Friday, June 29, 2007

Some IT outsourcers will "cease to exist"

I keep banging on about a strategic shift in firms' appetite for traditional outsourcing, but with good reason it seems. In its Top Predictions for IT Organisations and Users, 2007 and Beyond, Gartner paints a not too rosy picture for the Top 10 IT outsourcers.

According to Gartner, the reduced number of large contracts above $250 million, increased competition, and a reduction in contract sizes have placed great pressure on traditional "takeover outsourcing" providers, and the move towards selective outsourcing has paved the way for non-traditional providers(software-as-a-service, utility computing, managed services and specialised hosters) to enter the bidding.

"Through 2009, at least three of the top 10 IT outsourcers will cease to exist in name, with their services and product portfolios divided into spin-off companies, divestitures, longtime partners and faceless third-party aggregators. Providers of all sizes will rationalize portfolios based on desired regions, service lines and vertical industries," says Gartner.

It is no secret that revenue growth for the top IT outsourcers in Western Europe, North America and Japan has been slowing and contract terms and values have been declining.

Interestingly, while revenue margins for Indian IT outsourcing firms such as Tata Consultancy Services and Infosys have been increasing, Gartner predicts that only one Asia/Pacific-based service provider will make the global top 20 IT service providers (based on IT services revenue) through 2010. Currently, Fujitsu is the only Asia/Pacific vendor in the global top 20 based on revenue.

Gartner says Tata Consulting Services (TCS) is the only Asia/Pacific-based service provider in the global top 50. Infosys is close behind, but at its current growth rate, Gartner predicts that it will likely be in the top 50 in the next two years.

"Indian service providers generally have been growing 30% to 40% annually and are gaining market share. However, this growth is difficult to sustain and would still not be enough to put TCS or Infosys in the global top 20 without a major acquisition," says Gartner.

Data privacy back on the agenda

Last year, revelations that SWIFT had allowed US intelligence agencies access to data pertaining to financial transactions on it network, created a furore with data privacy groups.

SWIFT's assurances at the time that it had only shared limited sets of data with US Treasury failed to assuage the concerns of data privacy groups and led to calls for clearer guidelines on privacy laws and counter-terrorism procedures. Privacy groups expressed concerns that the SWIFT data could be used for non-terrorism related purposes such as taxation monitoring and espionage.

Well, this week the EU and the US reached an agreement on sharing of bank data with the US. That agreement says that SWIFT data can only be used for "counter-terrorism purposes" and kept for a maximum of five years. A European representative will be appointed to monitor how that data is used.

Vice President Frattini, Commissioner responsible for Justice, Freedom and Security, stated: "The EU will have now the necessary guarantees that US Treasury processes data it receives from Swift's mirror server in the USA in a way which takes account of EU data protection principles."

But what does "counter-terrorism purposes" actually mean as when the initial use of SWIFT data was revealed in US newspapers last year, US agencies maintained that they needed to monitor this data to combat terrorist financing.

However, one has to ask, how effective has monitoring of SWIFT data been in combating terrorist financing given that such financing has tended to use non-bank channels such as mobile phones? Furthermore, why does the US even require access to SWIFT data given that banks are meant to have by law, rigorous anti-money laundering measures in place?

In order to bring its own operations in line with EU data protection laws, SWIFT has joined the EU-US Safe Harbor Agreement, which provides a framework for ensuring that customers' data located in the US is protected under similar data privacy principles as those in Europe.

SWIFT has established a data privacy group and also announced a "system re-architecture" yet to be approved by its Board, which means "intra-European messages" will be stored only in Europe and the US. Currently, messages are processed simultaneously at SWIFT's European and US operations centres to prevent data loss.

Wednesday, June 27, 2007

Firms increase adoption of Linux

The open source software movement has certainly come a long way from its early days when vendors such as Microsoft painted it as a 'pariah' of the software industry.

Undoubtedly, Microsoft is not the open source software movement's hugest fan, however even it has been forced to acknowledge increasing industry traction and appetite for open source software by forming a business and strategic partnership with one of Linux's biggest proponents, Novell.

