The Connected BusinessFINANCIAL TIMES SPECIAL REPORT | Wednesday June 29 2011

www.ft.com/connectedbusinessjune2011 | twitter.com/ftreports

Recent high-profile hacking attacks,such as the theft of more than 100mcustomers details from Sony and afour-day data centre outage at Ama-zon that took down thousands of web-sites, have done nothing to reassurecompanies about the security of cloudcomputing.Hacking is one of the biggest con-

cerns for companies considering out-sourcing IT functions to an externalprovider. A recent survey by theCloud Industry Forum found that64 per cent of companies named this

as their chief worry in moving to acloud-based IT model.Although the majority of businesses

one recent study put this at about90 per cent are taking steps to out-source IT, their approach is oftenhesitant and limited to transferringless critical business functions suchas e-mail and data back-up.About 41 per cent of companies out-

source their e-mail, but only 11 percent process their payroll through anexternal service.Ryan Rubin, UK head of security

and privacy at Protiviti, an IT secu-rity company, says: There arentmany people putting mission-criticaldata in the cloud. The crown jewels customer records, for example arestill very much embedded in theorganisation.A director at one London invest-

ment bank says: We use the cloud forthings such as e-mail. We would neverput our client services on it.

Fears about cloud computing arenot entirely justified, says JohnWalker, a member of ISACA, the secu-rity advisory group.Companies are more likely to lose

data if they run their own data cen-tres, he says, than if they entrust theinformation to a professional out-sourcing company.There is a long list of companies

whose corporate data has been com-promised by hacking, lost laptops andUSB sticks left on trains and in taxis.A lot of organisations who say

they dont trust the cloud should lookat how they operate their own ITdepartment, Mr Walker says. Data-centre companies provide technologyand well-trained staff better than theaverage company does.Last year, when Anonymous, a

group of hackers, began attackingthe systems of companies that had

Internet is industry Achilles heelSecurityThere is confusion betweencloud computing providersand clients about who isresponsible for security,says Maija Palmer

Continued on Page 2

In the 25 years sincesuch western multi-nationals as EastmanKodak, GE, Citibankand American Expressbegan to outsource their IToperations, the global ITservices industry has growninto an $820bn behemothand outsourcing has gonemainstream.Outsourcing is no longer

a novel business tacticwhere companies are forcedto farm out a function theycannot manage internally,says Jagdish Dalal, manag-ing director of the 110,000-member International Asso-ciation of Outsourcing Pro-fessionals.Outsourcing is providing

companies with alternativebusiness models, wherebythey can manage a smallbut market-differentiatingcore while engaging expertthird parties to perform thenecessary work.This atomic business

model is helping them notonly weather the [eco-nomic] storm, but create amarket advantage even inthese turbulent times.Companies, big and small,

also use outsourcing to givethem flexibility as theyexpand their markets.In March, Royal Haskon-

ing, an Netherlands-basedengineering and environ-mental consultancy, signeda multiyear, multimillion ITinfrastructure outsourcingdeal with Indias Tata Con-sultancy Services.TCS is providing a full

suite of IT infrastructureservices, including a multi-lingual service desk, data-centre hosting and manage-ment, end-user computingservices and applicationsupport services.Royal Haskoning is plan-

ning to grow, not only inour home countries butacross emerging markets,explains Eric Overvoorde,chief information officer.We face interesting chal-

lenges, so consistent experi-ence of service delivery isessential for us to be suc-cessful.With TCS taking care of

Royal Haskonings IT infra-structure, its managementwill be able to focus onbusiness performance andinternational growth plansin Europe and elsewhere.As Royal Haskoning

demonstrates, IT outsourc-ing is no longer the pre-serve of big multinationals.The market has expanded

to embrace relatively smalland medium-sized compa-nies.In the UK, for example,

Everest, a provider of dou-

Genpact (the Indian BPOcompany that was spun outof GE) signed a five-yearcontract with AstraZenecato provide the pharmaceuti-cal group with globalfinance and accountingservices, which it did notconsider to be a core com-petency.Tony Glynn, Astra-

Zenecas senior director fortransformation global trans-actional finance, explains:

We had entered into aperiod when the wholepharmaceutical industrywas changing and gettingready for greater competi-tion, more uncertaintyaround patent expiriesand so forth.Mr Glynn initially identi-

fied some six BPO providers

that could offer the transac-tional finance processingservices that he was look-ing for and finally choseGenpact.We signed a contract in

November 2009, and we arenow about 80 per cent ofthe way through the transi-tion of our activities acrossto Genpact, he says.Like most other big phar-

maceutical companies,AstraZeneca has also out-sourced much of its IT.We have also signed

a contract to outsourcesome of or human resourceswork, and weve alreadydone some selective out-sourcing of some of ourR&D work, explains MrGlynn.Mr Dalal points out that

the pharmaceutical indus-try is full of examples ofcompanies that outsourcetheir R&D activity for drugdevelopment.On the other hand, he

says: real estate outsourc-ing provides companieswith options for conservingtheir capital instead ofinvesting in a building.And IT departments havelong used outsourcing toprovide innovation and fillskills gaps.Manufacturing outsourc-

ing [also] provides manyexamples of convertingfixed cost base for produc-tion to a more variable costbasis, he says.A recent survey of more

than 2,500 chief informationofficers conducted by PAConsulting and HarveyNash, the recruitment busi-ness, reached similar con-clusions.While cost reduction wasthe rationale most oftengiven for outsourcing,companies reported thatthe second most importantreason was to to accessskills not found in-house.The same survey also

underscores the growingpopularity of IT outsourc-ing.Almost a third of CIOs

said they would spend up toa quarter of their entire ITbudget this year on out-sourced activity and morethan one in 10 said theywill spend 50 per cent oftheir budget on outsourc-ing.Software application

development remains themost popular outsourcedactivity, although external

help/service desks are nowbeing used by 40 per cent ofCIOs worldwide.Do companies also have

an eye on the growth ofenterprise cloud comput-ing?Cloud computing is one

form of outsourcing, saysDaryl Plummer, of Gartner,the research company.The difference is in the

types of contracts andterms applied.In cloud computing,

there is one contract that isapplied to all customers inthe same way.Mr Plummer believes

cloud computing and tradi-tional outsourcing will bothcontinue to exist side byside.Some companies need

Paul Taylorintroduces a focuson outsourcing used for flexibility,to harness newskills and cut costs

the customised delivery ofservices that traditionaloutsourcers deliver.Some need more com-

moditised services at thelarge scale that cloud com-puting delivers.But as the cloud model

continues to grow, it willsteal more and more atten-tion away from traditionaloutsourcing models.

