THE HOME OF THE GLOBAL SOURCING STANDARD
Most e-tailers appear to manage their own website operations while a few have chosen to outsource this aspect of the business. In the US, Amazon.com runs e–commerce sites for a number of retailers and in April 2005 Marks & Spencer announced that Amazon Services Europe would look after the technical side of the Marks & Spencer website and link in-store, telephone and online ordering systems.
Outsourcing of these functions is becoming increasingly common but it is important to consider the high level issues before e-commerce operations are contracted out, in order for the relationship to succeed.
Understanding and clarifying objectives
The most important first step in any outsourcing arrangement is to analyse and identify the key drivers for taking such a step, and to have a clear understanding of its outcomes and benefits. The most obvious advantages for the retailer are time and money savings but there a range of other advantages. In particular, the retailer may hope to benefit from the latest technology without having to invest manpower and money developing its own systems.
The retailer will also hope to benefit from the outsourcing service provider's expertise, allowing it to improve its consumer service levels leaving the retailer to concentrate on its core competencies of marketing and growing the business. For example, outsourcing critical back end functions such as customer service and e-fulfilment enables retailers to get their e-commerce initiatives up and running much more quickly than if they have to build the entire infrastructure. Marks & Spencer believed that taking advantage of Amazon's established technology would allow its website to reach its full potential in 2006 and allows the in-house marketing and sales teams to focus on their core values.
There are potential pitfalls in any outsourcing relationship and these need to be managed carefully. For example retailers need to manage their reputations carefully and avoid any brand damage that a supplier could inadvertently inflict. It is important that retailers consider the following:
• What its internal drivers for outsourcing are; the commercial consideration over the venture; and its defined objectives
• Clarifying its overall e-strategy and considering how outsourcing will support such strategy
• Which outsourcing model is best, for example: indirect, tied, direct or joint venture.
E-tail is a very specific function to outsource and the retailer must consider specific e-commerce issues. If a traditional bricks and mortar retailer is moving into e-commerce for the first time then this will be the first time some of these issues have been considered. Roles and responsibilities can be split between the retailer and the outsourcing service provider if this is clearly agreed and understood in advance. For example, consideration given to points such as: electronic stock control, security (e.g. information and e-tail loss reduction), order fulfilment, warehousing and distribution, helpdesk and consumer support, integration with multi-channel and payment processing.
Managing the negotiations and meeting objectives
Prior to agreeing the deal with Amazon, as would be advisable, Marks & Spencer reportedly talked to a number of interested parties. This is a sensible move. It is crucial to source the services carefully and once a short list is selected, to perform sound due diligence on suppliers before a final selection is made. In order to ensure the supplier is financially stable and therefore able to commit to a long-term outsourcing contract, the retailer should insist the supplier makes financial information available to them. It is not simply a question of who can perform the service most cheaply; issues of capability, culture, relationship and other factors can be as important to long-term success as price and finding a supplier that ticks all the boxes rather than just the cost efficiency box is the key to success.
The outsourcing contract must include the details of the arrangements including how the provider will be paid. This may sound simple but there are different payment models, such as the service provider taking a slice of the online revenue. Parties should be very clear about who is responsible for legal and regulatory compliance. Other negotiation and contractual considerations include:
• Sole-vendor or multi-vendor tendering (consider the RFP objectives and process)
• Negotiation strategies & negotiation process (will there be parallel negotiations and will negotiation strategy include specific session goals)
• Negotiation problems and escalation
• Service Level Agreements and contract issues, e.g.
- Service level agreement (SLA): key performance indicators (KPI) and remedies.
- Contract: provisions for enforcement of obligations, continuity of services, exit provisions, term, tax issues
- Front-end legal and regulatory issues: e-commerce, distance selling, data protection, online marketing laws and regulations
- Back-end arrangements: website hosting, design and development, and content.
Balancing / managing expectations during negotiations and through service term
It is of paramount importance to update and evaluate an outsourcing relationship to find out exactly what works and what doesn’t and to identify and rectify any problems whilst they are in their infancy. Outsourcing relationships are often regarded as partnerships. It is important that the outsourcing contract and the relationship must be developed to anticipate and accommodate change factors.
