_ 01.April. 2014

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NO LONGERJUST CHEAPLABOUR

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‘SMALL’ GUYSGET IN ONTHE ACTION

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CASH IN ONSPECIALISTEXPERTISE

FUTURE OF OUTSOURCING

FUTURE OF OUTSOURCING

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Ȗ Outsourcing is an emotive sub-ject. Take the NHS. Recently the Green Party vowed to end all NHS outsourcing contracts. Green Party leader Natalie Bennett cited an end-of-life care contract which is up for tender to outsourcers, stating to a cheering crowd: “The NHS is a national jewel that must be grabbed back from the jewel thieves, polished and set back again in pride of place. The profit motive has no place in the health-care system.”

To which we might say: OK then, just try. Ban all products and ser-vices currently produced by profit-making firms.

Let’s start with CT scan machines, which produce those breathtaking three dimensional images of the human body. Cur-rently the manufacture of CT machines is done by profit-making third parties such as Philips and GE. Both firms own vast libraries of patents relating to CT machines, putting up legal barriers to the NHS making its own.

The PET variation of the scanner will be even trickier for the NHS to reconstruct. PET stands for posi-tron emission tomography. Posi-

trons are anti-matter. How many NHS employees know how to make an anti-matter scanning machine?

Put bluntly: the NHS can neither make, nor should it attempt to make or maintain, CT or PET scanners.

We could run similar arguments for umpteen other areas of NHS outsourcing. The NHS needs insulin. It has a contract with Novo Nordisk. The NHS needs stethoscopes. They are made by Littmann.

Ah, but critics might say, are these things really outsourcing? But of course they are. The NHS could make its own CT scanners, insulin and stethoscopes, but the benefit of relying on third-party contractors to supply these goods is so vast no one dreams of doing them in-house.

The same logic should apply to all goods and services, from cleaning to end-of-life care. When contracting out is more produc-tive – according to whatever metrics the buyer thinks relevant and price is only one among many – and whether we are talking about making something or ser-vicing something, then it should be done.

The question is merely when and how to use outsourcers.

To understand the relationship between core functions to be kept in-house and those which should be outsourced, we need to grasp the reasons outsourcing can beat doing it yourself.

This is a conversation about specialisation. As the father of economics, Adam Smith, pointed out, if two people specialise on their own task then productivity will rise. It is because Novo Nordisk is devoted to insulin R&D that it can outperform an unfocused rival. In fact, Novo Nordisk outsources doz-ens of roles too, again, to specialists.

It is about innovation. A mono-lith like the NHS would produce

one answer to any given problem. Throw the same problem out to the private sector and you’ll get a plethora of answers. In the retail sector firms such as Ann Summers needed help with analysing con-sumer behaviour. It chose retail IT consultancy PCMS because of its strengths in improving contact centres and checkouts.

It’s about cost. It’s about secu-rity. It’s about flexibility. Who wants to blow their entire budget on capital expenditure when an outsourcer can offer the same products as pay-as-you-go, with continuous upgrades and expan-sion when required?

This isn’t to say that outsourcing

is always right or that all deals give value for money.

Ruby McGregor-Smith, chief executive of Mitie, says: “It remains the case that every organi-sation is different and there is no one-size-fits-all solution. We have to be adaptable and innovative to succeed, continually pushing boundaries and challenging the industry status quo.”

There are clearly problem areas. Graham Beck, of PA Consulting Group, concedes: “Companies pursuing the multiple-sourcing route must recognise and take responsibility for stitching the patch-work quilt of outsourced services together. Despite integra-tion being a hot topic in outsourc-

ing, companies are yet to deal with this successfully – and a lot have yet to even recognise it.”

These are the realities. The answer is to forge ahead and establish the best ways of out-sourcing – the best ways of writing contracts, of getting partners to work together, and to ensure deals deliver value and cost sufficiently to silence doubters.

Outsourcing is a vital business tool. To doubt this is to argue that the NHS should cobble together a homemade PET machine. That is a non-starter.

But how should outsourcing be used? Now there is a debate worth having.

Outsourcing can offer specialist expertise, economies, flexibility, security and, not least, innovation, writes Charles Orton-Jones

OVERVIEW

SOME THINGS ARE BETTER DONE BY SOMEONE ELSE

When contracting out is more productive and whether we are talking about making something or servicing something, then it should be done

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JONATHAN AMESFormer editor of The Law Society Gazette, he is now a contributor to The Times and a special reports writer for The Lawyer magazine.

GABRIELLA GRIFFITHBusiness journalist and editor for Black Heart Media, she was assistant editor of LondonlovesBusiness.com.

NICK MARTINDALEAward-winning freelance journalist and editor, he contributes regularly to national business media and trade press, specialising in HR and workplace issues.

CHARLES ORTON-JONESFormer Professional Publishers Association Business Journalist of the Year, he was editor-at-large of LondonlovesBusiness.com and editor of EuroBusiness magazine.

JOSH SIMSFreelance writer, he contributes to the Financial Times, The Independent, Wallpaper* and Esquire, and is editor of the social trends journal Viewpoint.

SHRUTI TRIPATHIBorn in Delhi, she is associate editor of LondonlovesBusiness.com, and specialises in profiling entrepreneurs and writing about everything London.

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CONTRIBUTORS

Global healthcare giant Novo Nordisk outsources some

specialist functions

IN ASSOCIATION WITH

ALL FTSE 100 COMPANIES USE OUTSOURCERS

FUTURE OF OUTSOURCING

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they were looking for and did a lot of internal planning before they even went to the market”.

“And it helped them that from the start they were dealing with the people who would deliver the services, not salespeople who would then pass them on to people they’d eventually work with,” Mr Wybrant adds.

Robert Wentink, client account executive for the IT company Unisys, agrees. Yes, it was able to reduce the operating margins and reduce the costs of household products manufacturer Henkel by some 20 per cent. “But that only worked because we were not han-dled by them as a provider, but had a fully integrated arrangement,” he says. “In outsourcing, success is all about keeping it human – and the leadership on both sides to bring that out.”

This might also assist in another lesson of successful outsourcing – the need not just for communica-tion, but clarity.

Denis Creighton, chief executive of managed business solutions and outsourcing for FEXCO, Ireland’s biggest privately-owned financial services organisation, argues that beyond the standard tender document, a pilot pro-gramme of maybe six months allows a supplier to prove it can bring added value, and to provide the reassurance “that it actually understands the buyer’s business and actually can listen to what it’s saying”.

Certainly the idea of added value is essential in understanding tar-gets. “The incentive may simply be to do something cheaper than the buyer can do it themselves,” says Mr Creighton. “But increas-ingly there are more ways than financial of measuring the suc-cess of a partnership that both sides need to be agreed on. It may be positive movement in what a customer thinks of your company, for example, or an improvement in retention.

“It was a problem for the indus-try a decade ago when outsourcing was essentially much more price driven. And what happened? Cus-tomers walked.”

Clarity on goals works as much for the supplier as it does the buyer – again pointing to the notion that success stories are ones of building partnerships. “As a supplier you have to focus on what the buyer’s priorities as a business are – and this doesn’t happen a lot,” says Spencer Bradshaw, the head of technology at Olive Communica-tions, a specialist in the provi-sion of mobile phone benefits to organisations including Travelex and NASDAQ.

“The fact is that a successful buyer-supplier outsourcing rela-tionship starts with suppliers dif-ferentiating themselves beyond the box or the service they provide because it’s hard to find a product from a vendor that’s markedly dif-ferent from that of competitors. And they differentiate themselves by not just paying lip service to understanding the company they are supplying.”

Indeed, as in any relationship, a lack of understanding can usher on its end or signal that it wasn’t right in the first place.

So perhaps one final lesson is key. And that is, as Ms Hallard notes: “Outsourcing isn’t right for everyone – it’s down to the culture of the respective organisations and the people there to manage them. Done well, outsourcing works for many. But it’s not a panacea.”

Ȗ As with so many things, you can blame the government. “Out-sourcing is prolific in the UK – it’s the UK’s second biggest employer after retail and there’s not a sin-gle member of the FTSE 100 that doesn’t outsource. And yet it doesn’t have the best of reputa-tions,” concedes Kerry Hallard, head of the National Association of Outsourcing (NAO), the industry’s professional body.

“Look at the headlines over the G4S security issue at the Olympics, various NHS projects or people’s experiences with call centres. The industry has success stories, but unfortunately companies rarely want to talk about them.”

Problems in outsourcing arrangements there certainly are. A failure for buyer and supplier to be strategically aligned, or too much focus on the contract and its indicators of fulfilment and not enough on achieving the real objectives are among those cited as typical by Ms Hallard.

But what then might be the recipe for a truly successful buyer-vendor outsourcing arrangement? After all, as Why Partnering Strat-egies Matter, a new IBM study suggests, outsourcing is no longer viewed simply as a means of sav-ing money or of bringing in expert competencies outside a business’s core activities.

For example, some 53 per cent of chief executives now outsource as a means of tapping into innova-tion, with 92 per cent of the chief marketing officers seeing it as a way of better analysing what their customers want.