Awareness and uptake of open source software has also increased amongst IT and business users in industry sectors such as financial services firms according to Actuate's 2007 Open Source Software Survey, which surveyed UK, North American and German firms across industry sectors. The survey was first conducted in 2005 and this year's results demonstrated that the proportion of financial services respondents using open source software had increased from 38.8% in 2005 to 45.8% in 2007.

More than 50% of respondents are using Linux open source software with more than 64% of firms perceiving the main benefits to be no licence costs. Other perceived benefits included not being locked into Microsoft (45.2%), vendor independence (43.5%), access to source code (42.6%), flexibility (39.1%) and open platforms (37.4%).

However, despite increasing industry traction and software vendor support for Linux, the survey indicated that challenges remain around long-term support and maintenance, the lack of in-house open source software skills and incompatibility with existing applications, which was highlighted by almost half of respondents.

Microsoft's strategic partnership with Novell was aimed at addressing some of the interoperability issues around firms wanting to operate Windows servers in a Linux environment. Other vendors such as Oracle have also nnounced enterprise level support for Linux in the form of its Enterprise Linux Program.

It ain't easy being 'green'

With political leaders and even the UK's royal family paying lip service to reducing their carbon footprint, businesses appear to be struggling with how to reduce the carbon footprint of their energy intensive IT systems.

The UK Government has set a target of a 20% reduction in greenhouse gas emissions by 2010, but what does this actually mean for business and IT managers? Recent news reports indicated that Prince Charles had reduced his travel carbon footprint by 9%, but how significant is that in terms of the overall reduction required to effectively combat the impact of greenhouse gas emissions on the environment?

A recent survey conducted by the UK-based Green Technology Initiative found that whilst 90% of UK businesses felt that tackling the carbon footprint of IT systems was integral to an overall green strategy, 70% had no concrete plans in place to reduce their carbon emissions.

So whilst businesses may support the concept of 'greening' IT, there is no clear
cut guidance on how they can achieve that. The knowledge gap is clearly highlighted by the fact that 95% of survey respondents did not know how energy efficient their
IT systems were because they had no means of measuring it.

“What we are doing in IT today is not sustainable. Systems efficiency is the cheapest and easiest way of reducing the carbon footprint of the work you do and delivered properly it has the benefit of bringing down costs across the board. Whilst undoubtedly UK enterprises are willing to take action, many lack the incentive, knowledge and resources to make immediate changes,” says Dan Sutherland, founder and acting chair of the Green Technology Initiative.

When reducing a company's carbon emissions can be as simple as flicking a switch in terms of switching off systems that are not in use, it appears that firms are relying on software vendors, governments and manufacturers to take the lead without considering what they can do themselves to reduce their carbon emissions. More than 50% of respondents to Green Technology Initiative's survey had still not caught on to the idea of reducing power costs and energy consumption by turning off unused systems.

With so much media attention on high carbon emitters, it appears that the penny has not dropped in terms of how businesses in general can contribute to the battle to reduce carbon emissions without relatively little upfront investment.

Tuesday, June 26, 2007

The LSE expands into Europe

I have been particularly vocal about the London Stock Exchange's 'go-it-alone' strategy in light of trans-Atlantic consolidation between competing exchanges NYSE-Euronext and Nasdaq OMX, as well as the increasing threat of competition from emerging MTFs such as Project Turquoise.

Well the latest news is that the LSE instead of pursuing mergers with its larger rivals has decided to expand into Europe by buying Milan's Borsa Italiana for approximately £1.1bn. The question is, will it be enough to fend off competition from its larger consolidated European rivals and emerging competitors such as Project Turquoise which is in advanced negotiations with the Nordic Exchange's OMX Group to use it as its sole technology partner.

However, some bloggers, including myself, question whether the LSE's expansion strategy is a viable one going forward given that Borsa Italiana will not give the London exchange the global leverage cross-Atlantic mergers have given Euronext and now OMX.

