John Seddon identifies another Stupid Sourcing approach

So, if you approached the finance department of your local council or indeed a private sector organisation, and said, “I’ve got a way you can vastly reduce the number of invoices you have to handle, with no cost and no effect on service or quality”, what would you expect them to do?  Bite your hand off, or tell you to get lost?

I’ve recently seen an example of the latter and the reason was simple. The “finance department” was outsourced to a BPO service provider. And they were paid for running the accounts payable function based on the number of invoices they processed. So obviously, they had no interest at all in reducing that, to the point that not only were they not doing anything pro-actively to achieve that, they were resisting moves that didn’t even require any effort from them. As they ran procurement as well, they could do this quite easily in some areas – there was no incentive to move suppliers onto consolidated or electronic invoicing, use procurement cards or look at similar efficiency actions.

Don’t blame the outsourcer – blame the client organisation who put this payment structure in place. Another candidate for our Stupid Sourcing awards!

On a similar note, John Seddon, a hugely influential and distinguished writer / academic / consultant, whose thinking on systems and processes we really should feature more here, has given another example of a poorly thought out payment mechanism here. Writing for Public Finance, he explains that Birmingham, who have a major outsource venture with Capita (extended by ten years without further competition a while back), are paying Capita for running a customer information / complaint call centre based on volume of calls.

"I predict that Birmingham City Council will rue the day it got into bed with Capita in a classic shared services outsourcing deal. The councillors there have just woken up to the fact that their shiny new call centre is full of failure demand – that is, demand caused by a failure to do something or do something right for the customer. Birmingham is paying Capita more as services fail because the contract is based on transaction volumes, and the same phenomenon is a ubiquitous feature of shared services deals".

Presumably, as staff levels are reduced in the Council generally, the centre is receiving more calls and the cost is going up. There is of course also the perverse incentive not to resolve problems first time – more revenue if someone calls back multiple times! Now I’m not suggesting for a moment that Capita would do anything other than the right things here, particularly as I’m sure they value the long-term nature of their deal. But putting in place that sort of payment mechanism can encourage the wrong actions from less scrupulous suppliers.

It’s not rocket science really. There are many different ways of rewarding providers, so just think carefully about what you want to achieve - value, efficiency, service – and which mechanisms will drive the right long-term behaviour from suppliers in support of those goals. Paying based on volume is, in many cases, not the right way to go.

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