Monthly Archives: January 2011

Asia’s IT services market to keep growing in 2011

 

The overall IT services market in Asia-Pacific excluding Japan (APEJ) will continue its growth momentum in 2011, a 9.4 percent year-on-year increase fuelled mainly by outsourcing and project-oriented services and cloud services, according to a new report from IDC.

"IT-as-a-service and pay-as-you-go models have triggered the market to explore alternatives to traditional outsourcing models," said Natalie Wan, senior research manager of IDC’s Asia-Pacific Services Research Group, in the study released Thursday.

Wan added that because of these new service models, there has been greater interest in hosted application management, such as public cloud, data center consolidation and virtualization initiatives.

However, Chris Morris, director of IDC Asia-Pacific’s practice group, said in a September interview with ZDNet Asia that 2011 would be "a big year for private clouds". His reason is that CIOs in the region, fearing the security risks, u-turned from public cloud projects to private cloud deployments.

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http://www.zdnetasia.com/idc-asia-s-it-services-market-to-keep-growing-in-2011-62204941.htm

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Cloud computing is the highest form of outsourcing

 

[...]

Outsourcing giants: China vs. India

Loh acknowledged that China’s current stake in the global outsourcing industry is where India was 10 years ago. However, in terms of rate of growth, Chinese is definitely growing faster despite its late entry.

He considered China to be today’s outsourcing hotspot, thanks to a huge domestic IT market, the tremendous size of its labor force, increasing proficiency in English–now introduced as a second language in high school–and most crucially, a supportive government.

For an outsourcing industry to flourish, Loh identified that there must be a very high bandwidth infrastructure and Internet connectivity. Part of the Chinese government’s efforts to promote outsourcing involve building infrastructures that prioritize these necessities, which lead to what Loh sees as stronger infrastructural capabilities than India.

The CEO also highlighted another unique differentiator that China has in outsourcing: it is leading in the global telecommunications and Internet industries.

He commented that the country is one of the fastest-growing mobile Web markets and has the world’s biggest online population. In addition, it has successful local equivalents of Internet giants from the West, such as search engine Baidu, online video site Youku, and e-retail site Taobao.

To manage such a huge volume of consumers and data, Loh reasoned that China’s domestic tech companies possess an advanced level of IT expertise, skills and support architecture. This, he said, puts China in a good position to export such services to foreign companies operating in similar industries.

Furthermore, several global firms want to enter China because it is a "very important end-market that [they] cannot miss out on".

Therefore, despite the competition from India as well as the Philippines and Malaysia, "China will definitely emerge the outsourcing hub" as the industry continues to grow, Loh said.

[...]

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http://www.zdnetasia.com/cloud-computing-is-outsourcing-on-steroids-62204736.htm

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How IT Sourcing Pros Can Do Better on Emerging Technology

 

As the latest technologies are incorporated into the business process, organizations will naturally become more comfortable when working with third-party technology vendors. This means the ability to identify, select, and manage the right technology vendor can make the difference between the success and failure of a new business initiative. But, while many sourcing and vendor management (SVM) professionals are starting to play an increasingly important role in this emerging technology evaluation process, many of Forrester’s sourcing clients explain that their involvement is not always clearly defined, resulting in a more reactive and makeshift role than they would like.

Why? In part, it’s due to the historical nature of the challenges SVM professionals face. For example, emerging technologies are not traditionally considered the responsibility of sourcing professionals, making them a less likely player for key insight. Additionally, the high standards sourcing applies to larger contracts often raises red flags, which does not translate very easily to new technologies. The unintended consequence? SVM professionals often slow the adoption process and are viewed as barriers to innovation, rather than supporters and enablers.

Despite these challenges, at Forrester, we’re still hearing that sourcing’s role is becoming more relevant and more valued in the evaluation process. In order to better understand the changing role sourcing plays when evaluating emerging technology, we asked 113 SVM professionals about their current focus and outlook on emerging technologies—including which technologies would impact their business over the next five years, and whether they were actively involved in sourcing these technologies in 2010 to 2011. The result? Key differences exist between the expectations for various technologies, and the actual role of sourcing. For example:

• SaaS and business analytics are expected to have significant business impact. This result is in line with the rapid growth of these technologies: SaaS is infiltrating most enterprises with a dramatic affect on software and services contracts, while the evolution of business analytics still holds the promise of significant business impact. But, when it comes to actively sourcing these technologies—we saw a great difference. While 58% of respondents are involved in sourcing SaaS today, only 47% are currently sourcing business analytics.

• SVM professionals can play a more active role in mobility and UC. We weren’t too surprised to learn that the more cutting-edge technologies are also the ones currently lacking SVM’s involvement. These technologies include videoconferecing tools, tablet PCs, and social technologies, which will all have a big impact on the business, but are not currently influenced by the sourcing team. But this gap between the expected value and current role of sourcing may highlight a long-term opportunity: as IT and the business select which new buzz technologies to adopt, they will need help clarifying contractual terms and distinguishing vendor offerings. That’s where SVM professionals should chime in, to improve the relevance in the emerging technology process.

