My response to a recently published Equaterra Outsourcing report (see excerpt below) >>>

Organizations are looking for a single service provider to go to for software, IT Services and BPO/KPO services. They want to reduce multi-vendor complexity as well as drive down costs by utilizing combined offerings from vendors.

For new outsourced service providers to get a chance to do business with clients, they need to have a unique service offering, delivery capability or pricing structure that provides the buying organization a competitive advantage over its peers.

Demand for outsourcing services is actually increasing in certain areas. As an example in the field of mortgage banking we are seeing an increase in demand for services such as loss mitigation, default and investor reporting where there is a need to staff up quickly to handle the deluge of delinquencies being faced by servicer. Additioanl drivers for outsourcing continue to be cost reduction and variable capacity requirements.

Longer term projects are being shelved for short term gains by organizations mindful of the fact that rapidly changing market conditions need to stabilize before the viability of any long term projects can be established.

>>> Quoted from Equaterra 3Q08 Pulse report

Despite the fact organizations worldwide are deferring capital expenditures, outsourcing continues to be the number one tool chosen to drive organizational change, outpacing business investments in other areas such as hardware, software or other types of more discretionary project-based services, according to EquaTerra’s Advisor and BPO/ITO Service Provider Pulse Survey 3Q08.* Growth in outsourcing was positive but mixed across market sectors, with over 40 percent of those polled citing increased demand levels in the quarter. But the focus is shifting from longer-term initiatives aimed at improving end-to-end business processes toward efforts that deliver quick return on investment (ROI) and/or facilitate short-term business objectives that bring immediate cost savings, help align operating costs to reduced revenue/profits levels and reduce short-term capital outlays.

Key findings from EquaTerra’s 3Q08 Pulse:
Demand for outsourcing – Demand for BPO and ITO rose in 3Q08 according EquaTerra advisors, and was mixed according to service providers. Demand was stronger in Europe than in the North America (64 percent of EU advisors citing increased demand compared to 25 percent in the Americas) and slightly stronger for BPO (58 percent) over ITO (39 percent). - -Service providers polled were somewhat more pessimistic on demand levels, but, overall, are still seeing market growth.

Forty-one percent of service providers, a drop of 11 percent from last quarter and below the survey average of 55 percent, characterized their 4Q pipelines as up.

Economy both disrupting/driving deal flow – Thirty eight percent overall (service providers 43 percent, advisors 33 percent) cited economic conditions as causing buyers to slow or defer outsourcing efforts, the highest level cited over the past three quarters. However, 42 percent of overall survey respondents indicate economic conditions are driving more outsourcing, despite slowness in certain market sectors.

Increased pricing competitiveness– Half of the service providers polled reported more aggressive pricing, up 15 percent, but contract profitability remains stable – 61 percent of service providers report no change, while 26 percent report a year-over-year improvement. Increased pricing competitiveness is a manifestation of tight market demand, increased.

>>> End Quote

Merger or Partnership - Security and Crime Threat

a. An inevitable part of any merger is the rationalization of the work force. Typically in a merger there is two of each skill set available in the merged companies especially if the merger is one where a competitor firm is being acquired by a more powerful parent. The senior members of the acquired company get unprecedented access to the IP and confidential company data. Although a typical merger ties the proprietors and senior managers of the acquired company with privacy and non-compete clauses, it is difficult to prevent intellectual property from dissemination by these means. When the inevitable departure of these key executives happens in due course many companies end up seeding competitors promoted by the acquaintances or business partners of these departed executives. The dissemination of corporate IP in a merger or partnership is thus a major threat – in the euphoria of consummating a merger companies usually leave their doors wide open for losing precious company secrets to ex competitors who, if disgruntled can cause great harm,
b. The other big issue in a merger or partnership is based on the theory of “the weakest link” in IT or physical security. Typically post merger there is a chaotic period when the acquired companies processes and systems are being integrated into the parent company’s existing processes and systems. This compared with the “change of guard” in process and technology gatekeepers causes a window of opportunity for hackers or information thieves to target the weak link – the acquired company’s systems to get access to the acquirers networks. A vulnerability test of existing systems and procedures is usually not a part of the due diligence checklist of most acquiring firms where the focus usually is on audit of finances and business processes.

Offshore Outsourcing Trends in Europe

This recent article has a good summary on the trends of offshore outsourcing in Europe.

Interesting tidbits such as Belgium has the highest outsourcing rate at 81% and France the lowest at 63%! Who could imagine Belgium to lead the outsourcing trend in Europe?!

While 70% outsourced to lower costs interestingly only 49% agreed that offshore outsourcing was an effective cost saving tool. That leaves a full 21% that feels there is a questionable costs benefit in offshore outsourcing. Given the soaring euro this is quite unusual that such a large percentage find the cost benefits of offshoring to be nebulous.

Interesting to see logistics to hold the third largest share of the pie for outsourcing segments after computing and maintenance which have been the traditional leaders in offshore outsourcing.

-- snip --
1. 70% of respondents reported outsourcing at least one business process to lower-cost countries;
2. 49% of respondents agreed that offshore outsourcing served as an efficient cost saving tool;
3. 33% pointed to better quality through hiring the specialists among the major reasons for outsourcing;
4. Computing / telecommunications (68%) along with maintenance (76%) and logistics (73%) are the largest outsourcing segments;
5. Belgium was found to have the highest outsourcing rate (81% of companies), while France was found to have the lowest take-up rate at 63%;
6. At the industry level, the finance industry is reported to be the most mature in adopting outsourcing; banking is considered to be the most focused on IT and telecommunications outsourcing with a 75% take-up rate;
7. Medium-sized companies and multinationals are the major users of offshore outsourcing;
8. The majority of respondents generally report positive experience they have had with offshore outsourcing.
9. 20% of European companies admitted intending to increase their outsourcing level within the next two years.
-- snip --

Why do most SOA projects fail?

