Striking the Balance: an Outsourcer’s Tale
To outsource or not to outsource? With financial pressure a fact of life, it’s a question many of our clients have asked. Whether you are for or against, there are clear benefits that can be reaped by bringing specialist organisations into the mix. But care needs to be taken not to contract yourself into future problems. If an outsourcing deal looks too good to be true, then that might just be the case…
With many authorities on their second or third generation of outsourcing, you might assume lessons have been learnt – and they have in some areas. But there are still challenges. Ameo has provided commercial challenge to JVs and outsourcing arrangements for a number of authorities recently. When we undertake this work, we often find that the contract is set up, procured and managed inappropriately or inconsistently. I personally believe the failure of these arrangements is down to a lack of partnership, dialogue and understanding. More often that not, the responsibility lies with both parties.
I’ll give you a practical example. A friend of mine works as an estimator for one of the large outsourcing providers. Let’s call him ‘John’. He was asked to price up a very large public-private contract to provide a range of soft services. John is a bright and very capable man. Our conversation went something like this.
Me: So, what wonderful model have you developed to price such a complex bid? The calculations and variance must be mind boggling.
John: They are indeed.
Me: So how do you do it?
John: It’s simple. We find out the current cost and we undercut it by 5%.
There was a brief silence at this point. I looked at my clearly capable friend and processed what he had said. I concluded there had to be more, so I continued the discussion.
Me: What about the cost of delivery?
John: Well, that sits in operations and I am in the bid team. So long as we win more than we lose, everyone is happy. To be honest, the client can’t provide anything like the data we need to bid accurately, and they already know what they want.
This conversation has stuck with me for a number of years. It made me realise that, while the concepts of outsourcing and economies of scale are sound, the practice can be very, very different.
The public sector is always driven to reduce cost, and the procurement process often runs without any real data on service performance. When you have saved every last penny available, and you have good performance data, then outsourcing may be the right route. Yet, even at this point, transparent negotiations with your proposed partner are essential. Ultimately, you are accountable for public service delivery, no matter who delivers it. By contrast, private practices are often driven by short-term growth, and their sales teams are rewarded for winning the deal, rather than looking at commercial reality. Some corporate sales strategies are focused on building large stocks of (frequently loss-making) contracts, then selling their business before the borrowing and losses catch up with them.
My other observation would be the huge variation in contract management and challenge. We recently reviewed a contract where the terms agreed were poor and where due diligence had clearly not been completed. As a result, the provider was exploiting gaps to push everything down a variance route. What worried me about this was not only the ethos of the provider, but the lack of proactive management taken by the public organisation. Too often, public bodies deploy a mid-range manager to run hugely complex, challenging commercial agreements. He or she must then face off against a well-paid, highly-experienced commercial team (and associated lawyers) on the provider side. If the public sector wants to be commercial then I would implore them to invest their finite resources in sound commercial management skills.
There is nothing new in this story, of course, but having worked with public sector clients for more than fifteen years, it is frustrating to witness the same mistakes repeated on both sides.
Thankfully, there are many public-private partnerships which do work well. A quick glance at these reveals a number of common themes. Honest and talented people, thorough negotiations, and above all, transparent agreements based on mutual values and ambitions – not just the bottom line.
If you would like to learn how we may be able to support you with similar commercial challenges, please do get in touch.
Back to news