Model that works even in turbulent times

Paul Taylor introduces a focus on outsourcing – used for flexibility, to harness new skills and cut costs

In the 25 years since such western multi­nationals as Eastman Kodak, GE, Citibank and American Express began to outsource their IT operations, the global IT services industry has grown into an $820bn behemoth and outsourcing has gone mainstream.

“Outsourcing is no longer a novel business tactic where companies are forced to farm out a function they cannot manage internally,” says Jagdish Dalal, managing director of the 110,000-member Inter­national Association of Outsourcing Professionals.

“Outsourcing is providing comp­anies with alternative business models, whereby they can manage a small but market-differentiating core while engaging expert third parties to perform the necessary work.

“This ‘atomic’ business model is helping them not only weather the [economic] storm, but create a market advantage – even in these turbulent times.”

Companies, big and small, also use outsourcing to give them flexibility as they expand their markets.

In March, Royal Haskoning, an Netherlands-based engineering and environmental consultancy, signed a multiyear, multimillion IT infrastructure outsourcing deal with India’s Tata Consultancy Services.

TCS is providing a full suite of IT infrastructure services, including a multilingual service desk, datacentre hosting and management, end-user computing services and application support services.

“Royal Haskoning is planning to grow, not only in our home countries but across emerging markets,” explains Eric Overvoorde, chief information officer.

“We face interesting challenges, so consistent experience of service delivery is essential for us to be successful.”

With TCS taking care of Royal Haskoning’s IT infrastructure, its management will be able to focus on business performance and international growth plans in Europe and elsewhere.

As Royal Haskoning demonstrates, IT outsourcing is no longer the preserve of big multinationals.

The market has expanded to embrace relatively small and medium-sized companies.

In the UK, for example, Everest, a provider of double glazed windows, wanted to upgrade its network and IT infrastructure but did not want to commit to a long-term deal.

“Initially, we needed a supplier with system expertise but with flexibility in its approach,” explains Dave Gordon, IT services manager. Last year, Everest selected Calyx, a UK-based independent managed service provider for the project.

“We agreed a one-year contract with Calyx that had the merit of minimal set-up costs,” says Mr Gordon.

“Once we had worked with Calyx for a while, its team’s ability to innovate while retaining a flexible approach in day-to-day operations was obvious.

“We have been pleased with the team’s input and extended the managed services agreement and this is helping us ensure enhanced wide area network (WAN) capabilities for our departmental users.”

In the past, outsourcing mainly focused on IT services, but one of the fastest areas of growth over the past decade has been business process outsourcing (BPO).

As with IT outsourcing, there are many reasons why companies such as Microsoft, the US software group, and pharmaceutical companies including AstraZeneca have chosen to hire external help with business processes.

Microsoft set out to re-engineer its global finance processes and operations under its ‘OneFinance initiative’, launched in 2006.

As part of this effort, the company outsourced back-office finance transactions in 95 countries to Accenture, the consultancy, under an agreement designed to promote a commitment to “mutual gains and performance improvements”.

More recently, in 2009, Genpact (the Indian BPO company that was spun out of GE) signed a five-year contract with AstraZeneca to provide the pharmaceutical group with global finance and accounting services, which it did not consider to be a “core competency”.

Tony Glynn, AstraZeneca’s senior director for transformation global transactional finance, explains: “We had entered into a period when the whole pharmaceutical industry was changing and getting ready for greater competition, more uncertainty around patent expiries and so forth.”

Mr Glynn initially identified some six BPO providers that could offer the transactional finance processing services that he was looking for and finally chose Genpact.

“We signed a contract in November 2009, and we are now about 80 per cent of the way through the transition of our activities across to Genpact,” he says.

Like most other big pharmaceutical companies, AstraZeneca has also outsourced much of its IT.

“We have also signed a contract to outsource some of or human resources work, and we’ve already done some selective outsourcing of some of our R&D work,” explains Mr Glynn.

Mr Dalal points out that the pharmaceutical industry is full of examples of companies that outsource their R&D activity for drug development.

