The past year has seen trends continue that have been prevalent in the outsourcing market in Canada for several years. There are, however, significant new developments, especially with respect to companies considering the effect of outsourcing on their carbon footprint.
In this article we provide a snapshot of the existing trends in the outsourcing market in Canada by reference to ‘The State of Canadian Outsourcing’, a report prepared by the Centre for Outsourcing Research & Education (CORE) and presented in January 2008 (the CORE Report). We also list trends identified by Blakes in its outsourcing practice over the past couple of years. We conclude by briefly discussing developments in respect of green initiatives in Canada and their impact on the outsourcing market.
CONTINUING TRENDS
CORE Report
The CORE Report covers outsourcing across all industry sectors in Canada from 1 January 2002 to 30 June 2007.1 It focuses on the larger end of the outsourcing market (transactions with a total contract value in excess of C$10m) and provides an indicative (but not definitive) picture of the outsourcing market in Canada. The CORE Report identifies the following notable continuing trends in the Canadian outsourcing market:
Value of the market
The total value of major outsourcing deals in the time period covered by the CORE Report was approximately C$50bn. About half of the market was represented by deals worth C$1bn or more in contract value and the average contract value of all reported deals was about C$200m. There were approximately 300 major deals in total, for 40 of which the contract value was not disclosed.
Reasons for outsourcing
Two-thirds of companies still use outsourcing as a tactic to achieve business targets, but companies are increasingly using outsourcing to achieve strategic objectives. The primary reason for outsourcing in Canada today is to access expertise and additional capabilities rather than to reduce costs.
What is outsourced?
Most outsourcing involves information technology infrastructure and related activities (ITO). There is, however, increased outsourcing in application development and maintenance of software applications (ADM) and business process outsourcing (BPO). ITO and ADM are often done in combination.
Industries outsourcing
The financial services sector is the largest adopter of outsourcing arrangements. In the time period covered by the CORE Report, 34% of all deals were conducted by financial services providers. Other major industries that have adopted outsourcing include telecommunications (8% of deals), the public sector (22% of deals), and energy and utilities (6% of deals).
Results of outsourcing
The satisfaction levels of companies that outsource (clients) are mixed. Levels are high for functions such as ITO and ADM (70-80%), but only 50% for BPO, reflecting the complexity of BPO and its recent adoption. Despite mixed satisfaction levels, clients are optimistic that the results of outsourcing are improving and 70% of those surveyed expected to increase their outsourcing levels in the next three years.
Management of outsourcing
Clients are moving away from a ‘one-size-fits-all’ approach (where several functions are outsourced to a single, trusted service provider), towards a ‘best-of-breed’ approach where service providers are selected based upon their expertise in performing the specific function to be outsourced to them. A service provider’s specific expertise is now considered more important than the existence of a previous relationship. Clients are choosing to split deals, notwithstanding that it requires them to manage and integrate the work of various providers. In part due to this trend, clients are also investing heavily in their outsourcing governance and management skills. For example, clients are establishing ‘outsourcing centres of expertise’ within larger companies and more carefully selected ‘stay back’ teams to manage individual outsourcing relationships. Clients are also more willing to have work (especially ADM and call-centre work) performed offshore.
Trends apparent in Blakes’ outsourcing practice
Canada as choice outsourcing destination
Companies are re-evaluating their international outsourcing plans in response to the recent turmoil in global financial markets, political stability concerns, changes in international labour rates and foreign exchange changes. A number of these changes favour the reconsideration of Canada as a preferred outsourcing destination:
- It is politically stable, has a technologically skilled English-speaking workforce, and a highly developed and dependable communications and transport infrastructure. For call-centre operations, those outsourcing to Canada can draw upon an employee cohort speaking almost any language. Moreover, exchange rates have recently returned to levels that give the US dollar and the euro a significant purchasing power advantage in Canada.
- There is very little direct legal regulation of outsourcing transactions in Canada. Canada has an open, market-orientated economy in which businesses are generally free to contract for the goods and services they require.
Growing number of parties outsourcing
The ongoing development of computer and communications technologies is continuing to accelerate the use of external specialist service providers. Outsourcing in Canada is expanding from IT into finance, human resources, facilities management and other business process areas, and is moving from financial services, telecommuincations and other large companies into healthcare and mid-market companies.
Onshore/offshore outsourcing
There are increasingly more offshore and onshore/offshore combination deals being completed in Canada. These deals have increased the complexity of the transactions and have legal implications for data privacy, intellectual property rights, enforceability and remedies.
Deal structure
Deals tend to be smaller, shorter and focused on particular areas of specialisation. Multi-vendor environments that provide co-ordination and governance challenges, and require more active management, are becoming increasingly common.
‘Software as a service’ (SAAS)
In ITO there is an increase in hosted deals and IT environments are normally hosted and arranged by the service provider. This fact reinforces the trend in ITO towards SAAS, a model of software deployment where software is hosted as a service provided by service providers to clients across the internet or other telecommunications networks. By eliminating the need to install and run software on the customer’s own computer, SAAS aims to alleviate the burden of software maintenance, ongoing operation and support. It does, however, raise several new issues and concerns (especially in circumstances where many companies are examining the financial viability of key vendors).
