Inside Outsourcing

Last month the Communication Workers Union (CWUs) announced that it intended to take action if stories about O2 transferring jobs to Capita, as part of an outsourcing deal were true.

An article that appeared in the Sun in April suggested  O2 call centre jobs would transfer to Capita as part of a deal that had not been announced. As we know there is no smoke without fire and Capita yesterday announced a ten year deal with O2. This sees Capita manage O2's customer services and help with the digitisation of many of these services.

The CWU told me today that about 3000 workers across four siutes will tranfer to Capita. They said another 600 will be made redundant. But Industrial action could be on the cards if the CWUs stance last month is anything to go by.

The CWU said: "Whilst the CWU understands that this is a company that is transforming itself for the future, to take advantage of new technologies and in order to provide new services, any transformation plans need to take into consideration the CWU members that are affected and they need to be at the very heart of any decisions made.

"The CWU therefore instructs the Telecom and Financial Services Executive to oppose any move by O2 to outsource the majority of call centre work as it is not in the interests of the members we represent. To oppose by all means possible up to and including industrial action."

Offshoring IT made sense ten years ago because labour costs in countries such as India were so much lower than the UK. But is this still the case?

In this guest blog post Andrew Holley, founder partner at Holley Holland argues that some businesses with offshore operations should cut their losses and come home.

Offshore or off course?

By Andrew Holley

"It's time for a re-think on offshoring. A decade or so ago it may have made sense for UK-based organisations to send some of their jobs and business processes to areas of the world where labour costs were lower. There were reports of overheads cut by around three-quarters. Yet, any company still following an outdated offshoring strategy needs to ask: 'Does the maths still add up?'

Think back to the London Olympics.  Overnight, the UK re-defined itself as a 21st century, vibrant and highly-capable nation; a welcome change from its previous heritage-based image. We should use this updated image to optimise our identity business-wise, bringing jobs back to the UK and encouraging European companies with bases in this country to see that the UK is better served by local jobs and services.

The tide is already turning; more competitive onshore wage bills are being negotiated through the unions and the cost of offshore manpower is rising. Gartner is predicting that by 2014, EU directives will drive legislation to protect jobs, reducing offshoring by 20 per cent by 2016.

The unemployment figures are fuelling frustration. Returning work to the UK would be good for brand image. Onshoring or nearshoring also helps reduce an organisation's carbon footprint.

There are hard economic reasons to return too. Previous estimates of cost savings though offshoring now seem naïve. For some, the loss of customers has eaten away at any initial savings. Santander was an early backtracker, announcing in 2011 that it would replace its Indian call centres with those in Glasgow, Leicester and Liverpool.

Wages in fast-developing countries such as Brazil, China and India have risen steadily. Last year The Economist reported a rise in Chinese labour costs of 20% year on year over the past four years. One company, New Call Telecom, is reported as discovering that it was cheaper to set up its datacentre in Burnley, Lancashire than Mumbai.

Job mobility in India and other offshoring destinations is high. Consequently, training has to be continuously repeated and becomes an ongoing cost. In some sectors, the annual attrition/staff turnover rate can reach 30%.

It's no wonder that nearshoring - the transfer of business operations to a nearby region - is becoming the favoured option. Doing so can mean becoming eligible for various incentives. Those relocating to an Enterprise Area in Scotland, for example may enjoy discounted business rates and enhanced capital allowances, training support and planning concessions.

There are still reasons why offshoring makes sense for some businesses; for example, for those that need to '"follow the sun" and provide a worldwide, 24/7 service. However, many companies that offshored on purely financial grounds are now left with a dilemma.

A move back could make sense financially and earn the trust and respect that has waned in the financial services sector of late."

I interviewed Mahindra Satyam last week and for the first time since it was hit by a $1bn internal fraud in 2008 it was confident enough to say it has now recovered and will push for growth. I spoke to Roger Newman, who heads up a UK business unit, at Mahindra Satyam.

He said the company is ready to draw a line under the chaos case over four years ago when Satyam's former chief B Ramalinga Raju admitted to fixing the outsourcer's books. Last thing I heard about him was that he was in a prison in Hyderabad.

So important is the Indian IOT services sector that the Indian government so fit to get directly involved to help protect the countries reputation. Following the fraud Western corportes were suddenly very concerned about offshoring to India.

Back in November 2010 Mahindra Satyam's European head Vikram Nair told me the company was back, but now it is drawing a line under the problems.

Satyam is a company close to my heart. I wrote so many articles about the company and the fraud that it felt that that was all I was doing. I thought I would do a timeline with a selection of the articles I wrote about Satyam so you can follow the saga through to its happy ending.

There are many more but here are some of the key stories.

