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The FSA has written a ‘Dear CEO Letter’ expressing concern that the asset management industry may not have “effective recovery and resolution plans” in place should an outsourcing provider face financial distress or severe operational disruption which could lead to client detriment. The full text of the 11 December 2012 letter appears here.

The FSA states that firms’ Boards must consider the implications of outsourcing to a third party supplier and the regulatory requirements that apply. The FSA calls on firms to exercise “due skill and care and diligence” whenever they enter into, manage or terminate any outsourcing arrangement.

The FSA’s letter highlights its growing concern about the risks associated with asset management firms which outsource operational activities to third party providers. The FSA has been looking at firms’ contingency plans and has concerns about a number of them. These concerns include asset managers relying on the fact that an outsourcing firm is part of a financial institution that is deemed too big to fail. The FSA says that this approach is imprudent, as the FSA might actually allow such institutions to fail.

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The timelines of most strategic IT or sourcing projects are punctuated with key moments that can make or break the deal. These include defining the customer’s strategic objectives, determining which suppliers will be asked to compete (assuming it’s not a sole source deal) and, of course, executing the contract. Another critical juncture is downselection. This is when the customer eliminates competition by choosing a “winning” supplier and focusing on getting a contract signed.

Customers should manage the downselection process thoughtfully. Here are some factors to think about:

1. Timing.

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“Everywhere you look, the quantity of information in the world is soaring.”

ICD has predicted that, by 2012, mankind will have created 2.7 zettabytes of data! The numbers are mind boggling – a zettabyte is a 1 billion terabytes. With all of that data comes the Next Big Thing – namely, Big Data.

What is Big Data?

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Want to learn more about the insourcing trend and pointers for the proper process to follow for those tempted by that trend? Please check out our article in Computers & Law Online here.

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As the Thanksgiving holiday approaches, we are all juggling a whole host of “to-dos”, such as working out family travel logistics, making sure the turkey is thawing, and shopping for all of the “fixins”. Many of us are also starting to contemplate our impending consumption of too much turkey, stuffing and pie. Yes, we know everyone tries to be strong and resist temptation, but we generally just give in. Fortunately, we can all take solace in the fact that calories consumed during a holiday don’t count as much as non-holiday calories – well, at least that is the wise advice I got from my Aunt Simone (which, by definition, makes it a “fact”).

Thanksgiving is also a time when you can sit back and think about those things you are thankful for. In this blog, we decided to reach out to our Pillsbury Global Sourcing group to find out what outsourcing industry trends they were thankful for. Here are a few responses mixing outsourcing trends with Thanksgiving themes – enjoy:

1. We are finally addressing the “messy middle”. You might be misinterpreting this item to be the state of your stomach following dinner. Actually, this refers to IT service integration that is required to align service delivery among multiple players typically found in an IT environment. We refer to the service integration layer as the “middle”, because it usually sits between leadership and service delivery execution. We also refer to it as “messy” because most IT operations are at very low maturity levels in optimizing their service integration capabilities. Implementing a successful service integration framework can be difficult, time consuming and challenging. That said, we are thankful that many of our clients recognize harmonizing the activities of internal IT and multiple of third party providers is critical if they want to be in a position to mitigate operational risk, promptly address incidents and maximize efficiencies in their environment.

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The Federal Communications Commission (FCC) is considering whether to make fundamental changes to how carriers (and ultimately their customers) pay for federal programs that provide greater access to telecommunications and Internet services. The dilemma facing the FCC is that Universal Service Fund (USF) program expenses are increasing, while interstate and international telecommunications revenues, the source of the funding, are on the decline. Facing a carrier contribution rate that is now 17.4 percent – a hefty rate in any economy – the FCC is looking at alternatives to revenues, including assessments based on telephone numbers or network connections.

No one disputes the laudable goals of USF. These include funding for: a) carriers who provide free or low cost telecommunications services to the poor; b) high cost telephone companies so that customers in rural and remote areas can access telecommunications at rates similar to customers in the cities; c) schools and libraries to get discounted rates for essential telecommunications services; and d) telecommunications services for rural health care providers. In 1998, these programs cost about $3.9 billion. In 2012 the cost will be more than $9.5 billion. The FCC has taken steps recently to cap or slow the growth of these programs, and put in place rules and regulations to reduce fraud, waste and abuse.

