Minimizing Risk in the Outsource Model

Posted: 02/22/2018 - 05:53

2018 is not the first time our industry has come under fire. It’s had a colourful history from tales of cost-cutting to ethical arguments around driving labour arbitrage. Outsourcing has often been misunderstood and the whole industry blamed when things go wrong. But with the recent, spectacular collapse of Carillion we are seeing a renewed attack from certain corners in relation to the “failure of outsourcing.” A grand, sweeping statement, but is there any truth in it? 

Unsurprisingly, the Labour Party has been quite vocal in its criticism of the current government’s position and actions in connection with the outsourcing of public services. Jon Trickett, the shadow minister for the Cabinet Office, has suggested that a Labour government would not tolerate “risky behaviour” from suppliers and would grant ministers more control over the stewardship of those contracts. Some of this criticism aimed at “rogue suppliers” will undoubtedly have a negative impact on the commercially astute and well-managed suppliers that support our industry, as they are tarred with that “risky” brush. In fact, it’s important to remember that the sourcing industry is growing in sophistication, maturity and, if anything, learning from mistakes of the past both in the public and private sectors. To suggest that private suppliers in the public sector should all be “shown the door” is insulting to those private firms who pride themselves on customer service, consistently meet or exceed challenging service level agreements and have a buoyant, reliable customer base. It takes multiple parties to make any relationship work and some introspection would not be a bad thing. 

However, with other suppliers issuing profit warnings, including the sizable recent announcement from Capita in January this year, perhaps our shadow government is on to something? Is this a “risky” business? 

Numerous articles have been written on avoiding the most “common pitfalls” in outsourcing over the last 20-plus years and the same message is delivered each time: preparation is critical. If expectations are misaligned from day one, the contract is unlikely to yield favourable results for either party. For example, if a customer has certain expectations such as innovation or proactive improvements in the service, it should be discussing these expectations with the supplier early in the process. Then, once expectations are aligned and the concepts agreed, the contract should be drafted to reflect such agreement including governance mechanisms to encourage open dialogue and transparent review of performance. 

Customers in the private sector are learning these lessons. They are becoming more sophisticated and taking steps to understand their requirements, business objectives and costs and are creating sourcing policies as a core business strategy. Furthermore, as part of these strategies we are seeing more collaborative ventures between customers and suppliers as they leverage experience and strong relationships in the industry to streamline governance and use incentives and innovation to achieve an efficient and cost-effective service for their end users. All of this work effort de-risks an outsourcing model but how much of this is done in the public sector before a government contract is issued and how successful is it? 

Outsourcing isn’t successful across all services – it’s incumbent on the customer (yes, Prime Minister, that’s you too) to understand whether an outsourced model will work for that service or function. It is also necessary to analyse the market to be in a position to select the right supplier. This initial due diligence should cover the financial standing of the selected bidder, its position in the market and capability across the specific service or function. It is also prudent to consider culture. A customer should consider whether its processes and attitudes towards labour arbitrage, robotics or data security are aligned with the supplier’s. A customer is unlikely to be satisfied by a supplier whose culture or business strategies are misaligned with its own. 

It is also critical to carefully examine bidder proposals with a team that has the correct experience that can advise on how solutions match customer requirements to business outcomes and offer value for money, without compromising on customer service or innovation (or the strength of a supplier’s financial covenant). A customer has to fully understand its own business and where it may need additional expertise or assistance from its suppliers. For example, with the increased focus on data security, engaging a supplier who is less sophisticated than a customer needs for its business could be a costly, and embarrassing, mistake. Not all - but many private customers rely on referees, workshops and creating relationships when selecting their potential suppliers. These tools help to flush out potential misalignments, risks and key areas of importance and therefore ultimately future proof the services, the contract and the interests of both supplier and customer. 

The public sector should be no different. Perhaps the perceived costs associated with these preparatory steps and the skills required to perform make them prohibitive in a public sector environment. Or perhaps these steps are being taken but the mechanisms around them are too adversarial, preventing a good supplier and customer relationship – which every sourcing arrangement should be built on. 

Instead of criticising private procurement processes, or indeed the private suppliers that serve within them, the government should consider reviewing its relationships with its suppliers and improving them with clear, transparent communications and more flexible tender processes rather than moving back toward the “supplier bashing” of the past. Of course, the current criticism is likely to be political point scoring at this stage. However, restoring a blame culture in the industry would be a step backwards. Let’s hope the government can engage and learn their lessons, protect our industry and those it employs without compromising on service.

About The Author

Megan Paul's picture

Megan is a partner in the Commercial team with Charles Russell Speechlys LLP in London. She has in-depth experience in technology, communications and large-scale complex outsourcing transactions, both locally and internationally. Megan also advises on the commercial aspects of private equity and M&A transactions. Megan was previously at Mayer Brown International LLP where she spent ten years, with secondments to Nomura International plc, Unilever plc and Airbus SAS as well as an international secondment to Mayer Brown's head office in Chicago working for the firm's US client base. 

Megan is admitted to practice in England and Wales.