As Hillary Clinton recently commented, "never let a good crisis go to waste". She's not the first to use the expression of course, but it seems as appropriate for the challenges facing CIOs this year as it does for diplomatic relations.
There's no question that CIOs are experiencing a difficult year. Across the board, the impact of the economic downturn is driving businesses to find new cost-efficiencies and technologists will be tasked with finding areas for rationalisation. Nevertheless, there are opportunities in a crisis: a chance for CIOs to change their companies for the better, to look at how the business works and improve it. This year is not only about survival, but can also be about seizing the moment, taking the opportunity to get the business into a position where it can best take advantage of the upturn when it comes.
The IT department will be expected to make the most of the opportunity for change and create cost efficiencies this year. They ought to be helped by recent developments in the outsourcing sector such as new deal structures and the rise of Spain and Brazil as offshoring destinations, both of which could make the CIO's job easier.
Gartner's report in January this year found that "one third of CIOs reported no change in their budget from 2008, while 46 per cent reported a slight increase, and 21 per cent reported a cut in IT budgets". More recently, the research house discovered that although large deals had fallen off in the early part of 2009, the basic drivers of outsourcing remain intact. "Organisations still outsource for cost, efficiency, access to skills, focus on core business, innovation, modernisation and even business transformation," reads the report.
Even where slight budget increases are expected, CIOs know that operational, run-the-business projects often take up two-thirds of the available monies. Yet, aside from just getting through the year in one piece, many industries are facing additional pressures on their CIOs in terms of change-the-business programmes, as a result of expected mergers or, as in the financial services sector, compliance with new regulations.
Time for change
So what are the new advantages to be had from outsourcing, or is the format now refined to its cost-effective best? Is this an opportunity for CIOs to take advantage of the crisis to review and evolve their outsourcing options? Two new developments in the outsourcing sector would suggest that there are opportunities to be seized, notably via new partnership deals with long-term contracts for capital costs and reducing soft costs, and improving results through using emerging offshoring territories like Spain and Brazil.
The advent of static or declining budgets and an increase in delivery expectations has given rise to a new form of partnership. Responding to their clients' budget difficulties, outsourcers are providing services, and perhaps also hardware, but rather than selling this at a project fee with advance payments and regular installments, the provider leases the service or hardware to the client, receiving payment on a per-click basis or offering a reduced monthly fee over a long period. This gives the provider a long-term contract and a regular income, while the client does not have such a large one-off capital outlay at a time when budgets are limited.
In the financial services sector, this approach is one which could get banks through this difficult year. For example, say that a mortgage processing service needs to be outsourced to a far-shore location in order to achieve cost benefits. This requires an in-house scanning system to capture the relevant document images and send them to the far-shore service provider. However, this year's limited budgets will not allow for long term investment with an ROI in year two. The service provider is looking for a long-term contract and a regular income stream. Therefore it provides the capital outlay to create a service in effect leasing it back to the client at a cost per page; we might well ask ourselves: ‘who are the bankers now?'.
The rise of Spain as an outsourcing location was reflected in Forrester's recent report Spotlight on Spain, which suggests that the country is an ideal nearshore complement for European firms outsourcing to India, or a first step for those new to outsourcing. The report explains that "European sourcing specialists ... fail to consider the advantages that Spain has to offer [such as] a thriving technology economy, competitive software development rates, industry innovation, and the potential to scale low-cost delivery in Latin America".
As the outsourcing sector in India begins to suffer from attrition, wage inflation and skills shortages, its cost advantages- are beginning to narrow against European rates. Add Spain's strong cultural and linguistic ties with Latin America, which allow the potential to scale and Spain, plus somewhere like Brazil, starts to seem a good alternative to India or Eastern Europe.
Successful outsourcers know that the so-called soft costs - such as travel time to the offshore destination, the impact of working with partners in distant time zones and cultural differences - can have a significant effect on budgets. Correspondingly, close proximity and real-time collaboration can generate cost efficiencies, reducing -management overheads, travel expense and the need for repeated internal change requirements.
Intelligent financial institutions and their CIOs already acknowledge the seriousness of the current situation, but are not paralysed by it. They acknowledge that there are opportunities to be seized in these turbulent times. New partnership models are emerging in the outsourcing sector and new destinations are already demonstrating cost benefits. Innovation continues despite the economic climate.
This is not a time to do nothing, rather it's time to take advantage of the chance to rationalise your business's outsourcing programme, to improve its systems and to ensure the simple things are done better. With budgets hardly moving, it will be the competent and responsive companies who take advantage of the crisis and create better ways to control and decrease costs. This year may not be a year of growth, but it will have to be one of intelligence, resourcefulness and agility.
About the author:
Graham Underwood is UK managing director of GFT, an international IT and services group