What about SVM professionals who have a clearly established role in the new technology adoption process? Even in these instances, the level of contribution often varies significantly. We found that:

• When involved, SVM focuses on contractual terms, and vendor viability. By negotiating prices, establishing exit clauses, ensuring compliance standards, and investigating vendors’ financial stability, SVM professionals are helping mitigate the risks inherent in new technology evaluations.

• Security, scalability, and integration requirements are likely IT specialist domain. Although SVM professionals will work with IT to define contractual terms, the vast majority are willing to defer to the expertise of IT specialists in these areas.

In the end, it’s important for SVM professionals to clearly define and take ownership of their responsibilities in the evaluation process. Otherwise, establishing sourcing’s value within the business will become an increasingly difficult task. This means sourcing professionals need to proactively show IT and the business examples of how sourcing has helped in the past—and use those examples to clarify future roles. And amongst other things, SVM must be prepared to enable innovation, by providing new levels of flexibility. Rather than slowing the adoption process, consider raising concerns and allowing business users to decide if the risks are acceptable and reasonable.

Source: http://www.cio.com/article/658180/How_IT_Sourcing_Pros_Can_Do_

Better_on_Emerging_Technology?taxonomyId=3195

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Insurer Global Outsourcing Trends Upward

Thanks largely to increased regulation, insurers will demand innovation, transparency and stability from sourcing providers.

The global economic climate had a distinct effect on the outsourcing expectations and decisions made by insurers and financial services organizations in 2010. So says a report issued this week by San Francisco -based law firm Morrison & Foerster, LLP. In its annual “Global Sourcing Trends” report, the firm includes survey responses from its Global Sourcing Group lawyers in Asia, Europe and the United States to create a state of the outsourcing market across a variety of vertical markets.

It’s no surprise that as insurers sought to recover from financial woes brought on by the 2008-2009 economic crisis, they were weary of entering into new long-term outsourcing arrangements. Outsourcing in 2010 was flat over the year prior, and those deals that were made were largely restructuring of old deals, notes the report’s authors, Alistair Maughan (London), Chris Ford (Washington, D.C.), and Nigel Stamp (Hong Kong).

Yet the value proposition of outsourcing, namely cost-cutting, has evolved into one of broader benefits—and expectations. Those expectations will put a new onus on service providers for innovation, service quality and value for the money, say the report’s authors. Further they predict that as innovation takes center stage, so will the obstacles to its successful achievement; service provider selection, contracting for innovation, and paying for innovation.

“The worlds of outsourcing and financial services regulation will continue to intertwine ever closer,” says the report.

Of primary concern, say the authors, is capital adequacy requirements for banks and insurance companies imposed through Basel II implementation and forthcoming Solvency II and Basel III requirements. The increase in regulatory requirements will result in insurers looking even more closely at the integrity of the outsourced service providers with whom they contract. “Most immediately, there will be increased emphasis on counterparty risk and the effect on banks’ and insurers’ capital; and more interest from regulators in outsourcing service providers,” notes the report.

Cloud-based solutions continue to grow in importance in the outsourcing market but concerns about data security and data privacy in the cloud remain high. Customers are now demanding that security be built into cloud services, and the market is driving the emergence of highly secure and trusted cloud services. “Private clouds” have gained popularity, especially in regulated industries where security and risk concerns may deter companies and their regulators from moving to genuine “public clouds.”

And where will the biggest deals be cut? In the “Global Outsourcing Trends” report, IBM notes that BPO activity in the Philippines exceeded BPO activity in India. This is a sign that outsourcing continues to become more global, migrating to areas where buyers can take advantage of labor arbitrage, say the authors. Countries such as South Africa are also making a push into the market by changing laws and granting incentives that will reduce costs for companies seeking to outsource there. Meanwhile, established outsourcing destinations such as India are seeking to move up the “sourcing food chain” to retain their piece of the outsourcing market.

Source:                           http://www.insurancenetworking.com/news/

insurance_outsourcing_Morrison_Foerster_BPO-26987-1.html

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Offshoring Data: You Can Never Be Too Careful

The news is full of stories of leaked information these days. Whether it’s state secrets released by WikiLeaks or a product release slipping out early from a careless team member, information is supremely difficult to control in today’s world of instant online communications.

It’s no wonder that so many businesses cite intellectual property concerns as one of their top worries when considering IT offshoring. Once your data or systems for managing data cross a border into a new nation, a whole new world of regulations and laws apply. Some of them might look similar to American intellectual property laws and some might look quite different. But the fact remains that no matter what laws mitigate or protect intellectual property, once information is out in the global marketplace today, you cannot take it back. It’s out and the damage is done.

Working in IT outsourcing for decades now, I have built sourcing solutions for companies from a wide range of industries (finance, media, manufacturing, telecom, energy, IT, pharmaceuticals, etc.). Each of them has expressed the same concerns in one form or another:

How can I be sure that my intellectual property will be safe when I outsource and/or offshore?

What I have learned over the years is that most leaks come from internal sources and the majority of those leaks are not malevolent but accidental. For example, a 2009 study by IDC revealed that most business leaders (52%) reported their "insider threat incidents as accidental and only 19% believed the threats were deliberate."