Ms Hallard sums it up neatly: “Successful outsourcing is about understanding that it is not merely about making a purchase – it is about building a partnership.”

Indeed, according to Tony Mor-gan, chief innovation officer of strategic outsourcing for IBM in the UK, from the very outset best practice involves client and sup-plier sitting down together and first working out if there is a busi-

ness and cultural fit between the two sides.

In other words, he says: “You need to get the governance of the relationship right from the outset and on an ongoing basis. And any subsequent contact needs to have a high degree of flexibility to it. The fact is that business moves very fast now and both a client’s requirements and our capabilities change. The incentive to do this is there on both sides.”

The “easily underestimated power of positive communica-tions”, as Mr Morgan calls it, is unfortunately just that. Matt Wyatt, vice president and head of business transformation at CGI, one of the UK’s biggest IT employ-ers, works with the likes of Daimler Chrysler, Welsh Water and Equity Assurance, with which outsource provider Olive Communications has recently renewed contracts.

“What has made that arrange-ment work has been an under-standing that changing needs over time require frequent attention, face to face and at the highest level – that’s essential because outsourcing can be such a major strategic move and can see a good percentage of a business going into third-party hands,” he says.

More particularly, this means ensuring that, crucially, a buyer has “the right skills to manage a third-party organisation, the right guys in place capable of working within the new relationship – and that can be quite a steep learning curve”, says Mr Morgan. “Certainly there was a little bit of pain at the start with Equity, but that is quite common [in a new relationship].”

That cuts both ways. John Wybrant, a key account director for Arvato’s public service busi-ness, notes how its ongoing, ten-year contract with Chesterfield Borough Council – the relation-ship having scooped the NAO’s Public Sector Outsourcing Project of the Year award in 2011 – got off to a good start because “Chester-field were very precise about what

Clarity of purpose and partnership are essential for outsourcing to succeed, as Josh Sims reports

NOT FAILINGTO SUCCEED

LESSONS FROM SUCCESS

Some 53 per cent of chief executives outsource as a means of tapping into innovation, with 92 per cent of the chief marketing officers seeing it as a way of better analysing what their customers want

TOP TIPS

mobile devices, to mid-market and FTSE 100 companies needing a unified communications solu-tion that integrates mobiles, fixed lines, data networks and busi-ness applications. This growth saw Olive join The Sunday Times Tech Track 100 in 2013.

Olive’s chief executive Martin Flick says the growing complex-ity of communications makes out-sourcing an increasingly attrac-tive option for ambitious firms. “Staff are finding they now have better tools in their home life than in their professional life,” he says. “They use Facetime on their iPhone, they use productiv-ity apps and a variety of commu-nications platforms, such as Twit-ter and instant messengers. Then they get to work and wonder why they can’t do the same thing. We provide trusted advice and imple-mentation so employees can have the perfect tools.”

Olive will even help your firm understand how to handle new trends, such as customer feed-back through Facebook, and flex-ible working protocols. “Whatever our customers need help on, we use our deep industry experience to consult on that,” says Mr Flick.

Education and publishing firm BPP chose Olive to manage 600 mobile and fixed-line connec-tions. Richard Brown, voice ser-vices manager for BPP, Europe, the Middle East and Afr ica, explains: “The telecoms mar-ket is a really interesting place to be, but as a buyer, the options are almost endless, with many different commercial and tech-nological delivery models. But Olive is a trusted partner who have not just helped us to navi-gate the waves of technology, but to take advantage of them. We’ve saved significant amounts for our business, but we’re also ensur-ing our users are as connected as we need them to be, which

Mace Group needed to rethink the way it ran communications. Due to significant business growth, they had found it dif ficult to keep track of what they needed and what all their 4,000 mobile devices were costing. IT opera-tions director Alan Webb was brought in to oversee a transfor-mation and in 2012 chose to out-source Mace’s telecoms needs to Olive Communications.

Olive set about creating a new package for Mace. This included Olive’s billing management soft-ware, which gave Mr Webb an overview of who was running up large charges. The billing tool, combined with other benefits such as free line rental, resulted in Mace’s communications bill fall-ing by 40 per cent in a year, despite adding another 179 workers.

Today Olive offers quarterly strategic advice to Mace, ensur-ing it makes the most of new products and processes. It pro-v ides ongoing per formance management via weekly account management sessions. And it has daily contact with Mace staff as its support team handle around 350 technical inquiries a month.

The anecdote sums up the ben-efits of working with an outsourcer such as Olive. There is the access to deep expertise. Outsourcers know their niche inside out and certainly far better than a con-struction firm like Mace could develop by itself. There is the buying power of an outsourcer. By purchasing in large volumes from networks and internet ser-vice providers, a telecoms special-ist can pass on significant savings to clients. Outsourcers can supply time-saving and cost-saving tech-nologies. And there is the conveni-ence factor. No longer does the cli-ent need to trawl the market to find the best deals as the outsourcer has already done the legwork.

As the cherr y on top, Olive works with Mace using open-book costing. Both parties are able to see what they achieve through the deal.

Olive Communications was founded in 2003. Since then, through a mix of organic growth and acquisition, it has grown to a point where it now employs 160 people and serves more than 7,000 customers, from micro-businesses that require just a few

supports greater productivity.”A new pricing plan negotiated

by Olive with free talk time, and a converged voice and cloud net-work deal, led to a fall of 50 per cent in call charges. Mr Brown’s verdict on the relationship? “The quality and responsiveness of customer service, and the profi-ciency of Olive’s account manag-ers are second to none,” he says. “When this is added to the vision and the ability to help customers future-proof themselves against technology and telecoms changes, it makes for a very potent blend.”

TOP TEN BENEFITS

COST RECOVERY

A managed service provider will analyse all communications supplier contracts together, giving immediate savings – 25 per cent is not uncommon.

ONGOING COST CONTROL AND BEST TARIFF SELECTION

Management tools and software will give predictability of spend and ongoing right sizing of tariffs can save many firms 50 per cent on previous expenditure.

CORPORATE RISK REDUCTION

The same tools prevent users running up huge roaming bills. Olive has seen examples of $80,000 bills from just one user, when they haven’t implemented these controls.

CONTRACTUAL FLEXIBILITY

Companies change regularly. Hiring or firing, or moving offices all impact on what communications they need. A service provider, unlike the big networks, will be better placed to react and adapt accordingly.

ACCESS TO NEW DEVICES

Many providers will offer a “technology fund” which allows businesses to upgrade handsets when they want to, not just on an 18-month cycle. If they choose not to do so, they can reduce their monthly bill instead.

ADVICE ON TECHNOLOGY TRENDS

Every year sees new buzzwords and disruption; for example, 2013 was BYOD, 2014 is mobile apps. Your provider will help steer you through the minefield.

BUSINESS TRANSFORMATION CONSULTANCY

The big networks and the smaller resellers lead with technology. A dedicated service provider starts with understanding business objectives and then matching the technology strategy accordingly.

DEDICATED ACCOUNT MANAGEMENT

A one-to-one relationship is important in many areas of life, but business-to-business firms often forget this. For service providers, who are selling other people’s products, customer relationships are critical.

HIGHLY RESPONSIVE CUSTOMER SERVICE

Unless you are a huge organisation with 10,000-plus mobile connections, the customer service you get from a network can be patchy.

BEING DIFFERENT

By not taking the easy option and choosing a household name, you mark yourself as innovative and progressive. And if the relationship is a success, which it is likely to be given these ten benefits, you gain the kudos.

Connecting with expertoutsourced communicationsOutsourcing company telecommunications can cut costs and save time, says Olive Communications

We’ve saved significant amounts for our business, but we’re also ensuring our users are as connected as we need them to be, which supports greater productivity

MACE GROUP CASE STUDY

4,000mobile devices

cost reduction in the client's communication bill following a

new package set out by Olive Communications

40%

Be transparent with staff to ensure a smooth transition – be collaborative

Share the risk – provide incentives for both sides of the arrangement

Ensure cultural alignment – buyers and vendors need to know they think alike

Don’t be tied to restrictive contract arrangements

Engagement should be face to face and at top-management level

Performance indicators aren’t necessarily indicators of the great relationship you need

Deal with problems honestly and head-on

Be flexible – both sides of the arrangement need to be ready to adapt to change

All FTSE 100 companies use outsourcers

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FUTURE OF OUTSOURCINGFUTURE OF OUTSOURCING

Ȗ From the chap cleaning the office floors to the dinner lady in the canteen, from the geek who wanders round rebooting desktop computers to the scientist carry-ing out complex pharmaceutical clinical trials – just about every aspect of modern business can be outsourced.

Long gone are the days when everyone was a “company man”, employed by one monolithic cor-poration. The benefits of outsourc-ing are touted as appealing directly to boardroom bottom lines – it takes non-core business functions off the books, removing respon-sibility for boring issues around personnel, payroll, facilities and technology, leaving executives to get on with what they do best.