17 May  2013: Mahindra Satyam draws a line under turmoil
07 Feb  2013: Inside outsourcing interview: Former Satyam business in a better position than ever before following Tech Mahindra take-over
16 November 2010: "We are back" says Mahindra Satyam's European head, as the supplier has its year zero
29 October 2010: Disgraced former Satyam chief to head up prison BPO
30 September 2010: The ghost of Satyam is laid to rest
29 September2010: Mahindra Satyam has cut its losses as ship steadies
12 July  2010: Well done Mahindra Satyam as the World Cup software acheives 100% uptime
27 November 2009: Satyam's fraud bigger than thought, what does this mean?
27 January 2009: Interest grows in Satyam acquisition
27 May 2009: European customers stick with Satyam
14 April 2009: Satyam saviour is part-owned by BT
20 March 2009: Satyam bidding deadline arrives
17 march 2009: Satyam loses 46 customers
01 February 2009: Interview - Satyam CEO speaks to Computer Weekly
05 February 2009: Satyam sets the record straight
04 Feruary 2009: Satyam could be auctioned off electronically
02 February 2009: Satyam signs 15 contracts despite its troubles
26 January 2009: Price Waterhouse partners arrested in connection with Satyam fraud
23 January 2009: Satyam close to sealing funding
22 January 2009: 13,000 Satyam staff never existed, says prosecutor
20 January 2009: General Electric gives Satyam vote of confidence
16 January 2009: Satyam staff dreams shattered
16 January 2009: Satyam may ask customers for cash early
12 January 2012: New board at Satyam following chairman's arrest
09 January 2009: Satyam staff exodus as fraud unravels
08 January 2009: Satyam emergency conference reveals recovery plans
08 January 2009: Troubled Satyam needs cash
07 January 2009: Satyam chief B Ramalinga Raju admits to fixing the outsourcer's books 

The International Association of Outsourcing Professionals (IAOP) recently published the results of its research identifying the world's best outsourcing firms.

One part of this focuses on outsourcing advisors. I think the number of CIOs that outsource without taking independent advice must be pretty much zero. The outsourcing industry transforms every few years in reaction to new technologies, such as cloud computing, and economic changes, such as the 2008 financial crisis. So a CIO will struggle to keep up to date. Then you have an unimaginable amount of possible suppliers and numerous delivery locations. So outsourcing advisory has become big business.

Here is the IOAP top ten outsourcing advisories.

1 Deloitte Consulting
2 KPMG
3 Avasant
4 Alsbridge
5 Elix-IRR
6 Ernst & Young
7 Baker & McKenzie
8 Pace Harmon
9 Kirkland & Ellis
10 Quint Wellington Redwood

I recently blogged asking the question: Can you outsource innovation?

In this guest blog post Matt Cooper, CEO at Imaginatik, tells us why the answer is yes. In fact he thinks outsourcing could be the answer.

This is interesting because one of the biggest criticisms of outsourcing is often that there is no innovation. But there is a counter argument that if you outsource it frees up internal staff to innovate.

Ready for Innovation? Outsourcing may hold the answer

By Matt Cooper

"Can companies outsource their innovation function? The answer to this questionis a resounding 'yes' with an important caveat - companies need to know when to outsource innovation and toward what end.

At a growing number of large organisations, innovation is now an identified organisational group, with a specific mandate, roles and responsibilities, metrics, processes, resources, and governance. According to a 2012 Capgemini study, 43 per cent of large global companies now have a formally accountable innovation executive. Innovation has become a corporate function, and the trend is gaining steam.

Yet despite the trend, today's innovation leader has a very difficult mission, for two reasons. First, most corporate warriors in middle management persist in thinking of 'innovation' as a management fad - a distraction from quarterly goals and core objectives. As a result, the innovation leader faces a constant uphill battle for legitimacy - unless he/she demonstrates clear, powerful business results from innovation's efforts. And there is a limited time window before faith and confidence are lost permanently.

Secondly, innovation has a distinct rhythm from the daily business. Instead of driving to efficiency and operational excellence, successful innovation requires space and time to create, tolerance of failure and a culture of open experimentation. In a corporate setting, individuals with 'innovative' personalities have long since learned to hide or downplay them, for the sake of career advancement. So the natural rhythm of innovation inevitably feels strange and foreign within a large organisation.

Yet senior leaders increasingly view innovation as a strategic imperative, allowing the firm to adapt and respond to competitive pressures, customer needs and technology change in a rapidly changing, information-rich 21st century world. Most of the time, a great deal is riding on the success or failure of the Innovation Leader. In some cases, the C-suite has staked the company's future on it.

In this environment, outsourcing is a critical enabler of success. Experienced innovation firms use proven methods and tools to produce those crucial early-stage results, while also injecting the DNA of innovation process into the organisation. Typically this outsourcing takes one of two forms.

When the need for a specific innovation is clear - breakthrough new product designs, for example - the innovation leader may outsource the entirety of an innovation project. This is called Innovation Project Outsourcing - in which an innovation firm acts like a design agency, working independently and producing ready-made innovations as deliverables. These projects can range from R&D and engineering work, product and/or industrial design, to innovation process design.