Increased focus on audits and internal controls
Stricter governance requirements, including those under applicable securities law, are increasing the focus on compliance, audits and appropriate controls.2
Increased security and privacy obligations
Security and privacy are increasingly critical. There is greater emphasis on security, including IT systems, people and premises, especially in offshore services. This includes increased focus on business continuity and a growing focus on redundancy, failover capabilities, data back-up and recovery (which may be provided by different service providers in diverse locations).
Green Initiatives in the private sector in Canada and their Impact on Outsourcing
General observations
There have been several recent developments in Canada with respect to the nascent regulation of greenhouse gas (GHG) emissions in the private sector. These developments, whether mandated legally or initiated by parties seeking to obtain a competitive advantage in the marketplace, may impact on whether, how and to whom companies outsource certain functions. With growing requirements for GHG reporting and carbon pricing on the horizon, investors are increasingly demanding disclosure of information about energy consumption and direct and indirect production of GHG; especially for sectors of the economy where energy represents a significant portion of production costs.
Companies may improve their management of GHG emissions and reporting through the outsourcing of functions such as logistics, facilities management, manufacturing, print and mail, and IT operations to specialised service providers. For example, the exponential growth in data storage requirements, which are forecast to expand at an annual rate of over 50% over the next few years, is leading to corresponding increases in power consumption and associated GHG emissions. It is therefore more difficult for companies to achieve net reductions in GHG emissions. Outsourcing can provide the expertise and concentrated investments required to substantially reduce the GHG footprint of data centre operations, including through strategies such as the concentrated co-location of data centres at locations that are proximate to renewable energy and cooling resources.
Green issues such as GHG emissions, electronic waste, and reporting obligations are beginning to factor into long-term outsourcing contracts as clients and service providers attempt to hedge and allocate the risks associated with future legal and market requirements. Such concerns are also expected to become increasingly important considerations when selecting service providers.
Carbon Disclosure Project 2008
The increasing focus of Canadian companies on the reduction of their GHG emissions is reflected in the trends identified in ‘The Carbon Disclosure Project Report 2008 – Canada 200’ (the 2008 CDP Report).3 The report is prepared by The Conference Board of Canada, an independent, not-for-profit research organisation.
The 2008 CDP Report analysed the results of the Carbon Disclosure Project (CDP) for Canadian investors. The CDP, which was launched in 2000, consists of 385 global investors, including 40 Canadian investors, and is the largest investor coalition in the world. Each year the CDP requests climate change-related information from the senior management of the world’s largest companies.
The 2008 request for information (the CDP6) was sent to over 3,000 companies worldwide. Companies are encouraged to disclose information on the financial and business implications of climate change risks and opportunities, GHG emissions, accounting, and GHG management strategies. The 2008 CDP Report analysed the level and quality of Canadian company disclosures and listed some examples of the actions Canadian companies are taking to mitigate and adapt to climate change. The CDP6 was signed by 200 of the most valuable companies by market capitalisation listed on the Toronto Stock Exchange (Canadian recipients), with a combined asset base of C$57trn.
Some notable facts from the 2008 CDP Report are:
Number, quality and type of responses
- The CDP6 request was responded to by 55% of the Canadian respondents, representing 77% of the total market capitalisation of the 200 companies that received the questionnaire. The completeness and quality of responses have improved from 2007, with the vast majority of major GHG emitters and large-cap companies fully completing the CDP questionnaire.
- The high-carbon impact sector companies that responded included Gaz Metro LP, EnCana Corporation, Enbridge Inc, AbitibiBowater, Bombardier Inc, Nexen Inc, Suncor Energy Inc, Penn West Energy Trust, ARC Energy Trust and Catalyst Paper.
- The low-carbon impact sector companies that responded included Royal Bank of Canada, Canadian
- Imperial Bank of Commerce, Alimentation Couche-Tard, Bank of Nova Scotia and BCE Inc.
Risk strategies
- Climate change was integrated into the risk management strategies of 84% of the 200 Canadian companies surveyed. Formal GHG management programmes and emission reduction activities are being implemented by both high- and low-GHG emissions impact companies in 49% of those surveyed.
CONCLUSION
While it is impossible to forecast the impacts of the current economic
turbulence on the Canadian outsourcing market, we expect the current trends towards the more sophisticated use of outsourcing as a management tool will continue into the foreseeable future. We also expect that green issues, particularly concerns about GHG reporting and emissions reductions, will become a more significant factor in outsourcing deals in Canada (not to mention around the world) during the coming years.
By Richard Corley, partner, and Francois van Vuuren, associate, Blake, Cassels & Graydon LLP. E-mail: \n This e-mail address is being protected from spambots. You need JavaScript enabled to view it "> This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
NOTES
1) For more information see www.core-outsourcing.org.
2) CICA 5970 is a Canadian standard administered by the Canadian Institute of Chartered Accountants, while SAS 70 is the US-based equivalent developed by the American Institute of Certifi ed Public Accountants. Service providers seem more comfortable to undertake periodic CICA 5970/SAS 70 reviews of their internal controls relevant to the services. CICA 5970/SAS 70 are similar audits that defi ne professional standards used by independent auditors to rigorously assess the internal control of service providers. These audits place specifi c obligations on service providers managing customer data and focus heavily on the areas of compliance, security and access.
3) For the full text of the 2008 CDP Report see www.cdproject.net/reports.asp.