Industry news

As reported in News, oil giant Royal Dutch Shell has finally announced the completion of a three-way outsourcing deal for its technology and telecoms infrastructure, valued at more than $4 billion.

As expected, the networking and telecoms component is going to AT&T for $1.6 billion; the hosting and storage deal has been clinched by Deutsche Telekom subsidiary T-Systems for $1 billion; and the $1 billion computing services and operational integration contract has gone to EDS.

"Partnering with EDS, T-Systems and AT&T gives us greater ability to respond to the growing demands of our businesses. It allows Shell IT to focus on information technology that drives competitive position in the oil and gas market, whilst suppliers focus on improving essential IT capability," said Shell CIO Alan Matula.

Shell expects to keep layoffs to a minimum, it said in the announcement on 31st March, with 3,000 staff going to the outsourcers, and most of the remaining internal teams remaining with Shell.

Terms of the staff transfer have not been revealed, and the union Unite will be watching for any attempt to take on staff on reduced terms and conditions. The union slammed Shell earlier this year when the company inadvertently revealed that job losses would be on lesser terms than for other professional roles within the company.

So what can we learn from this affair? First and foremost that it has been extraordinarily badly handled.

Barely a week ago, Shell said it was undecided on the outsourcing decisions; this would have alarmed and confused an already demotivated IT workforce unnecessarily. In a downturn, especially, decisions about who you work for and under what terms and conditions can be stressful, especially if you have no control over them. Meanwhile, the internal rumour mill will have been working overtime.

In this type of situation – all-too familiar in takeovers, mergers and outsource deals – what normally happens is that by the time a decision has been made, the new employers inherit a depressed and uncooperative workforce at a time when the technical, operational, cultural and managerial aspects of the transfer are at their most complex, expensive and sensitive.

This is not a recipe for a successful outsourcing deal, particularly when your former employer is reporting multibillion-dollar profits in a flatlining economy – both based partly on the price of crude oil.

The other message of this deal is a risky one, long term. If IT is not core to a company such as Shell, then this follows the recent trend of companies redefining themselves around narrower and narrower points of focus. Ever more highly paid management teams guard the organisation's essential IP and brand, with everything else outsourced as a supporting, often low-cost, service.

IT experts risk becoming the 21st century typing pool, hidden not behind flimsy office partitions but behind a wall of management consultants. That doesn't strike me as a secure or healthy future.

CIOs and other executives involved in such decisions should read some of the technology noticeboards and follow the threads that concern their companies; they might not like what they read. These are your future employees; and it is your fault they feel that way.

KPMG, the largest integrated accountancy firm in Europe, has given the go ahead to a £62 million outsourcing agreement with BT. The five-year deal will support a drive towards cost savings, the building of value-added services and improved employee productivity across KPMG UK and Germany.

Bryan Clark, the KPMG partner leading the IT infrastructure consolidation, said: “This is an ambitious outsourcing programme and one that will deliver significant benefits to both our cost base and our effectiveness in serving our Clients.”

BT will manage the delivery of numerous telecommunications services including a fully converged, IP-based, networked telephony infrastructure. The platform will allow additional countries to join if at a later date whilst allowing for greater levels of flexibility and collaboration.

Riding a wave of growing interest in Latin America, EDS has extended its reach in the area, opening a new applications services facility in Argentina’s Buenos Aires. The move is part of the company's aggressive expansion of its multibillion-dollar applications business worldwide.

EDS Argentina has approximately 2,500 employees and operates in Buenos Aires, Córdoba, Rosario and Mendoza. The new facility marks the next step in EDS' ongoing expansion throughout Latin America.

Eduardo Araujo, vice president and regional general manager of EDS Latin America, said: “We intend to keep growing those markets [Latin America] as they have strategic importance to our worldwide operations.”

Multinational oil giant Royal Dutch Shell has finally announced the completion of a three-way outsourcing deal for its technology and telecoms infrastructure, valued at more than $4 billion. The announcement ends months of rumour and speculation about the terms of the deal and its impact on IT employees.