Ultimately, however, the innovation leader cannot be wholly dependent on an outsourcer to produce innovation. Innovation Process Outsourcing is a critical step in embedding innovation habits into an organisation's DNA. An experienced innovation firm will be intimately familiar with the difficulties of involving broad sets of enterprise stakeholders in a collaborative process. Working underneath the innovation leader, outsourced programme managers can be embedded into the organisation as change agents and campaign managers. Through careful scoping of innovation initiatives, combined with skilful management of the campaigns themselves, dramatic results can be achieved while also socialising the behaviours and rhythms of successful enterprise innovation.

The end goal of these outsourcing efforts is innovation skill transfer and discipline-building within the corporation. Over time, the outsourcer trains its client on the core Innovation Management skills and methods, which allows the innovation programme to achieve sustainable scale as an enterprise program. As a result, the organisation begins to treat ideas as valuable intellectual capital - and consistently collect, vet and leverage this capital for business benefit.

In the longer term, there is a permanent home for innovation outsourcing in most companies. Innovation strategy is a core competence any organisation needs to build, refine and invest in - it's the future of the company. But aspects of how innovation is built and executed may be outsourced, as external parties have skills and competencies which the company may not have or even need to be in-house."

Also read:

Has Outsourcing 2.0 arrived and is innovation built-in?

CW500 in the City: IT innovation in financial services

It came as no surprise to hear last week that the GB smart meter implementation programme (GB SMIP) has had its target of having smart meters in UK homes has been put back a year.

The project, which is planned to be fully completed by 2019, had a target for the introduction of smart meters in homes by the summer of 2014, but this has been put back to the autumn of 2015. The reason for this is that more time is needed to get the critical communications network right.

SMIP is part of the UK's plan to cut carbon emissions by helping consumers and businesses better control their energy usage. These meters communicate with a central system at regular intervals. This can give consumers accurate information on their usage and enable them to make cuts.

But it is a huge task to get it right. Not only does billions have to be spent on getting the smart meters in and the IT that makes it all work, but there is also a lack of public understanding. A lack of public understanding has led to the downfall of many a public sector IT project. If the taxpayers that are funding the project don't understand its benefits the battle could be lost even before the massive IT undertaking gets going. Research has shown that consumers are not up for it because it is likely to cost more for energy and the promised savings in the long run will not be guaranteed. Basically most people would rather save money than the planet. Part of the problem is the government have not done enough to sell the cost advantages to consumers.

And it is a massive IT undertaking involving huge outsourcing contracts.

This project will require a company to be set up, known as the Central Data and Communications Company (DCC). This will manage the data that smart meters send and receive. The DCC will require services from IT and communications service providers. It will collect information from smart meters in homes and send information on to utility companies to enable them to bill accurately. This will be a massive IT shop.

All this as well as the need for smart meters, smart communicating sensors, modules, advanced communications networks and then things like security will make this a major project. The problem is that the public don't seem to be behind it.

So we have a huge IT project that people don't seem to support. In a few years people could just see the project as a lot of very expensive IT projects that don't deliver any savings.

This would be a shame because protecting the environment is important. But the government must better communicate the financial savings people can make. This will require a lot of education and if consumers want to really save money they will have to have smart devices to link to the grid and use power efficiently. So there is investment needed in homes as well. 

OK there has only been a delay to one of the projects deadlines, but that will inevitable mean an increased cost. It will be interesting to see if there are further problems when the IT and comms service providers actually get going. I can imagine costs rising and rising.

Could this be another NHS Project for IT (NHS NPfIT) in the making? What I mean is there is a lot to do and a lot of money required to do it and there seems to be lots of points of failure. The fact that the public aren't really behind it could be the excuse a government needs to cancel it. Just like NHS NPfIT.

In 2011 Margaret Hodge MP, chair of the committee of public accounts, said:

"Smart meters could help us all cut our energy consumption but government's track record on delivering large programmes is patchy at best. At the moment the estimated cost is £11.3 billion, but all our experience suggests that this budget will be blown.

Also, for the money spent to provide value, we all have to change the way we behave. It is not clear how the Department will stimulate this behaviour change. And, as technology changes, the Department will have to be properly flexible to respond with up-to-date technology for the smart meters. These uncertainties can drive up costs more than planned.

We will keep a close eye on project progress, and would urge the Department to address the risks identified in this report."

Also read:

Smart metering - the next big waste of money or venerable project?

Is UK smart metering project an NHS IT disaster in the making?

The UK smart metering project: a failed NHS project in the making? Continued.

Smart metering project puts billions of pounds on table for IT suppliers, but are cost overruns inevitable?

I recently met up with the CEO of finance software maker Microgen. One of the things we talked about was outsourcing. Microgen does a lot of its development work in Poland. The story behind this is a great one.

