Why outsourcing divorce can end in tears…
And what makes for happy second marriages?
Outsourcing arrangements made in the 1990s are coming to a close. But public sector organisations considering going elsewhere next time have a number of options, says Paul Bentham.
The outsourcing industry was agog when Accenture and the NHS parted company on extremely acrimonious terms in 2006. Accenture pulled out of the provision of core services on a £12.4bn IT contract, having been unable to stem the flow of huge losses that had arisen from the NHS project.
The legal team that extricated Accenture from the deal even won an award for the cunning way they had managed to disentangle their client from the relationship. The NHS was left, as many estranged spouses have been in the wake of a particularly brutal divorce case, wondering how on earth it was going to pick up the pieces and start all over again.
This is just one way in which outsourcing can end. It is often a lot less embittered, even amicable. And it's often the public sector body that calls time. But the council or central government organisation is always left in the same position - what happens from here? Shall we take the outsourced function back in-house? Or shall we opt to go with another outsourcing partner?
Many of the first-generation outsourcing contracts that were entered into in the 1990s have now expired or are coming to an end, especially IT outsourcing contracts. Lawyers are increasingly advising on second- and subsequent-generation outsourcing transactions. The whole issue of untangling an outsourcing relationship and embarking on another is a veritable legal minefield.
When an outsourcing arrangement is nearing the end, or comes to an end abruptly as in the NHS-Accenture case, the public sector body has to decide what to do and formulate a plan as quickly as possible. And there are a number of choices.
One of the options is to extend its relationship with its current supplier. As mentioned, outsourcing relationships are usually not that acrimonious and often it is a much less risky option to stay with the incumbent - better the devil you know.
Sometimes it is better the devil you don't and organisations may opt to go with another partner altogether. This means the outsourced services, employees and all, get moved across to the new provider.
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Another option is service unbundling. In the outsourcing deals of the late 1990s it was common for suppliers to take on board everything from a public sector authority's entire IT infrastructure through to software development.
Many of these deals are being replaced by right-sourcing arrangements, where organisations outsource elements of the services bundle to different suppliers. However, multi-sourcing can be a can of worms. Its success depends on the effectiveness of the interface between all the different suppliers.
Whatever path public sector organisations decide to take, it is in its own interests to secure the help of the incumbent provider. For example, when the service is retendered, all parties bidding for the contract will need access to information previously only privy to the original supplier. But the co-operation of the supplier isn't always easy to get in these circumstances, particularly if it hasn't been asked to retender.
In situations like this, it's really important for public sector organisations to find out where they stand from a contractual point of view, before the supplier gets a whiff of the idea that they might not even be in the running.
The problem with many of these contracts is they were drafted when outsourcing was relatively embryonic. There are often antiquated or non-existent clauses related to the provision of information, access rights, intellectual property rights or exit management.
All or some of these clauses might need to be renegotiated before repitching. And that means the incumbent supplier needs to be in the right frame of mind for the public sector organisation to have a decent degree of negotiating leverage.
Parting on good terms is also of vital importance where people are concerned. Because of Tupe, (transfer of undertakings - protection of employment) the contract should detail, among other things, the identity of the staff who will transfer, pensions and redundancies. In the absence of contractual provision, this information only has to be provided 14 days before the transfer, which renders it fairly invaluable.
A further risk is that disgruntled incumbent suppliers might retaliate by introducing some form of poison pill such as a special bonus payment - a hit that the new supplier will have to take. They have also been known to carry out a practice called "social dumping" where the outgoing supplier assigns inexperienced staff to the contract, meaning the new provider is lumbered with a junior workforce.
The whole transition process needs to be handled with kid gloves to make sure there are as few hiccups as possible - and that means trying to keep everyone happy. If they're not, it means having a contract to enforce the necessary clauses.
If a public sector organisation is embarking on outsourcing with a new provider after having its fingers burned by an old relationship, as in life, it has to stay optimistic and not let the baggage of the past jeopardise future success.
The key things to remember before progressing to second-generation partnerships are: do your homework, be prepared for whatever eventuality arises and have a cast-iron contract that will protect your interests.
Paul Bentham is the public sector expert and partner in the technology and outsourcing group at Addleshaw Goddard