As expected, the networking and telecoms component is going to AT&T for $1.6 billion; the hosting and storage deal has been clinched by Deutsche Telekom enterprise subsidiary T-Systems for $1 billion; and the $1 billion computing services and operational integration contract has gone to EDS.

"Partnering with EDS, T-Systems and AT&T gives us greater ability to respond to the growing demands of our businesses. It allows Shell IT to focus on information technology that drives competitive position in the oil and gas market, whilst suppliers focus on improving essential IT capability," said Shell CIO Alan Matula.

Shell expects to keep layoffs to a minimum, it said in the announcement on 31st March, with 3,000 staff going to the outsourcers, and most of the remaining internal teams remaining with Shell.

The T-Systems element of the deal sees the company take over the infrastructure and IT staff of Shell’s global datacentres including three in the Netherlands and one in both the US and Malaysia. T-Systems will move its U.S. headquarters to Houston, and integrate approximately 900 Shell specialists into its ranks.

"We are delighted that Shell rewarded our commitment to their global IT needs with the largest contract in today’s market. We see their complex environment of over 7,400 application servers as an exciting challenge. This is true global delivery", says Reinhard Clemens, T-Systems’ CEO.

KPMG signs contract with BT in £62m outsourcing deal.

KPMG has signed a five-year, £62m contract with BT to cut costs and boost productivity. The deal will see BT provide network telephony services, including audio- and videoconferencing and will manage KPMG's LAN and WAN connections. The deal will help the company’s expansion while promoting it’s customer service depatment.

In the drive to increase shared services across local government, Cambridgeshire and Northamptonshire County Councils have announced an unprecedented partnership with Fujitsu.

The shared service will be the first Enterprise Resource Planning (ERP) solution in local government and will underpin the Councils’ delivery of back office services including HR, finance and procurement.

Cambridgeshire County Council cabinet member for corporate services, Councillor John Reynolds, said: "This new shared service makes good business sense and fits in with the national requirement for the modernisation of local government, to develop ways to improve the performance and further reduce the cost of our back office processes by sharing appropriate services with like minded councils with the support and expertise available from the private sector.”

To develop the service, Fujitsu has invested in an infrastructure that provides services to the councils’ on a managed service basis whilst offering savings over the cost of traditional stand-alone ERP solutions.

Geoff Neville, local and regional government director at Fujitsu Services commented: “This new shared service is a major step forward in the local government sector for two county councils to share a common ERP solution.”

As reported in News yesterday, Randall S Stephenson, the CEO of US telecoms giant AT&T, caused outrage in the United States by denigrating students there. His comments concerned the problems his company is having sourcing enough workers to fill the 5,000 customer service jobs he promised to return to the US from India.

Only 1,400 of the 5,000 jobs have been sourced from within the US since he made the promise in 2006.

Referring to poorly skilled American school-leavers, he said: "If I had a business that half the product we turned out was defective or you couldn't put into the marketplace, I would shut that business down."

"We're able to do new product engineering in Bangalore as easily as we're able to do it in Austin, Texas," he added.

His comments come in the same week as the US Journal of Information Technology Research published a more tactfully worded article entitled Information Systems, Offshore Outsourcing, and Relevancy in the Business School Curriculum by William J. Tastle et al. Nevertheless, it reached the same conclusion. The US education system, suggest the writers, is failing to provide people with the right IT and IS skills for the business marketplace (something UK skills campaigners have been bemoaning for at least a decade).

The article included the comments: "The long-term future for IS education seems bleak at best unless the IS curriculum is reoriented to address these critical issues that are also apparently neglected by some businesses, and our instruction is modified to make IS graduates more appealing and productive to business.

"Outsourcing of IT functions is not a new reality for many organizations in the United States. However, what originated as a domestic approach to business management has increasingly been refocused to explore the cost savings in outsourcing overseas."