On the other hand, he says: “real estate outsourcing provides companies with options for conserving their capital instead of investing in a building.” And IT departments have long used outsourcing to provide innovation and fill skills gaps.

“Manufacturing outsourcing [also] provides many examples of converting fixed cost base for production to a more variable cost basis,” he says.

A recent survey of more than 2,500 chief information officers conducted by PA Consulting and Harvey Nash, the recruitment business, reached similar conclusions.

While cost reduction was the rationale most often given for outsourcing, companies reported that the second most important reason was to to access skills not found in-house.

The same survey also underscores the growing popularity of IT outsourcing.

Almost a third of CIOs said they would spend up to a quarter of their entire IT budget this year on outsourced activity and more than one in 10 said they will spend 50 per cent of their budget on outsourcing.

Software application development remains the most popular outsourced activity, although external help/service desks are now being used by 40 per cent of CIOs worldwide.

Do companies also have an eye on the growth of enterprise cloud computing?

“Cloud computing is one form of outsourcing,” says Daryl Plummer, of Gartner, the research company.

“The difference is in the types of contracts and terms applied.

“In cloud computing, there is one contract that is applied to all customers in the same way.”

Mr Plummer believes cloud computing and traditional outsourcing will both continue to exist side by side.

“Some companies need the customised delivery of services that traditional outsourcers deliver.

“Some need more commoditised services at the large scale that cloud computing delivers.

“But as the cloud model continues to grow, it will steal more and more attention away from traditional outsourcing models.”

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The IT department: Keep your strategic decisions on IT in-house, say experts

The IT department: Keep your strategic decisions on IT in-house, say experts
By Stephen Pritchard
With a plethora of suppliers queueing to provide IT services – from hardware maintenance to running complex software applications – keeping any IT expertise in-house may appear to be an unnecessary luxury.

Some businesses, mostly start-ups or smaller firms, are reporting that they have achieved significant cost savings by outsourcing all their IT. But the fact that these companies lack an IT department does not mean there is no one looking after technology.

“In an SME that is not very technical, and doesn’t make great use of IT, there still needs to be someone ensuring that it is run effectively and who manages the third-party providers,” says Jonathan Cooper-Bagnall, head of PA Consulting’s shared services and outsourcing practice.

“In mid-sized firms, even if there is not a chief information officer, there is likely to be someone in a mid-management role or a higher IT manager role who looks after the portfolio of suppliers, provides some support to the business and sets the direction.

“Even if there is no IT department, someone still has to be accountable, even if that accountability sits with the chief financial officer, or an operations director.”

In larger businesses, the size and scope of the IT department will depend on company policy on outsourcing and will also be an important factor in whether or not it is a success.

Although some have been able to drive down the operational costs of IT through outsourcing, others have found that this has come at a price.

Unless it is managed well, outsourcing can result in less flexible services and business processes. Organisations that have slimmed down their internal capabilities to the bare minimum and have handed control to an outsourcer, may find that their technology is no longer as able to respond to change.

For example, many older-style outsourcing contracts made few provisions for moving to new technologies, and adding capabilities can be costly.

Although companies are able to outsource services, they obviously cannot outsource all responsibility for IT – or its strategic direction.

“A lot of discussions [about the role of IT] are triggered when the IT department has not delivered, or the business feels it is not getting the response it needs,” says André Christensen, a principal with McKinsey & Company, the consultancy.

“But there are things you need to keep in-house, such as managing demand, and shaping your requirements. You can’t outsource that.” Outsourcing the role of the CIO, he says, “is very seldom the right answer”.

The more a business relies on IT for its competitive advantage, the more important it is to keep a core of IT capability in-house, to set strategy and to translate business requirements into IT supply contracts. Companies now need CIOs to be far more business focused.

“There are different levers you can pull in a business and IT is one,” says McKinsey’s Mr Christensen. “You don’t just hand over your business requirements to an outsourcer, and expect them to deliver.”