But there are legal traps waiting to snare those businesses that charge in unadvised to embrace outsourcers. So while outsourc-ing has the potential to benefit a company’s profits, watertight con-tracts are crucial to cover a range of areas, including service lev-els, data protection, compliance, security, and break and financial penalty clauses.

Specialist lawyers point out that every area a business might wish to outsource comes with its own peculiarities. But before looking at the nuts and bolts of contracts, businesses need to address core issues around employment and the impact of European legislation.

The Transfer of Undertakings (Protection of Employment) Regu-lations 2006 (TUPE) is the UK’s implementation of the EU 2001 Business Transfers Directive. TUPE has two significant ramifi-

cations on outsourcing. First, staff currently employed by a business wishing to outsource their tasks have a right to transfer with their roles to the new provider.

“The big issue is who picks up the risk and the cost of those employees,” says Mark Prinsley, an outsourcing partner in law firm Mayer Brown. “Because often the new employer won’t want to take on all the former employer’s staff.”

Likewise, on termination of an outsourcing agreement, the supplier’s staff assigned to the function also fall under TUPE provisions, meaning the customer or a successor service outsourcer could be forced to have them trans-ferred back.

Once businesses have under-stood the employment issues around outsourcing, there is a raft of points lawyers argue must be incorporated into any contract. To determine which are most important, businesses need to be absolutely clear about what func-tions they want to outsource.

“Can you put a rope around it?” asks Mark O’Conor, a partner in law firm DLA Piper’s technol-ogy group. “And then what is the target operating model; in other words, what is the desired end-state? Clear definitions of what

the business wants and how the outsourcer is going to provide it must be written into the contract. If it is too vague and amorphous, and not sufficiently precise, then the outsourcer will be unlikely to do cheaper what the business is already doing in-house.”

After defining the functions, key contractual elements should cover performance levels, payment mechanisms and remedies if it all goes the shape of a pear. Indeed, that last point, say lawyers, is argu-ably the most crucial.

Just as engaged couples might find drafting a pre-nuptial agree-ment useful, despite it slightly dulling the romance, businesses should discuss potential future difficulties with outsourcers before tying the knot. “We try to ensure that a client business is not draft-ing a contract where the only rem-edy is termination,” says Simon Colvin, an IT partner in law firm Pinsent Masons.

“We include escalating rem-edies – greater transparency of reporting to higher levels at both businesses – so the partnering arrangement between customer and supplier can be maintained, rather than it being a battle with arms drawn. In our contracts, ter-mination is the last resort.”

Short of termination, contracts can include provisions for the business to take aspects of the service back from the outsource supplier. Or the ability to require the contractor to pull back on-shore a function that it had being conducting off-shore.

Nonetheless, as many a married couple will attest, sometimes there

An outsourcing arrangement which lacks legal finesse is doomed to end in tears, as Jonathan Ames discovers

LEGAL DETAIL IS CRUCIAL AND SHOULDN’T SPOIL PARTNERSHIP

CONTRACTS

Just as engaged couples might find drafting a pre-nuptial agreement useful, despite it slightly dulling the romance, businesses should discuss potential future difficulties with outsourcers before tying the knot

Business and IToutsourcing analysis

Page 08

is just no patching up differences. “From a legal position, termina-tion is a pivotal right,” says Mr Colvin. “It means that, if things are really hitting the buffers, there is an ability to walk away.”

Therefore, it is important to have in place robust legal exist arrangements to ensure that data, assets, contracts and licences are all transferred smoothly back to the customer or to a new outsource

provider. “If you are in a termina-tion scenario, when it is the result of supplier default,” says Mr Colvin, “you cannot at that stage be negotiating the basic principles of the exit arrangements because the supplier is not going to be willing to bend over backwards.”

Mayer Brown litigator partner Miles Robinson specialises in out-sourcing disputes and advises that contracts are difficult to unravel if things go wrong because the out-sourced elements are often critical to the business. “It’s a tough call to terminate a contract for breach, as there will generally need to be a lengthy transition period to the

new provider to avoid business disruption. That can be difficult to achieve successfully for parties who are in dispute,” he says.

Mr Robinson says wrangles often arise because an outsourcing contract “isn’t adequately future proofed”. He cites the example of new technology becoming avail-able with the potential to perform a function better while at the same or lower cost. “The outsourcing provider could be reluctant to provide that technology because the investment cost will eat into the revenue generated by the con-tract,” he says.

Outsourcing has become so pop-ular that even some legal services can be sent to arguably cheaper and more efficient bulk providers. Indeed, ranks of lawyers at legal process outsourcing assembly lines in India and the Philippines, along with other jurisdictions, have cropped up over recent years to deal with much of the work that in-house trainee or junior lawyers would have done until only recently.

“When outsourcing legal pro-cesses, finding ways of using technology to streamline pro-cesses is key,” says Steve Holmes, the partner in charge of law firm Baker & McKenzie’s London outsourcing team. “You can’t underestimate the time you need to put in ensuring that an off-shore provider has the quality you need. You’ve got to look for suppliers that provide their staff with long-term career paths so the staff churn is low.”

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is inherently more efficient and user friendly than the paper, proprietary or legacy systems used by many manufacturers. Procurement spe-cialists instinctively grasp this, while Mr Timms says he wants to reach out to the C-suite too.

“Once we explain the benefits, cli-ents start to grasp why they should be working with us as we guarantee we will improve your bottom line. A client-saving in excess of 10 per cent is the goal and is currently running at an aggregate 11 per cent. We’ll save you money on procurement, reduce your working capital and we’ll take care of the long administrative chain, taking over your middle and back-office functions so you are free to concentrate on the things which are really core to you. Product savings are often typically only 30 per cent of the overall saving,” he says.

Given the chance to deliver his solu-tion, backed up with testimonials from the long, long list of blue chip client relationships IESA has secured in the past few years, Mr Timms feels he’s got a profoundly attractive proposition.

“While it might not trip off the tongue – the procurement and man-agement of indirect materials in manufacturing and process indus-tries – once people understand what IESA can do for them, it becomes compelling. They listen intently and quickly follow up with the inverse of their opening statement: “Why wouldn’t we work with IESA.”

For more information Tel: 01925 857 585 Web: www.iesa.co.uk E-mail: info@iesa.co.uk

An explosive growth story

At first glance this might appear to be a somewhat unsexy proposition and beg the question: “Why would we work with IESA?” The sector it occupies is “indirect” procurement. In other words, IESA takes care of buying and storing things for its cli-ents which don’t end up in the final product. This includes anything from safety goggles and uniforms to pro-duction line motors and bearings.

So to grab the attention of poten-tial clients, chief executive officer Glenn Timms has a more up-front strategy.

He starts by listing clients. “In auto-motive we work with Jaguar Land Rover, for example. In food we work with Kellogg’s, Premier Foods and Weetabix, among many others. In beverage we work with Carlsberg, Greene King, Molson Coors, and in pharmaceuticals, we look after AstraZeneca, Eli Lilly and Pfizer. We also work with General Electric, Johnson & Johnson and Proctor & Gamble..." He can keep going.

Then he’ll mention his revenue. Not to be boastful (far from it as he bashfully explains), rather because the numbers reflect the strength of IESA’s business model. IESA – pro-nounced i-esa, it sounds like iPad or iPhone yet shows its heritage as it stands for Integrated Engineering Stores Associates – was founded in 1892 and generated revenue of just over £1 million only 12 years ago.

Then it reinvented itself as a cloud-enabled industrial BPO (Business Process Outsourcing) specialist. The model made immediate sense to clients. IESA grew sales to £49 million four years ago, to £142 mil-lion this year and will pass £200 million in the next two years. It’s a growth story explosive enough to land IESA on The Sunday Times Tech Track lists several times as well as securing many other awards

and accolades.Attention guaranteed, Mr Timms

will then explain what IESA does.In a nutshell, it buys non-core prod-

ucts and manages them on behalf of its clients. A car manufacturer may keep the procurement of windshields and brakes in-house, because it is core to them along with all other direct material and anything else we can take care of. This might include components for maintaining the pro-duction line, repair, overhaul, health and safety, consumables and station-ery. These indirect supplies account for around 20 per cent of expenditure with a typical manufacturer, proces-sor or assembler.

As a bulk purchaser for approxi-mately 60 of the world’s leading manufacturers, IESA has phenome-nal buying power. It has relationships with 20,000 suppliers. That’s the first way it saves money for clients.

Second, IESA will provide a com-plete management service for the transaction and stocking of the prod-ucts on the client’s site. Ensuring that the profile of the inventory held, and hence client working capital, is opti-mised at all times. Reducing client spend and lowering the value of their cash tied up on shelves can double the value of savings realised.

Third, it automates and simplifies the entire P2P (purchase-to-pay) pro-cess. Instead of clients wrestling with hundreds and indeed thousands of purchase orders, invoices, payments and reconciling supplier statements, they receive a single invoice.

The final piece in the jigsaw is the physical handling of indirect stock. Mr Timms explains: “When we take on a new client, we manage the indirect inventory. This means their stores employees join us, under TUPE [Transfer of Undertakings (Protection of Employment)] regula-tions, although they stay in the same factory or plant as before.