This post at ZDNet blogs states 1 out of 5 SOA projects fail. Here are my notes on why I feel this happens:

Lack of an Enterprise Integration Office – Without a string EI office through which all development efforts are approved maintaining an organization compliant with an SOA strategy becomes virtually impossible. Developers often circumvent the SOA layer by creating database level integration shortcuts under time constraints or lack of knowledge that a SOA solution exists to solve the same problem.

SOA Layer Silos and Duplication – Typically an application development team creates a SOA layer to serve the needs of the same application and a few other closely related applications. Other development teams do not use this SOA layer and it remains limited to the original application cluster that it was used for. A related problem is duplication of the same business logic in separate SOA efforts by separate development teams. These problems stem from the lack of a widely published and promoted UDDI so developers across the organization are aware of the SOA services available.

Inadequate Tool Support – If creating SOA compliant code or creating the SOA layer itself is difficult or cumbersome developers frequently will circumvent the SOA effort. Proper tool support is vital in making the job of writing SOA complaint code easier.

SOA for SOA’a Sake – SOA is not a silver bullet for all application development efforts. Unless the business logic for which a SOA layer is being created does not have an enterprise wide need , the additional work of creating the SOA layer should be avoided. Developers frequently gravitate towards using SOA and other “cool” technologies tending to over-engineer applications. Strong architectural oversight needs to be provided to prevent this issue.

Big Bang Approach – Implementing SOA across an entire organization needs time and should be done in phases rather than in one big bang development effort. The best place to start is to integrate new and strategically important applications into the SOA layer. Over a period of time as the benefits of SOA become widely recognized backward integration into existing apps should be attempted.

Automation vs. Outsourcing - What's the right solution?

This article of mine was recently quoted in Mortgage Technology Magazine. Read it here.

Any automation project must always be evaluated against all other options and a true comparative ROI should be established. The three possible choices facing an organization are:

Full Automation – Preferable when the process being automated has achieved process maturity and the workflow is well established. Full automation is preferable only when it is a solution for a long term need. Buy vs. build is a major decision in full automation. As a rule of thumb, if an off-the-shelf software solution can meet at least 75% of the requirements, there is no compelling justification to build the software from scratch. Proprietary plug-ins can always be built over packaged software. While this might not be the most elegant solution, considering the rate of software obsolescence this path must be given great consideration before investing in a long term automation project.

Partial Automation – Sometimes the productivity gains from partial automation might be able to provide the maximum benefit for the minimum cost. Examples of this are imaging systems, workflow software, telephony and fax automation solutions, etc. Frequently enabling the workforce with productivity improvement tools is the solution.

Outsourcing/ Offshoring – If an external vendor(s) has already made the investment in automation and/or has the economies of scale to perform a process better/faster/cheaper than a heavily automated organization can achieve, outsourcing should be the preferred path. With the outsourcing approach there is no upfront investment in software development or programmers and a variable cost model can be established. Further, there is no cost of technology obsolescence or ongoing maintenance. An organization needs to evaluate whether its investment in an automation tool achieves it a greater ROI over outsourcing the same work within a reasonable time span. Offshore outsourcing options need to be evaluated to further reduce the cost of outsourcing and to achieve a greater ROI.

Global financial firms go slow on recruitment - Lehman shuts down Mumbai unit

Lehman Brothers is reportedly shutting down their 100 person Mumbai unit noted in the above article on Hindustan Times. Merrill Lynch is also reported to be scaling back its India operations significantly.

Although the article notes this as a probable cost saving measure I would think that it is equally an effort to focus on core competencies. This is another example that supports my previous thread on the increasing difficulty for companies to run offshore service captives that do not have any revenue generating function in the host country.

Expect a whole host of this kind of news in the coming months and the remnants of a majority of captives being picked up by large offshore outsourcing vendors. Good times to be a vulture investor if you wanted to pickup "fire sale" equipment, office space and of course talented and trained employees from these departing captives.

BPO's Build Talent Pool Through Corporate Social Responsibility Programs

This interesting article notes how Philippine BPO firms, faced with a shrinking talent pool of qualified workers to hire from, are using their Corporate Social Responsibility Programs, especially education focused programs, to access a talent pool for future employment.

With the rising cost of making "raw" grads employable and having to compete in a vicious cycle of poach and be poached BPO's have to look at creative new ways to create a "funnel" of low attrition recruitable talent that is sustainable over the long term.

This is an interesting new twist on the business model of global software firms such as NIIT that also operate their own education arms and actively utilize these divisions to hire new talent.
NIIT's model is a for profit model which does not necessarily buy loyalty of its incumbent employees for tenure which I feel the associates recruited through a CSR program would have.

Think about it, who would you be more loyal to - somebody who charged you for your education or somebody who gave you the education for free?

Outsourcing the Offshore Operations

This recent article in BusinessWeek by Steve Hamm points to the growing trend of "Western companies are increasingly getting away from running their own offshoring operations, handing the jobs over to Indian tech-services specialists".

The article cites the recent $228 million purchase of Aviva's 5,000 strong operation by WNS (which itself was a spin off of British Airways India captive), Infosys acquisition of Phillips Electronics offshore arm and of course the pivotal event of GE spinning out the majority stake of its India operations to Genpact in 2005.

The reasons for this shift are noted to be the increased economies of scale which the offshore outsourcing specialists can bring to bear. The overhead costs of managing an offshore operation which can decimate costs savings of an offshore operation are also a reason for this shift.

Are we looking at the beginning of the end of "offshore captives" as we know them?