In terms of offshore, businesses must see their offshore solution providers-no matter how distant they are-as extensions of their internal teams who must be held to the very highest levels of process excellence and security and confidentiality accountability. Any good outsourcing or offshore solutions provider will tell you that they expect no less.

So the challenge for those seeking the right offshore partner is to distinguish between the providers who say they are rigorous in protecting intellectual property and data and those that truly do it. Below is the checklist I would give to anyone anxious to measure the security, integrity, and intellectual capital sensitivity of an offshore provider:

– Data Access: Ask to see the strategy for how data is managed, protected and controlled. Who has access and how is access beyond that select group prevented? What kinds of non-disclosure agreements do they have staff members signing? Just as sensitive data is managed across your internal systems, good IT offshore solutions providers will have careful plans for data management and access.

– IT Security Assessment: Conduct a complete assessment of the IT environment (networks, hardware, etc.) and ensure that all major global security standards are met.

– Infrastructure Security Assessment: Examine how the building(s) are secured. Who has access and how well controlled is it?

– Site Visit: Visit the site and meet the team members who will be working with your onshore team. Pictures and voices are not enough when it comes to understanding where your solutions will be managed. I highly encourage businesses to go and visit the offshore centers where they are sending valuable work.

– Referrals: Ask to speak with company clients from the same industry or a similar industry to see how well data and sensitive materials are being protected by the provider.

– Always Start Small: Finally, I always advise companies to start on small, non-sensitive projects to get a feel for an offshore provider. Never begin with something that could be bottom-line or brand crushing when you are starting out with a new and distant provider.

Instead, start with a smaller project that will not put your brand on the line but will test the skills and service of the offshore team. As trust builds, businesses can then strategically and cautiously expand the workload and trust-load of their offshore providers, always ensuring that quality and security standards are exceeded.

Security and intellectual property are just one of the many issues I will discuss in my presentation on multisourcing best practices at the upcoming HDI Annual Conference and Expo this March. I encourage everyone interested in discussing the complex and exciting opportunities in outsourcing and offshoring to attend this year’s Conference. I hope to see you there.

Source:

Anna Frazzetto

http://www.informationweek.com/

blog/main/archives/2011/01/offshoring_data.html;

jsessionid=4UKW1TNKNZSXJQE1GHPCKHWATMY32JVN

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IT Outsourcing: 3 Reasons Your Vendor Won’t Innovate

CIO — Internal IT organizations choose to outsource for any number of reasons: to cut costs, improve service, increase efficiency. Increasingly, they’re seeking innovation from their IT outsourcing partners, even though many don’t have a clear picture of what innovation means in the context of outsourcing. Consequently, those IT departments are not getting much innovation from their service providers.

According to a 2009 Forrester Research survey, 38 percent of IT outsourcing customers said lack of innovation or continuous improvement was their greatest challenge with existing vendors—up from 33 percent the previous year. (Also see CIO’s Exclusive Outsourcing and Innovation Survey.)

"Clients expect more from their service providers than just a cost reduction and reliable service," says Forrester Senior Analyst Chris Andrews. "In many cases they want their supplier to be aligned with their own business concerns, and that implies some level of evolution in the supplier’s capabilities."

Leading IT outsourcing providers recognize that innovation is integral to their survival. "None of the service providers I have ever spoken with is unwilling to engage in an innovation discussion," says Andrews, who recently interviewed ten technology service providers to figure out the disconnect between customer expectations for and outsourcer delivery of innovation.

So what’s the problem? In a word—it’s you. Andrews says IT outsourcing customers make the following three seemingly basic, yet critical mistakes in attempting to procure innovation from their external partners. He recommends ways they can address these mistakes to obtain the innovation they seek from their vendors.

1. You don’t know what you want.

Everyone wants innovation, but no one knows what it is.

In talking to IT service providers, Andrews found that most agreed that innovation should help clients achieve "a new and disruptive business impact," but the scale and scope of such initiatives fluctuated wildly. Before the recession, transformational IT outsourcing deals or "going green" were seen as innovative. In the last few years, however, the focus shifted to cost-cutting efforts, preserving cash flow or increasing efficiency. In the near future, innovation may center on cloud computing or social computing.

If an IT outsourcing customer doesn’t define innovation in its own terms, an IT services vendor can’t provide it. "I don’t think that many [clients] really know what they are looking for," says Andrews, recalling an outsourcing RFP he recently reviewed with a "innovation" section. "It laid out that the service provider was expected to help the company innovate—without any definition or context. There is widespread confusion, and this confusion has a big effect on the alignment between service providers and their clients."

If you want your outsourcer to innovate, you must define innovation in the context of your corporate objectives, says Andrews. A good way to start is to think about the various innovation stakeholders in your company—executives, line-of-business leaders, IT, product development, marketing—and what innovation looks like to them. For the C-suite, it may be transformation efforts that improve shareholder value or create long-term strategic advantage. For business stakeholders, it could be projects that increase sales or improve customer satisfaction. "With that understanding, the innovation discussion can be clarified," says Andrews.

If you’re still struggling, ask a provider to help. Many outsourcers are willing to administer IT-business workshops to outline objectives for their most strategic clients. Some have processes to sharpen a customer’s innovation focus, says Andrews, such as Capgemini’s TechnoVision and Rapid Innovation frameworks, Fujitsu’s FutureScape program and Accenture’s High Performance Research.