For example, this may include considerations for:
• Retailers – In an instance where high cost savings are not realised a retailer will need to audit and evaluate to ensure this is rectified immediately. It can also be the case that a retailers needs change, for example if they grow or shrink in size or change focus, a supplier relationship and subsequent contact needs to be able to accommodate for this. Supplier financial difficulties are another factor that needs to be considered. If a supplier goes bankrupt leaving you out of pocket and with no service, how you tackle this needs to be taken into consideration. Overall, the best approach to take is to aim to minimise costs whilst maximising protection (and therefore minimising retailers risk).
• Suppliers - Need to be wary of unclear obligations and unanticipated costs. Meticulous preparation and planning is required to ensure that nothing catches you by surprise. Adding on costs or arguing over obligations can leave a bad taste in a retailer’s mouth and may sour a relationship. Maximising profits has to stay at the front of a suppliers mind in order for the company to remain profitable. Allocating risk to retailer can help a supplier protect themselves if the project does fail. There should always be joint responsibility as an outsourcing project is not a case of out of sight out of mind and should consist of a partnership.
Online retail is thriving: many reports indicate that online shopping over Christmas set new records across all sectors from sales of groceries to gadgets. Many retailers now adopt the multi–channel model, with customer reach not only through stores, catalogues, telephone but also through websites. Retailers that take their website operations into an outsourced relationship should consider the issues very carefully to ensure that the arrangement is based on a solid legal and commercial framework.
AstraZeneca has signed a seven-year £736m global IT outsourcing contract with IBM.
According to Gary Harwood, client executive at IBM, the agreement is among the first of a new breed of outsourcing agreements based on desired outcome or "service effect".
AstraZeneca will maintain control of its IT strategy but use joint governance boards so that IBM will determine how IT is delivered while AstraZeneca will have control over the broader IT infrastructure.
Other areas of joint collaboration drawing staff from both companies will include innovation and managing cultural and behavioural change to ensure both companies work well together.
CMS Cameron McKenna has become the latest City firm to outsource a chunk of its IT work to India.
The top 20 UK law firm has struck a five-year deal worth £10m with HCL Technologies, with the Indian IT outfit working alongside Camerons' internal IT capability.
While the majority of the firm’s 70-strong IT team will transfer to HCL, around 22 employees will find themselves out of a job.
Camerons is the latest City firm to broker a deal to outsource IT support, following the likes of Allen & Overy, Clifford Chance, Eversheds and Linklaters.
UK financial services companies are wasting money and damaging customer relations by offshoring call centres, according to a study by Compass Management Consulting.
Rises in personnel costs of up to 15% per annum in countries such as India are reducing the price advantages of offshore call centres, according to the study.
Tech Mahindra Limited, a leading, global systems integrator and business transformation consulting firm focused on the telecom space, today formally announced creation of a Centre of Excellence for business service delivery including solution design in Belfast, Northern Ireland.
The centre, which is being supported by Invest Northern Ireland, will provide end to end IT and BPO solutions to customers primarily in the European and US markets. The centre will have thecapability to provide multilingual support to Tech Mahindra customers on 24X7 basis. The addition of this centre will be an important milestone in Tech Mahindra's efforts to build a global delivery capability.
Speaking on the occasion, Sanjay Kalra President Strategic Initiatives at Tech Mahindra: 'Global Telecom and Financial markets are a well developed ecosystem. Tech Mahindra as a leading Solutions provider to the Telecom industry has clients and partners worldwide. Our growth requires high class talent with the right attitude and a good work ethic. Belfast has this refreshing attitude and the spirit of innovation in abundance. Our Belfast centre will play a pivotal role in servicing and growing our client base in Europe and North America.'
Hanif Lalani, Group Finance Director, BT Group. said "I am delighted that Tech Mahindra has decided to set up in Belfast. It is a coup for Northern Ireland that they took the decision to locate here as a result of the strong recommendation and experience of BT. Winning such a globally respected operation can only raise the perception of Northern Ireland as a good place in which to do business and act as a testimonial to Investment Northern Ireland's efforts"
Leslie Morrison Chief Executive of Invest NI, said 'This is another landmark investment, the fourth by an Indian Technology company in Northern Ireland, and one which is a tremendous endorsement of Northern Ireland as world-class location for telecommunications companies? he further added ?This investment will bring to over 2,500 the number of people employed by Indian companies in Northern Ireland. Tech Mahindra is a welcome addition to Northern Ireland?s expandingcluster of global software-development companies that have found this region to be an excellent position from which to target the European and US markets. The company will benefit from a ready supply of local telecoms expertise and in turn will introduce new specialist skills that will further enhance the marketability of our workforce.'