Inside this issueIndustry trendsCost savings becomeharder to find Page 2

Case Study Externaladministration in the fundindustry Page 2

Business case First askwhy are we outsourcing?Page 2

Hub beauty paradeShopping for locations in abuyers market Page 3

The IT departmentSome decisions must stayinhouse Page 3

Case Study Achange in culture andstyle at BAA Page 3

Procurement Innovationis an important part of thedeal Page 3

Focus on The CloudRetro styling rather thanrevolution. Plus sweetliberation for Domino SugarPage 4

Podcast Clouds,balls and planesCloud computing;the CIO of LondonsHeathrow airport;and how IT runsWimbledon

SecurityData centres: thephysical part of thevirtual economy; anda change in role forIT departments

SecurityAmazon outagesshake faith in thecloud

PerspectivesThe delicate balancebetween power atthe centre and atthe periphery

Guest ColumnIndian outsourcinggrows upft.com/connectedbusiness

Get Connectedonline

As the cloudgrows, it will stealmore attentionfrom traditionaloutsourcingmodels

ble glazed windows, wantedto upgrade its network andIT infrastructure but didnot want to commit to along-term deal.Initially, we needed a

supplier with system exper-tise but with flexibility inits approach, explainsDave Gordon, IT servicesmanager. Last year, Everestselected Calyx, a US-basedindependent managed serv-ice provider for the project.We agreed a one-year

contract with Calyx thathad the merit of minimalset-up costs, says Mr Gor-don.Once we had worked

with Calyx for a while, itsteams ability to innovatewhile retaining a flexibleapproach in day-to-dayoperations was obvious.We have been pleased

with the teams input andextended the managed serv-ices agreement and this ishelping us ensure enhancedwide area network (WAN)capabilities for our depart-mental users.In the past, outsourcing

mainly focused on IT serv-ices, but one of the fastestareas of growth over thepast decade has been busi-ness process outsourcing(BPO).As with IT outsourcing,

there are many reasonswhy companies such asMicrosoft, the US softwaregroup, and pharmaceuticalcompanies including Astra-Zeneca have chosen to hireexternal help with businessprocesses.Microsoft set out to re-

engineer its global financeprocesses and operationsunder its OneFinance initi-ative, launched in 2006.As part of this effort, the

company outsourced back-office finance transactionsin 95 countries to Accen-ture, the consultancy,under an agreementdesigned to promote a com-mitment to mutual gainsand performance improve-ments.More recently, in 2009,

Modelthat workseven inturbulenttimes

2 FINANCIAL TIMESWEDNESDAY JUNE 29 2011

The Connected Business

Internet is proving to be industrys Achilles heelwithdrawn support fromthe WikiLeaks website,those companies that usedcloud providers for their ITfared better than those whoran their systems in-house,he says.I have yet to see a genu-

ine cloud security incident,agrees Andy Burton, chair-man of the Cloud IndustryForum.The Achilles heel of out-

sourcing IT, however, isdependence on the internet.The internet is a free-for-

all environment, which wasnever designed to carrycommercial traffic. MrWalker says.In 2008, for example, Dan

Kaminsky, a computerenthusiast, was widelyreported to have brokenthe internet when he

stumbled on a security flawat the heart of the system.It would have allowed

him to reroute anyonesmail, take over bankingsites or simply disrupt theentire system.Fortunately, he reported

the flaw, but it was onlypatched, never fully fixedand has raised the spectreof when the next seriousproblem will arise.In the industry, we call

the internet an untrustednetwork, Mr Burton says.There is also confusion

between clients and cloudcomputing providers aboutwho is responsible for secu-rity.A survey by the Ponemon

Institute, a privacy researchgroup, found that a major-ity of cloud providersbelieved it was the custom-ers responsibility.

Cloud providers allocate10 per cent or less of theiroperational resources tosecurity, and most do nothave confidence that theircustomers security require-ments are being met.Industry experts say com-

panies must be very specificwhen negotiating cloud con-tracts, asking questionsabout disaster recoveryplans, security provisionand insurance.Cloud providers dont

often offer a lot of guaran-tees on what they will do ifthey lose your data, saysDaryl Plummer, a cloudexpert and Gartner researchfellow.If you want something in

a contract, you will have tonegotiate for it.Companies may also have

trouble auditing their data-outsourcing provider.

With thousands of busi-nesses springing up to offerservices, it can be hard tojudge whether a particularcompany is an experiencedoperator with a wellthought-out contingencyplan.Some companies will hire

security experts, such asProtiviti, to kick the tyreson an outsourcing companyto check if it has securityand disaster recovery inplace.But such due diligence

can cost anywhere from5,000 ($8,000) to 100,000.The Cloud Industry

Forum is trying to simplifymatters by setting up ascheme to certify serviceproviders that meet certainminimum standards ofsecurity, confidentiality andservice.Many vendors have char-

ters, but it is more a mar-keting statement of whatthey hope to do.We are trying to create

an independently verifiedprocess, doing spot checksto make sure that they areproviding the level of serv-ice they promise, says MrBurton.Mr Burton believes

increased accountabilitywill help ease securityfears. But even he believesthe market will always be ahybrid.There will always be

some tasks on the premises,some in the cloud.It may also be a question

of calibrating expectations.Andy Singletons business,Assembla, which offersservices for open-sourceprojects, was hit by theApril outage at Amazon.He has moved some com-

puter functions in-housebut Mr Singleton has notbeen put off Amazon. Ahighly experienced technol-ogist, he never expected itto be perfect.The Amazon outage does

damage confidence in cloudcomputing. But it is a lotless damaging for peoplewho have seen a lot of host-ing services and have seenthat these outages arepretty common.Squirrels chew through

fibre optic cables. Data cen-tres can catch fire. It hap-pens all the time, he says.However, he says, it is

well within the realms ofacceptable risk for busi-nesses that are prepared.

