Check this blog soon for Sealock’s latest thoughts on calculating total cost of ownership (TCO) on outsourcing deals. Hint: They involve getting engineers to think like finance people and finance people to think like engineers. Guess which group is harder to morph?]]>
Given my recent work covering outsourcing and offshoring plans among enterprise IT organizations, the international element of this brouhaha speaks to the idea of U.S.-based businesses investing in business operations abroad, the due diligence that takes place in assessing IT outsourcing locales, and whether the business should be prepared to accede to the mores of its new base.
Relationship building is a key aspect of outsourcing arrangements. There are often language barriers, time-zone differences and cultural variances to consider, but these are sometimes forgotten as companies draw up outsourcing SLAs and haggle over IT pricing models. Whoever in your organization oversees IT outsourcing arrangements — whether it’s the CIO, procurement or another business executive — needs to know what the company is getting into when it strikes a business deal with a foreign partner.
In the past year, I compared the pros and cons of IT outsourcing in Asia and Latin America, including some of the sociopolitical considerations to take into account. Take these as guidelines, but remember it’s your responsibility to undertake due diligence and understand the inherent risks and rewards of individual offshoring vendors, to avoid getting caught in Google’s current predicament.
But if you follow the news, you might have also heard about what must be considered an IT outsourcing failure in the state of Virginia, which is currently embroiled in controversy over its $2 billion IT outsourcing contract with security firm Northrop Grumman. Although there have been a number of missed deadlines and service failures, as we reported this week, breaking the current contract could cost the state hundreds of millions of dollars in taxpayer money – that’s no pocket change! It leaves the state with little choice but to get this deal back on track.
So what went wrong? Perhaps most importantly, there was a poor governance framework in place for overseeing this deal. I wasn’t so surprised to hear that – a lot of organizations struggle before successfully implementing a governance framework for IT outsourcing contracts. But I’m still wondering how the state could not include penalties for any missed deadlines and service levels below those specified in SLAs. Isn’t that the entire basis of a contract — to hammer out those details? It’s mind-boggling.
(And, just so you know I’m not new to such failures: As a community journalist, I covered the construction of a new high school with a budget that’s ballooned to nearly $200 million, almost double the initial estimates. So, trust me, I know government incompetence.)
I’m scheduled to speak to Virginia CIO George Coulter Friday about the corrective action plan proposed by Northrop Grumman and how the state intends to straighten this mess out. Do you have questions regarding IT outsourcing contracts or what went wrong here? I’d love your input.
Also, for those who view Virginia’s mess as a cautionary tale, remember to check out SearchCIO.com, where we have information on IT outsourcing governance, outsourcing trends going into next year, and more.]]>
When my colleague Christina Torode covered the Burton Group’s Catalyst conference this summer, the buzz among IT executives was that business users were purchasing SaaS services without running these agreements by IT first. As Torode reported:
“Business users tired of waiting for IT to provision a new application or service are tapping cloud providers and bypassing IT along the way, much as they have for many Software as a Service applications over the past few years. And cloud providers are not calling on the IT department, but rather going to department heads to pitch their wares.”
But if this trend makes it harder for IT outsourcing contract professionals to oversee the company’s IT assets as a whole, there is also a flip side: When business users procure their own software, it doesn’t come out of the IT budget.
During a breakout session on SaaS services and cloud computing outsourcing contracts, Forrester senior analyst Liz Herbert said that she’s heard that some IT outsourcing contract professionals would actually prefer that individual departments continue purchasing their own SaaS services for this reason. In this economy, with all budgets and spending being scrutinized so closely, why make it look like IT is doing the spending if these other departments are willing to foot the bill?
To be fair, I noticed some snickers from the IT contracting professionals in the room upon hearing Herbert’s comment, so perhaps it’s not a common point of view but I thought it worthy of mention nonetheless. Certainly, it speaks to the need for governance in IT outsourcing contracts on an enterprise-wide level – a subject I’ll be delving into in the coming week.
Has your IT organization surrendered oversight of SaaS services contracts procured by the business, or do you still intend to oversee all these IT outsourcing contracts throughout your organization?]]>
First, Tech Mahindra Ltd., which purchased the troubled IT outsourcing company two months ago, following the Satyam scandal, has officially rebranded it as Mahindra Satyam.