Neil Thompson, CTO of Microgen, discusses how, following the advice of his father who was injured in WWII in Poland, he came to launch a software development centre in Poland.

By Neil Thompson

"I started a software company in Poland because my father was injured in the war. He spent six months in a hospital bed next to a polish sailor who didn't speak English so, to avoid dying of boredom while his leg healed, he learnt Polish. He was told by the sailor that Polish people were good technically and had a strong work ethic.

In 1992, I was trying to start my second software company and could not afford English programmer's rates. On my father's advice, I went to Wroclaw, Poland, where they had a huge technical university as well as eight other universities in the same city. I found two graduates who helped me to recruit nine programmers and we started on our first contract writing a sales management system for ICL.  It was successful and we prospered although it was initially a hand to mouth existence.  I spent half my time in Poland and the rest, working as a salesman or doing consultancy work in Abu Dhabi to help pay the wage bills.

I was then approached by a salesman and an accountant whom I knew from a previous life and who believed there was an opening in investment banks for a 'Rules Engine' which could be used by business professionals to develop and control business logic.  I developed a prototype in Poland and together we started a London based company to sell and market the product; OST Business Rules.  UBS in London was our first customer. The product was a success so we went on to sell it to a number of investment banks with all the development work being carried out in Poland.

In 2002,  Microgen plc acquired our business, despite my expectation to either leave or be resigned from the company, due to always having been an entrepreneur, the company allowed me to continue to run the software house in Poland.  Supported by Microgen, we re-wrote the Rules Engine to use "In Memory" processing to achieve unrivalled levels of performance. The product Microgen Aptitude was launched in 2007.  While 'In Memory' processing is now in vogue, back in 2002, it was a novel architecture and enabled Microgen to realise great success in the market.

We celebrated out 20th Anniversary last year and Microgen Poland has grown to almost 100 staff. We have produced Microgen Aptitude and the Microgen Accounting Hub products, both of which have been adopted widely are used in some of the largest financial services, telecommunications and digital media companies amongst others. 

Over the last 20 years, the Polish staff have proven to be consistently loyal and innovative and we have a stable team of clever people who other companies envy and regularly try to steal.  With hindsight, the choice of Wroclaw seems prescient as it has become an important technical centre with IBM, Google, Microsoft, Credit Suisse, Philips and many other Western companies since opening offices in the area - in fact, it was all due to a war injury that happened in 1943!"

Read more about sending your IT to central and eastern Europe:

Report on Central and Eastern European nearshoring

Agile software development demand could put nearshore IT in the spotlight

Are nearshore suppliers the best low cost option for agile software development?

Vampire IT service workers that tell you as it is.

Why more businesses are nearshoring in Eastern Europe

UK IT professionals face nearshore competition

The Communications Workers Union (CWU) said it will use all actions at its disposal, including strike, to oppose call centre outsourcing at O2 if reports are accurate.

I missed this late last month but thought it worth noting.

Reacting to an article in the Sun Newspaper, revealing plans at O2 to outsource call centres and up to 1000 jobs to Capita.

It is another good example of the challenges facing companies when they introduce technology at the expense of people.

"Whilst the CWU understands that this is a company that is transforming itself for the future, to take advantage of new technologies and in order to provide new services, any transformation plans need to take into consideration the CWU members that are affected and they need to be at the very heart of any decisions made.

"The CWU therefore instructs the Telecom and Financial Services Executive to oppose any move by O2 to outsource the majority of call centre work as it is not in the interests of the members we represent. To oppose by all means possible up to and including industrial action."

Two different ranking lists in the outsourcing sector struck me this week because they both lacked the name IBM within them. Both had reasons for not including IBM but it does put into question the value of these lists.

IBM Global Services personifies IT services and its absence from these lists was surprising to say the least.

The first was a list from ISG, the big IT outsourcing consultancy, it has a list of the top 20 IT service providers for the first quarter of 2013. This was the 20 suppliers that had reported the highest contract values won in that period. IBM was not on the list. Apparently this was because a. contracts often come in lumps so it is not that surprising that a supplier might have a quiet quarter. And it is only contracts that are made public, so IBM might have been quiet about it.

The second list wasn't the top 100 Outsourcing Leaders from the International Association of Outsourcing Professionals. This is the top 100 outsourcers in general and is not focused on IT. However IT makes up a sizable chunk of the list and IBM is not on there. I was told the reason for this is that it is an opt-in list, so IBM presumable didn't opt in. Although the ranking is not just on size it is still a surprise that IBM is not there.

This makes me question the value of such lists. Having worked in journalism for years and seen many people win awards you learn that entering a competition is not only a must if you want to win, but is also half the battle. But it does not mean you the winner or winners are the best. OK industry awards are a bit of fun I suppose, but if you are a business taking these lists seriously they might be misleading if leading companies are excluded for one reason or another.