Amazon outages shakefaith in the cloud:www.ft.com/connectedbusiness

The internetis a freeforallenvironmentthat was neverdesigned to carrycommercial traffic

First, askwhy are wedoing this?

For many chief executives,outsourcing IT functionscame to be seen primarilyas a way of cutting costsduring the recession.Businesses that had

signed contracts scrambledto renegotiate deals, extend-ing terms and scrappingnon-essential features toreduce their annual outlay.But outsourcing IT

should never be seen solelyor even mainly as a meansof reducing outgoings,according to experts.The decision on what to

delegate needs to fit into abroader corporate strategybased on what is crucial tothe success of the businessand what is routine.In the first place, you

need to know why you aredoing it, says AlistairMaughan, a London partnerat Morrison & Foerster, alaw firm. It seems obvious,but you would be surprisedhow many organisations gointo it without a clear, con-sistent idea as to why.Outsourcing can be used

to allow management toconcentrate on the com-panys core business; toaccess people with special-ist IT skills they could nototherwise find; to improvebusiness performance byupgrading the operation ofvital computer-based serv-ices, or to spread the opera-tional risks of running anIT department.We are in transition

back from the recession,when saving costs domi-nated everyones thinking to a broader spread ofreasons, comments MrMaughan. Companiesshould do it to improvetheir business rather thancut short-term costs.But whatever set of rea-

sons predominates in driv-ing outsourcing, theyshould be shared by thechief information officer,the chief executive and thefinance director.Before outsourcing any IT

functions, managementneeds to ensure they arewell run to start with.A business cant out-

source its problems, saysNeil Louw, chief technologyofficer at Dimension DataEurope, an IT services ven-dor. If it attempts to useoutsourcing to fix a brokenbusiness process or tostandardise processesacross different parts of theorganisation, it will almostcertainly fail.Jo Stanford, group IT

director at De Vere Group,the hotel operator, says thatif a business decides to out-source, it needs to carry outthorough due diligence onits potential partner. Youneed to look for full finan-cial security, and at thevendors expertise and abil-ity to deliver. Previousexperience of IT service pro-viders going into adminis-tration was a nightmare,she says.Vendors can offer a fan-

tastic price, but you need todrill down to the after-salescare that they provide andget references from othercustomers. This is a connec-

tion that requires morethan the traditional sup-plier relationship.De Veres web-based

booking system is hosted byClaranet, a provider of man-aged IT services.In the past, managers

were often too eager to out-source functions that theyshould have kept undertheir own direct control.Historically, clients have

outsourced too much: ele-ments that were absolutelycritical to the organisa-tion, says James Cockroft,associate director at XantusConsulting, an IT specialist.The client ends up hav-

ing to take responsibilityand has to bring in morepeople to fill the gap. It canend up costing you morethan expected, because youneed to backfill certainroles.Companies have run into

difficulty because the ITservice provider has failedto keep an up-to-date inven-tory of the number of com-puters being used, so it failsto maintain enough soft-ware licences.Successful outsourcing

deals may even lead togreater spending by the cli-ent. A well managed dealwill reduce your unit costs,but will not necessarilyreduce your overall spend,says Mr Maughan.If it works well, it should

support more of your busi-ness. You spend morebecause you are investing

in higher quality services.In the early days of out-

sourcing, a contract wouldoften be with a single sup-plier that would take onresponsibility for the entireIT function.However, as the market

has matured, managementteams have realised thatindividual vendors havespecialist skills, so theyhave allotted different sec-tions of IT to different serv-ice vendors. However, thistoo can bring its problems.You have to make sure

that the different parts aretechnologically joinedtogether and are managed,explains Graham Beck, out-sourcing specialist at PAConsulting.What tends to happen is

that management of theintegration is left high anddry. If clients fail to recog-nise the issue, they haveproblems along the servicechain and individual ven-dors say: Thats not mybit. Staff at their desks arenot concerned about whosupplies the service. Theyjust want the end-product.Outsourcing IT does not

mean a companys manage-ment can forget about it.The relationship will stillneed to be managed fromthe client side and staff whohave been retained to dothis will need to feel moti-vated.The skill set required is

very different, says MrCockroft. Some people seeit as more of a managementthan a technical position,but others feel their abilityto make a difference hasbeen taken away and theybecome frustrated.

Business caseOnly well run ITfunctions should bedelegated, findsCharles Batchelor

Standardisation is the way to save

The first wave of business processoutsourcing (BPO), 20 years ago,enabled many organisations to cuttheir costs by up to a third. Out-sourcing companies could be more efficientand achieve economies of scale by perform-ing similar back-office tasks typically HR,finance and procurement for a number ofclients.By the turn of the millennium, outsourc-

ers had begun offshoring to India and thePhilippines, where cheaper labour enabledthem to deliver further significant costreductions.But since 2007, the potential cost savings

of outsourcing have been shrinking. In thatyear, 87 per cent of US and Europeanorganisations reduced their costs by atleast 10 per cent, according to research byGartner, the consultancy.In 2010, just 58 per cent of companies

managed this. The financial advantagesseem to be flattening out, says California-based Robert H. Brown, Gartners researchvice-president, BPO.Not surprisingly, some outsourcers have

struggled to survive. Convergys wrotedown $273m at the end of 2008 on a busi-ness with $60m revenue. And in March lastyear it sold its HR management arm forabout $100m to NorthgateArinso of the UK.Hewitt Associates, a UK consultancy,