For more opinions on the LSE's new-found expansion strategy, which some believe will not be enough to counter the threat from Project Turquoise, go to The CityUnslicker.

Wednesday, June 13, 2007

Move over traditional outsourcing

I have been watching the outsourcing market with interest for some months and am somewhat bemused by the conflicting stories one reads about firms' appetite for outsourcing, particularly offshore outsourcing.

As the initial hype around outsourcing has died down and firms that were early adopters have had the chance to learn from and share their experiences, there is no doubt that some of the lustre has gone off outsourcing in terms of the initial 50% cost savings some firms touted and the "hidden costs" that have emerged when it comes to the need to actively manage and monitor offshore outsourcing relationships.

Data privacy concerns have also been raised following allegations that offshore call centres were selling customer data. Eager to preserve its reputation as a major outsourcing and offshoring centre, India recently announced the formation of the Data Security Council of India (DSCI), a self-regulatory member organisation that will be run by the Indian IT and software association, Nasscom.

Arguably the Council's formation is a long overdue measure that recognises the concerns of foreign firms outsourcing customer data to India. The National Outsourcing Association says concerns have grown over the past few years over data security lapses that have occurred, fuelled by 'mud slinging' by the British tabloid press about alleged security breaches.

Although the NOA says that security breaches are few and far between it stated that the Indian government - and the governments of other offshore and nearshore destinations - needed to openly demonstrate that they recognise the problems around data security and are actively doing something about it.

Securing data that is outsourced or offshored to a third party provider is even more important now that the next wave of outsourcing is encompassing content and document management, as well as “knowledge process outsourcing” or KPO.

According to EquaTerra research, KPO, which encompasses a broad range of processes such as market research, financial analysis, M&A due diligence and related M&A legal work, is gathering momentum.

While the Indian market may be suited to this form of outsourcing, with some major investment banks outsourcing financial analysis and research to India in recent months, KPO is a surprising trend given banks' general reluctant to outsource data, which is the lifeblood of most companies.

John Boyle, EquaTerra’s managing director, Financial Services, says:

“The growth in KPO is intriguing because it involves work that was traditionally viewed as too strategic to outsource, or where outsourcing was not viable because candidate services providers lacked the skills or experience required to perform the work. But these perceptions are changing. While in most cases KPO today involves rote work and number crunching, the breadth and depth of work being performed is expanding as buyers gain comfort with the model and suppliers’ skills and levels of context improve."

However, instead of directly outsourcing KPO work to an offshore third party provider, Boyle says financial services firms still prefer to manage the process themselves by establishing captive operations to perform KPO and related work in offshore locations. Increasingly it seems traditional outsourcing models are being challenged by alternative approaches such as captives and shared service operations.

Monday, June 11, 2007

More banks may join Project Turquoise

So much for sabre rattling. The prospect of multilateral trading facilities setting up in opposition to the national exchanges is not just a bunch of the world's leading investment banks making a lot of noise in order to get the national exchange monopolies to drop their trading costs.

When Project Turquoise, the MTF announced by seven leading investment banks to challenge the monopoly on equity trading by the national exchanges, was first announced, some suggested it was merely a ploy by the investment banks to get the stock exchanges to reduce their trading costs. Once the exchanges had dropped their tariffs, it would disappear into thin air.

Well some of the exchanges are already reviewing their tariffs and having announced the appointment of EuroCCP (European Central Counterparty), a subsidiary of the DTCC, as its clearing agent, Project Turquoise, appears to be a goer. According to a Financial News report, Société Générale and BNP Paribas may also be joining Project Turquoise.

All Project Turquoise has to do now is choose a trading platform (believed to be a toss up between the Nordic Exchange Group OMX's technology and Instinet's Chi-X), appoint a CEO, attract sufficient liquidity and Bob's your uncle.

Thursday, June 07, 2007

The 'Project Turquoise' of payments

Lafferty Group has an interesting news story on its web site about European banks being in "secret discussions" to set up a pan-European debit card scheme to rival Visa's and MasterCard's.