“The employees respond posi-tively because whereas before they were in a back-office function, deal-ing with products which the clients may not see as a strategic priority, they work for us in a core function which is revenue generating and drives our business. They are the front line of our team and have an exciting career path.”

IESA runs on a bespoke cloud-enabled SAP platform, meaning it

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IESA buys and manages indirect materials on your behalf

We guarantee we will improve your bottom line

is the typical overall procurement and stores

management saving a client will make working with IESA

CASE STUDY

TAKING LEGAL ADVICETO MAKE IT WORK

Any business considering outsourcing functions should take a lead from every boy scout and Baden-Powell’s well-known maxim – be prepared.

“Thorough preparation is critical,” says Mark Leach, part-ner and head of the international outsourcing practice at law firm Bird & Bird.

Businesses must ensure they have a clear understanding of any function being considered for outsourcing, carefully assessing how it currently operates and what kind of service levels are achieved internally.

That process should be documented and communicated to all potential suppliers pitching for the contract. Bidders must also be given sufficient time to analyse and conduct due dili-gence based on that information. Without this process, says Mr Leach, “even the best supplier is unlikely to appreciate what it is taking on and its chances of improving the service over time will be jeopardised”.

Outsourcing arrangements are frequently complex and suppliers will usually need customers to continue to perform certain activities to enable the fulfilment of outsourced responsibilities. Failure to understand these dependencies and to document them properly in a contract can frequently trigger legal disputes down the line.

“If anything is certain in an outsourcing relationship,” says Mr Leach, “it is that a customer’s requirements will change over time.” Therefore, it is essential that the contract remains as flexible as possible. Businesses should build in practical and easy-to-operate procedures that enable new services or amendments to be scoped, agreed, and priced quickly and efficiently.

Businesses should also establish a contract governance framework combining regular service review meetings with continued involvement of senior players from both sides of the agreement. A well-designed framework will oil the wheels of the outsourcing relationship and foster a collabora-tive approach that enables change to be dealt with effectively.

Mr Leach advises businesses to be aware of potential legal issues, pointing out that it is crucial to take advice early. Certain organisations, such as those in the financial services or legal sectors, are subject to specific regulations that affect the way outsourcing must be structured and operated.

More broadly, legislation will be relevant to the transfer of employees, both at the outset and at the end of an outsourc-ing deal, and compliance with data protection legislation is critically important where a supplier is handling personal information relating to a business’s customers.

Ultimately, a well-drafted contract is crucial as it will provide a customer with essential protection against the legal risks inherent in outsourcing and an ultimate fall-back if the relationship falls apart.

But businesses should aim to achieve a balanced contrac-tual relationship. Mr Leach concludes: “For an outsourcing to work, the supplier must remain incentivised and able to make a sensible return. A customer may feel that a one-sided con-tract provides superior protection, but in practice this is often an illusion. It is more likely to be damaging to the long-term viability of the outsourcing relationship and a project’s overall chances of success.”

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FUTURE OF OUTSOURCINGFUTURE OF OUTSOURCING

appear on balance sheets. “You’re not investing unnecessarily in hardware upfront; you’re simply paying to use what you need and costs are therefore more regular, making them easier to predict,” says Piers Linney, co-chief execu-tive of Outsourcery and Dragons’ Den TV star.

The cost argument remains com-pelling, but other issues are also coming to the fore, says Andrew Long, Europe, Africa and Latin America cloud strategy lead at Accenture. “The more notable benefits include risk reduction for delivering standard services, speed – simply getting the capabil-ity faster – and agility,” he says. “It is also true to say that a range of organisations can now get access to best-in-class services, which means that smaller organisations that had to rely on second-tier solutions now don’t have to.”

Aside from these practical con-siderations, the cloud is now help-ing organisations embrace the philosophy of outsourcing as the new way of working in a digital age, says Ananthakrishnan Sankarana-rayanan, vice president, Europe, at Indian IT and telecoms firm Tech Mahindra. “Historically they had wanted to own and operate the ser-vices,” he says. “Then they wanted to co-own and then they wanted to outsource. Now they’d rather

be just consumers than own any aspect of the IT lifecycle.”

There are strong business argu-ments in favour of this model, he adds, including only having to pay for what is consumed and ena-bling businesses to put together outcome-based contracting mod-ules with customers with a degree of confidence.

However, the market is con-stantly evolving. Mick Briggs, head of IT service operations at Cancer Research UK, has recently over-seen a move towards a “hybrid” set-up using VMware’s vCloud Hybrid Service, based around a software-defined data centre. “It gives us the ability to virtualise the entire stack – the storage, networking and the compute,” he says. “It’s effectively an internal cloud that is controlled and built internally, which allows us then to push it out to anyone compatible with that notion.”

Using this solution means the business can “drag and drop” internal applications on to the cloud, he says, and either retain them there or bring them back in-house at a later date. “The question is not in or out any more, which was the concept that always

applied before,” says Mr Briggs. “As long as we retain the central control kit that allows us to build VMware, we could plug into mul-tiple people’s clouds. It allows you to play the sourcing market much more freely.”

In the longer term, the cloud could have an impact on the nature of IT outsourcing more generally, says Andrew Brabban, director of application services, international business, at Fujitsu UK & Ireland. “Outsourcing has often been per-ceived as a barrier to innovation, being inflexible and slow to react,” he says. “Cloud has provided organisations with mechanisms to react more quickly to business change, while taking away some of the responsibility from the IT departments, giving them a platform to innovate and experi-ment, without the complexity and commitment that comes with an outsourcing contract.”

Yet there are issues that organi-sations thinking of outsourcing some or all of their IT infrastruc-ture or applications to the cloud should consider and, as always, security is top of the list.

Kurt Hagerman, chief informa-tion security officer at FireHost, says that in some cloud environ-ments security has been “bolted on”, almost as an afterthought. “There is an abundance of auto-

mated attack traffic out there that will exploit whatever vulnerabili-ties they come across on under-protected cloud environments,” he says. “Fairly routine attacks, like cross-site scripting and SQL injection, are still very popular as cyber criminals find these easy to orchestrate.”

Organisations also need to ensure they don’t sign up to oner-ous contracts they may regret further down the line. “Unless you are a large company dealing with a cloud provider that is used to large companies, you will find the legal terms to be both non-negotiable as well as often highly unreason-able,” warns Alex Hamilton, chief executive and founding partner of Radiant Law.

“You need to take a risk-based approach. What data are you comfortable uploading? What will you do if the supplier shuts down? Have you understood the pricing and what your long-term charges will be? If you upload any data that relates to people, then you need to know where the data is being stored and that you are comply-ing with the Data Protection Act. Above all, be sensible and think it through.”

Ȗ The continued development of the cloud is having a significant impact on organisations’ attitudes towards outsourcing. According to research conducted by managed ser-vices provider Claranet, 73 per cent of organisations now use some form of cloud service, up from 62 per cent in 2012. The most significant growth was found in the mid-market sector, where 81 per cent of organisations now make use of the cloud, rising from 65 per cent in 2012.

Much of this growth is due to the increasing ability of the cloud to take responsibility for hosting both hardware and software, away from in-house IT teams.

“The flexibility of the cloud has resulted in an increased demand for outsourcing,” says Mahesh Venkateswaran, global head of social, mobile, analytics and cloud at outsourcing consultancy Cogni-

zant. “Today’s XaaS [anything-as-a-service] offerings allow organi-sations to choose exactly which IT or business functions to perform internally and which they can bet-ter source from the cloud.”

The public sector has been par-ticularly quick to spot the potential cost benefits of the cloud, helping it to tackle the challenge of reducing overheads while maintaining vital services, says Steve Shakespeare, managing director of Civica’s man-aged services division, including Luton Borough Council, which has recently outsourced its IT opera-tions in a ten-year deal.

“They have an ambition to work in a smarter, leaner and more sus-tainable way by creating a flexible workforce that is able to deliver services from the most appropri-ate location,” Mr Shakespeare says. Using a private cloud, the council now hosts a range of applications, data and infrastructure in a virtu-

alised environment, he adds.In theory, the use of cloud tech-

nology should help the develop-ment of super-computing and big data as organisations can draw on almost unlimited resources as they require them. “Cloud is a fundamental delivery mechanism for big data,” says Andy Lancaster, cloud director at Dimension Data. “With such high data volumes being produced, organisations need a cost-effective solution to collate, store and analyse the data.

“This often requires large amounts of computing power, but sometimes only for short periods of a day, week or month. A high-performance cloud can help resolve this by providing the scalability required for increasing volumes of data, while also deliver-ing the computing power needed for this type of use.”

The advantages of outsourcing to the cloud are compelling. First off, there’s the financial aspect. “There are very low costs in terms of capi-tal expenditure to get up and run-ning,” says Geoff Whitemore, head of innovation and portfolio at CGI UK. “When companies have made the step to the cloud they no longer have to worry about significant costs every five years to move to a new platform – that problem then becomes one for companies that operate the cloud infrastructure for customers.”

