3 Lessons from Somerset Council’s Final Southwest One Termination
Byon January 20, 2016
Photo credit: Dick Thomas Johnson
Ever since the first accounts emerged of the situation Southwest One found itself in, we’ve been keen to understand precisely how such a promising, value-adding venture could encounter the magnitude of challenges that it’s faced over its eight-year life. Now, we understand that Somerset Council has agreed their final Southwest One Termination
To date, we’ve covered a number of key lessons that we’ve been able to identify as relevant for anyone who may find themselves facing similar trials.
However, the latest news – that Somerset County Council will be discontinuing their contract in its entirety prior to its natural end date – speaks volumes about the challenges experienced in this relationship.
Somerset’s council leader John Osman said: “Having carefully weighed up the benefits and costs of letting the contract run its course or leaving it early, we have concluded that an early exit is in the best interests of the County Council and its taxpayers.”
According to the BBC, the county council’s decision does not affect Southwest One’s agreements with either the borough council or the police.
It is worth noting that the contract, created in 2007, was initially due to run for a period of 10 years, there was talk of the venture creating hundreds of jobs, and it was expected to provide up to £192m in savings over its life.
The reality has been quite different, however. Allegedly dogged by poor community and stakeholder relations, amidst suggestions from a Unison report of excessive secrecy and questionable management – the Southwest One joint venture does not appear to have delivered the outcomes envisaged at its outset.
The initial contract was valued at £535m. However, in March 2012, Council Cabinet member David Huxtable signed off the decision to renegotiate the Southwest One contract. This would see its value reduced to £158m as Somerset Council sought to bring many of its outsourced services back in-house to cut costs on this ‘loss-making venture’. Just four weeks earlier, it was reported that IBM had bailed out the ‘failing partnership’ with a £10m loan.
Then, in 2013, Somerset County Council had to pay £5.9m to settle a contract dispute with Southwest One after the joint venture company tried to sue the Council for £25m in a disagreement over performance concerns. Things did not seem to be going well for either party.
There had also been allegations that Southwest One had offered £60m in savings, but that these proposals had been blocked by Somerset Council. When taken together, you can begin to see that there was a lack of clarity between each partner as to what requirements, behaviours and operating foundations – including the contract structure – that they expected from each other. In our experience, this lack of clarity rarely amounts to a positive outcome as far as strategic partnerships and joint ventures are concerned.
Jill Shortland, who was leader of the council when Somerset outsourced these services to Southwest One, said as much when she stated that:
“They’ve not actually tried to make it work… We knew when we first set this up that you had to put both sides together. Part of the job was down to identifying the savings. The other part was driving them through. If you are going to drive out the savings, it’s not just the company – the council have to be doing it as well. You’ve both got to be working on it together.”
The writing seems to have been on the wall from the outset, as it was reported that there may have been uncertainty over partnership expectations very early on.
In a report published by Unison in 2008, a year after the inception of the partnership, significant concerns were raised over the use of what they termed as overly secretive ‘confidentiality clauses’ to prevent stakeholders and the wider community from understanding how the contract and services were changing and being managed. For instance, one of the aims of the Southwest One partnership was to create jobs. But Unison alleged that confidentiality clauses were used as a means for the councils and IBM to agree on the handling of staff in secret – so that Unison could neither consult nor object. Unison stipulated that the rights of workers and their positions might have been handled in a way that runs contrary to what they were told when the project was first proposed. In this same report, Unison also raised concerns as to why the initial promise of ‘hundreds of jobs’ suddenly evaporated when IBM was announced as the preferred bidder.
When talking about the freedom of information and the types of access to it, Unison likened the confidentiality agreements to a gagging order. They explained that had they signed the agreement, they would have been unable to act on the information. Whereas if they were to use freedom of information requests which they could act on, the process could be ‘dragged out’ so that the receipt of information could be timed so as to render the information unusable. As such, Unison alleges that they had no means or access to disrupt or influence project activity, should it have impacted workers in a negative fashion.
In addition, legislation at the time meant that neither IBM, Somerset County Council or Taunton and Dean District Council were under any legal obligation to involve members of the local community. They could have operated legally in an insular fashion if they felt it was best. However, in the interests of preserving local relations, it seems odd that the immediate stakeholders would go to such alleged extremes to keep their activity a secret, particularly when the project was perceived as offering a positive and significant change in public services.
What is interesting is that many of the stories circulating online regarding the partnership, appear to paint IBM as being a profit-driven entity of poor cultural fit for the public bodies it was joining to set up this venture. This inevitably will have caused some to look at IBM in a negative light, while sympathising with the public sector partners involved.
