Keynote Speech by Mr. Stephen Mak, Deputy Government Chief Information Officer, at the 3rd BPO & IT Outsourcing Summit
28 - 11 - 2006

"IT Outsourcing: Opportunities and Strategies"

Gary, Distinguished Guests, Ladies and Gentlemen,

Good morning. I have great pleasure to be invited again to speak at the Outsourcing Summit in this year. This is the third time I am invited to deliver an opening keynote for this Conference. I guess one of the reasons for this is that the organisers have not yet found a way to outsource me (joke). I am delighted to do so as I reckon Outsourcing still stands as a crucial business strategy for most organizations today, and there are new developments and dimensions on the subject that I would like to share with you. As mentioned by Thomas Friedman in his book "The World is Flat", "Outsourcing" is one of the ten forces that are flattening the world. This fairly echoes and reflects what most organizations around the world are now doing today - factoring in Outsourcing as part of their business and competitive strategies. In fact, five other flatteners he mentioned can be related to sourcing.

Today, I would like to share with you some Trends that we observe in Outsourcing. I would talk on the Opportunities that these trends and developments would bring about. And also the Strategies that would be adopted to capitalize and harness these Opportunities.

The Trend

IT outsourcing has been in the market for years, and it has become a mature practice nowadays. However, it is not static. There are developments undergoing throughout the years that bring new dimensions and add greater depths to the subject. There are three major trends that we observe, namely: Evolution; Globalization; and Standardization.

Evolution

Outsourcing is fast extending its reach and coverage. Starting from traditional activities such as Data Centre Operation and System Development, it has rapidly evolved and expanded its presence in nearly all areas of IT activities that one can think of. While mature activities such as Data Centre Outsourcing have reached the plateau of productivity of a technology life cycle and are delivering values to businesses, we see new forms such as Helpdesk, Storage, and Desktop Outsourcing emerging and fast finding their places in the main stream.

To further explain and illustrate this trend, I would like to quote our actual experience in the context of government. We started actively pursuing IT Outsourcing in Government back in 1998. At that time, we started off by outsourcing Applications Development only. Our focus was mainly on System Analysis, Design and Implementation. As we gained more experience, we extended outsourcing into other areas along the System Development Life Cycle (SDLC) : downstream to activities such as System Maintenance, and upstream to activities such as Feasibility Studies and Strategic Studies.

With experience acquired in outsourcing individual activities along the SDLC, we then piloted some wholesale approaches. By wholesale approach, we mean "Departmental Outsourcing" whereby all IT related activities of a department, be they one-off or on-going, are outsourced to an external service provider. We also mean "Business Process Outsourcing" in which we do not only outsource IT activities but also their related business functions to the outsourcer. In this connection, the Judiciary and Intellectual Property Departments are good examples.

Globalization

The Evolution of Outsourcing is fuelled by Globalization. Some of the outsourcing models that were not feasible in the past can now be realized under the wave of Globalization. With the advent of the Internet and communication technologies in general, activities that have to be done locally in the past can now be conducted near-shore and even off-shore. This trend is supported by the fact that increasing types and volume of IT services of the Western world have now been outsourced to Asian countries such as India and China. According to the forecast of Gartner, from 2005 through 2010, the Asia/Pacific IT services market will grow at a compound annual growth rate of 9.3% which is significantly faster than the global rate of 6.4%. This phenomenon can be explained by the increasing volume of off-shore outsourcing to the Asia/Pacific which is facilitated by Globalization.

Standardization

Standardization is another trend that aids and contributes to the development of outsourcing. In recent years, we have seen increasing commoditization of IT hardware. Nowadays, PCs are commonly sold in departmental stores instead of computer shops as commodity products. Facilitated by technology convergence, more and more computing capabilities are bundled in various commodity devices, such as PDA and smart phones. Apart from hardware, software is also progressively commoditized. Increasingly, software is offered as Service instead of Product and marketed and delivered through the web instead of traditional channels.

Interoperability and standardization are the keys for making all these to happen. Through standardization, automation of services can be facilitated. More and more IT services can be offered in the form of utilities similar to the supply of electricity and water. Service levels are commonly defined and shared. Metering and benchmarking criteria are increasingly standardized. All these standardization works contribute to the development and prevalence of IT outsourcing.

Opportunities and Strategies

With the above trends in train, the next question is "What opportunities will these developments offer us ?" And the follow up question is "What strategies should be adopted to harness these opportunities?" There are a few thoughts that I would like to share with you on this.

Evolution

Under the trend of Evolution, new opportunities for outsourcing are open to us. In recent years, we see new technologies such as the Internet giving rise to new types of IT services, for example, Web Hosting and Internet-related Services such as anti-virus, intrusion detection and anti-spamming. We note that the outsourcing market has been responding swiftly to these new demands. With the rich outsourcing experience acquired in the past and the skills, knowledge and human capital in outsourcing management so far established, we do not see these new types of IT services posing much difficulties to our outsourcing practitioners. Instead, they present new opportunities to the global outsourcing industry.

As a user, a strategy to cope with this trend of evolution is to keep a close watch on the development of the outsourcing market. Under this strategy, we should keep in view the availability and maturity of the required type of outsourcing services in the market. The abundance and quality of the required service providers in the market are also factors that we need to look out for.