which bought Exult, an HR outsourcingcompany, in 2004 for $613.5m, found thecontracts it was signing difficult to fulfil.Within three years it wrote down almost$920m.Mike Gammage, vice-president for prod-

uct marketing at Nimbus, a software com-pany, agrees that BPO cost-savings aredwindling. But this does not mean it is onthe way out, he says. Providers such asIBM, Accenture, HP, Capgemini, Tata Con-sultancy Services, WNS and Wipro aremaking money and expanding.Moreover, process management has

become fashionable. It used to be seen asa boring back-office, career limiting over-head, whereas now its become worthy ofattention, Mr Gammage says.Seeing the cost-benefits of BPO in isola-

tion is misguided, because it depends whatan organisation is trying to achieve, saysTim Palmer, who leads PA ConsultingsBPO services. Some companies use BPObecause they cant afford to invest in, say,an HR application. By outsourcing theysave on the wage bill, but the main advan-tage is that they dont have to build andmaintain the system themselves.Other motivators include a desire to shed

non-core activities, or to access specialistknowledge. The latest wave of cost cut-ting is in the creation of service centresthat can run standard applications for anumber of companies, says Mr Palmer.These often include learning-administra-tion, HR helpdesk, performance manage-ment, payroll and accounts payable.Cloud computing is seen as the latest big

opportunity to cut costs, by enabling BPOto be provided online, on demand. This isthe next generation of thinking, but is notyet a reality, although some companies doclaim to offer it, Mr Palmer says.Saving money with BPO now tends to

mean working in a more standardised way.Outsourcing companies look for work thatis scalable and repeatable. They avoid com-plexity and systems that need customisingfor individual clients.This was the experience of Mike Dunlop,

when, as HR director of Sun Microsystems,he signed a five-year global contract in 2005with Hewitt Associates. It worked well forstandardised processes, he says, but provedmore difficult in areas such as employmentrelations, where regulations vary betweencountries.The scope of the initial contract was too

ambitious and both sides realised it, so we

brought some back in-house, he says.Many outsourcing contracts hit similarproblems after a couple of years.Renegotiating contracts in these circum-

stances can be expensive, says Mr Dunlop.The big question is where you draw theline about what you give to somebody elseand what you continue to do in-house.Big multinationals still have many

legacy terms and conditions, practices andpolicies that make it hard for them to takeadvantage of the outsourcing opportuni-ties, says PAs Mr Palmer.Smaller, more nimble companies are

better able to do so, he notes.

The continued focus on financial savingsby BPO buyers is driving providers to lookat other low-cost areas such as centralAmerica, says Gartners Mr Brown.Other providers, such as Cognizant of the

US, are investing in automation. They areusing software to take humans out of theequation, replacing call-centre staff withinteractive voice response to drive moreefficient process management.BPO providers should make processes

better rather than cheaper, says Mr Brown.The focus needs to be on analytic servicesand knowledge processes, not about costreduction, but getting better insight.

Industry trendsProviders look for work that isscalable and repeatable. Theyavoid complexity and systemsthat need customising,discovers Jane Bird

By 2000, outsourcers began offshoring to India and the Philippines, where cheaper labour offered much lower costs Getty

ContributorsPaul TaylorThe Connected BusinessEditor

Maija PalmerTechnology Correspondent

Charles BatchelorFT Contributor

Jane BirdFT Contributor

Stephen PritchardFT Contributor

Jessica TwentymanFT Contributor

Ursula MiltonCommissioning EditorSteven BirdDesignerAndy MearsPicture Editor

For advertising contact:James Aylott on:+44 (0)20 7873 3392;email: james.aylott@ft.comor your usualrepresentative

Continued from Page 1

AlistairMaughan:Outsource toimprovebusiness, notto cut costs

External fund administration We would not consider bringing it back inhouseCost saving was not the mainreason for European CreditManagements decision tooutsource its fund administrationactivities.Shedding noncore activities

was another important motive forthe Londonbased institutionalasset manager.Our business is fixedincome

investments we manage $14bnof investor funds, says StevenBlakey, ECMs chairman.We wanted to focus on that,

rather than on fund administration.Managing complex securities andderivatives requires significantinhouse infrastructure Given thechanging environment, we felt itwas time to outsource.Using an independent third party

was also a way to providetransparency to investors, asrequired by regulations after theMadoff investment fraud and the

financial crisis. In addition, ECMthought moving to an outsourcerwould expand career opportunitiesfor middle and backoffice staff,who had been with the companysince it was founded in 1999.In 2009, ECM invited 10

outsourcing companies to bid forthe full outsourcing ofadministration, includinginfrastructure and 50 staff.After a ninemonth evaluation,

ECM chose GlobeOp, whichoffered potential savings of severalmillion pounds over the first fewyears.The decision was not driven by

price alone, says Mr Blakey. Fundadministration for our asset classis complex and involves a degreeof expertise which the largerproviders didnt necessarily offer.ECM also liked GlobeOps

entrepreneurial nature and recordof adopting sophisticated

technology to serve the hedge fundindustry.Hans Hufschmid, GlobeOps chief

executive and cofounder,describes the companystechnology as integrated, scalableand industrial strength.Its central database, in two US

data centres that mirror eachother, can be sliced and diced indifferent ways for individual clients,for example, showing all tradesbetween Brazil and Russia over thepast two months.GlobeOp was keen to expand its

workforce and recruit personnel the ECM staff represented a largenew resource. This type of teamliftout is cuttingedge, says MrBlakey at ECM. Not many serviceproviders pitch to take on 50specialists in this business. AtGlobeOp they can move to workingon other projects, he says.ECMs fund administration and

data systems are handled byGlobeOps operations in Londonand Mumbai, India, not at ECMsoffices in Londons Mayfair district.Although ECM has outsourced

the vast majority of its businessprocesses, it has kept eightmanagers in compliance, HR andmarketing, who report to the chiefoperating officer and chiefexecutive. This offers a level ofprotection against the risk of fullyoutsourcing key businessprocesses.Wells Fargo, ECMs major

shareholder, also outsources someof its fund administration. It isquite an industry norm, says MrBlakey.Our move to outsourcing is

intended to be permanent. Wewould not consider bringing itback inhouse.