There can be other costs in mak-ing the transition, however, such as those incurred in porting main-frame systems, which are often not considered in any initial decision, he adds.

Linked in with the financial equation is the ability to attribute costs to operational – rather than capital – expenditure, meaning no upfront costs or borrowings to

THE CLOUD

Cloud computing offers considerable opportunities for businesses of all sizes – and is spreading, as Nick Martindale reports

BRIGHT OUTLOOK FOR BUSINESSIN THE CLOUD…

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You’re not investing unnecessarily in hardware upfront; you’re simply paying to use what you need and costs are therefore more regular, making them easier to predict

BUSINESS AND IT OUTSOURCING ANALYSIS

*HOW EFFECTIVE HAVE YOUR OUTSOURCING INITIATIVES BEEN IN ACHIEVING BUSINESS BENEFITS?

*HOW IMPORTANT ARE THE FOLLOWING BUSINESS DRIVERS BEHIND YOUR COMPANY'S IT OUTSOURCING AND BUSINESS PROCESS OUTSOURCING DECISION-MAKING?

TR A NSFOR M/ R E-ENGIN EER PROCESSES

MOR E EFFECTI V E OPER ATIONS AT GLOBA L L EV EL

MEET COMPLI A NCE/ R EGU L ATORY R EQU IR EMEN TS

STA N DA R DISE PROCESSES

GR E ATER FL E X IBILIT Y TO SCA L E OPER ATIONS

R EDUCE OPER ATING COSTS

TRENDS IN EUROPEAN OUTSOURCING MARKET

4 0

35

30

25

20

15

10

5

0

STRATEGIC MEASURES

TACTICAL MEASURES

Pa r t icu la rly i n Ger ma ny

Pa r t icu la rly i n Ger ma nyPa r t icu la rly i n Spa i n a nd Netherla nds

CLOU

D C

OMPU

TIN

G

COM

BIN

ED O

UTS

OURC

ING

OF IT

AN

D BU

SIN

ESS

PRO

CESS

ES (M

ULT

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ION

AL

BUSI

NES

S SE

RVIC

ES)

SPEC

IFIC

OR

SPEC

IALI

ST K

NOW

LED

GE

AND

EX

PERT

ISE

BIG

DATA

NEW

MOR

E FL

EXIB

LE

PRIC

ING

MOD

ELS

SUST

AIN

ABLE

OU

TSOU

RCIN

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SOCI

AL M

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CO

NN

ECTI

ONS

VER

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TSOU

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SIGN

IFIC

ANTL

Y IM

PROV

ED

GOV

ERN

ANCE

MU

LTI-

SOU

RCIN

G

IN-S

OURC

ING

CROW

DSO

URC

ING

9%10%

11%

13%

15%

19%

20%

20%

21%

22%

23%

36%

FORCING CHANGE

INTO BUSINESS

OPER ATIONS

21%14%

TR ANSFORMING/

RE-ENGINEERING

PROCESSES

18%13%

GAINING ACCESS

TO ANALYTICAL

CAPABILITIES

18%10%

GAINING ACCESS TO

NEW TECHNOLOGY

17%20%

PROVIDING

INNOVATION

12%7%

MEETING REGULATORY

REQUIREMENTS

25%20%

MORE EFFECTIVE

OPER ATIONS AT A

GLOBAL LEVEL

29% 29%

STANDARDISING

PROCESSES

35%23%

REDUCING

OPER ATING COSTS

40%31%

GAINING ACCESS TO

CAPABLE TALENT

21%20%

OPERATIONAL

STRATEGIC

MISSION CRITICAL IMPORTANT BUT NOT CRITICAL

SOMEWHAT IMPORTANT NOT IMPORTANT AT ALL

FORCE CH A NGE IN TO BUSIN ESS OPER ATIONS

PROV EN/ M AT U R E OFFER INGS FROM SERV ICE PROV IDER S

IMPROV E A NA LY TICA L CA PA BILITIES

GA IN ACCESS TO N EW TECHNOLOGY

GA IN ACCESS TO TA L EN T

46%40%

41%45% 43%

39%

29%

12%

22%

21%

16%

27%

10%3%6%

5%11%15%5%

33%

34%

35%

37%

43%

36%34%39%

45%44%

28%

32%

27%

29%

27%

3%

24%22%21%

20%17%

6% 11% 9%

11%

BUSINESS PROCESS OUTSOURCING

IT OUTSOURCING

SOURCE: OUTSOURCING IN EUROPE, 2013, EY

*SOURCE: 2013 STATE OF OUTSOURCING, HFS RESEARCH

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FUTURE OF OUTSOURCINGFUTURE OF OUTSOURCING

INDIA

NO LONGER JUSTCHEAP LABOUR

India is feeling the competition and is becoming even more competitive in response

As competition from Eastern Europe, China and the Philippines hots up, India is rallying in a bid to maintain its position as a dominant world outsourcing centre, writes Shruti Tripathi

Ȗ If you thought India’s outsourc-ing industry is just about grave-yard shifts in tacky call centres, then you are wrong. A nation that once based its appeal on low-cost menial tasks is now a world leader in a wide range of technically spe-cialised industries. From big data and law to engineering and con-sultancy, India has become an outsourcer offering brain power, rather than merely manpower.

This change is epitomised by engineering. India’s top trade asso-ciation, the National Association of Software and Services Companies

(NASSCOM), expects the Indian engineering research and devel-opment industry to hit $40 bil-lion by 2020 from its current $10 to11-billion mark. This is widely attributed to India’s cost-effective development and design solutions, and a vast talent pool of engineers.

From India’s Tech City in Ban-galore, Tata Consultancy Services (TCS) tests car models and engines for the biggest automobile makers in the world. Infosys, another lead-ing IT and engineering firm, helps develop commercial aircraft from its engineering hub in the city.

To get more foreign compa-nies to its shores, India hosts the Engineering Outsourcing Show in Mumbai every year. This year’s show in January saw top global firms, including Swiss giant ABB,

US powerhouse Cummins, Toshiba of Japan and 50 other international corporates, exploring opportunities for outsourcing their critical busi-nesses to Indian engineering firms.

Another outsourcing sector hot-ting up is data analytics. This sector gained momentum when big global players, such as Lenovo, Pfizer and Target, outsourced their analytics functions to India. Dell Global Analytics, an India-based captive analytics division of the company, continues to expand, reflecting Dell’s reliance on India as its number-one services loca-

tion outside the United States.According to financial services

firm Avendus Capital, the global data analytics outsourcing market in 2012 stood at $500 million, of which Indian service providers delivered $375 million. By 2015, the data analytics market in India is expected to reach $1.15 billion.

India’s IT prowess has also sparked a boom in financial out-sourcing. Dallas-based BancTec, which provides financial transac-tion services to 75 per cent of the world’s leading financial services organisations, set up a headquar-ters in Delhi to cash in on financial firms coming to India.

Martin Edwards, an outsourcing consultant with BancTec, says: “There’s no stopping the expertise and ambition of outsourcers in

India. As inflation rises and wages increase, Indian service providers are becoming increasingly com-petitive to survive. But they are also changing their global position – Indian companies are now some of the largest on-shore employers in the UK. The perception that off-shoring means a loss of jobs on-shore is fast becoming a myth.”

There are other players entering the market too. Last year, India’s Tech Mahindra signed a five-year agreement with Luxembourg’s UBS Fund Services to provide a finance platform to support asset managers, wealth managers, investment banks, custodians and administrators.

Law process outsourcing is also

gathering pace in India. According to the Economic Survey 2012-13 by Indian Finance Minister Shri P. Chidambaram, India is one of the best legal process outsourcing (LPO) destinations in the world. For a country that has 1.2 million registered advocates and produces

up to 70,000 law graduates every year, this comes as no surprise.

The rise of the sector has put a lot of Indian LPOs on the global map. In March, financial investors were reported to have offered $200 mil-lion for Gurgaon-based LPO firm UnitedLex Corporation.

The availability of talent, tel-ecom, real estate and IT support

has made India a hub for HR ser-vices. Result? A burgeoning human resources outsourcing (HRO) industry. It makes perfect business sense for companies in the UK or the US to outsource their HR func-tions to India to cut costs. Big play-ers in India include TCS, Wipro, Hewitt, Convergys and Accenture, among others.

India may well be the outsourc-ing champion of the world, but it needs to be on a look out for threats to maintain its position. Competition is creeping up. India can’t afford to rest on its laurels as Eastern Europe, China and the Philippines are fast ramping up their outsourcing industries to woo the world.

BancTec’s Mr Edwards says: “India is an outsourcing hotspot because its talent pool and exper-tise is unmatched. Nowhere else gives you qualified engineers and programmers by the thousands. But it needs to watch out for East-

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Outsourcing for smaller businesses

Page 12

CASE STUDY

DRIVING A BARGAINOUTSOURCING BUSINESS

Indian IT giant Tech Mahindra has become a $2.9-billion company thanks to its outsourcing operations.