In the Government, we are now reviewing our current Information System Hosting Service (ISHS) arrangement in conjunction with the review of our Central Computer Centre Outsourcing Initiative (CCCOI). We are considering the ways to synergize these two similar kinds of hosting services. And we are studying the feasibility of evolving our new ISHS into a new type of outsourcing arrangement.

Globalization

As regards Globalization, undoubtedly it helps provide much outsourcing opportunities for organizations in Hong Kong. The relatively cheaper rental and lower labour cost in the Mainland provide much business incentives for outsourcing IT services over the border. The physical proximity, cultural affinity and the increasing maturity of the IT workforce in the Mainland provide added attractions.

The outsourcing opportunities however are two-way. While on the one hand Hong Kong companies may outsource IT activities to the Mainland because of economic reasons, companies in the Mainland may also outsource their IT projects to Hong Kong for the sake of better project management, enhanced quality assurance, wider international network and exposure, more comprehensive intellectual property and legal protection, and most importantly, getting access to the global market.

To help Hong Kong companies harness these opportunities, the Government has been working on several initiatives. First and foremost is the CEPA - the Closer Economic Partnership Arrangement. Under the CEPA, Hong Kong companies can participate in the System Integration (SI) Certification Scheme operated by the Mainland so as to enable the companies to provide System Integration services in China.

Apart from the CEPA, the Government has also established a number of cooperation and collaboration channels between the Mainland and Hong Kong. These include the Hong Kong/Guangdong Expert Group on Co-operation in Informatisation (or EGCI in short) which is jointly chaired by the Director of the Guangdong Information Industry Department and me. Under the EGCI, we have jointly worked out 9 main areas of co-operation. Of these, an important area is to strengthen co-operation between the software industry of Hong Kong and Guangdong with an aim to exploiting the outsourcing market and expanding software export of the two places.

We have also collaboration projects below the provincial level. For example, we have signed a strategic partnership agreement between the Hong Kong Cyberport and Shenzhen Hi-Tech Industrial Park in 2004. The agreement covers aspects such as legal services, promotion and trade exchange, information flow and information services for SMEs.

In the longer term, we have started work in exploring the opportunities under the Eleventh Five-Year Plan of China. In this Five-Year Plan, there is explicit statement suggesting cooperation between the Mainland and Hong Kong in the areas of financial services, logistics, tourism and IT. It is expected that new cooperation opportunities would be a natural outcome of this.

Standardization

The opportunities offered by standardization are numerous. Some outsourcing activities that were not feasible in the past can now be made possible with the aid of standardization. To harness such opportunities, organizations may wish to take a strategy to adopt international or industry standards where appropriate so as to enable and facilitate outsourcing.

In the Government, we have already established an Interoperability Framework which contains well accepted industry standards to facilitate data exchanges. We also encourage the adoption of international/sector specific standards such as XML and XBRL where applicable.

Supported by the various standards in place, we are now planning to further strengthen our Government Infrastructure and to consider various sourcing options for its new provision. By sourcing options, we do not confine ourselves to outsourcing. All possible options including in-sourcing, out-sourcing, co-sourcing (i.e. partnership), and facilitating options such as policy directive setting, funding and sponsorship will be taken into consideration. Our current plan is to acquire consultancy services to help develop this Government Infrastructure and Sourcing Strategy. We expect to start work in January 2007 and to complete the Strategy development in about seven months' time.

Another project that is related to Standardization and Outsourcing is our new One-Stop Portal initiative. As you may know, we have soft launched our new Portal, GovHK, in September this year. And we are now collecting feedback from the public. The new Portal is a result of our effort of standardizing and streamlining our various Government web-sites and electronic services. With standard look-and-feel and interfaces established in the current stage, our next step is to build up the service clusters and solicit ideas from the market on possible models of private sector participation. To this end, an invitation to Expression of Interest (EOI) would be issued very soon. Subject to the results of the EOI exercise, we plan to start introducing suitable forms of private sector participation on the GovHK platform from the latter half of 2007.

Digital 21 Strategy

As you may be aware, we have recently issued a consultation document on our new Digital 21 Strategy. In the proposed Strategy, we have identified 5 actions areas for implementation, namely, (i) facilitating a digital economy; (ii) promoting advanced technology and innovation; (iii) developing Hong Kong as a hub for technological cooperation and trade; (iv) enabling the next generation of public services; and (v) building an inclusive, knowledge-based society. Outsourcing will undoubtedly play a pivotal role in all the proposed action areas, and new outsourcing opportunities will be opened up under the new Strategy. The consultation period of the Strategy will end on the 18th of December. We very much appreciate views and feedback from you on the proposed Strategy.

Conclusion

In conclusion, we see trends in the market that are in favour of more outsourcing both in terms of volume and variety. We note that there are numerous opportunities brought about by these new developments. And we encourage businesses to develop strategies in time to capitalize on and harness these opportunities.

A focused conference like the one today is surely a good forum for us to brainstorm, exchange views and share experiences on these interesting and challenging subjects. I appreciate the good efforts of the organiser for staging the event today, and wish the Conference every success.

Thank you.

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