Jane Bird

Although ECM hasoutsourced most ofits business processes,it has kept eightmanagers incompliance, HRand marketing

FINANCIAL TIMES WEDNESDAY JUNE 29 2011 3

The Connected Business

In the race to grab a slice of the mar-ket for offshored services, it seemsalmost every country in the world ishoping to become the new India, orat least to create its own version ofIndias dazzling success.Twenty years ago, India had a still

largely agrarian economy. Today,while agriculture still employs justover half the workforce, it contributesjust 16.1 per cent of gross domesticproduct. Industry contributes 28.6,while the services sector accounts for55.3 per cent.The jewel in Indias services crown

is its $76bn IT and business processoutsourcing (BPO) industry, fed by alarge pool of low-cost, but highlyskilled English-speaking workers.That workforce, along with Indias

hefty first-mover advantage, has keptthe country at the top of the latest ATKearney Global Services LocationIndex (GSLI), a biennial ranking bythe management consultancy firm of50 outsourcing locations worldwide.Johan Gott, co-author of the report

and AT Kearney global policy man-ager, explains that each country isevaluated as an attractive destinationfor service delivery using 39 measure-ments in three categories: financialattractiveness, people and skills avail-ability, and business environment.Clear rivals to India are emerging.

In the latest ranking, China andMalaysia lag not far behind, followedby Egypt and Indonesia.The remaining countries in the top

ten are Mexico, Thailand, Vietnam,the Philippines and Chile. The full top50 ranking, meanwhile, reveals thatcurrency movements in recent yearshave helped to boost states where costlevels had previously kept them fardown the list, including the Balticstates, the UK, Mexico and the UnitedArab Emirates.The GSLI is intended as a measure

of each locations potential, not itsproductivity, says Mr Gott, but pro-vides some useful clues as to where

many of the big outsourcing providerswill look to establish global centres.In recent years, for example, Info-

sys, Wipro and TCS have all estab-lished operations in Chengdu, China,alongside western technology compa-nies including Intel, IBM, Cisco, SAPand Microsoft. The first three alsohave operations in Mexico.Picking the right spot is not easy,

says Vineet Nayar, chief executive ofHCL Technologies, the Indian out-sourcing company. Numerous consid-erations need to be taken intoaccount: cost, social responsibility fac-tors, cultural alignment and also time-zone alignment with established andemerging markets, as this is whatdetermines speed of response.Macroeconomic factors, political sta-bility and, of course, available skillsare also important, he says.There is no room for short-term

experiments, says Hansjoerg Siber,head of global operations atCapgemini, the consultancy. Wedont want to set up lots of smalllocations all around the world, just tosee which ones work, he says.We monitor a specific location

over a number of years and thinka lot about what might change

there, from the political parties inpower to the currency exchange rate.Egypt and Russia may have much

to offer as low-cost, high-skills baselocations, for example, but they willnot be viable targets, says Mr Siber,until Egypts political stability ismore certain and the Russian govern-ment does more to fight corruption.Luckily for the leaders of large out-

sourcing companies, they are shop-

ping for locations in what is effec-tively a buyers market. Policymakershoping to transform their countriesinto outsourcing hubs have to workhard to attract their attention, oftenby means of regional developmentgrants and tax subsidies.HCL Technologies, for example, has

received more than 5.5m ($9m) infunding from regional development

agency, Invest Northern Ireland, sinceit set up a call-centre in Belfast in2004 and acquired another in Armaghthe following year.This kind of incentivisation is not

new, Mr Nayar notes. It is no coinci-dence that the IT services business inIndia thrived in the 15 years that itoperated under a zero-tax regime,where generous subsidies were offeredon land acquisition, he says.But it only thrived because, in

return for subsidies, companies likeours were prepared to invest in build-ing infrastructure, training peopleand bringing in foreign business.Now, other governments are say-

ing to us: We want to attract you toour country, to help you build theskills base and to get our people intowork and were prepared to subsi-dise you for that, he says. Its animportant factor . . . but it isnt theonly one.To present the most attractive pack-

age in this nation-by-nation beautyparade, governments must increas-ingly be prepared to offer long-term,mature subsidy frameworks, notshort-term rewards, says MichaelRehkopf, partner and director at TPI,an outsourcing advisory company.

At a recent outsourcing industrymeet-and-greet in China, he was sur-prised to discover that other USattendees were public-sector workers,representing a number of cities andstates. They wanted to understandhow subsidies were being packaged inChina, so that they could do some-thing similar back home.But how much does geography

really matter for customers? Formany mature outsourcing customers,offshore services are simply part oftheir global supply chain. Theyre notparticularly interested in where theservices are based, only in output andoutcome, says Alex Blues, an out-sourcing specialist at PA Consulting,the management consultancy.At the other end of the spectrum,

there are companies that insist thattheir managers go and kick the tyresof every city their provider suggests.Best practice lies somewhere in the

middle, he says: Smart outsourcingcustomers leave the choice of locationto the supplier, but give them somerules that define where theyre happyfor specific services to be based andprovide guidance as to the maximumamount of service that should be pro-vided from any one location.