Eversheds has revealed the cost of its IT outsourcing deal with Computacenter, with the UK giant shelling out £27m on back-office functions over the next three years.
The top 10 UK firm will transfer 79 professional staff as part of the deal, which covers various core support functions including the helpdesk network, infrastructure teams and its IT training specialists.
The departing staff are understood to come from offices across the firm’s national network, which includes a major call centre in Birmingham, and account for around 80% of its entire IT capability.
The shake-up follows a review of Eversheds’ IT function by director Malcolm Simms, who joined the national firm in 2005 from Disney, and made Eversheds the first major UK law firm to outsource one of its core support divisions.
Retailers and business services firms are leading the growth in IT spending in the UK, as organisations step up their investment in online commerce and knowledge management systems.
The latest Computer Weekly/Kew Associates research shows that retailing, wholesaling, hotels and catering firms increased their IT spending at a rate of 7.6%over the 12 months to the end of March, a rate higher than the rest of the economy.
Emerging cyber crime including ID thefts, data thefts, credit card manipulation and stealing confidential information from companies, have put IT companies and BPOs on high alert. The IT-ITES sector in India has initiated several radical moves that has brought in some amount of confidence back in the sector. Companies are also demanding that Nasscom, the apex body for the segment, create awareness in US and Europe countries on the various security measures taken by Indian companies.
Says Ashwin Mittal, director, Cross-Tab Marketing Services Pvt. Ltd, an ITES company, “Data security is paramount in our business. We need to demonstrate strong systems for getting business, and can be exposed to litigation from clients if we do not protect their data. Nasscom can help by introducing a common platform of security standards throughout the industry and also by introducing a certification programme for companies' data security systems." Cross-Tab adopts strong data security measures at the personnel, process, infrastructure and technology levels. The company spends about 1% of its revenue annually on data security.
According to Neeraj Kaushik, country head-India, Trend Micro, a security software provider, “Security is not something that you do once and do away with, but an ongoing process. Where Indian companies lack is in constantly being aware of the challenges and accordingly redeveloping their data security measures.” Industry players say that, the job of a typical BPO worker becomes very suffocating as there is no access to personal e-mail accounts and access to websites not necessary for work are also blocked. Workers are forbidden from socializing with non-employees during work hours. Also visitors are required to seek permission and are required to sign a document of non-disclosure.
It has its detractors, but in reality there is little evidence to suggest that the outsourcing market is doing anything other than booming. Research firm TPI has found that Europe and Asia-Pacific are both still experiencing strong outsourcing growth. Outsourcing activity in Europe for the first quarter of 2007 was up by two-thirds compared to 2006, with $9.7bn-worth of contracts signed, while Asia-Pacific experienced a 30 per cent rise to $2.1bn. Outsourcing is still, and will continue to be, a boom market. However the nature of the outsourcing deals is changing.
In the past in the financial services sector, reducing overheads to maintain a competitive edge or simply staying afloat was the underlying force behind every outsourcing decision. In some respects outsourcing was seen as a way of passing on a problem that was too expensive and resource-draining for the company. Financial services organisations have been guilty in the past of viewing outsourcing primarily, if not solely, from an operational perspective.
Nowadays, a more mature and wiser outsourcing market has emerged. Companies no longer see cost as the principle driver behind outsourcing deals - more and more companies are viewing outsourcing as a way to add value to their organisation as well as gaining additional domain and technology expertise. By employing a supplier with high-level industry knowledge to develop complex technology that transforms or re-engineers a key business process or function, the end user aims to change the operation so that both the performance improves and the cost decreases.
Outsourcing the development of high-end technology, which will re-engineer the company’s key processes – transformational outsourcing - is a new and exciting development in the outsourcing marketplace. Analysts describe transformational outsourcing as “an emerging form of IT outsourcing that combines cost saving with the potential for enhanced IT flexibility”.
One example of transformational outsourcing is within banks and financial services organisations, which outsource software aimed to improve or re-engineer their front line operations. By employing a supplier with the domain and technology expertise to deliver mission critical software, the banks accelerate process transformation and build software that is a vital part of their operations.