In March, Volvo Car Group selected Tech Mahindra to provide its end-to-end IT infra-structure services in key markets, including Sweden, China and Belgium. The scope of the deal demonstrates how Indian players can take on big projects. The Volvo partnership covers 2,800 servers across Volvo’s global factories and data centres, as well as 4,000 factory devices in Sweden, Belgium and China.

Volvo will use Tech Mahindra’s Infrastructure Management Services team, which provides data centres, computing, networks, security and IT operations.

Vikram Nair, head of Tech Mahindra’s Euro-pean enterprise division, says the partnership will help Volvo increase efficiency and reduce costs. “Volvo’s values and goals emphasise ‘reliable products and services in all opera-tions, from product development and produc-tion, to delivery and customer support’. The vision outlines IT as a competitive advantage for all Volvo business units,” he says.

To bolster its position as an outsourcing leader, Tech Mahindra has also branched out to other services. One such offshoot is Managed Data Services (MDS), a part of the company that is designed to support financial organisa-tions. Last year, MDS bagged a five-year deal to

provide Luxembourg’s UBS Fund Services with securities reference data, pricing, corporate actions and tax data.

Pierre-Antoine Boulat, chief executive of UBS Fund Services, says: “By leveraging the Tech Mahindra MDS platform, we can achieve substantial cost-savings and process efficien-cies, while maintaining our focus on delivering high-quality services to our fund administration clients.”

Balfour Beatty is another firm using Tech Mahindra’s expertise for its Platform for Growth (PfG) programme. Julia Rogers, busi-ness services director at Balfour Beatty, says: “Tech Mahindra has risen to the challenges of PfG and we have formed a good partnership to get the job done.

“Obviously there have been difficult times, but a combination of hard work, flexibility and technical expertise have pulled us through. In a programme of this complexity and duration, there will be many changes to the original plan, but we have always found a pragmatic way of moving forward and keeping things on track.”

Players like Tech Mahindra are becom-ing outsourcing stars by setting up what are called “shared service centres”. These are their own outsourced finance, IT, HR, legal and procurement teams based in India to cater for global operations.

ern Europe and China. Both are attracting more outsourcing con-tracts and could become tomor-row’s hotspots. India is feeling the competition and is becoming even more competitive in response.”

But what can India do to keep up with other countries? Mayank Chandra, managing partner at recruitment firm Antal Interna-tional, thinks that it’s important to exploit growth potentials in tier-two towns, such as Kanpur and Luc-know, to attract more companies.

“One of the biggest reasons for global companies to outsource services to India is its competitive pricing of both labour and real estate,” he says. “But over the years, demand for big outsourcing centres in cities like Bangalore, Pune and Gurgaon has driven up costs of office space and salaries. Therefore, improving infrastructure in tier-two towns will help make these towns global hubs at cheaper costs.”

Big investments are being made to keep India ahead of rivals. In Thiruvananthapuram, a city in southern India, the country’s top outsourcing firm TCS is building the world’s largest corporate train-ing facility. The centre is being constructed on nearly 100 acres of land and will contain more than six million square feet of buildings. It will train India’s next generation of engineers and professionals who will be the face of its burgeon-ing outsourcing industry.

However, a major roadblock within India is the outsourcing industry’s relatively poor image. A job in a business process outsourc-ing (BPO) company is no longer considered a good package for can-didates and the sector is struggling to attract the right talent.

India’s outsourcing stars may need to do a better job at selling themselves to the world. Given the size and growth potential of the industry, schools and col-leges could have curriculums designed specifically to train new talent for the outsourcing sector.

Yet, despite the problems, more foreign players are coming in their droves to India to outsource business functions. India remains the world’s dominant outsource location. Research by Tholons found that Bangalore is this year’s number-one destination for out-sourcing in the world. Also, six Indian cities, including Delhi, Mumbai, Chennai and Hyderabad, are among the top-ten hotspots.

The biggest outsourcing sector in India remains IT and, accord-ing to NASSCOM, the outsourc-ing industry as a whole will generate revenues of $13 to $14 billion by 2015. India has come a long way from just being a source of cheap labour. The country’s cutting-edge technologies and talent have made the world sit up and take notice.

Infosys staff at the company’s campus

library in Electronics City, Bangalore

In the current economic climate a significant number of UK businesses take advantage of technologies which enable them to place some of their processes offshore. This enables them to ensure price competitiveness in a rapidly evolving market.

Established in 2001, by dual qualified solicitors who still manage the company, Global BPO provides high-quality business process outsourcing (“BPO”) and legal process outsourcing (“LPO”) services. Our clients include UK law firms and other UK businesses such as accountancy firms, property companies and recruitment companies. We have offices in London, Sydney and Cape Town, enabling us to make the most of our international footprint and deliver cost savings without compromising on quality.

Our clients love our location and the myriad benefits that South Africa offers. We provide –

We understand how. Can you afford not to?

For an immediate, confidential discussion, please contact Emma Baddaley, emma@globalbpo.co.uk, 020 7739 8773

Examples of BPO services provided are Document Production, Data Entry, PowerPoint, IT Support, and HR Support.

LPO services include Litigation Support, Due Diligence Review, Property Transactions and Debt Recovery.

In recent years we have taken over services previously provided from locations such as India and the Philippines as the cost of doing business in those regions rises, and the quality of service continues to be a concern.

Jan Scholtz, co-founder of Global BPO comments – “The global market is highly competitive. The companies that we work with innovate in order to maintain a competitive advantage, reduce their costs and improve their ability to service their clients. An increasing number of UK law firms and other UK businesses are looking to work in partnership with us and it is clear that the question is no longer whether they will outsource some of their processes, but how they are going to go about doing so”.

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FUTURE OF OUTSOURCINGFUTURE OF OUTSOURCING

SMBS

Ȗ Jazzing up a PowerPoint presen-tation so it’s fit to be presented to Madonna, booking a seat on Virgin Galactic, organising a shipment of politically sensitive documents to Rwanda – this may sound like the to-do list of a modern-day 007, but they are just a few examples of services small and medium-sized businesses (SMBs) have out-sourced through a company called Time etc.

“Most of our clients are time-poor SMB owners who perhaps can’t justify the spend for a full-time assistant or full-time employ-ees, so they pay our skilled free-lancers at set hourly rates to pick up the slack,” says Barnaby Lash-brooke, founder of the UK and US virtual workforce platform.

Madonna and her presentation requirements aside, outsourcing among SMBs is on the rise. Not only is the strategy becoming an increasingly important one, both the reasons for SMBs to outsource, and the services and functions they are choosing to give to third parties are shifting also.

Sourcing advisory company Information Services Group (ISG) recently reported a decline in the value of outsourcing contracts dur-ing 2013. ISG says 167 outsourcing contracts were awarded in Europe, the Middle East and Africa in the fourth quarter of 2013, a 25 per cent rise year on year, but the annual contract value fell to €2.16 billion, a 20 per cent decrease quarter on quarter. Rather than a slowdown in outsourcing, this is because businesses are opting for more, but smaller, deals – pointing to SMB activity.

It has always made sense for smaller operations to outsource

some of their services, but the recession has made this even more pertinent. Outsourcing gives SMBs the flexibility they need to have services on hand when they need them, but not have to pay a full wage when they don’t. An SMB can increase and decrease its size quickly and without hav-ing to make difficult decisions around staffing.

“The major advantage is having flexibility, being able to buy in expertise when you need it,” says Kate Russell, managing director of Russell HR consulting. “Not having to pay National Insurance contributions is a big cost-saver and therefore very attractive to small businesses. Having trusted associates can improve problem-solving and make your business look bigger, which means in busi-ness terms that you can punch above your weight.”

Of course, it doesn’t just come down to cost-saving and, as we emerge from the credit crunch, experts anticipate no slowdown in outsourcing – this strategy is no one-trick pony.

“With a degree of economic uncertainty remaining and 49 per cent of SMBs still in survival mode in 2014, it’s no surprise that many

business owners are making the smart decision to outsource,” says Patrick Gallagher, chief executive of CitySprint. “But unlike last year, when SMBs were outsourcing for survival by reducing costs in the downturn, they are now outsourc-ing for success.”

The way SMBs view outsourcing is changing and it’s opening up a whole world of opportunities to outsource more non-tradi-tional functions.

“This year’s Collaborate UK 2014 report identified a shift in focus for outsourcing among SMBs. Rather than focusing on inward-facing support, such as IT, legal and training, business owners are now seeking marketing and advertising, IT, and sales and customer services expertise – in other words, exter-nal, reputation-enhancing func-tions,” says Mr Gallagher.

Along with cost-savings, out-

sourcing has a number of benefits for SMBs. Outsourcing can help a company to deal with seasonal fluctuations, it can give you access to high-quality skills you might not have been able to attract previ-ously and it also makes the world a lot smaller.