Yet, the 2008 Unison report states on numerous occasions that the council officers, HR staff and leaders involved appeared wholly complicit in everything that IBM asked them to do. Unison insist that the councils involved ignored calls for public involvement and scrutiny and that on the rare occasion that they issued documentation, it couldn’t be shared. Similarly, important documentation is said to have been read aloud to pre-vetted individuals, giving the speakers the opportunity to omit pertinent details; a belief that Unison feel is backed up by the council’s unwillingness to provide complete hard copies of the same documentation. Unison even goes as far to as to say that in some instances, council representatives ignored council rules in order to conceal or prevent access to information.
From our experience, in order for collaborative joint venture projects to succeed, they must remain just that – collaborative. If Unison’s version of events is accurate, and there is no reason to think they are not, then you may begin to see why this partnership encountered challenges at such an early stage.
There also seems to be the question of commercial sustainability.
The Improving Services in Somerset (ISiS) project, which led to the formation of Southwest One, added a shared services dimension to the relationship by using the framework agreement process, which allows public bodies to sign up at the OJEU Notice stage. In doing so, any bodies that sign up would be allowed to later join the project without having to undertake a separate procurement process, a distinct advantage, and one that could theoretically have led to cost savings, thanks to economies of scale. Initially, 36 local authorities signed up; however, because of the difficulties the relationship found itself in, it does beg the question as to whether Southwest One was in fact designed to deliver the proposed savings only on the basis that the majority of these bodies pursued Southwest One contracts, which of course they did not.
According to Unison, ISiS senior management stated several times that the business case was not dependent on IBM winning the Avon and Somerset Police contract, nor on shared services contracts from other local authorities and public bodies.
“This point was made emphatically by senior management at a recent JCC meeting, although it never appeared in the minutes and at the March 2007 Somerset CC Scrutiny and Executive meetings.”
Unison, however, stated in their 2008 report that:
“We believe this is not the case and that IBM won the contract because it undercut BT and Capita and that it is dependent on winning additional shared services contracts.”
In a Computer Weekly article published in July 2008, commentator Ted Ritter speculated that:
“[Southwest One] has a framework agreement which 33 other public organisations have signed. This means that they can, if they wish, join and hand over their back room services as well. In fact, the success of the venture might just depend on it.”
It wasn’t until much later, in December 2015, that Somerset Council stated that the deal was:
“…envisaged as a much larger exercise in collaboration, with a wide range of public sector entities having originally expressed interest in the Southwest One framework.”
“The fact that, in the end, Southwest One was unable to bring these further clients on board meant that the level of investment required to deliver the benefits originally envisaged became excessive and detrimental to all parties.”
With the benefit of hindsight, it is easy to pick holes in past decision-making. But some have questioned the commercial due diligence that was undertaken to confirm IBM’s promise of success, even if other bodies refused to join.
Many project teams in successful strategic partnerships go to great lengths to thoroughly scrutinise the project’s business case to ensure commercial sustainability. In these instances, cases are deliberated upon by a multi-disciplined, client-side team with technical, commercial, financial and legal expertise. In bringing these minds together, you are often able to uncover nuances, risks or gaps in the business case that can be questioned or catered for pre-contractually. It has been questioned to what degree this had taken place with IBM’s Southwest One proposal.
Was it clear to everyone involved that IBM had a reliance on signing up other public bodies when the finances were interrogated? Whether this process was undertaken by the councils and the police in the early stages of the project, will only be known to those intimately involved with the venture’s set-up.
In our view, we would have thought that a risk like this should have been identified and that sufficient caveats should have been built into the contract to protect the clients from any negative repercussions, should IBM’s gamble to successfully sell to other public bodies not have paid off. In the event, whatever due diligence was undertaken, and whatever service delivery performance was actually achieved, it has been reported that the three partners have faced escalating costs and diminished service delivery, while Southwest One have made consistent losses.
In fairness, at the time the venture was envisioned, the parties involved imagined a future that would see increases in public spending, despite the objective of millions in savings to be gained from the partnership. They weren’t to know that the global financial climate would go into meltdown just 12 months later, resulting in an era of unprecedented austerity that would see enormous budget pressures strike at the heart of public service delivery. So you have to question, not only what due diligence was undertaken, but whether in reality it could have been completed in a different way?
From the lessons learned report that was created, it seems that costs and restrictions imposed by the 3,000-page Southwest One contract meant that for those managing the contract and services, there was very little scope to practically alter their arrangement in a way that could have been commercially beneficial for all parties. In many of the stories surrounding the project, council members were often faced with a choice of paying termination fees or shouldering excessive costs in order to alter their arrangement, so commercially they were often forced to maintain their existing arrangement where other solutions might have otherwise provided a more beneficial outcome.
With relationships and ventures of this scope and nature, we would almost always recommend the use of contracts that are designed to be reshaped at least once every six months. By structuring a flexible contract foundation, all parties have the opportunity to modify and evolve their partnership to ensure that it is always in line with changing service delivery needs and conditions based on their learnings over the preceding six months. From the reported issues with this contract and relationship, it would appear that despite the sheer length and complexity of the contract, no such reshaping structure was built into it, making for an agreement that would be challenging to change in pragmatic terms over its lifetime.