The growth on the expense side has put added pressure on the revenue side – all of which comes from carriers providing interstate and international telecommunications and VoIP services. As a result of the declining cost of telecommunications services combined with reduced demand because of email and free voice services, there has been a reduction in assessable revenues from 1998 to 2012, from $80 billion to about $66 billion. Accordingly, the contribution factor has risen from 3.19 percent in 1998 to 17.4 percent today. The FCC adjusts the contribution factor quarterly.

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I recently attended the UK Society for Computers and Law’s Annual Conference where Cloud Computing was one of the ‘IT Law Hot Topics’ under discussion. The others, in case you are interested, were Big Data, Apps and Mobile Payments. The event was sold out which goes to show how ‘hot’ these topics really are!

One of the speakers was Christopher Millard, Professor of Privacy and Information Law at Queen Mary, University of London where he leads the Cloud Legal Project – a three-year Microsoft funded academic project undertaken by the Queen Mary Centre for Commercial Law Studies. Started in October 2009, its mission is to reduce uncertainty regarding legal and regulatory status of essential aspects of cloud computing by “the production and dissemination of a series of scholarly yet practical research papers to address various legal and regulatory issues that will be fundamental to the successful development of cloud computing… [which will] demonstrate thought leadership in several complex and difficult areas of law and regulation that are of vital importance to governments and businesses globally.”

The Cloud Legal Project website contains a rich source of content and is recommended reading for IT law practitioners whether in house or in private practice. Topics covered include an analysis of Cloud service provider’s standard legal terms; data protection issues in cloud computing; law enforcement access in a cloud environment; and the role of competition law in the cloud; as well as a report on some of the differing legal issues in cloud computing as compared with conventional outsourcing or hosting contracts.

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Sitting in the Northeast, our news has been dominated by only two stories for the last week–Hurricane Sandy and the Presidential Election. Both events have far reaching impacts on this country and its citizens, and both have (or could have) significant impacts on our industry.

Sandy . . .

Hurricane Sandy tested disaster recovery (DR) plans and operations. With outages in power and internet, and flooding of operations creating multiple points of failure, redundancy plans were pushed to the brink. Transportation options significantly limited in the hardest hit areas even where technology was available and workers were often unable to get to a viable work site. While some companies were able to swing operations to backup locations seamlessly, some had primary and secondary outages that prevented such successful recovery operations.

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There has been much brouhaha throughout the 2012 presidential debates about the loss of American jobs through outsourcing to lower-cost countries. China has been portrayed as the evil nation stealing jobs and intellectual property, and violating trade rules. However, outsourcing doesn’t necessarily mean the loss of jobs to other countries. It can simply be movement between US-based organizations.

There are numerous US-based outsourcers in all sectors of the industry: IBM, HP and Xerox are brands that the population recognizes as home grown IT providers; Aon Hewitt, Mercer and Fidelity are local entities that provide HR outsourcing; and Fiserv, Accenture, and Total System Services provide outsourcing services to the Financial industry, just to name a few.

In deciding to outsource a function or service, companies look at various considerations including cost reduction, service improvement and the ability to focus attention and resources on core lines of business. Using an offshore provider certainly provides a greater cost advantage, but the chances are that onshore service providers can also perform a function more cheaply than you are currently doing it in-house. Onshore service providers can generally provide service at a lower cost due to a number of factors:

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In negotiating outsourcing agreements, I sit on both sides of the table – obviously not at the same time. I represent customers about half of my time, and I spend the rest of the time representing suppliers.

It’s always interesting seeing a transaction from one particular viewpoint, but also knowing the dynamics that are at play for the other side. One thing that strikes me is that, regardless which side of the table I am on, my clients always think that they have little or no leverage, and that the other party in the negotiation holds all the bargaining power.

The customer sees itself pitted against a team of professionals who negotiate outsourcing agreements day in and day out, whereas the customer might have an agreement (or a handful of agreements) that is up for replacement or renegotiation every few years. They may be under time pressure to get the transaction executed, either to meet internal deadlines, to implement new technology, or to give termination notice to an existing supplier.

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