“Outsourcing is an enabler for international expansion,” says

OFF-SHORE

ACCOUNTING FOR INDIA

HW Fisher & Company is a medium-sized firm of chartered accountants within the top 30 in the UK. Founded in 1933, the practice comprises 29 partners and some 260 staff. The firm is arranged as a series of partner-led departments covering a full range of dedicated industry groups.

FisherE@se, part of the company, outsources a large portion of its work to dedicated sites in Bangalore and Delhi. It has been outsourcing a range of services to India for the past decade to maintain a competitive advantage over smaller firms with lower overheads and less-costly compliance measures.

HW Fisher operates a standalone office in Bangalore, as well as having a dedicated team at a large accountancy outsourcing provider in Delhi. The type of work outsourced is mainly back-office, such as client bookkeeping, prepara-tion of working paper files, tax return preparation, corporation tax returns and preparing annual accounts.

“Outsourcing enables us to maintain a competitive advantage in the UK where, in most cases, we are competing against smaller firms and one-man bands who don’t have the overheads we do,” says Mukesh Shah, head of outsourcing. “I’ve never found the time difference a problem as India being five hours ahead means that by the time I come in, often the work has been done and is ready for review or approval. We have a few hours overlap where we can discuss anything that needs doing before they leave for the day and we continue the work. It is almost creating a 24-hour office.”

ON-SHORE

STAYING CLOSE TO HOME

Heating Master is a Nottingham-based firm established in 2013, specialising in underfloor heating products. Direc-tor Sean Liu’s family runs a successful underfloor heating company in northern China, so the business runs in the family.

“We are small in size, but a rapidly growing business,” says Mr Liu. “We sell underfloor heating products and building materials, wholesale and retail, such as insulation boards, heating mat and cable, thermostats and accessories. More than half our sales are via online channels, such as our own website, and eBay and Amazon. The remainder are via off-line wholesales.”

Heating Master outsources its fulfil-ment to UK-based Core Fulfilment. This takes the pressure of handling com-plicated logistics off the company, so it can concentrate on other parts of the business and its growth.

Core Fufilment provides a “pick and pack” service to e-commerce busi-nesses of all sizes. It fulfils e-commerce businesses’ customer orders from holding stock, downloading the orders, packing up the product and posting it out.

“At the early stage, we really want to win more frequent customers by giving them a good, professional first impres-sion,” says Mr Liu.

“This is already paying off, with many of our customers becoming long-term cli-ents. Core Fulfilment could also provide customer service outsourcing, answer-ing customer telephone inquiries, e-mail inquiries, and so on, on our behalf. This is a facility we would like to start using in the future.”

Arnold Cobbaert, chief executive of Conectys. “The right partner can help an organisation tap into new markets by instantly adding mul-tilingual and multicultural capa-bilities to the business. It allows a business to focus on growth and build on the strengths that are key to its expansion.”

If the days are gone when out-sourcing was relegated to payroll functions, although clearly these are obvious choices, what kind of things are SMBs outsourcing these days?

Wales-based entrepreneur Chris Niall outsources dangerous research projects for his company Hyderus. Outsourcing has given him a level of access to parts of the world which are integral to his research.

“A lot of Hyderus’ work involves field work in countries across the world, including areas of political unrest like Egypt or Somaliland. Travel to these areas from Wales is both costly and dangerous, but research there is essential to the suc-cess of the business,” says Mr Niall.

Social media has taken a hold on society like ever-present, attention-seeking wildfire. It has changed our personal habits beyond belief, but it has also changed the way we do business. Catherine Clavering, founder of lingerie brand Kiss Me Deadly, out-sources her production selection process to her fans on social media.

“Unlike most people in fashion, we kept our fulfilment in-house, but outsource plenty of other things, including picking what goes into production,” says Ms Clavering. “Every season we come up with more designs than we can afford to make, in terms of both cash and, more importantly, factory time. As there are more brands than factories, for a small brand, you’re fighting against eve-ryone else for time.

“Now we use software created by a Twitter developer for brands to create a simple-looking ‘hot or not’ style voting website. The genius of it is that the back-end uses some complicated maths – non-pareto voting methods – so we can see, not just which products are most pre-ferred, but if there is any internal competition between products.”

Meanwhile, far away from frilly knickers and suspender belts, you’ll find the world of investment management is also seeking new functions to outsource in a post-recession world. Vast changes to the regulatory environment have meant many small firms don’t have the resources to deal with the swathe of new requirements.

“Outsourcing in the investment management industry is a continu-ing trend,” says Steve Young, chief executive of investment manage-ment consultancy Citisoft. “As firms face the consequences of the financial crisis that gripped the markets in 2008, the challenges of running an investment manage-ment firm have multiplied consid-erably. In a recent EY survey, 84 per cent of European asset man-agers said that compliance with regulatory requirements was still the primary challenge they faced.

“Investment management firms must have undertaken thorough reviews of their operating models, with an emphasis on which areas they need to retain in-house and which functions can be outsourced to a third-party supplier.”

Naturally, SMBs must be aware of the challenges of working with third parties. It shouldn’t be seen

as handing a problem over to someone else; it should be col-laborative wherever possible and ensure company culture is mir-rored as much as possible by the outsourcing partners.

“Put the same amount of effort into finding the right outsourced workers as you would for an in-house team,” says Elance’s UK country manager Hayley Conick. “Remember that highly skilled outsourced workers are just as in demand as top-talent permanent

employees, so be clear about why your project might be of particular interest to them. Distance manage-ment is an art and communication is critical. You need to make sure you communicate clearly and frequently.”

One last important consideration for SMB leaders is that outsourcing your personal tasks can be almost as much benefit to your business as outsourcing company functions.

“My piece of advice for any busi-ness owner running an SMB is

outsource and automate as much as possible in their personal lives as well as their professional lives,” says Gem Griffiths, managing director at The Crowd & I. “Out-sourcing the tedious tasks, such as cleaning your home or sorting your bills, frees up mind-space to help you concentrate on the more important business decisions and things in life. It helps the entire process to run smoothly.”

After all, no one should have to book their own seat on Virgin Galactic. Outsourcing allows a business

to focus on growth and build on the strengths that are key to its expansion

NOW THE ‘SMALL’ GUYS ARE GETTING IN ON THE ACTION Smaller businesses are increasingly outsourcing non-core or peripheral work, as Gabriella Griffith discovers

Smaller businesses are seeking reputation-enhancing outsourced functions such as customer services and marketing

FUTURE OF OUTSOURCING

15raconteur.net twitter: @raconteur14 raconteur.net twitter: @raconteur

OPINION

An adviser to government, and public and private sector bodies, Colin Cram is managing director of Marc1 consultancy

CONTINUING RISE OF PUBLIC SECTOR OUTSOURCING?As government and local authorities look set to outsource even more services, outsourcers could switch their focus to a more lucrative private sector, says Colin Cram

Ȗ It is just over 30 years since out-sourcing became a policy of the Thatcher Government. Senior civil servants were determined to minimise its impact and, in cen-tral civil government, ensured that outsourcing applied only to secu-rity guarding, cleaning, messenger services and catering – the most junior and lowly paid staff.

Outsourcing of these services was mandatory, but I estimated that by 1990, less than £10 million of services had been outsourced. It may go against the conventional wisdom, but outsourcing only took off in central government when John Major came to power. Having risen up through ministerial ranks, he understood the levers to make things happen.

The “creation” of the private finance initiative in 1989 and the growth in IT initiatives provided a further impetus – buy now pay later seemed a good policy in the austere economic times of the 1990s – and with it came a require-ment for much greater contracting skills in the public sector. Also, from the mid-1980s, the Depart-ment of Environment took a strong line with local government, press-ing for a wide-ranging programme of outsourcing through opening up

in-house services to competitive tendering – compulsory competi-tive tendering – the criterion for contract award being lowest price.

Since the early-1990s, the public sector approach to outsourcing has become increasingly sophis-ticated and it has become a key means to deliver public services. The benefits have extended to the UK economy. I visited Capita in 1986, when it was five people in a small office off Chancery Lane in London, offering training pro-grammes; now it is a multinational company with an annual turnover of £4 billion a year.

By the time of the 1997 New Labour Government, many local authorities were outsourcing sig-nificantly and the criticism that quality had suffered through focus-ing on price alone was countered by “best value” being introduced, which took into account quality and service. Local authorities became more sophisticated and the accusation by industry that, in competitive tenders the in-house team almost always won, became muted. In the last years of the Conservative Government led by John Major, the outsourcing of the Benefits Agency was being contemplated, which would have affected some 100,000 staff.

So, why does the outsourcing industry appear to be on the defen-sive with its public sector contracts?

There have been problems with contracts and UNISON provided a list of allegedly problematic local government contracts to MPs on the Communities and Local Gov-ernment Select Committee for a recent inquiry into local govern-ment procurement. On the other hand, the National Outsourcing Association, in its written evidence to the committee, argued that outsourcing could save more than 20 per cent.

The definition of public sec-tor outsourcing is rather vague – essentially contracting with

an external organisation for the provision of a service that would have traditionally been done by the public sector. Applying this definition, the value of public sec-tor outsourcing amounts to some £90 billion a year – half of all public procurement spending.