According to the report on Lafferty, the banks involved in the discussions are Societe Generale, Deutsche Bank, Dresdner Bank, Commerzbank, ABN AMRO, ING and Rabobank. The report states that they are "unhappy" with the likelihood that MasterCard's Maestro may become the dominant provider of debit card network services in Europe.

The European Commission and the European Central Bank have also expressed concerns about competition in the debit cards space in Europe. The Lafferty report says discussions amongst the banks are in the formative stages and that they are considering leveraging the work already done by the Euro Alliance of Payment Schemes, which has established bilateral links between domestic card processors.

There has been a lot of activity on the card processing side in preparation for the Single Euro Payment Area, with Voca joining forces with Link to give it card processing capabilities so it can compete more effectively with the likes of Equens in the Netherlands. US-based First Data is also looking to become a leading global card processor and has made a number of European acquisitions in the last 12 to 18 months.

Italy's SIA-SSB, the result of a merger between Società Interbancaria per l’Automazione – Cedborsa S.p.A. and Società per I Servizi Bancari – SSB S.p.A., is also a leading European debit and credit card processor with 48 million payment cards issued and more than three billion transactions managed in 2006. It also recently acquired Hungarian card processor, GBC.

The Lafferty Report says that "there are contrasting opinions" on the level of progress achieved by the banks holding the secret discussions, which suggests that not much progress has been achieved at all. This is not the first time that banks have considered setting up a rival debit card scheme, but previously there was not enough support from the banks to do anything.

What is different this time? Well SEPA is in the air, anything is possible, but banks in the payments space have not been as fleet of foot as their investment bank counterparts when it comes to setting up rival market schemes and infrastructures.

We have seen Project Turquoise, a multi-lateral trading facility set up by seven leading investment banks to rival the domestic exchanges in response to regulatory pressures from MiFID. Are we likely to see the 'Project Turquoise' of the debit card world being announced by leading European payment banks any time soon? It seems unlikely.

Wednesday, June 06, 2007

MiFID readiness - a long way off

Having attended more than my fair share of events on the Markets in Financial Instruments Directive (MiFID), one has grown a little tired of hearing consultants' rhetoric that sell-side firms should not treat MiFID as yet another compliance issue, but in terms of the strategic benefits it could bring to their business.

Let's be frank; apart from the large sell-side firms which see MiFID as an opportunity to widen the gap between them and their nearest competitors, most firms are still treating MiFID as a compliance issue. Cultural and market differences also appear to play a part in how MiFID is perceived by firms and national regulators.

As a lot of Europe's stock trading activity is concentrated in financial centres such as London, it is no surprise that the UK was amongst the three member states to transpose MiFID into national law by the 31 January deadline. All other member states, including key financial centres such as France and Germany have dragged their heels.

At SunGard's annual European client event yesterday in Lake Como, Italy, the findings of a survey of 200 German investment firms and their preparedness for MiFID were presented. The survey was conducted in February this year following on from a similar survey a year earlier.

While more than 50% of firms reported that they were "very familiar" with MiFID in the 2007 survey, compared with 15% in 2006, when it comes to budget planning and seeking new solutions to address the impact of best execution requirements under MiFID on their IT strategies, the figures were less impressive. With the 1 November deadline for MiFID a mere four and a half months away, only 44% of German firms were in the implementation phase and 47.5% had analysed the impact of MiFID on their business strategy.

The point is that whilst a handful of investment firms may view MiFID as a strategic opportunity and may be further advanced in their preparations, firms in other European countries do not view it as strategically and it is doubtful that they will even want to become 'systematic internalisers' under MiFID. Hence they are likely to invest less time and money on MiFID than say top tier investment firms.

Another factor is that outside of the UK, a number of European markets support the concentration rule, which demands that all trading activity occur on the national exchange. Under MiFID the concentration rule will be removed, but there are concerns that in an effort to preserve the status quo, some European securities regulators will just "cherry pick" bits of MiFID to enforce.

