Guy Kirkwood's BPO Backchat

31 jan 2006

If anyone was in doubt the the sourcing market was expanding in 2006, the latest research from the Outsourcing Institute should alleviate any fears.

Among members who joined the Institute in 2005, plan to buy over USD24bn in new contracts in 2006. This is in addition to the USD19.4bn stake in the market that they currently manage.

Bearing in mind that the majority of the Institute's members are practitioners and not on the supply-side, this figure is astounding.

30 jan 2006

In a recent article by Brian Sullivan, chairman and CEO of Christian & Timbers, talks about the changes in executive search in the past five years:

The industry is still dominated by the big five firms. There hasn't been a new firm to challenge them in 20 years. However, the marketplace is changing fast as clients demand increased transparency, accountability and results. Firms need to realise that that the business they were in five, seven years ago is not the same business as they are in now.

What clients begrudge is if they pay a lot of money, and they don't get the best service. If projects are are not handled properly, then they have a legitimate gripe. If the established firms don't improve their performance, they are in danger of losing market share.

Surely this is a lesson for the BPO and sourcing market?

28 jan 2006

Business Week is bringing out a new perspective on outsourcing. Here is a taste:

A more enlightened, strategic view of global sourcing is starting to emerge as managers get a better fix on its potential. The new buzzword is "transformational outsourcing." Many executives are discovering offshoring is really about corporate growth, making better use of skilled U.S. staff, and even job creation in the U.S., not just cheap wages abroad. True, the labor savings from global sourcing can still be substantial. But it's peanuts compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.

Although it is US centric, the idea that outsourcing leads to increases in productivity and innovation, really appeals. Anyone involved in persuading their corporate to turn outdated processes into lean shared services or to outsource should read this.

27 jan 2006

As predicted last September, EDS has announced the sale of AT Kearney to a management buy-out. More than 170 AT Kearney staff from 26 countries participated in the transaction as investors, acquiring 100 percent of the equity in the firm - Financial details were not disclosed.

I predict this will mean big money to the investors and more tears for EDS.

26 jan 2006

According to the the NOA, Indian outsourcers are poised for European expansion. This report was featured by silicon.com. My response has also just been published:

Indian outsourcing companies could compete with the global technology firms. But, the key challenge that Indian firms will have to tackle will be to gain the ability to enter the doors of CEOs and CFOs as well as they now talk to CTOs. Outsourcing business is more brand name oriented than any other business and to build a brand that can operate on the business and IT side of the deal is going to take more than crowds of engineering graduates from Bangalore. It requires client facing groups able to tackle ambiguous, non-structured problems and though Genpact, Wipro and Infosys are beginning to hire European professionals, they have a long way to go. I predict that only through merger and acquisition activity will this be achieved.

25 jan 2006

The BBC's Tim Weber has just reported on a new PwC survey.

PwC has found that cost cutting is not the main reason for outsourcing anymore. Instead companies are focused on winning new customers in emerging markets like Brazil, Russia, India and China.

This, I believe is absolutely spot-on. The SBPOA has been arguing for some time that the focus on cost-cutting as the sole reason for outsourcing and off-shoring is muddle-headed. Growth and efficiency is the key to success in the run-up to 2010. The so-called BRIC countries - Brazil, Russia, India and China - a term first coined by investment bank Goldman Sachs, offers the highest potential growth during this period.

Outsourcing is a lever to establish companies in these markets and should in my opinion be exerted now.

23 jan 2006

As reported by Tim Worstall, at least one FTSE 100 company is thinking of moving their domicile out of the UK in order to avoid UK tax rates. The Times newspaper said this from a Treasury spokesman:

We’re just collecting the appropriate amount of tax that Parliament has already set. The UK remains a very good place to do business."

There are well known limits to taxation. People might stop doing the taxed activity if the burden became too high. Or they might leave the jurisdiction, similarly draining the coffers. The latter was, however, an extremely expensive undertaking, for in effect a company had to pay, on changing domicile, all of the tax that might ever be collected in one fell swoop.

This is no longer true under a number of EU laws. The most important for the long term is probably REG (EC) 2157/20. Under this a business can be organized as a European Company (S.E.) and it will pay corporation tax in whichever jurisdiction it places its head office while operating in any and every country. That head office can be anywhere it likes in EFTA (note, not the EU), say Estonia with 0% corporation tax on retained profits. Or Liechtenstein. Most especially, the original tax jurisdiction is not allowed to hinder such movements, nor tax them when they take place.