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BAA: ‘A change in culture and a change in style’

By 2013 BAA, which owns six airports in the UK including London Heathrow, will have spent £400m ($657m) modernising that airport’s IT. A large part of that is being spent with outsourcers.

In March, BAA signed a £100m deal with Capgemini. The technology services firm will become the primary supplier of day-to-day IT for Heathrow; up to 200 BAA staff are expected to move to Capgemini during the contract.

Deals of this size and scope fell from favour during the recession, but according to Philip Langsdale, the chief information officer, it makes sense for BAA.

“There were three clear drivers for the outsourcing decision,” says Mr Langsdale. “We wanted to improve the quality and robustness of the service to IT users – we would not have contemplated it without better service quality. The second is a reduction in cost: we have achieved very significant reductions in operational costs and will continue to do that, as part of the outsourcing contract.

“And the third was a strong desire to transform our ability to improve Heathrow through the use of IT: we will provide more bandwidth and more capabilities.”

BAA has been reducing its own IT headcount for some time. The department employed 800 people not long ago, but with the Capgemini contract, this will drop to about 100.

Part of the reduction stems from the disposal of Gatwick – the UK’s second-largest airport – sold by BAA in 2009. Capgemini was involved in helping BAA to separate Gatwick and BAA’s IT systems – and the move to use smaller, more nimble technologies at BAA’s smaller UK sites.

But BAA says the reduction in staff numbers also reflects its view that the internal IT department should be about planning, sourcing and delivering, rather than building and running IT.

“Outsourcing is changing the skills profile of the internal IT organisation. We have to become a much more intelligent client, with much stronger strategic leadership,” Mr Langsdale notes.

Strategy is partly driven by BAA’s regulatory time frame, based on five-year plans.

Mr Langsdale’s team is currently working on the plan for 2013-18. In addition, the company has to work with the Civil Aviation Authority, air traffic control, the International Air Travel Authority, other airports and the airlines.

All this comes as BAA is trying to improve experiences for passengers at Heathrow, an airport designed during the second world war and now running very close to full capacity.

Although plans for a third runway have been shelved, a new terminal is being built – as a replacement for an existing terminal – and Heathrow is looking to technology to squeeze more out of the airport’s resources. IT for the new terminal will cost £200m.

“IT has an increasing part to play in delivering our results,” says Mr Langsdale. “What we build has to work in conjunction with the airlines and other stakeholders [but with outsourcing] we have to step back from micromanaging everything. It is a change in culture, and a change in style.”

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The real benefits of outsourcing – value beyond the one-time cost saving

By Sanjiv Gossain, UK managing director of Cognizant Technology Solutions

Published: October 22 2009 11:42 | Last updated: October 22 2009 11:42

From IT maintenance to CRM and business process automation, outsourcing is firmly ingrained in company culture and is central to the smooth operation of the world’s biggest and most renowned businesses.

The benefits are supposedly clear, with cost-reduction typically the number one goal. However, despite vast sums spent on outsourcing contracts each year – more than $42.2bn in 2008, according to Gartner – it appears many companies are failing to keep track of their outsourcing investments and are subsequently missing out on the major benefits of outsourcing.

Cost saving, of course, is not the only desired outcome when entering into an outsourcing relationship. According to Gartner research, organisations still outsource for “efficiency, access to skills, focus on core business, innovation, modernisation and even business transformation”.

Yet the demand for cost reduction remains high and research recently conducted by Cognizant, in partnership with Warwick Business School, finds that a proven return on investment is required in a very short time.

Over half of more than 250 European chief information and chief finance officers surveyed are demanding ROI within the first 12 months of an outsourcing agreement being confirmed. The current economic situation has no doubt intensified this need, with outsourcing providers under increasing pressure to drive more value with their clients and deliver longer-term business benefits.

Whether an outsourcing agreement has saved money over the short term isn’t too difficult to measure; in the simplest terms, it boils down to whether the new supplier can do the task more cheaply than it was done previously in-house or with an alternative outsourcing supplier.

However, given that many of these relationships can stretch over a considerable length of time – the BBC recently extended one of its contracts for a further nine years – companies expect to profit from the additional benefits outlined above.