This includes the outsourcing of prisons, but also offender tagging and getting the unemployed back to work.

In local government this includes functions as diverse as waste col-lection and social care, as well as back-office services. It also includes partnership with private sector organisations, a classic example being SCAPE, a local authority construction consor-tium, partnering with several companies such as Wilmott Dixon. The consortium is expanding its activity beyond local govern-ment and claims to be delivering problem-free construction, aver-age savings of 14 per cent and much local employment.

An NHS hospital, Hinching-brooke, has been largely out-sourced and it will be interesting to see how this works out. Progress is promising, but had it not been out-sourced, its losses were such that it would have been closed.

So, why the bad press for the outsourcers and what does the future hold?

In local government, there have been several high-profile failures, starting with the outsourcing of many of Bedfordshire County Councils’ functions to HBS in 2001. I looked at it in 2003 and discovered that in-house staff were duplicating some of HBS’s work and there were a huge number of performance measures – manage-ment of the minutiae.

While in central government, we have the alleged frauds by Serco and G4S over tagging contracts, and by A4E over the number of unemployed people getting back to work. In addition, a recent Public

Accounts Select Committee hear-ing condemned the management of outsourcing companies.

Outsourcing is popular because it can reduce costs, inject new investment without the public sector organisation having to invest up-front, introduce new ways of working and innovation, and sometimes improve quality. It also means that public sector organisations carry fewer staff on their books, which always looks good to the Treasury, as there is no long-term commitment or hefty redundancy payments and there is greater flexibility due to not having to decide what to do with staff if their function changes or disappears.

So, why the well-publicised prob-lems with contracts?

One reason may be the reform of public sector procurement. The creation of the Crown Commercial Service (CCS) and the promo-tion of “lean” procurement mean that much greater expertise and attention is beginning to be paid to significant contracts, the major common suppliers and the pre and post-contracting phases. The latter, the contracts management phase, has always been neglected by the public sector. Paying greater attention to this is bringing to light irregularities that might not hith-erto have been discovered.

Local government is also step-ping up its act and there is an ini-tiative to boost the quality of pro-curement in the NHS. Increasingly, unsatisfactory supplier perfor-mance will get flagged up publicly.

More troublesome for some existing suppliers, particularly

those in the IT and back-office ser-vices industries, will be the CCS’s search for new, innovative sup-pliers, which will mean its break-ing up its vertically integrated contracts into chunks. The new European Union procurement directive encourages this.

Also, someone may draw com-parison with the UK water and waste water industries which are expected to reduce total costs of ownership by between 15 and 18 per cent over the next five years. To solve this, the companies are seeking innovative suppliers, as innovation seems to be the way forward towards delivering such savings.

So, what is the future for the pub-lic sector outsourcing industry?

Outsourcing will continue to increase, whatever the colour of the government after the 2015 general election, though there could be s short- lived hiatus. It has become accepted as one of the key means of delivering public services and a training programme in com-mercial leadership skills for senior public sector officials, initiated by the CCS, emphasises this.

However, the government will aim to create a more competitive market, standardisation of specifi-cations will increase, councils will increasingly look to be “commis-sioning” councils, and there will be more coherent management of contracts and suppliers with an expectation of higher standards of contract performance.

The possible risk to this scenario is that as the economy increases, potential outsourcers may decide they do not care for the increased transparency expected of public sector contracts and find that they can make more money by focusing on the private sector. The counter is that good suppliers to the pub-lic sector will increasingly begin to use this business as a badge of honour.

Outsourcing will continue to increase, whatever the colour of the government after the 2015 general election, though there could be a short-lived hiatus

annual public sector outsourcing market

saving on public sector contracts

saving on construction projects

20%

14%

£90bn

Source: National Outsourcing Association

Source: SCAPE

Source: Marc1

Ukrainian IT powerhouse stays agile despite political unrestUkraine is set to hit the headlines for reasons other than Crimean turmoil, says Ciklum’s Torben Majgaard

don’t find that anywhere else,” says Mr Majgaard. “You have some quality people in Belarus, but it’s a smaller talent pool. Russia also has a good talent pool, but they have huge inter-nal demand. If you go inside the EU, to Romania or Poland, the price goes up by £1,000 per person per month and there is no country with the size of the talent pool we have.

“We have come up with a new slo-gan, ‘the brain basket of Europe’, instead of the bread basket.”

Mr Majgaard’s own business is a case in point, having established itself as one of the largest operators in the software development sector, despite having only been in existence for 12 years. “We don’t see ourselves as out-sourcers,” he says. “We see ourselves as facilities managers and partners for customers who wish to establish a presence here in Ukraine.”

The business helps with all aspects of starting up, he says, including facilities and recruitment, where it offers a unique model, although legally staff are employed by Ciklum and the customer is sim-ply invoiced from inside the EU.

“We go to the labour market on behalf of customers and we then interview and present candidates to the customer,” he says. “So the customers choose the employees rather than being assigned them from a pool, but what is even bet-ter is that the employees choose the customer. Here is an employee who has left their job somewhere to come and work for this customer.”

This relationship also means Ciklum cannot raise the salary of employees without the authorisa-tion of the customer, Mr Majgaard adds, and encourages a direct rela-tionship where employees are will-ing to go the extra mile for custom-ers in a way that would not happen in a traditional outsourced model.

“There are elements here which create a high level of loyalty directly between the employee and the cus-tomer,” he says. “So if there is a need to work Friday night, they will do it for you. We sit on the sideline of everything and take responsibility for guiding the customer, as well as coaching, training and ensuring pro-ductivity and communication.”

For the past few weeks barely a day has gone by without the news focusing on developments in Ukraine. European Union leaders may have pledged to support the country with closer economic ties, but the whole situation has made investors decidedly nervous about the Ukrainian economy.

There is, though, one industry which is thriving and set to expand dramatically over the next decade – IT outsourcing. It is the potential that exists here which persuaded Torben Majgaard, founder and chief executive of Ciklum, to approach Pavlo Mykhaylovych Sheremeta, Ukraine’s minister of economic development and trade.

“He had said he wanted to change Ukraine from a resource-based economy to a knowledge-based one,” says Mr Majgaard. “He invited me for a meeting and we’ve now put out a statement saying that Ukraine aims to be the powerhouse of IT for Europe, creating another 100,000 programmers in the next six years. That’s the plan I’m working on now.

“By 2020 the sector will have total revenue of more than $10 billion, making it the country’s third big-gest industry, and by 2024 it will be the number-one exporting industry in Ukraine.” This would bring much needed economic benefits to the country, he believes, and see the emergence of a strong middle-class and consumer-led economy.

There are good reasons for this optimism, based around Ukraine’s attraction as a near-shoring desti-nation for software development. “Ukraine is a unique country for this,” says Mr Majgaard. “When things go wrong in outsourcing it is usually around culture. The cul-tural difference between the UK and Ukraine is not big. It’s a very British and northern-European mental-ity, and the work discipline is very strong.” The time zone is another advantage, he says, with Ukrainians tending to work late, meaning they operate similar hours to the UK and other European markets.

The Ukrainian market also has the added benefits of lower wage rates than many surrounding economies and a highly skilled talent pool. “You

The company’s business model also reflects this arrangement with customers. “We don’t invoice a cus-tomer at a price per hour, per month or even per project,” says Mr Maj-gaard. “We invoice the customer at the actual salary that is being paid to the employee and then we invoice a fixed price on top of that. If it were a percentage, we would have an inter-est in the customer hiring expen-sive staff and awarding big salary increases. We need to be independ-ent advisers for the customer.”

To this aim, Ciklum started its own consulting service in 2007, born out of introducing customers to learn from each other’s experiences. A core part of this is advising around agile working – a method of soft-ware programming where custom-ers and developers work together to develop programmes, rather than customers creating a specific brief and asking developers to go off and design a package.

“Often if there are problems, it’s not that the programmers wrong-code, it’s that they just code what the customer wanted,” says Mr Majgaard. “The more modern way is that you develop the idea and the planning while you’re program-ming so you do these things in parallel.” The company is already training programmers in organi-sations in the UK, Sweden and Switzerland, he adds, and has recently become the first company in Europe approved to certificate agile trainers.

It is this kind of innovation, as well

as the other advantages such as culture, time zone, quality and avail-ability of staff, which Mr Majgaard believes makes Ukraine a strong proposition for organisations looking for software development support, and why he believes the Ukrainian economy will ultimately flourish.

“Ukraine will become the pow-erhouse of Europe for IT, if it’s not already,” he says. “With 100,000 new programmers coming in over the next six years and a very small domestic demand, there will be a huge amount of resources for any UK-based companies. Even though there has been all this trouble, in the first quarter of this year we have added more than 100 to our headcount here and we will grow by an additional 800 this year. I’m very confident about Ukraine and the business.”

For further information please visit www.Ciklum.com or e-mail Ciklum@ciklum.com

Ukraine aims to be the powerhouse of IT for Europe, creating another 100,000 programmers in the next six years