It may well be that the UK remains a good place to do business and that the UK government is setting a certain amount of tax. But whether it will be collected is another matter, for it is now entirely legal, with a little shuffling of the company’s documentation, to do business in the UK without paying the UK Treasury part of the profits.

I wonder, might we see a confirmation in part of the Laffer Curve, rising tax rates and enforcement leading to lower tax revenue collected?

21 jan 2006

Despite media reports that Hewlett-Packard and private equity firm Blackstone Group were in preliminary discussions to acquire Computer Sciences Corp., such a deal never made it on the radar of HP executives and directors, said an HP source:

CSC has occasionally come up from time to time as a potential acquisition, but it's nothing that we ever seriously pursued and nothing we were in talks with recently.

Hmmm; I continue to think that CSC has lost its way and has to be a target. Whether HP or Unisys (the current preferred option) are the best homes is another question entirely.

20 jan 2006

UK retailer Dixons Group is to outsource IT infrastructure support and software development to Indian IT company HCL Technologies in a deal believed to be worth around GBP150m. As Eamonn Kennedy, research director of Ovum said:

To all the remaining doubters out there: HCL has just whipped away your comfort blanket. This deal is proof that Indian-based outsourcers have what it takes to beat the established players.

19 jan 2006

Wipro, India's third-largest IT service provider, has released its results for Q3 ending 31 December 2005. Revenues for the company's IT services and products division has grown 36% year-on-year to Rs21.5bn (USD485.2m), with operating profit up 25% to Rs5.2bn (USD116.5m). IT services revenues grew 39% to Rs19.6bn (USD441.7m), with operating profit up 27.6% to Rs4.8bn (USD110.3m).

Interestingly, the firm's BPO operations did not fare as well, with operating profit down by 1% to Rs290.2m (USD6.5m) on revenues up only 13% to Rs1.9bn (USD43.6m). Europe continues to be a strong growth driver, with revenues up almost 51% in the quarter to Rs6.6bn (USD148m).

This demonstrates two things: firstly, that Indian firms are still finding the BPO market tough to sell into; secondly, that Europe is the key potential growth area.

16 jan 2006

This is a year of milestones for Infosys. The Indian giant is celebrating 25 years of growth, revenues are set to cross the USD2bn mark and there will be 50,000 employees by March. This year also sees chairman Nagavara Ramarao Narayana Murthy retire. He spoke with BR Srikanth on his vision for the future:

All of us at Infosys have a sense of accomplishment, and satisfaction for a job done well so far. I am happy that we have worked as a team, and that this organisation has reached its targets without compromising our values. This is the opportunity to contribute even more to the country. I tell my colleagues that we must resolve to ensure that the company will remain strong for the next 250 years.

Now there is an example of someone who's focused on the future.

15 jan 2006

If anyone doubted the need for action on the Gershon Review, the Adam Smith Institute's recent report Rewiring Democracy shows that the UK is a world away from efficient e-government. Whitehall has tried to bolt it on to existing systems, rather than to redesign government to take advantage of this revolution in how to join up its service and communicate with citizens.

The Institute contrasted the UK with Estonia, where even Cabinet meetings are done online, the results on the web within minutes (the UK has a 30-year secrecy rule). Eamonn Butler has since discovered that the Netherlands too has a much more strategic vision of things. William Health of Government Computing points to the Dutch government's 10-point charter on what citizens can expect out of an electronically literate government:

Choice of Channel. Citizens should be able to communicate with government however they like; at the counter, by letter, phone, e-mail, or internet.
Transparent Public Sector. Citizens should easily be able to find where to get information and services.
Transparent Rights. Citizens should easily be able to find out what services they are entitled to.
Personalized Information. Citizens are entitled to information that is complete, up to date and consistent.
Convenient Services. Government has to make clear what records it keeps about citizens and will not use data without their consent.
Comprehensive Procedures. Government keeps citizens informed of procedures they are involved in and allows easy tracking and tracing.
Trust and Reliability. Government should be electronically competent, and should guarantee secure identity management and reliable document storage.
Considerate Administration. Citizens can file ideas for improvements, and lodge complaints. Government compensates them for mistakes, and learns from its mistakes.
Accountability and Benchmarking, Government actively supplies benchmark information about its performance.
Involvement and Empowerment, Citizens should be invited to participate in decision-making and government ensures they have the necessary information.