This reminds me of an article I wrote about IT analysts a while ago. IT analysts are highly respected and really influence buyers when decisions are made by CIOs. But how accurate and broad is the research? I suppose if you follow Gartner's advice you can't go far wrong, but this does not mean you will get the best IT for your need.

Magic quadrants and similar research, rank suppliers on different variables. Businesses are heavily influenced by these when buying.

But the problem with Magic Quadrants and the like are that analysts only really measure a few companies with global footprints. As a result research showing IT services buying habits are skewed because this type of service is often bought from a regional specialists. Particularly in continental Europe.

Cognizant announced its results this week and reported sales worth over $2bn in a quarter for the first time ever. The company said its social, mobile, analytics and cloud (SMAC) services contributed to the sales growth as well as services that achieve non-linear growth.

This is interesting because it is the big challenge for the Indian suppliers. They have grown fat of offering more and more to corporate customers. They have been achieving linear growth by selling more and more of the same services. For example add 10 more offshore workers and you add the same amount of revenue, but there is a limit to how many workers you can sell. In contrast a cloud service can increase your revenue whenever the customer increases its consumption, but the cost of providing the service does not increase in the same way as adding workers would.

Rising costs in India as well as technology developments such as cloud computing and process automation software are putting the big offshore suppliers under pressure but they are reacting to it.

Cognizant said in its results announcement that it is benefiting from non-linear growth. I am waiting to hear more details about the services providing this growth and will blog about it when I get some details.

It is not alone amongst the big Indian players. Infosys recently partnered IT and business process automation software maker IPSoft to add value to its services. This means Infosys will be providing higher value work to customers in the form of managing the automation of processes that previously would have been completed manually by Infosys.

And for similar reasons Wipro partnered and took a stake in Big Data science company Opera Solutions.

Then you have TCS, India's biggest IT services firm. TCS's deal with the Home Office to run the Disclosure and Barring Service (DBS), is interesting because when TCS takes over the contract there will be fewer of the delivery staff working offshore than there was under the previous supplier Capita. This is because TCS is increasing the amount of automation and digitization, which requires less people.

Could we see a lot more acquisitions from the big Indian players? I always thought someone like TCS would buy a big European supplier to gain a bigger footprint in Europe but it seems it is more likely to be small niche players that offer non-linear growth opportunities.

In his ten predictions for outsourcing in 2103, Mark Lewis, outsourcing lawyer at Berwin Leighton Paisner, said: "Only offshore IT and BPO providers that achieve the nirvana of non-linear growth will put on significant revenue and margin growth in 2013."

I blogged yesterday about ISG's list of the top 20 IT service providers in the first quarter of 2013.

This is in terms of contract value sold in the quarter. I focused in the fact that IBM was not in there. It seemed strange as IBM Global Services is a gorilla and a half.

I asked ISG why this might be the case so I thought I would set the record straight with the ISG reply.

he first thing to point out is the list only takes into account public announcements so if IBM didn't publicly announce wins they would not appear and the other point is that bookings come in chunks so nothing should be read into a quarter's performance.

So the shock of IBM's absence is explained.

The EMEA region saw $762m worth of IT services contracts signed at the beginning of this year. This was a 20% fall in contract values in the first three months of 2013 compared to the same period in 2012. This was according to the latest report from ISG, which registers all contracts worth over €4m.

I thought I would publish ISG's list of the companies that took the biggest shares of this spend. What is a surprise is IBM's absence? Strange, in 2009 according to Gartner IBM was the number one IT services firm in Western Europe (which accounts for most the EMEA spend.)

Most the usual suspects are all there but there are also a few I don't know at all, as well as some specialists thrown in.

Top 20 IT services firms in terms of total EMEA contract value won in the first three months of 2013. This is in alphabetic order

1 - Accenture
2 - AT&T
3 - Capgemini
4 - CGI
5 -Communisis
6 - Evry
7 - Genpact
8 - HCL
9 - HP
10 - Infosys
11 - Lottomatica
12 - Nokia
13 - SQS
14 - Swisscom
15 - TCS
16 - Thales
17 - Tieto
18 - Virtusa
19 - Xchanging
20 - Xerox

See more on ISG's research here.

Here at Computer Weekly we provide premium content for readers, free of charge. This includes detailed reports about IT services providers.

The latest one is about CSC, but we have published many already. You can download them by clicking on the suppliers' name and filling in a simple form.

Once you sign in you can read any premium content without having to out your details again.

CSC
Accenture
Infosys
Cognizant
Atos
Tata Consultancy Services (TCS)
Capgemini
Wipro
Capita
Steria

I have been writing quite extensively recently about the increasing use of automation software in business. Businesses are increasingly automating low level IT and business process tasks through software.

This might be a large telco automating a process by which it sends customers new SIM cards or it might be the automation of thousands on monthly software releases at a bank. Although there are money advantages such as increasing the speed and consistency of tasks it is the low cost which is seen by many as the big attraction.

