scratch, not the suppliers.

So you can’t outsource risk?

I have just read in a recent article how you can’t outsource risk and am amazed that people still think this is the case. Of course maybe they mean you can’t outsource all risk? In fact, if you have managed to do that then you have probably outsourced your business to such an extent that you don’t have it any more.

However, you can outsource a proportion of risk and liabilities; you will pay more, the more risk that your supplier takes on, but in some circumstances you may well find it worthwhile. One way to approach this is constructing an outcome based model with your suppliers. This model is being used by end users in an effort to detach themselves from how a supplier delivers their services, which allows the user to focus on end objectives. This model has become prominent enough for the National Outsourcing Association to hold a seminar dedicated to the topic. Essentially, the end user sets business orientated objectives and then lets the supplier(s) worry about how they meet the objectives and therefore they accept the inherent risk associated with reaching the objective.

Agreements can be put in place that essentially hold the supplier to account if the overall objectives are not met in a set time frame. This seems like the perfect end user model, however all the risk is quickly shifted back onto the end user if the vendor does not deliver at all! Essentially the user would be left with nothing to show for a great deal of time and financial investment. Wise users will split provision to mitigate risks.

This outcome based model is not a licence for end users to simply walk away and leave it to their suppliers. As with any outsourcing deal the nitty gritty of the contract needs to be thrashed out properly in order to reap the benefits. End users that only focus on outcomes can lead outsourcing deals into trouble. Whether a customer is starting out on a new outsourcing relationship or is renewing an existing one, if the aim is to achieve a business outcome, effectively analysing the service requirements is still as important as ever and should not be overlooked.

Outsourcing a process or outcome will certainly allow users to outsource an element of risk and depending on the type of outsourcing agreement the outsourced risk could be quite significant. However end users must ensure that the same precautions are taken regardless of the type of outsourcing model they engage in. Structured SLA’s and regular milestones should be included in any agreement to allow a user to keep track of the supplier’s progress. As with any business deal, risk should be carefully analysed and appropriately handled, outsourcing can alleviate pressure on end users, it just needs to be done correctly.