2. You chose the wrong provider.

Just as a tiger can’t change its stripes, a body shop won’t ever innovate.

"If the client has literally picked an IT services provider only to get cost savings, they are somewhat unjustified in turning around and asking the supplier to bring them greater levels of innovation," says Andrews. "This is a big complaint from the service providers themselves: we can innovate, but our clients won’t pay us for it. Cost-cutting and innovation can coexist, but they do not do so easily."

Once you’ve figured out what innovation means to you, seek out providers that line up with your definition. These days every vendor’s marketing materials stress their ability to innovate, but a closer look will reveal that a provider’s perspectives on innovation are closely linked to its culture, history and typical suite of services, says Andrews. Indian provider ITC Infotech, for example, says its ability to build deep vertical relationships at the IT level is helping it evolve from offshore outsourcer to strategic partner. IBM Global Services’ pitch is that it incorporates its technical research and consulting expertise into technology-focused business innovation.

Vendor-developed processes and methodologies around customer-specific innovation can be helpful in illuminating a provider’s experience, approach, and in setting client expectations, but they aren’t compulsory.

"The midsize company Sierra Systems does not point to an explicit tool or framework to guide their innovation efforts," says Andrews. "They simply rely on their deep understanding of a few key business processes and an intense focus on client relationships to improve their clients’ business processes."

Most importantly, says Andrews, look for an outsourcer that’s enthusiastic about the innovation challenge. If you’re frustrated with the lack of interest in innovation in your existing relationship, take your concerns to senior executives at the outsourcer. If you still encounter resistance, he says, it’s time to look for a new innovation partner.

3. You didn’t set up effective innovation metrics.

Innovation in IT outsourcing varies from customer to customer. So, too, do innovation metrics. Outsourcing customers have to define their unique desired outcomes and tie those objectives to service levels in the contract.

That’s easier said than done. Outsourcers are starting to move away from traditional IT service metrics that are easier to collect—and meet—to more complex business-outcome metrics, but the transition "is happening more slowly than many expected," says Andrews.

"Clients realize that a variety of internal and external factors could impact a business metric—not just the work of the service provider—and they are hesitant to link the dollar value of the contract to such a complex metric."

Further complicating the situation is the fact that more quick and easy metrics for innovation—such as number of Patents or R&D spending—don’t do the trick when it comes to IT outsourcing and innovation.

There are pockets of new innovation-related metrics activity in the IT services industry. India’s Wipro is starting some of its engagements with metrics discussions. "Instead of dictating a traditional IT metric, they are honing in on a client problem statement such as, ‘We want to reduce our days-sales-outstanding,’" says Andrews. "That helps the Wipro delivery team think about ways to affect that metric with their technology capabilities."

In many cases, IT outsourcing customers who want innovation must push providers toward metrics that align with their innovation objectives, whether it’s the introduction of emerging technologies, the development of more flexible technology platforms, process improvements, or increased business collaboration. Defining the desired end state will challenge vendors to come up with creative ways to meet your innovation requirements, says Andrews.

Source: http://www.cio.com/article/592750/

IT_Outsourcing_3_Reasons_Your_Vendor_Won_t_Innovate_?page=2&taxonomyId=3166

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IT Outsourcing in China: How China’s Five Emerging Drivers Are Changing the Technology Landscape and IT Industry

Truth be told, researchers can use statistics to argue just about any point of view. Case in point: A recent study by McKinsey concluded that China’s IT outsourcing industry, often mentioned in the same breath as India’s these days, won’t pose a threat to its continental rival for many years. According to the study, “The Chinese must consolidate their highly fragmented industry to gain the size and expertise needed to capture large international projects.”

We could not disagree more about the prediction. On the contrary, China is in a remarkable position to become an IT outsourcing superpower in less than five years’ time. Recent fundamental changes and trends also will accelerate the growth of the China IT services industry. Let’s take a look at the statistics. According to Gartner Dataquest, a U.S.-based research firm, IT services revenue in China is projected to reach $8.9 billion in 2006, a compound annual growth rate of 19.6 percent. Another report from IDC, also a U.S.-based researcher, states that China’s IT services market has grown nearly 42 percent a year since 1997.

According to a January 2005 report from Yu Guangzhou, Vice Minister of the Ministry of Commerce in China, the Chinese software industry has developed rapidly, with an average annual growth rate of 30 percent for the past five years. Software exports have grown a whopping sevenfold during the past five years. In addition, sales revenue of China’s software industry increased from USD 7.16B in the year 2000 to USD 19.3B in 2003, while software exports increased from USD 0.25B to USD 2B in the same period.

The McKinsey report also stated that 90 percent of China’s IT services work is done locally, and that it accounted for $6 billion (nearly half of India’s total revenues) in 2003; in comparison, only 30 percent of India’s IT services are done locally. China’s IT services growth in the domestic market should be seen as a sign of strength, not weakness. The drivers of the growth, including China’s membership in the World Trade Organization more than three years ago and the upcoming 2008 Olympics in Beijing, are great indicators of the long-term success of China’s IT software industry. Without a strong local market, India’s IT services are far more vulnerable.