It goes without saying, therefore, that every business has a solid methodology and auditing process in place to measure the benefits of their outsourcing investment. Or does it?

Our research suggests that business leaders are failing to get to grips with measuring the full financial impact of the outsourcing contracts they commission. Perhaps the most alarming discovery is that fewer than half of CIOs and CFOs have even tried to quantify the financial contribution of outsourcing to their business.

There is a widespread belief that the long-term value of outsourcing cannot actually be measured. More than a third (37 per cent) admit they do not try to measure the return, while a further 20 per cent do not even know whether they have tried.

This is perhaps unsurprising when considered that only 29 per cent believe that the contribution can be properly assessed beyond the one-time cost saving.

So what methods are being used to track and prove the value of these huge investments? The CIOs and CFOs surveyed provided several answers and in some cases, it seems the methods are vague at best.

Some show a degree of methodology, even if they couldn’t quite articulate what it was. Others amount to little more than “back of an envelope” sums. Examples included “Manual calculation”; “You know what it costs but you don’t really know the value”; “The accountants will use some formula for calculating ROI”.

Just 7 per cent of respondents were very confident that they know what they are spending in terms of time and money on their outsourcing arrangements.

Companies undertake outsourcing initiatives for a wide range of disciplines. So while a one-size-fits-all method for measuring value may not make sense, it is imperative to have some method to indicate what has been gained and at what price.

To measure outsourcing’s impact, businesses require a form of Return On Outsourcing methodology that includes benefits along three dimensions: innovation (the basis of future benefits, valued financially), process optimisation (quantified and valued over time) and total cost of ownership (reflected in IT budgets and IT accountability).

Value along all three of these dimensions should be addressed as part of the planning process and tracked through the life of the initiative. This should enable both the client and the vendor to see the business value and cost advantages from the outsourcing investment, understand the operational conditions and best practices that lead to long-term success, and compare projected financial returns with other companies within an industry peer group and beyond.

The evolution of an outsourcing project can and should, in many cases, begin with cutting operational costs through labour arbitrage. Over time it should gain operational flexibility, adding and subtracting third-party resources as needed, delivering additional cost savings.

As financial performance improves, the cost savings can be reinvested in strategic initiatives that enable even greater operational efficiency and support future growth initiatives.

This insight into outsourcing performance is crucial in determining future decisions. The research suggests that C-level executives are making such decisions on future business and outsourcing strategies without knowledge of the financial benefits: 78 per cent of those who cut back on outsourcing last year cited “unclear value for money”.

Yet many do not actually have any clear evidence or means to quantify this.

Senior executives, therefore, appear to be making outsourcing decisions based upon short-term cost-cutting – which remains crucial – without measuring outsourcing’s impact beyond the initial labour, skills and cost advantages.

Key business benefits such as innovation and transformation are being ignored by many. Given that outsourcing should be delivering significant operational flexibility and business process improvements, its true value is clearly being missed by many organisations given the widespread lack of measurement practices.

Without clear ways of measuring and monitoring their outsourcing arrangements, company executives could, in effect, be tying up costs that could be released to drive additional initiatives.

The practice of outsourcing IT and business processes is mature, yet the research suggests that the way in which companies measure the positive impact of these arrangements needs to be addressed.


More on the Cognizant and Warwick Business School research report on attitudes to outsourcing can be viewed at http://www.quantifyingoutsourcingbenefits.com/

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Narrowing the digital divide by nurturing a ‘business-ready’ workforce

Narrowing the digital divide by nurturing a ‘business-ready’ workforce
By Chris Miller of CA

Published: June 15 2009 14:40 | Last updated: June 15 2009 14:40

We often hear about the “digital divide” between those connected to the online world and underprivileged sections of society unable to reap the same benefits – but now we are seeing a “skills divide” preventing organisations and recruits from fulfilling their potential.

Today’s stream of employer dissatisfaction over suitability of new recruits is likely to become a torrent of complaint when economic recovery finally arrives and talent is thin on the ground.