While it is hard to consider comments about unskilled America too seriously in the context of the global dominance of such companies as IBM, Microsoft, Apple, Oracle, EDS, HP, and dozens of others, they unfortunately coincide with an increasingly isolationist and sometimes xenophobic debate in the US about offshoring. That debate is propelled to some degree by its selective and emotive use as a tick-in-the-box vote grabber by presidential candidates.

Candidates who have raised the issue of US jobs being lost to India and other countries neglect to mention the ways in which outsourcing benefits the US, especially given that the US is itself one of the world's leading providers of outsourced services. It is the world's leading hardware and software developer, and certainly the Moby Dick of intellectual property.

A report this week finds that the US remains the third outsourcing destination of choice for UK CIOs, for example. Many of America's leading IT brands are globally successful partly because they outsource; outsourcing risk is the hidden driver of the US high-tech economy, some commentators believe.

Negative comments about outsourcing appear on numerous blogs. For example, news that Indian giant Tata had acquired iconic British car marques Land Rover and Jaguar (from US car maker Ford, let's not forget) was the trigger for some vitriolic comments on a thread at technocrat.net. This is a site affiliated with Bruce Perens, one of the prime movers of the open source software community and a passionate campaigner for free speech through open source technologies.

Xenophobic responses were swiftly taken down, and in its place remains a fascinating, if bleak insight into the psyche and worldview of some highly vocal sections of the IT community.

What the debate is really about is fear: fear of the decline of US economic power, characterised by the downward spiral of the dollar against other currencies.

The downturn is not the fault of India, China, or any 'emerging economy' – countries that offer vast potential markets and partnership opportunities for Western companies and governments, after all. Gordon Brown has been swift to recognise this fact. Rather, that decline is due in part to an insular political climate combined with the subprime mortgage collapse, and an economy based on the inflation of some companies' worth to investors over what they actually produce for the wider public.

Perhaps some of the most alarmist and xenophobic technology commentators in the blogosphere – who usually hide behind 'Anonymous Coward' postings – might like to consider whether they have become part of the problem, rather than resort to xenophobic slurs on forums that encourage political discourse.

Accenture has provided more evidence of the success of many outsourcing and services companies in the economic downturn. The company surprised many analysts by reporting higher than expected Q2 (ending 29 February) results, and accordingly increased its full-year earnings forecast.

Net income rose 37 percent to $406.6 million on revenues of 5.61 billion, from $296.7 million on revenues of $4.75 billion in the same period last year. Chief financial officer (CFO) Pamela Craig added that outsourcing revenues were at a record high of $2.26 billion, an increase of 18% in US dollars and 11% in local currency, she said.

Chairman and CEO William Green said: “Our continued focus on clients, on execution and on accountability serves us well. In today’s environment clients are looking for results, and this plays to our strength. We see a lot of opportunities for our services in the market, and we are laser focused on taking advantage of them.

Chief operating officer (COO) Stephen Rohleder said: “We’re extremely pleased that four of our five operating groups achieved strong revenue growth and also delivered strong operating margin.” Rohleder said that demand within the financial services sector remains strong, despite the global economic downturn. “We are seeing strong demand in financial services throughout Europe and increased demand in Asia Pacific, while North America is holding up well.

“Through long-term relationships with key clients, we are selling additional work and signing contract renewals and extensions. We’ve sharpened our offerings to target the C-suite issues of today including cost management and we are using outsourcing as a strategic tool to deliver improved business results.”

Another operating group doing well for Accenture is communications and high tech (CHT), which continues to show strong momentum, said Rohleder. “This was the third straight quarter in which CHT had double-digit revenue growth in both US dollars and in local currency. In communications, we are seeing significant demand in the customer service area, which has resulted in some recent big wins throughout Europe.”

Rohleder said that not all areas of the outsourcing business were faring as strongly as others, leading to lower revenues in one market sector. “The public service operating group had some challenges this quarter, with three percent revenue growth in US dollars and a decrease of one percent in local currency,” he said.