So in the same way that offshore suppliers can lower the cost of IT and business processes through cheaper labour, software robots can. So it is often labeled as an offshore killer. For example O2 decided to move to business process automation software to reduce its reliance on offshore staff. Although the staff in India are about a quarter of the cost of UK equivalents it adds up.

The offshore suppliers therefore have to get involved with automation software as more and more businesses are likely to take it up. IT trade body Intellect is even promoting automation software to UK businesses. One of the things that software automation brings to IT departments is a freeing up of resources to focus on higher level tasks. It is debatable how many low level IT tasks are carried out in-house these days by big businesses with the massive cost savings offered offshore, but the offshore suppliers will want to be the ones that do the higher level jobs.

Anyway the point to this post is to highlight the deal agreed between IT automation software firm IPsoft and Indian IT services provider Infosys, which is training 5000 people in India on the IPsoft technology. So Infosys will be after the higher level IT jobs. I am sure there will be more offshore suppliers following Infosys' example but thought this was worth noting.

Read some of the articles I have written about automation software here:

Low-level tasks eat up 30% of IT departments' time, report reveals

Shop Direct deploys software to automate business processes

Co-operative bank extends automation

There have been a few high profile examples of big businesses dumping their IT service partners to start doing it themselves. General Motors' decision to take work back  in-house from HP is a good example.

But if a service has gone from being in-house to being outsourced and then brought back in-house it is backsourcing which is a bit different to insourcing, which is the process of setting up a service in-house.

Here in this guest blog post Professor Ilan Oshri at the Loughborough School of Business gioves us an academic view.

Backsourcing: can you do it right?

By Prof. Ilan Oshri

"The list is long, just to name a few: American Airlines brought back its IT infrastructure from IBM in 2007. JPMorgan Chase terminated a $5B contract with IBM in 2002 and Mutual of New York ended a 7-year contract with CSC in 1997. Sainsbury terminated an outsourcing contract with Accenture after 5 years of service. McDermott International Inc. dropped what was supposed to be a 10-year global IT outsourcing deal with AT&T's professional services and took back responsibility for design, implementation and management of its IT services. More recently both Santander and General Motors announced that they are bringing back offshored work from India to onshore. 

While there are high profile client firms and vendors involved in backsourcing, there is still very little known about the phenomenon. In many of the cases, it is simply because client firms avoid publicising backsourcing in order to not upset their outsourcing vendors. While we know a little about the reasons to backsource, I can safely say that we know nothing about the success criteria.

Backsourcing (also known as re-shoring or insourcing) is the act of bringing back in-house previously outsourced services as outsourcing contracts expire or have been terminated. This view of backsourcing implies an informed decision making to backsource in which firms evaluate a set of factors and arrived in a decision that is based on higher value or better control. Indeed in the vast majority of the cases, firms enanged in backsourcing because of their desire to improve control over services or escalating costs. In reality, firms do not always achieve such objectives through backsourcing simply because the act of backsourcing is often pursued as a remedy to a problem rather than a calculated sourcing model. In my view, some firms should have considered backsourcing simply because of improvements in their internal sourcing and retained organisation, while other firms should have re-considered their decision to backsource as their in-house service support function has not improved since they pursued outsourcing. In other words, success in backsourcing really depends on what you are trying to achieve in backsourcing and whether the act is a reaction to bad planning or a healthy evolution of the internal sourcing capabilities.

Backsourcing: The Drivers and Success

Basically there are three major categories of reasons for backsourcing: contract problems, opportunities from organizational changes, and opportunities from external environmental changes. Lets examine each driver and its success criteria.

-Contract Problems

Why are we still facing contract problems? There are quite a few reasons: The costs involved in outsourcing tend to be substantially higher than planned because of what has been coined as 'hidden costs'. Cost savings are not always as promised and tend to erode rather quickly in particular when the parties face challenges. There is also a sense of losing control by the client firm that may affect the client's strategic view of this outsourcing realtionship.
These drivers may make the client firms feel that they are locked-in in these outsourcing relationships, and the only way out is backsourcing. For example, In 1996, Continental Airlines ended collaboration with its outsourcing partner, EDS, after four years of successful work together. Continental wanted to improve their reservation system to enable more efficient fleet capacity usage and better ticket pricing. Since EDS was not familiar with the air flight industry, nor with Continental customers, Continental decided it was preferable to run these IT developments in-house.

The success criteria of such backsourcing depend on the client's ability to resolve conflict with the vendor in order to ensure an effective reverse knowledge transfer from the vendor to the client firm. The success of the backsourcing also depends on the absorption capacity of the client firm to take back knowledge and practices and re-integrate them rather rapidly at service levels on par or better than the vendor's. Considering these rather major challenges, my advise to the client firm is to think again their backsourcing intentions. In particular, if the key driver is losing control and running costs, I suspect that the 'retained' organisation is lacking the capabilities to effectively absorb knowledge and smoothly re-integrate the service.