There are five key drivers for China’s IT outsourcing market growth. Many of the research companies ignore these drivers, but all are critical to the success of China’s IT software and services sectors:

1. Zero Duty –In 2005, all 251 tax items related to IT products adopted zero duty. This presents both
challenges and opportunities for the domestic IT industry. It will allow providers to be more competitive in
terms of pricing, but also may invite foreign competition from India. It also means more opportunities for
U.S.-based IT services providers and multinational companies, since they can increase both their business
and their profits.

2. Standards Development on Core IT Technologies – From operating systems to 3G, China has already
made an impact on standards, and, with major events such as the Olympics in 2008 and World’s Fair in
Shanghai in 2010, its influence will continue to grow over the next five years. Standards development has
already become an important influencing factor in China’s IT industry development. On one hand,
technological standards are the lifeline that determines the prosperity of an IT enterprise and function as akey information industry development index for the nation. On the other hand, disputes on domestic IT
industry-related standards are becoming more and more intense. The domestic IT industry is eagerly
awaiting the launch of the standards, and China is emerging as a key player in shaping the standards that will
define the nature of global competition in the technology arena.

As we all know, technology standards are established in a marketplace when a critical mass of vendors and customers adopt a certain technology. In the near term, China will be successful in defining standards, as its large domestic market, low-cost IT services sectors and centralized government provide a competitive
advantage. The Chinese government and its IT services industries can realize huge benefits by attracting
investment capital, building technology know-how and using its market potential to attract global IT
services providers. China’s IT software and services industries are poised to move from catch-up position to
leadership in a much shorter period of time than India’s.

Some other interesting facts include a recent announcement by the Chinese government of a major
commitment to Linux, for which it will be drafting a new standard specifically for the Chinese market. Last
November, Sun Microsystems announced a multimillion-dollar deal to provide Sun’s Java Desktop to an
estimated 200 million Chinese workers at an affordable price. Java Desktop is a toolkit that includes the
StarOffice 7 (sorry Microsoft), the Mozilla Web Browser (sorry Internet Explorer), and customized
applications for e-mail and instant messaging.

3. Tougher Penalties for Intellectual Property Rights (IPR) – To boost enforcement in the face of
growing international pressure, on Dec. 23, 2004, China’s highest courts announced stricter interpretation of
China’s existing IPR laws. According to the courts, China has lowered the threshold for punishable offenses
to USD 6,000 from USD 12,000-24,000 and has increased prison sentences from three to seven years. And
for the first time, dissemination of pirated goods or software over the Internet is explicitly forbidden.

4. Outbound M&A activities – China will take a very different path than India to becoming an IT
outsourcing superpower. Unlike India’s leading IT outsourcing firms such as Infosys and Satyam, which
fundamentally grew their businesses organically and became powerhouses in the IT outsourcing world, the
Chinese are willing to acquire well-known brands to grow and expand. Many state-owned enterprises
(SOEs) operate like “super-capitalists,” combining entrepreneurial agility and government support, both in a
financial and regulatory sense. The recent purchase of IBM PC division from Lenovo is a good example.
China-based TCL, the largest TV manufacturer in the world, obtained majority control of Thomson’s
television business, which also owns the RCA trademark. It won’t be surprising at all for a major Chinese IT
services provider to conduct a joint venture or outright acquisition to become one of the well-known names
in the IT outsourcing world.

5. The Growing IT Talent and “Sea Turtle” – China has a reverse brain-drain situation and a fast-growing
IT talent pool. According to research, there are about 2 million software developers in China, with a CAGR
of 22 percent over the last five years; in addition, there are currently 5.86 million engineering graduates, with
a CAGR of 13 percent. Moreover, many China-born, U.S.-educated businesspeople and IT executives,
known as “Sea Turtles” or “Hai-Gui,” are going back to China to start their “China Dream.” These savvy
executives are importing the knowledge and experiences they gleaned from the best universities and
companies in America and reaping the rewards in their homeland. One of the best-known Sea Turtles is
Charles Zhang, Ph.D., founder of Chinese Internet Portal Sohu.com (market cap: $540 million). Zhang, a
1994 physics graduate from the Massachusetts Institute of Technology, got in on the ground floor of the
Internet market in China. He started the company in 1996 as a copycat of Yahoo with personal savings and
a loan of USD 225,000.

Peggy Yu, another Sea Turtle, came back to China in 1998 after 11 years in the U.S. to start DangDang.com (the Amazon.com of China), and she now heads up a successful online bookstore in China.China’s efforts in becoming a future IT outsourcing powerhouse are also supported by government officials, many of whom are forging partnerships with multinationals to train information technology engineers. For example, IBM has signed deals to train 100,000 software specialists over the next three years. Microsoft is spending $750 million to build a technology center that will expose Chinese hardware and software engineers to Microsoft technology. In addition, Microsoft is donating $25 million over the next three years to develop software for schools, and another $10 million over the next five years to put Microsoft products in elementary schools.