Governments vie for work in offshoring beauty paradeService locationThe leaders of largeoutsourcing companiesare shopping for locationsin a buyers market, saysJessica Twentyman

How can outsourcing IT serv-ices help chief information offic-ers to juggle conflicting priori-ties of keeping costs low whileincreasing the business value ofIT? Recent research fromGartner, the market researchcompany, suggests that procure-ment and IT leaders give theseaims more or less equal rank-ing, with a slight emphasis onvalue over cost.Claudio Da Rold, a Gartner

analyst, says that while thereare many ways to reduce thecost of delivery and increase thevalue of IT, from the sourcingperspective, increased polarisa-tion between two approaches isemerging in the market.The first approach, he says,

will see companies embrace thetrend towards industrialised,low-cost IT, in which they tradenon-essential customisation forbetter (and less expensive) serv-ices.These might include cloud-

based e-mail, for example, orinfrastructure-as-a-service offer-ings, where storage or process-ing power are provided on anon-demand, pay-per-use basis.The second approach, accord-

ing to Mr Da Rold, will seeorganisations embrace busi-ness-value-added services,designed to help expand oreven better, transform theirbusinesses.At Dollar Thrifty Automotive

Group (DTG), the US-basedrental car company, Rick Mor-ris, the CIO, hopes to cover bothapproaches with a recent three-and-a-half-year, $72m outsourc-ing deal with Hewlett-Packard.The deal, a continuation of

DTGs existing 14-year relation-ship with HP, focuses largely oninfrastructure management.From a cost perspective,

were offloading a great deal ofthe complexity involved in man-aging largely commoditisedservices within the DollarThrifty technology stack, sothat internal staff can focus onbusiness needs, without havingto worry about server provision-ing and patching, or databack-up and restore processes,or service-desk operations, MrMorris explains.At the same time, innovation

is an important part of the deal.I need to be able to look to myprovider in this case, a muchlarger and deeper-skilled organi-sation than our own to helpbring ideas to the table, onesthat will add real businessvalue, he says.If I dont do that, then its a

waste of a tremendous opportu-nity for Dollar Thrifty. I needevery member of my technologyteam whether theyre an HPemployee or a Dollar Thriftyemployee to play an activerole in the creative process.For many companies, how-

ever, that cannot happen untilthey develop a useful workingdefinition of the term innova-tion, says Ilan Oshri, author ofsix books on outsourcing and anassociate fellow at WarwickBusiness School in the UK.While innovation has been

explored and prized in busi-nesses for decades, it is a rela-tively new topic in the contextof outsourcing, he says. As

such, the perceptions regardingwhat innovation in outsourcingis, what inhibits or enablesinnovation in outsourcing, andwhat client [companies] are will-ing do to ensure they benefitfrom it are still being defined.Given that many companies

definitions of innovation willdiffer in terms of final businessoutcomes, it makes sense forcustomers to spend time withprospective suppliers hammer-ing out their terms on the sub-ject long before any deal issigned. But many still do not,says Jonathan Cooper-Bagnall,head of the shared services andoutsourcing practice at PA Con-sulting.Its a question of focus, he

says. If you think about it,when you first start outsourcingIT services, what youre mostinterested in is quickly estab-lishing stability for those serv-ices. As a customer, youre notmuch interested in innovation,in doing new things, or in doingold things differently, he says.What the provider learns

from that is that your companyisnt interested in innovation.That misconception quicklystarts to devalue the relation-ship between customer and sup-plier unless theres a con-certed effort early on by the cus-tomer to address it.

Reaching a workable defini-tion is just the start, warns MrOshri. A customer and their out-sourcing partner will also needto work out how to measure theinnovation delivered.In a recent survey he con-

ducted of 250 CIOs and chieffinancial officers across Europe,commissioned by outsourcingcompany Cognizant, 64 per centof respondents said that theynever measured or did not knowwhether they measured theinnovation delivered by theiroutsourcing providers.At UK pub and restaurant

chain Mitchells & Butlers(M&B), managers attend amonthly forum with their top 10suppliers, overseen by an inde-pendent third party. Among theattendees are the companysbeer supplier, its logistics pro-vider, its butcher, its propertyservices supplier and its IT out-sourcing provider, Fujitsu.Like most companies, we

have typically dealt with out-sourcing providers at armslength in the past, says RobinYoung, commercial director atM&B.Now, the intention is that we

open the door to our suppliersand give them the responsibilityfor engaging us on ideas andinnovation.The next meeting of the forum

will focus on M&Bs strategy forits pubs and bars, everythingfrom general kitchen manage-ment to providing wirelessaccess for customers andprocessing their payments.We believe Fujitsus repre-

sentatives will have a great dealof skills and experience to offerhere, says Mike Sackman, theCIO at M&B. In fact, its whatwe expect of them.

Innovation isan importantpart of the dealProcurementWise customers willhammer out termswith providers, writesJessica Twentyman

Vineet Nayar ofHCL Technologies:picking the rightspot is not easy.State subsidiesare an importantfactor but notthe only one

With a plethora ofsuppliers queueingto provide IT serv-ices from hard-ware maintenance to runningcomplex software applications keeping any IT expertise in-house may appear to be anunnecessary luxury.Some businesses, mostly start-

ups or smaller firms, are report-ing that they have achieved sig-nificant cost savings by out-sourcing all their IT. But thefact that these companies lackan IT department does not meanthere is no one looking aftertechnology.In an SME that is not very

technical, and doesnt makegreat use of IT, there still needsto be someone ensuring that itis run effectively and who man-ages the third-party providers,says Jonathan Cooper-Bagnall,head of PA Consultings sharedservices and outsourcing prac-tice.In mid-sized firms, even if

there is not a chief informationofficer, there is likely to besomeone in a mid-managementrole or a higher IT manager rolewho looks after the portfolio ofsuppliers, provides some sup-port to the business and sets thedirection.Even if there is no IT depart-

ment, someone still has to beaccountable, even if thataccountability sits with thechief financial officer, or anoperations director.In larger businesses, the size

and scope of the IT departmentwill depend on company policyon outsourcing and will also bean important factor in whetheror not it is a success.

Although some have been ableto drive down the operationalcosts of IT through outsourcing,others have found that this hascome at a price.

