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A recent morning paper reported that telecoms giant Orange, who are outsourcing their call center services to IBM in the Philippines, told their night-shift call center employees in Darlington that if they want to keep their jobs they would need to move to Manila. Orange reportedly offered these employees a transfer package which showed that they would receive the same package as the local employees, which is a £200 monthly salary and a rice and laundry allowance. Does this amount to Orange being brutal – as suggested by the reporter – or simply uninformed of their legal obligations to Orange employees? Have jobs become so scarce that employees are willing to accept a lower employment package and a substantial cross-border relocation?

With the continuation of the current global economic downturn, outsourcing has been used effectively by some companies to reduce costs and (hopefully) provide a more efficient service. A successful outsourcing by a European company can derive many benefits for both the company and its employees, particularly due to stringent employment laws in Europe, which are designed to protect employees’ rights when they transfer to a new service provider, whether onshore or offshore. The fact that a few employees at Orange are considering a substantial relocation and significantly reduced employment package is indicative that an employer must not assume that the employees whose job are affected by an offshore outsourcing will be unwilling to consider relocation to another country, no matter how far. Therefore, when companies are considering outsourcing, they must prioritize dealing with employment issues.

The law requires that an employer provide proper information to, and carry out adequate consultation with, the representatives of any employees affected by the transfer concerning any measures which the new service provider is proposing. Generally speaking , the employee’s terms and conditions of employment are protected so that a new service provider must hire employees on those terms. It is also unlawful to harmonize terms and conditions of employment if the reason for doing so is connected with the transfer.

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Over at CIO Update, John Hughes has recently written some advice for CIOs (Somewhere Between Abdication and Control Freak) that, coincidentally, is quite relevant for those charged with managing suppliers delivering services on an outsourced basis.

The premise is that an optimal solution for leadership exists somewhere between completely abdicating responsibility and pestering everyone until they give up and do it your way.

While I’ve heard of leadership being described in many ways, likening it to keeping plates spinning on thin wooden poles is spot on, as is the portrayal of abdication being the equivalent of starting up the plates and then walking away and micro-management having the effect of severely limiting the number of plate spinners that can be watched managed at a given time.

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Three recent reports, relating to each of the US, the UK and the EMEA region, revealed that the private sector has increased its spending on outsourced services during 2010 and the first quarter of 2011.

A report by Gartner on US businesses’ IT spending indicates that 3.1% more was spent in 2010 than 2009, and in the UK, a recent CFO World report has revealed that the outsourcing industry represents a massive eight percent of the UK economic output, with 20% of outsourcing revenues attributable to IT and data-related outsourcing. The third report indicates that throughout EMEA, sales of BPO services during the first quarter of 2011 were 65% higher than in the same period last year.

The extent of recent investment has been hailed as a sign of businesses’ willingness to invest in outsourced and IT services despite an uncertain economic outlook. In 2009, IT-related spending had been 5.1% down from 2008, but during 2010, each of the top five global IT service providers saw revenue growth, with Indian service providers in particular seeing big increases to their bottom lines and collectively increasing their market share.

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Posted In: Industry Trends
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Cloud-based services give new meaning to the IT holy grail of “cheaper, better, faster” in the right circumstances. You might not even have to settle for just two. But it is important not to let the Cloud fog your thinking when it comes to configuring mission-critical IT-enabled services: adequate failover capabilities, and service levels that will support the operational imperatives of the business, are as important as ever.

It is typical, if not the norm, for Cloud service providers to offer only a single contractual service level – Availability – and then to define it in a way that wouldn’t pass the sniff test in a traditional IT services contract. For example, it is not unusual for a Cloud service’s Availability standard to be exceedingly low by customary data center standards – 98% or even 97% (versus 99.999% or even 99.9999%) – and then to make an already weak standard even weaker by contractual devices such as:

  • Excluding downtime during the provider’s weekly maintenance window -which may span 2 days or more during the weekend, with no limit on how long the service can be taken down during that period,
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In our prior blog, Outsourcing Pricing and Implied Productivity we discussed the value of having a reverse engineered pricing model to evaluate supplier pricing. The idea is that by creating transparency into supplier pricing based on the factors of production (i.e., hardware, software, facilities, labor and margin) a rational pricing discussion can take place between customer and supplier – particularly in a sole source/contract renegotiation situation. A key assumption in any pricing model is what reasonable gross margin to use for IT outsourcing services.

One challenge in talking about gross margins is that the definition of gross margin varies somewhat by industry and company. For purposes of our discussion, gross margin is revenue less the cost of delivering the revenue (i.e., cost of services sold). It excludes selling, general and administrative (SG&A) and research and development (R&D) costs. In the case of a services company, it’s generally the direct cost of delivering services to their customers.

Another challenge in looking at gross margin is that not all companies break out SG&A from Cost of Services Sold or they report business segments in such a way as to make it difficult to determine their gross margin on IT outsourcing services.

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Providers are rushing head-first into the cloud revolution, marketing their latest cloud offerings and promoting the benefits of hosting data externally.

To The Cloud–Start-up–Windows 7 by windows-videos

But as customers analyze whether the cloud is the right fit for their technology and data, they need to carefully review whether the contract terms proposed by cloud providers truly work “in the cloud.” Customers may discover that cloud providers simply have taken their existing standard licensing agreements for software hosted at the customer site (or at least large parts of their existing agreements), slapped the word “cloud” on the document, and voilà! A new cloud contract!