-Internally Generated Opportunities

Changes in executive management within the outsourcing company are generally combined with shifts in power distribution. When companies introduce new executives, these new members are three times more likely to provoke changes. In particular, new CFOs and sometimes CIOs reconsider the value gained from the IT outsourcing contract. At JP Morgan Chase, for example, a new management team, including a new CIO, clearly influenced the decision to backsource services.

The key challenge for an organisation that is considering backsourcing following change in leadership is to realize whether the new leadership can align their sourcing vision with the breath and depth of the sourcing internal capabilities. New vision, which often means change in direction, can be a changing point for the organisation; however, can only materialize if the internal sourcing capabilities support such a new path. In addition to a strong retained organisation that can absorb knowledge and smoothly integrate new service, the success of this scenario depends on the alignment of the business and technical vision and actual operations. 

-Externally Generated Opportunities

Some firms pursue backsourcing following external changes such as mergers, divestures and acquisitions. The Halifax Building Society's merger with Bank of Scotland is an example of externally induced structural changes that led to Halifax Building Society cancelling a ten-year outsourcing contract with IBM. In such a scenario, the focus of the firm to assess threats following rapid changes in the environment and safeguard its competitiveness by securing access and ownership of critical resources, one of which is the repatriation of an outsourced function.  

Success of such backsourcing depends on the strategic value of the outsourced function to business operations and competitiveness and the strength of the retained organisation. Most firms fail to realize the strategic value of the outsourced function to business operations, therefore may properly understand the signals from the external environment as competition intensifies; however, the remedy for this strategic shift is not necessarily the backsourcing of a function, but possibly the extension of the partner networks to tap into innovation and value adding services.

Backsourcing: What should you do?

Based on this list nearly any client firm can be a candidate for backsourcing. However, some are going to be more successful than others if they pay close attention to the strength of the retained organisation, its ability to absorb knowledge, and re-integrate new services. Further, each scenario of backsourcing is different. Therefore, it is imperative to carefully analyse the driver (contract issues, internal change, external change) and seek advice regarding the factors affecting backsourcing success."

I blogged last week about innovation in Financial services. One of the things that speakers spoke of was that it is very difficult to outsource innovation.

In this guest blog UK head at IT services firm Cognizant, Sanjiv Gossain, talks about the role iof IT services firms in support innovation within enterpreises.

Outsourcing 2.0, by Sanjiv Gossain

"Whilst outsourcing has traditionally been seen as a way of cutting costs, the pendulum is definitely swinging towards clients wanting more than savings, increasingly looking at ways to add value.
 
As a result of this shift, the majority of our client engagements are now driven by helping customers to make their operations as efficient and cost-effective as possible, whilst embracing and investing in innovative technologies and services to help them become more agile and flexible, while enabling growth.
 
Many businesses, regardless of their heritage or the products and services they provide, are starting to place increasing emphasis on innovation. And with more pressure than ever on budgets and resources, they are increasingly turning to trusted third parties to not only "cut the fat", but also to bring innovation to the table, using savings from operational improvements to fund investments in new opportunities.
 
Innovation can be enabled in two ways. Firstly it is about enabling businesses to tap into the wealth of creative talent within their own organisations. Promoting innovation and an entrepreneurial culture internally is imperative; from suggesting new product lines and innovative business ideas to identifying new niche markets to target or ways to foster greater teamwork, employees should be able to share and voice their opinions and work with the right people to develop them. Outsourcers are increasingly taking a role to provide frameworks and practical support to enable this.
 
Secondly, businesses are looking to outsourcing providers for insight on the best use of technology and ways of working that will help give their business a competitive edge. Many service providers are already one step ahead of the game having developed their own technologies and processes to improve efficiencies and customer service. It is this wisdom gained from their own experience that they can share with their customers. Social, mobile, analytics and cloud technologies (SMAC) are the front runners in disruptive technologies driving business innovation; however, service providers need to assess what will work specifically for each individual client and offer valuable advice in terms of what to invest in to drive innovation, whilst enhancing productivity.
 
Increasingly, customers are asking for innovation to be built into their contracts. Today's outsourcing contracts are smaller and more flexible in order to give customers the opportunity to adjust things on an ad hoc basis or as business needs change. The commercial concept of outsourcing has also altered a great deal and pricing is now becoming more outcome-based so businesses get exactly what they want and are paying for results rather than large numbers of consultants.
 
Helping clients run better, run differently means reducing costs and maximising efficiency whilst adding value and helping businesses stand out from the competition through the delivery of innovative technology and services. The run better concept of outsourcing is a given for customers - improve efficiency and save costs- they are increasingly looking to run differently, searching for value and/or innovation that, in conjunction with operational efficiency and effectiveness, and cost savings, truly adds something to their business and, in the long run, to their end clients.
 
Outsourcers need to help businesses become more flexible, agile and innovative, get them closer to delivering competitive advantage while providing high levels of customer service to their own clients. We expect this shift to continue, helping clients to build stronger businesses."