Despite data from the Organisation for Economic Co-operation and Development showing that an average of 54 per cent of relevant age groups enters tertiary education, country-by-country research questions whether we are producing workforce candidates equipped to take on the challenges of a digital economy.

In the UK, for example, the CBI employers group revealed that two-thirds of employers think graduates and postgraduates still lack business skills necessary for the workplace.

Research shows that multinationals are planning to outsource even more non-core activity to help beat the economic downturn and drive out costs. For the US, UK and mainland Europe, this trend is effectively taking away the need for companies to maintain many core IT development programmes – a situation likely to intensify when cloud computing and software-as-a-service are piped into the enterprise.

As a result, precious IT, project management and business skills are being stripped out of companies and so denied to new recruits. This could harm future development of all types of businesses, especially as studies show that IT is required to perform nearly 80 per cent of all jobs.

With this in mind, we appear to be ignoring the strategic role of technology at the very time we require skilled practitioners to harness the full power of IT to run the 21st century organisation. Economies such as China and India are also experiencing a shortage of IT jobs, as competitor countries offer next-stage “body-shopping” of IT services.

This is all leading to a significant disconnect between the changing needs of an organisation and the ability of different departments to address them with smart technologies.

When competing in the global arena, today’s economies will always require a degree of outsourcing, but they also need personnel with a grounding in both technology and commerce to help drive business innovation.

As senior management pushes the “offshoring button” to drive out costs, the downturn has uncovered a need for workforces with the technology, project management, commercial and communications skills needed to make the case for, and manage, alternatives to large-scale outsourcing of IT.

No wonder organisations baulk at the investment needed to bring new staff up to speed. One multinational estimated that training just one graduate to full productivity in business today costs approximately $200,000.

So employers must find alternatives to nurturing workforce talent in-house. In short, they need to build 21st century business skills into school and university curriculums. In fact, they must set the scene for graduates to absorb a suitable balance of technology, communications and workplace skills to ensure that IT is able to play an enabling role in modern business.

A glimmer of good news is that employers are stepping into the breach, with governments following.

Global enterprises offer work-experience programmes and internships, but these are frequently scaled back when the economic going gets tough. Inspired by reality TV or charities that genuinely understand the younger mindset, governments are moving to establish “finishing schools” for recruits-in-the-making.

Necessary and well-intentioned? Yes. But a long-term answer? Probably not. Today’s businesses need a structured approach to giving young people a wider appreciation of the role of technology in business and society, and inspiring them to work in IT.

Enterprises and universities are therefore starting to combine resources to update the curriculum. In the UK, blue-chip companies, the e-skills UK sector skills body and a number of universities have established degree courses that balance business with technology skills.

Some use webcast lectures from IT executives, face-to-face mentoring and hands-on business exposure to cultivate wider business skills among their students. Undergraduates able to question a chief information officer on his or her role in innovation will have their eyes opened to the commercial potential held by IT in the workplace – and will fire up their career ambitions.

In fact, as global research calls for faster broadband to provide a platform for an integrated and dynamic economy, employers need to do more to connect technology – and the way it shapes business – with school leavers, younger-age groups and the disadvantaged.

Many a parent is surprised by the way a child is able to adopt and integrate technology into their everyday lives. Yet students are perceiving IT as a dull option, so applications to pursue technology courses continue to diminish.

How can this be when technology is so pervasive and such an exciting part of our economy? At the same time, research shows that IT is second only to finance as the most sought-after graduate discipline among recruiters.

Employers need to reach out to school-age youngsters and the disadvantaged in order to channel their seemingly natural affinity with technology into building successful and sustainable organisations. Bosses need to show young people what IT can do for them, and employers have a responsibility – beyond their CSR programmes – to make this happen.

Only when business leaders provide the necessary leadership and open up possibilities within the education system and wider community can they hope to attract IT talent into industry.

This will help close the divide between the beneficiaries of technology and those with the skills to make it work for all sections of society.


Chris Miller is senior vice president and general manager, UK and Ireland, for CA

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