Secondly – and, I think, more importantly – Satyam is looking to cut jobs if orders coming into the company continue to languish. According to this article, 8,500 employees placed in a so-called “virtual pool” might see their positions eliminated in six months if the company fails to find them work.
Satyam’s staffing troubles aren’t surprising — it must be difficult to woo new Satyam customers or retain those with expiring contracts, given the past transgressions of company leaders. Considering all that, I’m a little surprised that the new owners are leaving Satyam in the company’s name at all. As a point of comparison, after ValuJet Airlines experienced a series of safety problems and the fatal crash of ValuJet Flight 592 into the Florida Everglades, it changed its name and is now operating as AirTran Airways.
Since the Satyam scandal broke early this year, IT outsourcing and offshoring clients have struggled to parse through fact and fiction, protect existing contracts and wise up when pursuing new IT outsourcing deals. As the recession deepened, we began to hear that companies were seeking cheaper rates, sometimes in exchange for more flexibility on the part of the outsourcer in how work is completed. More recently, it seems that insourcing – bringing previously outsourced IT work back in-house – is on the rise.
So what role has the Satyam scandal played in these trends? I recently asked Ben Trowbridge, CEO of Alsbridge Inc., a U.S.-based IT outsourcing and business process optimization consulting firm, whether the scandal was sticking in his clients’ minds.
“Yes – but it’s amazing how short a memory clients have for bad news,” Trowbridge replied. “Within a month of that being brought to a head, it was like everybody had forgotten about it.”
This wasn’t the answer I was expecting. Google’s AdWords tool tells me that the term Satyam is still being searched quite a bit. So I’m putting the question out to enterprise CIOs: Has the Satyam scandal had any effect upon your company’s IT outsourcing and offshoring activities in the past six months? I’d love to hear your stories.]]>
While total value of large outsourcing contracts is down dramatically in the first quarter of the year, according to industry watchers, the number of contracts awarded by telecom, media, retail and the utilities, traditionally cool to outside help, is up at least 20% year over year.
Except for utilities, the sectors showing a 20% jump share another trait: All of them underperformed the Forbes Global 2,000 in growth of revenue and earnings and in market capitalization.
The data comes from TPI, a large global outsourcing advisory firm that tracks IT and business process outsourcing deals of $25 million or greater. Results from the first three months of the year show the total value of outsourcing contracts signed declined 22% from the same period a year ago to $19 billion, the lowest since the first quarter of 2001, when the air went out of the dot-com bubble. The number of contracts slipped to 141, 1.3% down from the same time a year ago. And the bulk of the contracts — 101 — were for IT work.
The utilities industry accounted for 30 of the 141 big deals signed over the past 12 months, compared with 23 contracts between 2007 and 2008. Highly regulated and influenced by unions, this is a sector that has traditionally avoided offshoring, according to TPI. But an aging workforce disproportionately hit by layoffs during the recession has depleted expertise, causing companies to look outside their four walls. The expense of compliance is also driving companies to cut costs on labor, even in the face of high demand for their products. “The industry has got to deal with the harsh reality of continued growth and demand for electricity, while the construction of the power plants to meet these new demands face increasing regulatory hurdles,” said TPI industry sector specialist Tom Lang.
The volume in retail, which also accounted for 30 contracts in first quarter, was up 40% from a year ago, although the total value of the awards dropped to its lowest level in five years, more evidence that the trend is to enact shorter contracts focused on fixing the problem at hand.
Telecom’s 99 contracts marked an all time high for that industry.
The underperforming media industry showed an uptick in both the number and value of contracts, consistent with the trend in that sector for the past five years. Most media outsourcing activity stems from the U.S., with about 60% of the transactions signed in the Americas. These are now increasingly coming not just from the top 25 global Forbes media companies, but also from smaller players.
“Companies of all sizes are aggressively seeking new ways to reduce costs and develop new revenue streams,” Lang said. “To make the most of their assets, they are also looking to leverage content across multiple platforms, which often requires the development of new software applications and other IT-driven innovations. But there is also a fair amount of BPO, largely focused on the financial processes.”
The media market is an exception on business process outsourcing (BPO). The market for big, transformational BPO work, hot during the boom-boom years, has shriveled, especially in the Americas, and it is unlikely to come close to any of the metrics of the past five years, TPI’s Peter Allen said. “The cost savings are generally longer in coming in BPO and require broader organizational change than we see in IT outsourcing, giving ITO the priority.”]]>