Industry news

The appointment highlights the role of IT in Tesco’s business and follows 18 busy months of IT implementation.

Over the last decade Clarke has overseen a number of large IT changes at the supermarket chain, including introducing systems to improve sales, the supply chain and efficiency across the company.

Last year the group made £550m in savings following the implementation of its Step Change efficiency programme, which involves IT improvements as well as general process efficiencies.

Clarke has been with Tesco for 29 years occupying various positions through the years. He joined the Tesco board in 1998, and then he assumed the responsibility for the group supply chain, taking over the role of looking after group IT a year later.

In January 2004 he was made responsible for international operations in addition to his IT responsibilities. Outside of his tech role he has overseen the opening of new stores and operational improvements across Asia and Europe.

Clarke replaces Sir Terry Leahy who has been at the helm of the group for 14 years.

Officials expect to save £86m once all exit costs are met and are currently renegotiating two contracts worth £650m with companies who had agreed to deliver parts of the project.

Various reasons have been quoted for the scheme’s failure. The advantages to the holder were slowly eroded while the voluntary nature of the scheme meant that few people would pay the £30 processing fee; the fee on which the government relied to recover some of its investment.

However, what appears to have sealed the fate of the scheme was concerns by civil liberties activists regarding privacy issues and how secure the information stored would be. Who would be able to potentially gain access to the information and their reasons behind it, certainly became a concern in the minds of the public.

The fear could well be founded after all the HMRC breach is quick to come to mind. Two years after the publication of the Poynter that folloed the breach, a similar breach could occur again.

Indeed, a survey by security firm Cyber-Ark, found that 19% of businesses still use couriers for transferring large files. Alarmingly, the number using the postal service has increased from four per cent in 2008 to 11% this year.

Meanwhile, research by service-oriented architecture (SOA) provider Software AG has shown that in the UK public sector bodies are failing to keep records on inter-organisational secure data transfer procedures and costs.

The research questions were asked to local authorities and central government departments across the UK. A total of 14 organisations out of 26 were unable to provide any information at all.

The issues pertaining to secure data storage and transfer also resonate with the private sectors, and in particular the financial services sector.

While the vested interest of Cyber-Ark and Software AG is clear, the issues raised are real.

The new system will replace more than 20 legacy systems and is designed to improve the efficiency of the Authority’s processes for financial management, procurement and works management.

Under the contract Accenture will deploy a new, fully integrated system in two phases over a three-year period, followed by an application maintenance period of five years.

The first phase will focus on upgrading the Authority’s finance and procurement capabilities with the implementation of ERP and supplier relationship management (SRM) software from SAP.

The second phase will feature the implementation of additional SAP modules to provide support for the Estate Maintenance division. When fully deployed, the new system will support more than 8,000 Housing Authority users.

The settlement sees BSkyB get £230m in damages and a further £40m in interest and tax – awarded in February this year. The balance corresponds to the legal fees incurred by BSkyB since the start of the legal battle.

BSkyB awarded the CRM implementation project to EDS back in 2000, but the contract was terminated in 2002. While the original deal was worth only £48m it ended up costing some £265m and six years to implement.

BSkyB’s victory comes as the National Audit Office (NAO) has called for a mandatory system of safeguards for major IT projects to halt projects running over budget.

The NAO wants a system that will provide necessary project information to the various parties involved. The new system of assurance would need to be compulsory, focused on outcomes, capable of collecting plenty of evidence from those involved in projects and triggering interventions where necessary.

It also needs to be capable of "systematically propagating the lessons learned". The safeguards would contribute to reduce the financial risk to the taxpayer and increase the likelihood of successful project delivery.

Indeed, the Central Government has become associated with big IT projects that run over-budget by millions of pounds and fail to be delivered on time, and the NAO said previous attempts to stop this happening have not worked.

In the current economic environment the safeguards become all the more relevant, especially with more systems such as the NHS’ centralised electronic medical records, ID systems, etc. being implemented or in the works.

A further increase (to 66%), subject to employee performance, could enter into effect from 1 October.

The decision comes following the series of suicide attempts at one of the firm’s productions plant in Longhua, where so far this year 16 people have attempted suicide, resulting in 12 deaths.

Foxconn, a major supplier for the likes of Apple, Dell, Hewlett-Packard (HP) and Sony among others, employs more than 800,000 workers in China.

The firm’s Taiwanese parent company Hon Hai Precision Industry, is said to have stated that the decision to raise wages was not a direct response to the suicides.

Apple, Dell, and HP are all said to be looking into Foxconn's working conditions. But for brands such as Apple a ‘divorce’ would be painful. Its order book for iPad deliveries is already behind while orders keep piling up.

