- February 1, 2018
Following Wednesday’s surprise profits-warning announcement from Capita (one of the largest UK outsourcers), coming so soon after the failure of Carillion and the travails at Interserve, several of our clients have contacted us. They asked: Should we be worried? And, are there structural issues in the UK outsourcing market that might endanger our own operations?
Our 4-point action plan will pinpoint the level of your risks and where they sit for your situation;
- Review your contract, the structure and the inherent risks,
- Review, and if needed, strengthen the contractual and service governance structure, interfaces and activities;
- Refresh, review or create your contingency plans;
- Ensure that your business holds and maintains ownership and access to the knowledge, process documentation and mapping for all your essential customer management services.
At the heart of the question is a fundamental uncertainty: are the issues within these high profile cases specific to them or have the risk levels inherent within the industry changed?
Our view is that there is still enormous value and business benefit to be had from the right outsourced relationship. There is no doubt that Capita has some very specific business challenges, as other commentators and, indeed, the new chief executive stated, they have had weak new sales and relied too much on growth through acquisitions. However our team at Ember, the largest independent advisors on customer management outsourcing in the UK, believes there are a number of factors that have increased the risks in the outsourcing market and those wise to this are reviewing their contingency plans and carefully monitoring the situation.
Contractual and Operational Risks
The core issue revolves around the scale of contractual and operational risks within contracts and where the burden sits. Carillion is a good example. In hindsight, the business appears to have signed up to a range of public and private contracts with significant risks to them and ultimately was unable to deliver “the goods” at the contractual price. In short, they had taken on these risks and had not sufficiently priced for these in the final contract. In our world, “the goods” tends to be a reduction in Total Cost of Ownership (often combined with a promise of quality improvement) through cost base reduction and customer journey transformation as a result of digitalisation, AI or other new technologies. The risk is “transferred” to the outsourcer, and on a point basis this is true. But if too many unachievable cost-saving promises are made in aggregate – by individual corporations or by the market in totality – they will cumulatively create chaos. The apparent transferring of risks to the outsourcer may actually be exposing you to even greater risks than you might imagine.
Ember’s advice has always been straightforward in regard to outsourcing deals. The core nature of the engagement, as reflected in the commercial contract, needs to ensure that both client and supplier are incentivised on outcomes that are mutually beneficial to both parties; the long-term commercial viability of the service provision must be attractive to both parties; and within the contract, the contractual risk levels and the actual service needs to be well and professionally managed.
If the worst comes to the worst, an organisation may need to enact contingencies and supplier exit plans. This is something that is always contracted for and very often neglected thereafter. It may well be that, through a period of outsourcing, an organisation has become far removed and distant from the operation and the knowledge, processes and activities within them. If this is the case, the prospect of having to move or re-create the service and have it delivered by another team – be that another outsourcer or in-house – is a daunting prospect.
A review and availability of clear process documentation is an excellent starting point. The ability to accurately model and adjust a range of change options needs a detailed and accurate understanding of what the current service is. This encompasses the activity levels, complexities, staff skills, systems, risks, values and interdependencies for your everyday business and customer experience activities.
Are you concerned?
Our checklist of immediate actions should help;
- Review your contract, the structure and the inherent risks;
- Review and if needed, strengthen the contractual and service governance structure, interfaces and activities;
- Refresh, review or create your contingency plans;
- Ensure that your business holds and maintains ownership and access to the knowledge, process documentation and mapping for all your essential customer management services;
- Use this time to review and benchmark the pricing, total cost exposure and risk position against repatriating in-house or transferring to alternative outsourcing vendors. This market testing will ensure you have confidence and knowledge of your financial exposure and options for the longer term, not just any immediate crisis.
Time spent now on these vital activities, at the very least, will allow you to provide internal business stakeholders with the reassurance they will be seeking regarding the risks associated with your outsourcing arrangements. In the unlikely event that problems do arise, you will be in a position of strength and knowledgeable to enact contingency plans to minimise the impact on your end users and customers.
The team at Ember is available to provide support and guidance on any of these matters relating to your outsourcing arrangements. If you would like a no-obligation chat with our in-house experts, contact David Leedham by emailing firstname.lastname@example.org