Outsourcing IT to China brings more opportunities in the fast-growing Chinese market. Technology services companies must pay careful attention to China’s regulations and changing technology standards and adapt their strategies accordingly. China will become the largest IT outsourcing player, and it will be to your own peril to ignore this powerful and important market.

source: http://www.outsourcing.com/china_trends/

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9 Ways to Find Hidden Savings in Your Outsourcing Invoice

 

Mistakes happen. Situations change. Yet very few outsourcing customers regularly check their outsourcing invoices against their original contracts on a regular basis. And that means they may be leaving thousands–or millions–on the table, says outsourcing consultants Adam Strichman and Mark Ruckman.

An outsourcing audit, especially these days when every dollar counts, can be a good investment.

"In addition to reviewing invoices for errors and SLAs and the typical stuff, there are lots of rocks to overturn…areas where the vendor may not be living up to its responsibilities, or where they may be making financial errors," says Strichman, founder of Richmond, Va.-based outsourcing consultancy Sanda Partners. "The goal is to find money you may be owed or services the vendor is not doing–or doing right–to use as leverage for other negotiations."

Outsourcing invoices can be complex–and dozens of pages long. What’s more, there’s often only one person on the provider side and one person on the client side who understands the details. No one asks, "Does the contract really allow them to charge for that?" or "Is that line item even relevant anymore?" Seemingly insignificant line items can add up over time.

Full-blown contract audits by a third party can be expensive, but it is possible to conduct your own audits internally. Reserve a conference room, have the person most familiar with the contract explain each line item to an IT executive unfamiliar with the invoice. "After his or her shock about the complexity of the invoice, you will find 10 percent of the line items will drive a lot of discussion," Strichman says, "and 5 percent of them can’t be explained at all."

Such an effort can yield at least 1 percent of the total contract value in savings for each year the invoices have gone unchecked, says Strichman. At a minimum it will drive discussion with the vendor about items which may not be necessary, whether the charges are correct or not. Ruckman, who works as an independent outsourcing consultant in conjunction with Sanda partners has seen clients save anywhere from a few hundred thousand dollars to over six million per year.

When you approach the vendor about audit findings, don’t expect to be greeted with open arms. "The providers can be defensive. Some are trying to protect their base charges and others didn’t realize these billing issues had evolved over the past several years," says Ruckman. "But in the end the providers all come around."

Here are nine common areas for errors in outsourcing invoices.

1. Leased Space

If you are renting space to your provider, double check their leasing obligations and responsibilities. Many times the customer continues performing certain data center duties, unaware that the provider is now liable for them. The potential cost savings increase with the size of the facility.

2. Secret Offshore Staff

It’s an open secret that most outsourcing providers have been shifting more of their workload to lower cost location. But they may be quietly offshoring your work–particularly non-client facing roles–and pocketing savings as their profit.

You may be paying $100,000 a year for a database administrator per your IT services contract while your vendor has been sourcing that work in India for $30,000 annually.

Request a list of all full- and part-time staff working on your account outside the U.S. and review past invoices to figure out if rates decreased with additional offshoring. Review your contract for language dealing with use of offshore labor.

3. Cost-of-Living Adjustments (COLA)

COLA contract provisions call for an adjustment to the fees to reflect inflation. Improper inflation calculations are rare, says Strichman, but they can have a huge impact when discovered.

Vendors are adept at increasing their costs each year along with inflation, but in 2009 COLA actually went down for most outsourcing customers. Did their fees? Confirm that the COLA is calculated correctly and your monthly invoice moved in tandem with the adjustment. If you’re renting space to your provider, the lease normally includes a COLA clause. Make sure that you actually increased the rent each year along with inflation. Thousands could be hiding here.

4. Temporary Labor

"The most common areas we find include improper use of contractual labor rates," Strichman says. "Hours calculations are usually correct, the problem is whether or not those hours are actually chargeable for the work performed per the contract, and whether or not the proper rates were correctly applied to the labor in question."

Review past invoices and compare contract labor rates and invoiced rates–and don’t forget to apply COLA to the rates. There are two kinds of temporary project staff from a provider: short termers that work one to six months and long termers working six months or more. Were you charged short-term rates when a person was working on a long term project?

The cost of project staff is much higher than hiring a full time employee. And the provider charges you that salary and benefit cost plus their margin, which can be from 35 to 75 percent, Ruckman says. Short term workers are fine for truly short-term needs, but they can become a long-term resource if a project drags out. You don’t want to be gouged for full-time work.

In addition, always compare the provider’s temp rates to those offered by local staffing agencies. "We have seen many cases where a client can save 20 to 30 percent for the same skills," Ruckman say.

5. N-1 for Hardware and Software

Chances are your contract contains a clause stating the outsourcing provider must keep hardware and software at a defined level–likely N-1, the industry term for one version prior to the newest one. "Customers don’t want hardware nor software that is too old, because the older it is the more is breaks down and higher the expense to maintain," says Ruckman. "Customers also don’t want all hardware and software to be the latest and greatest, because the new stuff hasn’t been tested in the real world."

The problem is that most providers don’t maintain software at N-2 or N-3, let the N-1 you are paying them to maintain. "Eventually the customer is going to experience larger or more frequent outages or have to pay a large bill to upgrade multiple versions," Ruckman says. "Rarely is the provider at the required level and reaching compliance can be expensive and, thus, a bargaining chip [for the client]."

Older software and hardware can also cost you in the maintenance department (see #9 below).