“This was primarily due to lower outsourcing revenues in the Americas. Q2 operating margin in public service was affected by delivery inefficiencies on a few contracts, as well as the investment we are making in building a strong pipeline of early stage opportunities. We are very focused on improving the growth and the operational performance in this business unit.”

The IT Services market in Asia Pacific (excluding Japan) will grow from $37.5 billion in 2007 to $55.9 billion in 2011, representing a compounded annual growth rate (CAGR) of 10.5% from 2006 to 2011, according to a report by Springboard Research.

The report, Asia Pacific IT Services Market and Forecast, 2006-2011 finds that the Indian IT Services market – with a CAGR of 18.6% will remain the fastest growing in the region – although as a region Greater China will offer the largest market opportunity in dollar terms at the end of the forecast period.

“The Asia Pacific IT services market is arguably the global leader in terms of growth, supplemented with a mix of mature and emerging markets,” said Phil Hassey, VP services research at Springboard Research. “The markets of interest are not just the top four – China, India, Australia and Korea – but the emerging ones like Indonesia and Vietnam, which will register significant growth going forward,” Mr. Hassey added.

The report uses Springboard’s 'Market Attractiveness Index' to rank countries and individual IT services markets on the basis of growth opportunities. According to this index, the top ten countries in the region are:

1. People’s Republic of China

2. India

3. Australia

4. Korea

5. Indonesia

6. Vietnam

7. Malaysia

8. Rest of ASEAN

9. Singapore

10. Philippines.

Both the Philippines and Vietnam are regularly touted by sourcing commentators as being the emerging hot offshore destinations of choice over the next few years, which does not seem to be borne out by Springboad's figures.

“For India and China, local capabilities, offerings and presence is just the start of a list of essential requirements for success. On the other hand, existing relationships, marquee clients and strong partnerships can provide capabilities for expansion in markets such as Hong Kong and New Zealand with relatively limited opportunities,” Mr. Hassey added.

According to the report, application hosting (with a CAGR of 19.5% between 2007 and 2011), will register the fastest growth during the forecast period, although enterprise application integration, at $ 7.8 billion, will continue to be the largest component of the market by 2011.

While enterprise IT outsourcing is the largest market in 2007, the reluctance of PRC firms to use the enterprise IT outsourcing model will reduce its relative size and weighting in the market by 2011.

The report predicts that challenges in accessing and retaining IT skills will accelerate the shift to external services providers, as enterprises will struggle to retain in-house key individuals and skill sets. Also, China will not challenge India as the home of offshore service delivery especially for English language requirements – as skill levels, quality, culture and governance are all more suited to India being a hub of global delivery against the PRC.

Beware of attempting to force outsourcing prices too low in the economic downturn warns new research.

A report from Compass Management Consulting finds that some companies are demanding discounts of up to 23 percent from providers when renegotiating contracts.

The company scrutinised 120 deals worth over £30 million apiece over a 12-month period and found substantial downward pressure on prices in the first two months of this year.

The research sounds a note of caution to executives about squeezing outsource service providers in a quest for a short-term financial gain, as doing so carries a strong risk of contract failure in the longer term.

Geraldine Fox, leader of global sourcing services at Compass said, “We are seeing aggressive, high-level targets plucked from the air in contract negotiations which bear little relation to what the business needs.”

Fox said that due diligence is often being skipped in the rush to secure a swift and aggressive deal.

The root of the problem is companies' micro-management of outsource specialists, who are regarded less as partners or service experts and more as low-cost task providers, she said.

“In some cases, managers are beginning to treat outsourced service providers in the same way as a discretionary spend that can be cut at will. In fact outsource providers are delivering core service to the business.

“If the outsource provider is delivering a good service already, these negotiations can have a negative impact... they will cut corners to deliver the service for the price agreed.”

As reported on sourcingfocus.com last week NelsonHall has been advising businesses to seek “transformational deals” when renegotiating contracts, but this refers to seeking less rigid and inflexible terms rather than merely driving prices down to the wire.