Unless it is managed well, out-sourcing can result in less flexi-ble services and business proc-esses. Organisations that haveslimmed down their internal

capabilities to the bare mini-mum and have handed controlto an outsourcer, may find thattheir technology is no longer asable to respond to change.For example, many older-style

outsourcing contracts made fewprovisions for moving to newtechnologies, and adding capa-bilities can be costly.Although companies are able

to outsource services, they obvi-ously cannot outsource allresponsibility for IT or its stra-tegic direction.A lot of discussions [about

the role of IT] are triggeredwhen the IT department has notdelivered, or the business feelsit is not getting the response itneeds, says Andr Christensen,

a principal with McKinsey &Company, the consultancy.But there are things you

need to keep in-house, such asmanaging demand, and shapingyour requirements. You cantoutsource that. Outsourcingthe role of the CIO, he says, isvery seldom the right answer.The more a business relies on

IT for its competitive advantage,the more important it is to keepa core of IT capability in-house,to set strategy and to translatebusiness requirements into ITsupply contracts. Companiesnow need CIOs to be far morebusiness focused.There are different levers

you can pull in a business andIT is one, says McKinseys MrChristensen. You dont justhand over your businessrequirements to an outsourcer,and expect them to deliver.

Keep your strategic decisionson IT inhouse, say expertsThe IT departmentOrganisations thatslim skills down to thebare minimum canfind it hard to respondto change, saysStephen Pritchard

BAA A change in culture and a change in styleBy 2013 BAA, which owns six airports in the UKincluding London Heathrow, will have spent 400m($657m) modernising that airports IT. A large partof that is being spent with outsourcers.In March, BAA signed a 100m deal with

Capgemini. The technology services firm willbecome the primary supplier of daytoday IT forHeathrow; up to 200 BAA staff are expected tomove to Capgemini during the contract.Deals of this size and scope fell from favour

during the recession, but according to PhilipLangsdale, the chief information officer, it makessense for BAA.There were three clear drivers for the

outsourcing decision, says Mr Langsdale. Wewanted to improve the quality and robustness ofthe service to IT users we would not havecontemplated it without better service quality. Thesecond is a reduction in cost: we have achievedvery significant reductions in operationalcosts and will continue to do that,as part of the outsourcingcontract.And the third was a

strong desire to transformour ability to improveHeathrow through the useof IT: we will providemore bandwidth andmore capabilities.BAA has been reducing

its own IT headcount forsome time. Thedepartment employed 800people not long ago, butwith the Capgemini contract,this will drop to about 100.Part of the reduction

stems from thedisposal of

Gatwick the UKs second largest airport soldby BAA in 2009. Capgemini was involved inhelping BAA to separate Gatwick and BAAs ITsystems and the move to use smaller, morenimble technologies at BAAs smaller UK sites.But BAA says the reduction in staff numbers

also reflects its view that the internal ITdepartment should be about planning, sourcingand delivering, rather than building and running IT.Outsourcing is changing the skills profile of the

internal IT organisation. We have to become amuch more intelligent client, with much strongerstrategic leadership, Mr Langsdale notes.Strategy is partly driven by BAAs regulatory

time frame, based on fiveyear plans.Mr Langsdales team is currently working on the

plan for 20132018. In addition, the company hasto work with the Civil Aviation Authority, air trafficcontrol, the International Air Travel Authority, otherairports and the airlines.All this comes as BAA is trying to improveexperiences for passengers at Heathrow, an

airport designed during the second world warand now running very close to full capacity.

Although plans for a third runway havebeen shelved, a new terminal is beingbuilt as a replacement for an existingterminal and Heathrow is looking totechnology to squeeze more out of theairports resources. IT for the newterminal will cost 200m.IT has an increasing part to play in

delivering our results, says Mr Langsdale.What we build has to work in conjunction

with the airlines and other stakeholders [butwith outsourcing] we have to step back from

micromanaging everything. It is a change inculture, and a change in style.

Stephen Pritchard

Waiting for an update: olderstyle outsourcing contracts made few provisions for moving to new technologies Alamy

I need to be able tolook to my provider a much larger anddeeperskilledorganisation than ourown to help bringideas to the table

There still needs to besomeone ensuring ITis run effectively andwho manages thethirdparty providers

Philip Langsdale: we haveto step back frommicromanaging

4 FINANCIAL TIMESWEDNESDAY JUNE 29 2011

Like cars and cloth-ing, computingseems to have gonein for some retrostyling, with a return to the1960s.Then, centralisation was

the name of the game, withmainframe computers inair-conditioned rooms anddumb terminals for users.The advent of the personalcomputer brought a switchto distributed computing,with desktop machinesmanaged by clusters oflocal servers.Now it is back to the cen-

tralised model, with cloudcomputing hosted in remotedata centres, this time oftenrun by third parties.

So is the cloud just thelatest fashion, or is it hereto stay? That depends onthe finances, says DavidWirt, head of managed serv-ice for Singapore-based TataCommunications. Its notreally centralised versusdecentralised, its that peo-ple want more cost-effectiveways to do things, he saysIn the 1990s, people

moved away from main-frames because theythought client-server sys-tems with PCs would bemore convenient, flexible and cheaper. This provedwrong because of problemssuch as security, compati-bility and data duplication.Although individual

devices were not thatexpensive, the fact thatthey were spread through-out organisations madethem complicated to main-tain, Mr Wirt says. Con-necting them was expen-sive, so there was a swingback to cost-cutting by cen-tralisation.

The appeal of cloud com-puting is that it offers hugeeconomies of scale. Organi-sations no longer need theirown computers to hold dataand applications, but buythe resources they want ona pay-as-you-go basis.Staff and customers accesssystems via the internet.But Michael Kogeler,

cloud strategy director atMicrosoft, thinks there is adanger in relying too muchon a centralised, cloud-based approach, because ofthe risk of internet connec-tions failing.This is the problem with

services from cloud-basedproviders such as Googleand Amazon, he says.Cloud computing is aboutleveraging the scale andopportunities of connectingto the cloud, not about mov-ing everything on to it.Microsoft believes in the

importance of intelligentdevices that can functionon their own.You see this on aircraft

when people with iPhonescannot use their e-mailbecause they need an inter-net connection for it towork, says Mr Kogeler.Microsoft is also working

on specialised devices foruse in fridges, ovens andcars, that might have inter-mittent contact with thecloud. A fridge-based devicecould go online to orderfresh milk when you runout; an in-car navigationdevice might combine its

knowledge of who andwhere you are with internetinformation on local places.Although cloud comput-

ing may seem like the latestfashion, the concepts onwhich it is based are notnew, says Christian Klezl,IBM vice-president of cloudcomputing. Virtualisation sharing workloads dynami-cally across IT infrastruc-ture has been aroundsince the 1960s.Nobody called it cloud

computing then, Mr Klezlsays. What we have ismore of a long evolutionthan a revolution itwasnt created overnight.But there are key differ-ences that make cloud com-puting transformational.This is because of devel-

opments in technology andbehavioural changeswhereby people have learntto use the internet, accessdata via portals, and useself-service applications.

