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For most enterprise customers, telecommunications regulation is a fact of life, requiring buyers to do what they can during negotiations to mitigate changes in state and federal law that could result in substantial cost increases during the term of the contract. Now, the Federal Communications Commission (FCC) is considering sweeping changes to mostly obscure rules concerning inter-carrier compensation and universal service that could have a large dollar impact on your future telecommunications purchases. These proposed changes come at a time when – and directly as a result of – enterprise customers are converging voice and data over Internet Protocol (IP)-based broadband networks and making greater use of wireless services.

Inter-carrier compensation is basically what carriers charge each other to originate or terminate traffic on another provider’s network. Telecommunications — including voice traffic that transits the public Internet or managed IP networks — is unique in that multiple service providers are usually required to complete a voice call. Rarely do calls (except possibly those in a corporate campus environment) originate and terminate on the same provider’s network. Compensation arrangements vary by geography and technology — with local traffic having one rate, intrastate calls a second rate and interstate calls a third rate. There is a separate compensation structure for wireless traffic, and IP-originated traffic (coming from broadband networks) has created another level of confusion (and a number of lawsuits). Per minute charges range from $0 to $.03 cents. The impact to large customers, is, ultimately, these costs are included within the rates charged to end users.

The FCC would like to rationalize these charges and eventually either make them go away all together or have them at a very low per minute rate — for example, $.0007 per minute, which has been accepted by many in the industry as the default rate for the termination of local traffic. The problem is that many mid-sized and smaller local phone companies claim to use these revenues to subsidize local rates in high cost-service areas. As these often rural local carriers offer more IP-based broadband services, questions arise whether these charges should continue at all.

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Typically, Suppliers ask for cost of living adjustments (COLAs) in IT outsourcing agreements to adjust prices periodically for inflation. We believe that the general assumption that a COLA is appropriate to “balance risk” in a three to five year IT deal should be challenged.

The Supplier community is highly sophisticated at managing a global workforce and associated delivery costs. They know their local labor markets (the source of most inflation) and, at least in the IT services domain, are adroit at managing labor cost and turnover. For example, for services delivered from India in particular, labor rate pricing has been flat over recent years in the face of sustained increases in labor costs. During this same time, Supplier margins have also been relatively constant. Why is that, and what are the implications for considering a COLA provision?

Suppliers have managed their non-labor costs extremely well though better expense management and economies of scale. In addition, by constantly moving into new labor markets, the large providers have been able to keep the cost of newer resources relatively flat. And they do all this while constantly cycling resources through their client accounts to replace the more experienced/expensive resources with less experienced/cheaper resources. Therefore, while the resource that was on the account last year may be more expensive this year, that resource has typically moved on and been replaced by a resource that cost the same as the prior one did last year – or even less if the resource is from a different geography.

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On April 13, 2011, the Indian Central Government issued final regulations implementing parts of the Information Technology (Amendment) Act, 2008, dealing with protection of personal information.

Pillsbury does not provide legal advice on Indian law, but we have been in contact with the Indian legal community and service providers. Here is what we have learned.

As drafted, the new Reasonable Security Practices and Procedures and Sensitive Personal Information rules appear to apply to all information in the possession of organizations in India, regardless of where it came from or how it got there.

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A recent survey conducted by Accenture and the Shared Services & Outsourcing Network found that 2/3rds of respondents believe conversations with customers and providers about IT performance focus too much on SLAs, and not enough on business outcomes. No news here…after all, the industry has only been talking about managing to business outcomes for oh, the last twenty years or so. Why do things never change? Service providers naturally focus on SLAs – it’s the way they quantify and measure the performance of their services. And let’s face it, much of the ranks of IT leadership have their roots in service delivery, so they tend share the same IT-centric perspective. So we end up with a closed-loop feedback mechanism that keeps us speaking only in terms of, well… SLAs.. The way to escape this “deadly embrace” is to break the mold, and that involves changing mindsets. Let’s look at how this can be done.

First, the demand side. Clearly, a Business Analyst who engages his/her customer in a discussion of Severity 2 Incident Response Times (or substitute your favorite SLA) deserves the glassy-eyed stare s/he gets. But even a more business-focused discussion may not get the IT department much further. For example, take my candidate for the most often-cited and over-used business outcome of the new millennium: “Agility”. So, what does being agile really mean? The ability of IT operations to respond to fluctuations in processing demand? Or perhaps the capacity to quickly resource and deliver IT projects to support new business requirements? How about the capability to act as a business enabler by proactively evaluating emerging technologies and their potential to drive new offerings? And while we’re on the topic… does “agility” mean the same thing to the Chief Sales Officer as it does to the SVP of Supply Chain, or to the CFO? No wonder it’s not easy managing customer expectations! The view, however, is worth the climb, and here are a few practices I’ve found useful in getting there:

1. Make it personal. Find out how your customer’s performance is measured. If the relationship allows, try to discuss what is personally important to your customer (i.e., what outcomes drive his/her compensation, standings amongst peers, chances for promotion, etc.) There’s no better way to cement a business relationship than by showing a genuine interest in helping your colleague attain his or her personal success.

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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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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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