It may be that end-users and suppliers will have to share the cost of bringing the working conditions in production plants to acceptable and responsible levels.

How this decision will impact on the contracts Foxconn has with its existing clients remains uncertain. This could be the IT industry’s ‘Nike moment’.

Among the top priorities for companies operating in the financial services sector, are identity and access management tools and data loss prevention. The shift comes as the threat landscape has changed.

On the one side, financial institutions face the growing sophistication of targeted attacks by criminal gangs. On the other, they recognize the increasingly expensive secure perimeter is no protection from internal threats.

Protecting data assets by placing appropriate emphasis on monitoring internally has become as vital as the need to spend ever more at the perimeter. Indeed, only a fifth of the respondents are “very confident” in their ability to prevent internal breaches compared to 50% when asked about their ability to thwart external breaches.

The matter has become even more pressing given the great deal of regulatory changes in the UK financial services sector, which followed the financial crisis. Indeed, the study found that only 40% of UK financial institutions believe that information security and business initiatives are sufficiently aligned.

The study surveyed senior information technology executives at more than 350 major financial institutions via face-to-face interviews and online questionnaires during early 2010.

The survey took place in March and conducted interviews with 200 L&D professionals in organisations of at least 1,000+ employees. It shows that attitudes to outsourcing within businesses are not as negative as might be assumed and trends point towards this figure only increasing in future, with a higher percentage of recent adopters of outsourcing (16%) stating that it is ‘enthusiastically embraced’.

Learning and Development (L&D) services are ahead in the outsourcing game. Indeed, close to half (48%) of companies have been outsourcing L&D for over a decade and it is the most likely function of a business to be outsourced, with 82% outsourcing a least part of their training function. By comparison, IT infrastructure is only outsourced by 49% and customer service by 29%.

The results imply that while outsourcing is very much an established and accepted part of L&D, however it is still being used in its traditional, piecemeal fashion.

While large number of businesses using tried and tested approaches in a rapidly changing environment, only around a 20% of businesses are exploring more sophisticated aspects of L&D. This trend could develop into a ‘two tier state’ in L&D provision.

Furthermore, while 56% of those surveyed said that the importance of L&D has increased in the last 12-18 months, cost is seen as the greatest barrier. On average, the increase in L&D spending during the last 18 months was minimal (1%) and the expectation of increase in the 18 months is little higher (1.4%).

This represents a growing dilemma for UK business as the economic environment pushes them to do more but allows them to allocate fewer resources to do so.

Click here to request a complete version of the survey.

Capgemini will continue to manage and deliver human resources administration, payroll, accounting and procurement support services to BlueScope Steel for its Australian and New Zealand business.

The renewal extends an existing service delivery contract which commenced in April 2002. The agreement leverages Capgemini’s global delivery model to best meet BlueScope Steel’s needs into the future.

Applications outsourcing customers are generally happy with the levels of service they receive from their providers - but they still want more. That's the message from a recent survey conducted by IT market analysis firm, Forrester Research.

In particular, customers want to see more innovation and more proactive suggestions for improvement from their suppliers. Are they being short-changed - and how could they be better managing outsourcing relationships to get what they want?

"[Providers] keep talking about moving up the value curve, but they need to do more. There is still too much required of the customer to manage them effectively," complained one respondent to Forrester's survey, an airline company manager. "In moving forward, we’d like to see [our suppliers] providing more creativity in a way that allows us to trust their creativity. When we lay out a plan for them to execute they are very good at that, but what is frustrating to us is that we would like to give them more."

But it would be unrealistic to suggest that the blame lies solely with providers. "Clients of applications outsourcing suppliers can’t expect to alter the tendencies of suppliers by themselves, but they can adapt their governance and oversight mechanisms to maximise positive outcomes," says Bill Martorelli at Forrester.

That's going to be increasingly important in the next few years, according to John Hanley, managing director of Fujitsu UK & Ireland's application division. Applications typically represent between 40 percent and 60 percent of IT budgets, and while they have yet to be significantly outsourced, he says that the situation is changing quickly.

“This is the next big area that CIOs are under pressure to address," he says. "The application outsourcing market is not as developed or as advanced as infrastructure outsourcing, but there are huge cost savings which can be realised. However, the costs of getting application outsourcing wrong can be very high – and potentially damaging to an organisation’s ability to do business."

Given the complex nature of application outsourcing, Fujitsu recently commissioned research from MBA students at the London Business School, to investigate best practice in this tricky area.

First, says Hanley, it's vital to get the basics right. "There are specific IT operational challenges which need to be overcome: changes in application software, upgrade decisions, maintaining legacy systems and managing and evaluating complex application portfolios, often with limited resources."