So, in addition to makingbusinesses more efficient,companies have been ableto introduce innovativeservices and give customerssomething different byexploiting technologiessuch as smartphones andtablet computers, Mr Klezlsays.The first to take advan-

tage of these opportunitieswere smaller companiesthat wanted to expand fastwithout having to make biginvestments in technology.The cloud is particularlyuseful for applications suchas social gaming or promo-tions, where companies donot know how muchresponse they will receive.Having servers available

at short notice compressestime to market, says MrWirt.Unlike the dotcom bust,

when lots of companies lostmoney tied up in hardware,the cloud gives virtuallyinstant access to worldclass technology with avery elastic model.Larger organisations such

as banks face a more diffi-cult challenge, becausetheir legacy systems werenot designed for the cloud.The logical conclusion of

the trend to use the cloudto achieve cost-efficiency, isthat the worlds IT process-ing capacity will end upconcentrated in relativelyfew large data centres.

There will probably eventu-ally be only three to five bigparticipants in the market,says Mr Klezl.But such centralisation

has risks. One problem islatency the time delaysinvolved in long-distancedata transmission. This var-ies depending on the qual-ity, load and capacity of thefibre networks being used.Latency can cause applica-tions to crash.The affordability of cloud

computing also raises therisk of individual depart-ments going it alone, ashappened with PCs. Thiscan create security prob-lems and lead to data incon-sistencies and duplicationwithin organisations.Another problem with the

highly centralised model isthat regulations governingdata privacy vary by coun-try. For sensitive govern-ment systems, at least,many countries are likely towant local data centres anddedicated private clouds.One answer is technology

that delivers the applicationperformance and reliabilityof the private cloud but isaccessible via the publicone, says Wille Tejada, vice-president of application per-formance solutions at Aka-mai, an internet infrastruc-ture group. Creating thesehybrid networks privateclouds within public clouds is the next big challenge.

Retro styling,not revolutionIT cyclesJane Bird on thedevelopment ofpayasyougocomputing power

Sweet liberation Domino Sugar

Don Whittington prefers notto concern himself withtechnology he wouldrather stick to sugar, writesJane Bird.As chief information

officer of Domino Sugar,the USs largest refinedsugar manufacturer, he likesto spend his time thinkingabout business challenges,delegating IT managementto others.Hence his decision in

2009 to transfer all thecompanys key applications,used by thousands ofemployees, to the cloud.It is part of a process

that began a decade agowhen network managementwas outsourced to Verizon,the telecommunicationscompany, says MrWhittington. Next,responsibility for PCs washanded over to thirdparties. Then an increasingamount of IT infrastructurewas transferred to serversin hosted data centres.The problem was, Mr

Whittington still had toconcern himself withhardware. If I decided weneeded a new server, Idhave to sign up for threeyears, he says. Althoughwe had more flexibility, andI had removed the capitalexpense, it was still anoperating cost.Now, thanks to a cloud

computing service providedby Virtustream, DominoSugar has no IT capitalcommitments. Moreover, itsbill is calculated accordingto the computer powerused rather than on aspecific number of servers,which is traditionally thecase with data centres.Its incredibly liberating

not to have to worry aboutthings like hardware andstorage capacity, says MrWhittington. And thesavings have been huge,with the IT bill reduced by30 per cent a year.The cloud service has

also speeded up thecompanys applications,which include enterpriseresource planning, customerrelationship managementand payroll among others.Users report response timesup by about 30 per cent.This enables faster

development of systems orprojects. What previouslytook up to seven days, canbe done in two, says MrWhittington. He hopes toreduce this to one day.Given that the company

is paying for its computing

on a byusage basis,development can be doneat almost no cost, hesays.Cloud computing also

makes acquisitions fasterand cheaper. When Dominothis year took over therefining operations of Tate& Lyle, the UK foodingredients company, it wasable to integrate Tate &Lyle data and applicationsvia the cloud.We agreed with the

seller that we would createa separate cloudbased areato do the testing, says MrWhittington.This enabled the

acquisition to be completedin four months, rather thanthe nine it would typicallytake. And instead of havingto put data on tapes, itcould be transferredinstantly via the cloud,without the risks involved inphysically moving it.Virtustream is able to

make its cloud computingservice costcompetitive by

combining the efficienciesof a public cloud, sharedby multiple organisations,with the security of anexclusive or private cloud.This is done by managing

the virtual machines thatrun on its servers at amore fundamental level,called infrastructure units,says Rodney Rogers, thecompanys chairman andcofounder.Companies such as

Domino Sugar can take abigger share of the virtualmachines when they needthe extra computing power,and release it to the poolwhen they dont, he says.Another advantage of the

transition involves legacysystems that are kept forhistorical reference but areneeded only occasionally.Previously, theseapplications would haverequired hardware andadministration, even thoughwe might only use them acouple of times a year,says Mr Whittington.Now, we can spin them

up to the cloud when weneed them, and back downwhen we dont. This is theway we have to go with ourIT systems, I cant imagineever going back.

DonWhittington:Its liberatingnot to haveto worryabout IT

Forward to the past: data centres are the core of cloud computing in the same way that centralised mainframes used to sit at the hub Dreamstime

The Connected Business | Focus on The Cloud