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On Friday, April 22, Pillsbury hosted a meeting of the Washington, DC, chapter of the Cloud Security Alliance (CSA-DC). Dr. Ramaswamy Chandramouli, Group Chair of the NIST Cloud Computing Security Working Group addressed members of CSA-DC representing local businesses, government agencies and various consulting and law firms regarding the work NIST is doing to develop a security architecture for cloud services.

Dr. Chandramouli’s presentation focused, among other things, on the various ways the software development life cycle (SDLC) needs to be adapted to address the move to cloud based services, including ways to maximize the ability to move applications from one cloud provider to another. According to Dr. Chandramouli, when moving to the cloud, a number of aspects of the SDLC need to be re-evaluated, from access controls and use of things like OpenID to the use of third party-provided digital libraries and APIs. As Dr. Chandramouli and a number of other participants at the meeting noted, the move to the cloud also requires an examination of your disaster recovery/business continuity planning.

Naturally, the discussion turned to last week’s Amazon EC2 outage, opinions about its cause and a discussion of its effects.

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Posted In: Cloud Computing
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In Outsourcing Pricing and Implied Productivity, we discussed the advantages of understanding the underlying staff productivity assumptions in a supplier’s solution and pricing.

What are the key IT infrastructure productivity measures that underpin a supplier’s price?

We’ve found that in medium to large, full service infrastructure outsourcing deals, a few pricing metrics typically drive 90% or more of the total supplier charges. And, within these pricing metrics, we found several key productivity ratios that (depending on scope) tend to drive the supplier pricing models:

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“Are you serious?” It’s a question we often feel like asking clients after they tell us they expect a service level of at least “four nines” from suppliers because that’s what they believe they are achieving. Yet many times, the client doesn’t have the historical performance information necessary to support their belief.

Let’s talk about nines. When someone says that they want “five nines” or “four nines” they typically mean they want availability or up-time of a system or application to be 99.999% or 99.99%, respectively. What does that equate to in downtime? Below is a chart that shows the allowable downtime under different levels of “nines” (assuming no scheduled downtime on a 30 day month):

Availability Level Downtime per Month
99.999% 26 seconds
99.99% 4 minutes, 19 seconds
99.9% 43 minutes, 12 seconds
99% 7 hours, 12 minutes

With certain exceptions (e.g., financial market systems, air traffic control systems, retail systems the day after Thanksgiving, etc.), it’s worth asking how many organizations would be seriously impacted if the unplanned downtime in month exceeded 4 minutes and 19 seconds for their critical systems. Clients all too often start at the four or five nines level and have to be convinced to consider a more rational (affordable) SLA.

There is a direct correlation between the supplier’s price and the SLAs required by the client, especially as it reaches the four and five nines level. Many suppliers will tie all sorts of provisions to providing four or five nine SLAs such that they effectively undermine the value of the SLA. Even so, suppliers will charge a premium for the risk associated with just the expectation that they achieve this level of perfection. Even a small move to 99.98% can help. While it doubles the amount of downtime, it’s still under 9 minutes a month.

Getting serious about SLAs also means getting the internal IT organization to address SLAs like you expect the supplier to. It’s interesting to see how many client organizations looking to outsource a critical IT function do not have their own effective “commercial grade” SLA measures, metrics and reporting. They’re absolutely sure they are delivering at a best-in-class level, but don’t have complete meaningful reporting to demonstrate it. How reliable is their level of confidence? Certainly not enough for the outsource suppliers: “show me the reports”.

Even if an IT function is currently insourced and there are no immediate plans to outsource it, CIOs should insist that a commercial grade SLA measurement and reporting structure is in place. If the function is ever targeted for outsourcing, this information is invaluable for preparing the RFP, obtaining an appropriate, properly priced solution and holding the supplier immediately accountable upon transition of services. If it’s never outsourced, the information will still be highly relevant to the proper management of the function. Peter Drucker said “What get’s measured, gets managed.” If the internal IT organization is not measuring performance consistent with industry best practices, there’s a good chance they’re not managing the function consistent with industry best practices.

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When clients raise the question of the security of an outsourced service, it’s frequently a proxy for the feeling that they can trust/have control over their own people, but don’t really trust the service provider’s personnel. This type of concern showed up in a recent survey of CFOs conducted on behalf of SunGard Availability Services, more than half (56%) of those polled said they are concerned about the idea of outsourcing the management of their IT infrastructure due to the perceived security risks. According to the survey, the responding executives’ fears are exacerbated by high profile media stories about third party IT outages or data losses – with 45% of the respondents confessing that such cases make them more inclined to keep their data in-house, despite the cost implications.

When these concerns come up in an outsourcing deal, it’s helpful to consider the current risk profile of the company and whether the company’s systems and data are actually more secure in their current environment with their current staff, or if it’s just the perception of loss of control that is making the executives feel that way.

There are, of course, risks associated with allowing your data and applications to sit somewhere else and be operated on by someone else, and some of these risks become more pronounced when you are operating in a cloud-based environment with little assurance about the physical location of your data. However, these risks can be managed both contractually and procedurally and have to be evaluated in the overall context of the business.

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