6. The Responsibility Matrix

Most IT services contracts have one or more responsibility matrices. Review each responsibility to determine if the vendor is living up to it. In some cases, vendors are performing 50 percent or less of their contractual duties, says Strichman. You’ll likely find responsibilities that you don’t understand at all so be prepared to do some additional investigation.

7. Shelfware

An audit of software charges almost always pays off, say Strichman and Ruckman. They recently found that one outsourcing client was paying $400,000 a year for software they didn’t use.

8. Pass-Through Expenses

These are additional fees the vendor charges you as they are incurred, and even they don’t review them as they "pass through." Some may be subject to restrictions such as advance approval. Start with the biggest pass-along invoices and figure out what it is for, if you are using it, and what alternative exist to the product or service.

9. Hardware and Software Maintenance

Take a look at your maintenance costs to find out which you are paying and whether the vendor has been soliciting competitive bids for the work or just awarding it to itself. In many cases, you can purchase maintenance services from a third party at one-third to one-half of the price your IT service provider is charging, say Ruckman and Strichman.

Source: http://www.pcworld.com/article/217218/9_ways_to_find_hidden_

savings_in_your_outsourcing_invoice.html?tk=rss_news

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IBM profits as companies spend more

US computing firm IBM has reported strong fourth quarter profits after companies spent more on outsourcing contracts and mainframes.

The company’s $29bn (£18bn) revenues – up 7% – and $5.26bn net income – up 9% – both beat market expectations.

Its new System Z line helped push revenues from mainframe computers up 69% from a year ago.

The value of new outsourcing contracts signed in the quarter rose 24% – a sign of growing corporate client confidence.

Corporate clients

IBM’s servicing business – including outsourcing – had been in decline over the first three-quarters of the year, as companies were nervous to commit themselves to multi-year contracts during what was an uncertain and faltering economic recovery.

Another positive sign for the business line was the growing backlog of unfinished work, which rose to $142bn in the quarter, up $5bn from a year earlier, according to the company’s statement.

Servicing has become an important source of income for the US IT company over the past decade, as it has sought to diversify away from hardware manufacturing.

As well as providing a direct source of income, by putting IBM in charge of managing companies’ IT systems service contracts also enable the company to channel more hardware and software business to itself.

Other business areas also did well, with, for example, underlying software revenues up 11%.

Revenue growth was solid across all regions, although developing markets led the way as expected, with sales in China up 25%, and those in Russia up 46%.

The results, which were announced after the close of trading in New York, translated into an earnings-per-share of $4.24, up from $3.65 a year earlier, and easily beating market expectations of $4.08.

The company’s share price rose 2.7% in after-hours trading in the US, following the announcement.

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11 Outsourcing Trends to Watch in 2011

Outsourcing activity is expected to creep back in 2011, but things are hardly getting back to normal in the IT services space. The new year will be marked largely by upheaval–smaller contracts, cloud-related chaos, increased offshoring and decreased quality, for a start.

Read on for more. It’s not all bad, we promise.

1. Progressive Outsourcing

The year will be marked by the inking of smaller IT services deals, many of them by first-time buyers who sat on the sidelines in 2010, say industry watchers. Providers, happy to have a foothold, will push such customers to expand the scope of their relationships over time–the old “penetrate and radiate”approach. Contract activity will “creep back throughout 2011, as the recover stutters and buyers pull the trigger on sourcing activity,” says Phil Fersht, founder of outsourcing analyst firm HfS Research.

2. Diving for Dollars

Facing a slow economic recovery, IT leaders will continue to scour their existing outsourcing arrangements for savings. “There’s a pot of gold in every contract, and in some cases we have found a pot worth millions,” says Mark Ruckman, an independent outsourcing consulting working in conjunction with Sanda Partners. IT services customers may reconcile their invoices with their original contracts with an eye toward under-delivery or over-payment, for example, or replace contractors from large sourcing providers with IT professionals from local temp agencies.

3. Outsourcing, Meet Cloudsourcing

Even if some of the discussion of cloud-based offerings from IT service providers is largely hot air, it will continue to be a hot topic in the industry. “The emerging cloud sourcing market will cause the destruction of the outsourcing market as we know it today,” predicts Ben Trowbridge, CEO of outsourcing consultancy Alsbridge. “The two markets will merge and cloud sourcing will drive the rebirth of outsourcing.”

Cloud players like Amazon, Google, and Rackspace are hitting traditional service providers like IBM and HP where it hurts. “An executive of one of the current low cost leaders recently told me they’re forecasting the need to be able to remain profitable while seeing the price of some of their services drop by 70 percent over the coming year,” says Trowbridge.

Look for mergers and acquisitions as legacy providers fumble their way forward. Customers, too, will need help stitching together old and new. “IT is going to be coordinating an increasing portfolio of third -party applications hosted externally,” says Brian Walker, managing director of EquaTerra’s information technology advisory. “The theme in 2011: SaaS-to-SaaS integration.”