I was at an interesting event the other night with IT executives within finance firms. The subject of the meeting was innovation.

The meeting was the first Computer Weekly CW500 in the City, a spin-off from the CW500 club where CIOs from all sectors get together to hear presentations on current issues and discuss them in depth.

It seems innovating in the finance sector is very challenging because companies are constantly afraid of breaking the regulatory rules.

Anyway there were some interesting outsourcing angles suggested by speakers and the audience during conversation. One that was that you cannot depend on consultants for innovation because they are not close enough to the company and don't understand it enough to be truly innovative. The fact that consultants are unable to provide innovation means businesses have to look internally for innovation. But this is really difficult. For example as soon as you make being innovative part of a job description you would put immense pressure on staff.

But there is hope for outsourcing innovation through small companies. Attendees at the event talked about how small companies are more able to innovate because they do not face the same regulatory requirements. These companies can be partnered of a big business wants innovation.

Big businesses could even acquire innovation by taking over small companies.
Wherever the business innovation comes from the IT departments in businesses must be ready to support it.

What are your thoughts on this? Can you outsource innovation?

I have written quite extensively about automation software and its impact on the offshoring and outsourcing sector. I met up with Nick Mottershead, the CEO at a company called Midvision, today.

Midvision has software that automates software releases. The company was created in the late 1990's when an IT professional at Lloyds bank, who was deveping software to automate releases, bought the bank's software and offered to sell it back to them. The contractor took all the programmes that had been written to automate all new bits of code and offered it to Lloyds as a service.

It still serves Lloyds Bank today with software, support services and resources and has other customers across sectors including other banks, healthcare organisations, retailers and recently won its first UK government customer with a contract with the DWP.

Application release automation reduces time and the risks associated with making updates to applications. Organisations in heavily regulated sectors such as banking, healthcare and the public sector, have to ensure that updates to applications are done properly as mistakes can be very costly financially and can damage reputation.

These organisations also have very complex systems linked together and a single release, if done incorrectly, can cause serious problems. The recent trouble at RBS when a software glitch caused online banking to crash is an example.

Mottershead at Midvision said 5 years ago banks would probably only have done 50 software releases a month but now they do 4000, so automation makes sense from a resources point of view. But it is also critical to ensure that releases, from different parts of the business, are done correctly. The software provides a single point that standardizes releases across departments and regions to ensure that there is consultancy, which is critical in heavily regulated industries.

Because of the complexity of systems at banks massive amounts of software updates banks have to be made which is expensive and risky. It can take months for a release to go from build to being live because it has to be checked at lots of different phases, but the automation software removes the need for this and  releases can go from creation to being live in minutes.

More on automation software:

Is it time to ditch offshore services for automation for security sake?

Will software robots really decrease offshoring and increase UK jobs?

Machines are rising and they are offshore IT killers

The latest research from ISG has revealed that contract restructuring contributed more to the EMEA outsourcing sector than new deals, in the first three months of this year.

Renegotiations accounted for $0.97bn and new deals $0.94bn in the EMEA region in the first three months of this year. This compared to the global total where new deals were worth $2.1bn and renegotiations $1.8bn.

In the Americas the value of new deals in the quarter was $0,84bn compared to $0.73bn for new deals. And Asia pacific new deals reached $0.36bn and renegotiations $0.08bn.
So why is it so high in the EMEA? The EMEA is dominated by Europe.

There could be multiple reasons for more than average outsourcing renegotiations and fewer new contracts.

The Euro crisis is hitting Europe pretty hard as well as government cost cutting. This is going to drive businesses to revisit their contracts and try to the scope and the price. In this business climate suppliers are willing to listen.

Then there are new delivery models emerging or reemerging. For example cloud computing is maturing and businesses will want to use these in some instances, which will drive contracts to be restructured. Again suppliers will be eager to get a piece of this and they know there is stuff competition.

But I suppose the overriding factor is that during these tough times businesses want to get their existing deals in order before they sign new ones.

Tata Consultancy Services (TCS) has acquired French IT services firm Alti for €75m and boosted its workforce across three European countries by 1200 in the process.

Indian IT services firms are increasingly investing in Europe to provide more onshore services to their customers.

Large enterprises and public sector organisations in Europe are prefer certain services to be delivered locally. To this end TCS recently opened a delivery centre in Liverpool to as part of a contract with the Home Office, which will have more than 300 staff when the contract is fully up and running by the end of June.

The Alti acquisition will support the company's business in France, Switzerland and Belgium. ALTI is a provider of IT services around enterprise software such as CRM.

Alti co-founder Andre Bensimon, said the agreement will benefit customers and employees.

"Supplementing our current services with TCS' renowned global expertise will provide tremendous additional value to our clients; while our employees will secure the advantages of building their careers in a larger global organisation, which is considered a Top employer in Europe."