But the London Business School study, which looked into application outsourcing projects at a number of major UK companies, showed that best-practice goes way beyond the basics.

Researchers found that ongoing flexibility is vital. Customers should anticipate the need to manage continuous change, they say: "Like the business processes they support, business applications are constantly being modified and adapted. This doesn't change once they are outsourced. While all IT outsourcing requires ongoing fine-tuning, this is even more the case for application outsourcing."

And increasingly, smart companies are seeking to measure performance on business outcomes, rather than just IT or financial metrics.

That's a view echoed by Kate Vitasek, author of Vested Outsourcing: Five Rules That Will Transform Outsourcing.

"Many conventional outsourcing arrangements are built around a transactional model. Most often, this transaction-based model is coupled with a cost-plus or a competitively bid fixed-price-per-transaction pricing model, to ensure the company buying the services is getting the lowest cost per transaction. The service provider is paid for every transaction - whether it is needed or not," she says. Thus, the more inefficient the entire process, the more money the service provider can make. The company that has outsourced gets what it contracted, but perhaps not the best solution.

Vitasek's 'Vested Outsourcing' approach operates under a desired outcome-based model, "with the emphasis on having the outsourcing provider align its interests to what the client really wants."

Desired outcomes are still quantifiable, she explains, but take a different form: they can be set availability, reliability, cost, revenue generation, employee or customer satisfaction, or even asset investment targets. "In essence, Vested Outsourcing buys desired outcomes, not individual transactions. The service provider is paid based on its ability to achieve the mutually agreed desired outcomes," she says.

In addition, customers need to build in more time to have 'innovation discussions' with their application outsourcing suppliers, says Martorelli of Forrester Research. "That so many clients are seeking more proactive ideas from their suppliers suggests that this aspect of applications outsourcing experience is structural in nature," he says. "To counter this tendency, sourcing and vendor management professionals should help craft governance strategies that elicit supplier input — and even penalise suppliers for failing to comply."

There is much work to do. But the Fujitsu/London Business School study shows that it's a two-way street, with responsibilities on both sides: client and provider.

"If an application outsourcing engagement is not delivering its expected value, the business sponsors need to think about what they can do to improve the situation, instead of blaming everything on the vendor," say the study's authors.

Or, as one respondent told them about previous, less-than-successful attempts at application outsourcing, "People have short memories and need to be reminded of how bad it used to be whenever things go wrong and the blaming game begins."

Management guru Peter Drucker challenged companies to “Do what you do best and outsource the rest!”

Unfortunately, too many companies jumped into outsourcing using the same approaches and methods that they used for procuring commodities and materials to run their operations.

The result is that far too many outsourcing deals are less than optimal – leaving most in search of a better way to outsource. The University of Tennessee studied some of the world’s most successful outsourcing deals as part of a research project funded by the US Air Force. Our work has uncovered the fact that successful outsourcing deals had one thing in common: They played by an unwritten set of rules that is fundamentally different than conventional approaches to procurement.

We have distilled our research into an approach that we call 'Vested Outsourcing' - because it is typified by an outsourcing relationship where both parties have a stake in maintaining the arrangement and work together to create a performance partnership. This kind of relationship, we found, enables both the company outsourcing and the service provider to achieve new levels of cost, service and profitability. We call these the 'Five Rules of Vested Outsourcing'.

Rule #1: Focus on outcomes, not transactions

Many conventional outsourcing arrangements are built around a transactional model. Most often, this transaction-based model is coupled with a cost-plus or a competitively bid fixed-price-per-transaction pricing model, to ensure the company buying the services is getting the lowest cost per transaction. The service provider is paid for every transaction - whether it is needed or not. Thus, the more inefficient the entire process, the more money the service provider can make. The company that has outsourced gets what it contracted, but perhaps not the best solution.

Vested Outsourcing operates under a desired outcome-based model, with the emphasis on having the outsourcing provider align its interests to what the client really wants: an efficient and low-cost total support solution. Instead of paying an outsource provider for unit transactions for various service activities, the company and its service provider agree on desired outcomes. Desired outcomes are still quantifiable but take a different form: they can be set availability, reliability, cost, revenue generation, employee or customer satisfaction, or even asset investment targets. In essence, Vested Outsourcing buys desired outcomes, not individual transactions. The service provider is paid based on its ability to achieve the mutually agreed desired outcomes.

Rule #2: Focus on the WHAT, not the HOW

Adopting a Vested Outsourcing business model does not change the nature of the work to be performed. At the operational level, there is still a need for lines of code to be written, bathrooms to be cleaned, orders to be fulfilled, spares and repairs to be managed, calls to be answered, and meals to be cooked. What does change is the way that the outsourcing company purchases the services.