14 jan 2006

All is not rosy for development of effective government in the UK with the announcement that Walsall Council has abandoned plans for a GBP650m outsourcing joint venture with Fujitsu Services.

The local authority initially announced Fujitsu Services as its preferred partner for the ambitious joint venture back in December 2004 but, after more than a year of contract negotiations, it has decided not to proceed with the project. The "Putting the Citizen First" project had aimed to create 750 new jobs and overhaul the town's services by creating a regional business centre supporting 24/7 access to council services by email, internet and call centres. More than 1,500 council staff would have transferred to Fujitsu Services, which had committed to investing £115m in the scheme. But Walsall Council now says strong service improvements made over the last few years mean it is now better placed to meet the needs of local people without the joint venture.

With the Gershon Review driving change and with the invitations to tender coming out next month, this does not bode well.

13 jan 2006

The bad news for IBM in the ongoing SEC investigation is obviously not that bad:

The investigation should not be construed as an indication that any violations of law have occurred.

So said IBM yesterday. SEC investigators were seeking information about the company's April 5 disclosure of a plan to treat options to employees as an expense, as well as the disclosure nine days later of weaker-than-expected earnings.

Shares fell less than one percent in the NYSE so I do not think they have too much to worry about, yet...

12 jan 2006

In an interesting addition to yesterday's Backchat, Steve Ranger writing for silicon.com said this:

Almost USD100bn in outsourcing contracts will be up for grabs in the next two years - and big players including Accenture, EDS and IBM could feel their grip on the market weakened by more competition from offshore companies. The 'Big Six' of outsourcing - Accenture, ACS, CSC, EDS, HP and IBM - are the incumbent service providers on 72 per cent of the contract value to be renewed over the next two years, and could see their "dominance challenged", according to outsourcing advisory firm TPI. TPI said 325 contracts are due for renewal during 2006 and 2007 - one in five of all outsourcing deals. Although incumbent providers usually win contract renewals, increasing competition means providers cannot rest on their laurels. There is also a trend towards smaller deals which could challenge the dominance of the big players - and help Indian outsourcers. Of the 293 contracts signed in 2005, nearly three-quarters were small- to medium-sized contracts. And whilst Indian providers rarely win deals over $200m, last year they were invited to pitch for 30 per cent of contracts below this threshold and won 70 per cent of them.

11 jan 2006

In 2006, Indian outsourcing companies could challenge the global technology consulting firms. But, the key challenge that Indian firms will have to tackle will be to gain the ability to enter the doors of CEOs and CFOs as well as they now talk to CTOs. Consulting business is more brand name oriented than any other business and to build a brand that can operate on the Business and IT side of the deal is going to take more than hordes of engineering graduates from Bangalore. It requires client facing group able to tackle ambiguous, non-structured problems and though Genpact, Wipro and Infosys are beginning to hire European professionals, they have a long way to go before they reach there.

I predict that only through M&A activity will this be achieved.

10 jan 2006

In an excellent summary of Q4 2005 for FAO, the SBPOA along with FAO Research makes the following predictions for 2006:

Increased competitive requirements to capture new FAO customers in a market that is still immature yet growing at a healthy rate worldwide.
Continued high bid costs to attract and win FAO contracts.
Greater involvement in multi-tower deals including an F&A component.
Focus of bidding on the outsourcing of routine F&A functions, with more higher-end process still being explored.
Chronic need to expand offshore as buyers demand FAO cost savings.
Greater requirements to educate buyers on risks (perceived and real) of outsourcing and planned solutions as well as routine contract monitoring/adjustments for such.

9 jan 2006

A couple of days ago, Accenture reported that net revenues for the first quarter of fiscal 2006, which ended at the end of November, were USD4.17bn, a 12 percent increase over the same period last year. The company said sales of outsourcing services helped drive these gains as application development, infrastructure management, and other IT and business services rose 18%. Outsourcing now accounts for over a third of Accenture's total revenues. Consulting sales, which account for just under two-thirds of Accenture's total revenues, increased 8%.

As I have said many times before, the two killers in this market will remain IBM and Accenture, this is just more grist to the mill.