When outsourcing is approached from a transformational perspective, the economic advantages are a beneficial result rather than an objective. The key aim is to accelerate and finance process transformation. This is geared around key business needs such as strengthening front line operations, accelerating speed to market, closing the skills and knowledge gaps and primary technology demands such as building a strong and flexible infrastructure. A recent IDG study on transformational outsourcing found that firms are increasingly using transformational outsourcing as a way to introduce strategic flexibility into their business models.
The transformational model implies another level of the vendor / end-user relationship. It is more of a partnership in which an outsourcing provider can demonstrate flair in thought leadership, pro-activity, domain expertise and an ability to adapt and respond to the end user’s business requirements. This approach can be used in any sort of outsourcing practice, from high-end applications through to complex IT systems and business process outsourcing.
With the rise of transformational outsourcing has come the realisation amongst end users that outsourcing isn’t a matter of simply handing over a problem to a supplier. The transformational model is different. As research firm TPI explains, transformational outsourcing is “the process of effecting continuous strategic change and tying the results of the outsourcing initiative to strategic business outcomes. It is a collaborative, risk- and gain-sharing relationship among the organisation and its service providers to drive enterprise transformation and achieve significant business process improvements.” By harnessing the outsourcing process, and working in tandem with the supplier towards the same goals, transformational outsourcing can have a strategic effect on achieving company goals.
There are both huge benefits and potential pitfalls when outsourcing such development to a supplier. On the plus side, the promise of rapid, substantial, sustainable improvement in enterprise-level performance, as well as an improvement on the bottom line has tempted end users to consider transformational outsourcing.
However, it is essential to follow best practice guidelines when considering a transformational outsourcing solution. As in any outsourcing deal, finding the right supplier is vital. The difference in transformational outsourcing being that the supplier must be trusted absolutely to know the end user’s business, the systems that are used and the operations and processes that are to be transformed. The domain-level expertise has to be one step above traditional outsourcing because of the fact that core processes are actually being transformed, rather than amended or simply being managed.
One other issue that must be thought through within transformational outsourcing is the need for the end user as well as supplier to look at their relationship as a business model, that benefits both partners, and not just a deal. It is very important that the strategic purpose should be kept at the centre at all times.
The advantages of transformational outsourcing come about as a result of intelligent outsourcing processes. When transformational outsourcing is put in place, monetary benefits are an inevitable outcome, but it is the improved value to the end user’s organisation and processes that is the most significant benefit to the end user.
By Sergey Karas, Vice-President, Luxoft.
For more information, please visit www.Luxoft.com
Xchanging has announced a five-year £1.7 million annual contract renewal with SELEX Sensors and Airborne Systems UK to provide HR services. This builds on a relationship which began in 2001.
SELEX S&AS UK is a wholly owned subsidiary of the Finmeccanica Group after BAE Systems sold its stake in May 2005. SELEX S&AS chose to renew its agreement with Xchanging under new terms for three primary reasons: recognition from both companies that the partnership is working and continuously improving service delivery; Xchanging's demonstrated expertise in HR processes and delivery channels; and the transparency of its pricing structures. This made Xchanging the provider of choice.
Under the new contract, SELEX S&AS will continue to receive tailored HR services, building on the already strong relationship with Xchanging. The agreement goes beyond the first contract with new services, new service standards and a new pricing structure. SELEX S&AS will also continue to benefit from the significant investment in HR processes offered by Xchanging.
Darren Bartholomew, HR Manager for Shared Services at SELEX S&AS UK, said, "We have worked together in partnership now for six years and I am pleased to have extended our relationship with Xchanging, taking the provision of HR services to a new level of maturity. With this partnership we have the ability to deliver an even better level of service to a very demanding customer base in what is an incredibly fast-moving business."
David Andrews, Chief Executive Officer at Xchanging, said, "SELEX S&AS' choice to renew its service agreement with Xchanging demonstrates our ability to tailor services and pricing structure to the customer's needs. We look forward to the next five years of delivering quality services and measured value."
David Rich Jones, Executive Director responsible for Xchanging's Human Resources services, said, "We are delighted to build on our excellent working relationship with SELEX S&AS – allowing them to focus on their exciting challenges while Xchanging applies its expertise to accelerate the HR service to even higher levels."