Using Vested Outsourcing, the company outsourcing specifies what it wants and moves the responsibility of determining how it gets delivered to the outsource provider. According to the outsourcing paradox, firms outsource to a supplier because they know the supplier can do a better job, yet write the contract as if they are the experts. Good companies outsource for a reason: in-house operations are either too expensive, ineffective, or both. Why dictate in an area where you have decided you are deficient? It is up to the service provider to understand how to put the supporting processes together to achieve the desired outcomes.

Rule #3: Agree on clearly defined and measurable outcomes

The third hallmark of a good Vested Outsourcing partnership are clearly defined and measurable desired outcomes. All parties must be explicit in defining the outcomes they want. These outcomes are expressed in terms of a limited set of high-level metrics, ideally, no more than five. Organisations should spend the time, collaboratively, during the outsourcing process, and especially during contract negotiations, to establish explicit definitions for how relationship success will be measured. Investing time up front is critical to ensure that none of the companies spends time or resources after implementation measuring the wrong things.

Once the desired outcomes are agreed on and explicitly defined, the service provider can propose a solution that will deliver the required level of performance at a predetermined price. This approach fundamentally shifts the business model, shifting risk from the company that is outsourcing to the service provider. Under the purest form of Vested Outsourcing, the company that is outsourcing pays only for results, not transactions; rather than being paid for the activity performed, service providers are paid for the value delivered by their overall solution.

Rule #4: Optimise pricing-model incentives for cost/service trade-offs

The fourth hallmark of a Vested Outsourcing partnership is a properly structured pricing model that incorporates incentives for the best cost and service trade-off. The pricing model is based on the type of contract— fixed price or cost reimbursement—that will be used to reward the outsource provider.

When establishing the pricing model, businesses should apply two principles:

• The pricing model must balance risk and reward for the organisations.

• The agreement should specify that the service provider will deliver solutions, not just activities.

The essence of Vested Outsourcing is a strategic bet by the outsource provider that it will meet the service levels at the agreed price. If the service provider does a good job, it will reap the rewards of greater profitability. Vested Outsourcing does not guarantee higher profits for service providers, but it does provide them with the authority and autonomy to make strategic investments in their processes and product reliability that can generate a greater return on investment than a conventional cost-plus or fixed-price-per-transaction contract might yield.

Rule #5: Governance structure should provide insight, not just oversight

In the early days of outsourcing, many companies made the mistake of simply throwing the work 'over the fence' to the outsourcing provider, with poorly defined requirements and often no performance metrics or service-level agreements. The downside is that many have gone to the other extreme. Today’s outsourcing providers often have a small army of program managers who micromanage the provider. An effective Vested Outsourcing partnership outsources to service providers who are real experts. Such partnerships should be managed to create a culture of insight, not oversight.

If a company has done a good job picking the proper outsource provider, a trusted expert in its field, why does it need a small army providing general supervision? A properly designed governance structure should establish good insight, not provide layers of supervisory oversight.

For many, Vested Outsourcing will seem like heresy to 'tried-and-true' procurement methods. For others, it will seem like a fresh approach to help companies achieve better success with outsourcing. Thought leaders from Microsoft, Intel and UPS are early advocates for the process. In fact, Microsoft has achieved such success that it won the Shared Services Outsource Network award in the category of “Best Mature Outsource Service Delivery” in April 2010. And leading practitioners like Brad Mitchell, President of DIstribution and Logistics for UPS, has predicted that Vested Outsourcing will be one of the top five trends in supply chain mangement.

For those wishing to explore Vested Outsourcing further, we offer the following resources:

• Our book, Vested Outsourcing: Five Rules that will Transform Outsourcing, was published by Palgrave Macmillan in February 2010 and offers a comprehensive guide for developing successful Vested Outsourcing partnerships.

• Visit the Vested Outsourcing blog to view additional resources, tools, insights from the authors and their contact details.

About the Authors:

Kate Vitasek is a thought-leader in the area of Supply Chain Management and is a well-recognised authority on performance management and performance-based approaches for business. She is the lead researcher and faculty for the University of Tennessee's Center for Executive Education work in the area of outsourcing and performance-based approaches. She is also the Founder of Supply Chain Visions, a Top 10 supply chain management boutique consulting firm.

Mike Ledyard is a veteran of international sourcing, manufacture and importation of product and tooling, especially from China and Eastern Asia. He is an author and frequent speaker on process measurement and improvement, and was selected as one of the Top 20 Logistics & Supply Chain Executives of 2001-2002. Mike is also a co-founder of Supply Chain Visions.