4. Back-Door Deals Put CIOs at Risk

Many of the discussions and decisions about cloud-based offerings will be handled by business unit or function owners rather than IT, says Kamran Ozair, executive vice president and CTO at offshore outsourcer MindTree. That could pose problems down the road. “CIOs must get ahead of business users reasonable zeal for the power of focused SaaS applications that could back the enterprise into stealth architecture decisions that could be expensive to undo,” says Trowbridge. “Business stakeholders want cloud, and they know smart CIOs can mitigate its risks,” adds Fersht. “However, IT professionals must tool-up to deliver cloud to their business stakeholders, otherwise they risk a gap growing between business demand and IT supply.”

5. The End of Customization

“Clients will be increasingly open to changing their internal processes and accepting standard ‘vanilla’ services in 2011,” predicts Bob Mathers, principal consultant for Compass Management Consulting. “Service providers will put renewed emphasis on internal initiatives to standardize their own offerings to leverage economies of scale and stabilize profit margins.” It’s the stuff of benchmarking dreams, but economic conditions may turn it into a reality. Stan Lepeak, managing director of global research for outsourcing consultancy EquaTerra, also predicts more process, technology, and location standardization including platform-based solutions.

6. Prices Get Firm

Remember when you could persuade (read: bully) your provider into lower pricing? Days of auld lang syne, my friends. “Outsourcing providers have filled up their prior excess capacity and will be driving to secure higher price points,” says David Rutchik, partner with outsourcing consultancy Pace Harmon. “Pounding on the table for price reduction is unlikely to be effective this year.”

Customers seeking savings will have to bone up on delivery models, deal structures, and value drivers instead. And vendors will have to woo clients with performance rather than a low bid, says Peter Bendor-Samuel, CEO of outsourcing consultancy Everest Group. “As a result, we will see select players grow disproportionately, taking clients away from others.”

Cloud-computing prices could also become less–well, cloudy. Pricing models will mature, predicts Dave Brown, managing director of EquaTerra’s IT advisory, and buyers will better understand the specific offerings.

7. M&A: East Meets West

A merger between a major Indian IT service provider and a U.S.-based outsourcer? It could happen next year, say some industry watchers, and an Indian company may be on the buying end. Western providers have adopted the process and cost initiatives first embraced by their Eastern counterparts. Indian providers are skilling up to try to win more consulting and integration work. “The cultures are moving closer together,” says Fersht of HfS Research. “2011 will see the first mega-merger between a major Indian services provider and one of the Western incumbents.”

“It has long been talked about,” says Joseph King, Chief Marketing Officer at MindTree. “There is no longer [cost] that CIOs can squeeze from their India partners. So for differentiation, India providers will be forced to move up the value chain.”

8. China, Brazil, and Egypt Take Center Stage

“Buyers are growing more interested in offshore services delivered from locations other than India,” says EquaTerra’s Lepeak. And service providers will continue to shift their delivery centers to markets such as China, Brazil, and Egypt, and not simply to address issues such as wage inflation or staff attrition. They want a piece of the business in hot emerging markets. “Strong sourcing market growth will be in geographies with strong economies, led by Brazil, China, India and the Middle East,” says Bendor-Samuel of Everest. “Countries with strong economies represent big markets with big demand for transformational and discretionary spend activity.”

9. Protectionism Will Continue…With Limited Effect

It’s practically inevitable with continued high U.S. unemployment levels that the new year will bring with it more proposals by American politicians that appear to limit the use of offshoring.

But any proposed protectionist legislation will be marked mostly by sound and fury. “Most of these measures will fail to gain traction and pass into law, and those that do will be difficult to implement and audit,” says Bendor-Samuel.

The attention that such measures, successful or not, draw could put pressure on offshore companies to increase their onshore capabilities, Bendor-Samuel says. But they hardly need more impetus to do that (see prediction #7 above). Concerns about a tax on offshore call centers specifically could be an incentive to reduce call volumes through the use of more self-service and automation tools, says Compass’s Mathers. But they hardly need more incentive to take more labor costs out of the outsourcing equation (see prediction #TK below).

10. Providers Embrace Mass Automation…

“It continues to become harder to turn a good profit as a third party service provider,” notes EquaTerra’s Lepeak. Pressure to keep costs down and rive performance up, outsourcers will rely more heavily on automation, says Rutchik of Pace Harmon, from optical character recognition to whole lights-out, employee-free delivery centers.

Providers will increasingly be slinging such automation tools as well. “Applications that reduce the labor a client is required to perform the services will be offered at lower implementation and running costs than they have in the past,” says EquaTerra’s Brown. “This will continue to create demand for additional opportunities and reduce the staff necessary to support critical business applications.”

11. …And Mass (Offshore) Migration

The internal corporate IT job isn’t the only one expected to go the way of the dodo in coming years. IT enterprise customers arent the only Expect more vendors to make like HP and attack labor costs through layoffs and offshoring in 2011. “[HP] has emerged leaner and dramatically more price competitive, ” says Bendor Samuel. “This increased competitiveness has already set off a chain reaction as competitors increasingly recognize the new competitive realities and move, in turn, to cut cost and match price.” The easiest way to do that it to move large swaths of delivery personnel to lower cost locations. “This mass migration of work is and will further stretch offshore delivery capabilities, resulting in decreasing quality and communication problems,” Bendor-Samuel predicts.

Source: http://www.pcworld.com/article/214322/

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