The EC certainly have a job ahead of them to ensure that MiFID is implemented consistently and in a harmonised fashion across all member states. Not only that, the Commission's commencement of infringement proceedings against member states that failed to transpose MiFID into national law by the 31 January, is unlikely to have the desired effect.

Taking member states to court is typically a lengthy process, which is not going to speed up MiFID's implementation. Perhaps that is why the Commission has resorted to "naming and shaming" techniques such as publishing information pertaining to member states' progress as well as league tables. 2007 may be the year of MiFID's introduction, but it is hardly the "year of the MiFID" as most firms and member states "have a long way to go before [they] can talk about MiFID readiness."

Tuesday, June 05, 2007

SunGard is "stronger" since going private

Oh what a difference private equity investment makes. At least that is the message SunGard's CEO Chris Conde was keen to impart at its annual European customer event SunGard Europa, which is being held on the shores of Lake Como, Italy.

In 2005 SunGard was acquired by a consortium of private equity investors led by Silver Lake Partners, and Conde appears to be prefer life as the CEO of a private company, saying that SunGard was stronger since it went private, growing by a factor of three. Total number of employees at SunGard has increased to 18,000 and it has made approximately 20 acquisitions since going private.

Harold Finders, division CEO, Financial Systems, SunGard, said since going private, SunGard had 50 R&D programs up and running at the same time, compared with 10 when it was a public company.

However, with so many solutions servicing different product silos within financial services firms, one of the chief criticisms of SunGard has been its 'siloed' approach to product development.

Today at Lake Como, SunGard was keen to challenge that perception by emphasizing its Common Services Architectures (CSA), which allows it to deliver more "flexible" software solutions by bringing together applications developed in different parts of SunGard's business.

For example, using CSA, the SunGard STeP and AvantGard businesses developed its new Real-Time Liquidity Management solution, which combines aspects of AvantGard's liquidity management capabilities with STep's exception management solutions.

Other examples of SunGard's CSA include its new Asset Arena solution, which maps different asset management workflows and pulls together its various asset management solutions "in a more integrated way". "[CSA] will turn SunGard from a siloed organisation into a more integrated one," remarked Hugh Grant, director, global IT, Credit Suisse and a member of SunGard's CSA Customer Advisory Board.

Using Business Process Modelling, service-oriented architecture (SOA) and its CSA, Finders said SunGard would be able to bring solutions to market more quickly, and lower total cost of ownership for customers.

Darren Wesemann, CTO, Financial Systems, SunGard, also highlighted SunGard's Infinity platform for delivering Software as a Service (Saas) or solutions on-demand. Using Infinity, he said SunGard would be able to leverage its solutions/assets on-demand and using a business modelling process engine, develop solutions that were more compatible with client's business needs.

Friday, June 01, 2007

Eating humble pie

Although the ink is not quite dry on the recent announcement that Nasdaq and the OMX Nordic Exchange will join forces to create yet another trans-Atlantic exchange, the real news surely is what does this mean for the 'go-it-alone' London Stock Exchange (LSE)?

With the NYSE Euronext deal completed and the Nasdaq OMX combination giving both exchanges a strong technology and derivatives card to play, isn't it time that the LSE "swallowed its pride," stopped being a "prima donna" and secured a pan-European or cross-Atlantic merger of its own.

Operating profit (up 55% to £185.6 million for the year ended 31 March 2007) and primary market activity on the exchange may be healthy, but Frédéric Ponzo, managing director of consultancy, NET2S, believes the competitive landscape will change next year as NYSE Euronext and Nasdaq OMX look to increase their global market share and new market entrants such as Project Turquoise makes its presence felt.

Although Ponzo does not believe that the competition from ECNs and multilateral trading facilities will be as fierce as some anticipate, by 'going it alone' the LSE currently does not have the global reach of the trans-Atlantic exchanges, nor does it have their derivatives capabilities.

Could it be that the LSE may have to eat humble pie and seriously reconsider merging with the likes of Deutsche Börse in order to sustain its foothold not only in the UK but the European, if not global market? Or will national pride and cultural differences continue to stand in the way of a deal that could make sense in the longer term if not in the short term?