Outsourcing – it’s all about expectations

No, this isn’t another post about G4S and the Olympics, but we will refer to the G4S deal with Lincolnshire police we touched on earlier this week. Today we’re discussing a different aspect of outsourcing and another source of potential tension instead.

I arrived as CPO of NatWest not long after a major outsource of telecommunications to British Telecom had been agreed.  It was all very high profile – the late Derek Wanless, our CEO, in the papers shaking hands with the BT Chairman and all that – but it was a highly problematical contract for us. (Actually, the CEO’s involvement didn’t help. Going public with the deal put NatWest under pressure to sign before all the details had been worked out. But Wanless was never a particularly “commercial” chap).

The problems arose to a large extent because of non-aligned expectations. BT saw NatWest as a account where they could grow their business (revenue and profit), and promote leading edge technology. NatWest basically wanted to save money via the outsource.  We were not perceived well by investors at the time (which ultimately led to the takeover by RBS a couple of years later) and our costs were high compared to competitors.

So of course, this misalignment was a recipe for problems and arguments. We wanted cost reduction and efficiency; BT expected more volume and NatWest to sign up to exciting new products. For some time, neither party was happy.

And that strikes me as a problem in so many outsourcing deals. The buyer wants cost reduction, but it is almost impossible for the sales person to be open about that when (s)he “sells” the opportunity internally in the provider company.

“I want to spend a £1M bidding for this big contract; it’ll be worth £10M a year revenue in year one but that will decline to £5M by year 5” is not a very exciting proposition. So the sales person talks about £10M in year one, “and of course we can grow that to at least £15M by year 5…”

It’s a tough one to overcome for the procurement side. Making it VERY clear what you expect, verbally and in writing (in the tender documents for instance) helps to ensure as far as you can that the suppliers and their senior people understand what you’re after.

It’s also the factor that concerns me about some high profile public sector outsourcing. Are G4S, for instance, approaching the Lincolnshire Police outsourcing deal in the spirit of efficiency and reducing Lincolnshire’s costs – which might of course mean that the G4S revenue declines over the next few years from that account? Or is someone in G4S bonused on growing that revenue and perhaps the profit margin as well?

That’s not having a go at G4S by the way; the same applies to many other examples, and in the public and private sectors. But the Police particularly worries me as a sector, given their lack of capacity and experience in terms of managing complex contracts of this nature.

But whichever sector you’re in, think about how the payment and reward mechanisms reflect the goals of both buyer and supplier – and that’s true really of any major contract, not just outsourcing.

 

Comments

Join the Conversation

* Required fields  [email address will not be published]

*