Had Somerset Council had the foundations of reshaping in their contract structure, they may have been able to avoid the costly restructuring of their relationship back in 2012/13 and they may also have had some flexibility that would have allowed them to entirely avoid the 2013 £5.6m out of court settlement.
What Can We Learn From This, And Somerset Council’s Final Southwest One Termination?
1. The Client Function
As we’ve alluded to in specific reference to Somerset Council’s experience, one of their biggest reported problems appears to centre around their client function. The lessons learned report they provided acknowledged that the team they built to manage the relationship was not equipped to deal with the challenges and legal disputes that the relationship would need to face and overcome.
In fairness, there was a notable churn in leadership and financial conditions changed drastically over the eight-year life of the contract. Even so, had Somerset Council formed a more robust and experienced team to manage the relationship, there is a chance that they may have been able to prevent, or at least mitigate, many of the challenges that would later surface and cost the relationship dearly. Many organisations would do well to take note of Somerset Council’s example, because, despite the controversy, audits and investigations, they still went to the trouble of reviewing their ‘lessons learned’ and publishing them for all to see in a document titled ‘Lessons Learnt from the Experience of the South West One Contract’, released in 2014.
“The Client function monitoring a major contract needs to be adequately resourced. At the outset, the size of the client unit was deemed commensurate with the tasks ahead… However, as performance issues became evident and legal and other contractual disputes escalated, the team had to cope with increasing workloads and increasing pressure from service managers and Council Members to address these issues… With hindsight, the initial team was too small to manage the contract when SAP and other performance issues were not resolved quickly enough. Sizing the function is tricky but we do now have an extremely knowledgeable and experienced client team.”
We said at the time that the lessons learned report was released, and we still maintain, that Somerset County Council should be applauded for publicly acknowledging the challenges they experienced and for sharing their lessons learned with the wider public sector audience.
In our view, a client function team needn’t be viewed as a finite entity. In the early stages it may be sensible to overestimate your needs – better to pay a little more for a higher level of expertise that may not be fully utilised (or may only be needed at the outset) than to suffer often far more significant preventable costs as a result of not having them on-board. It is normal to supplement a lean permanent team with external expertise for its first year of operation while the service delivery, operating process and innovation governance bed themselves in and you build your own team’s internal capability. Once your own team is fully skilled and the relationship is operating well, you may let the external support go. But those first 12 months are critical to get the right behaviours embedded between all parties.
2. Due diligence and commercial sustainability
Your approach to due diligence and commercial sustainability will be coloured by your view on how relationships and procurements should be managed. Some believe that if you are paying the supplier to provide a service, it’s the supplier’s job to ensure that what they propose is commercially viable and that all potential risks are catered for.
Our own experience, after many hundreds of projects – often having been asked to come in after the event and deal with relationships that were not delivering expected benefits – we would suggest a slightly different approach is needed to improve the chances of project success. Our view is that a sizeable, complex, outsourced project will often benefit from establishing relationships that are collaborative, not just cooperative. This is a key difference. You aren’t your brother’s keeper, so you shouldn’t be telling the provider how their commercial model should work. But it is in your own interests to also have the supplier’s interests align with yours if you want a transformational service delivery relationship to be created that reduces costs and improves service levels over the life cycle of the project.
In this respect, undertaking your own due diligence on the supplier’s commercial model will provide you with visibility as to what evidence is available to prove just how commercially sustainable the supplier’s cost/revenue benefits are from the solutions they provide, but also how realistic your own business case is for the benefits you thought you would receive.
In addition, we are finding that there is increasing support for client function teams to be more rigorous in their analysis of the technical aspects of supplier bids; drawing on the team’s overlapping experience to uncover issues and gaps that the supplier either hasn’t considered or has (thankfully, rarer these days) purposefully kept quiet about. In the case of Southwest One, some argue that for the joint venture to have succeeded, far more public bodies would have needed to use this shared service to reduce the cost of delivery.
In respect of IBM’s proposals, the question has been asked as to whether adequate consideration was given to the sustainability of the venture should only three partners make use of the service during the venture’s life? It is not known outside of the partnership to what degree IBM was asked to implement a contractual mechanism that would protect clients of Southwest One from escalating costs should only a small number of public bodies sign up to use the service. If such a mechanism had been incorporated, it may have provided a different and more flexible structure for ongoing service delivery and benefits realisation.
3. Flexible contracts
Organisational needs and circumstances change, as do the environments in which they operate. With the quickening pace of technological development, innovation and models for service delivery are rapidly changing. With this in mind, signing a complex and restrictive contract that doesn’t allow for some inherent flexibility, seems inadvisable at best. The chances are that factors outside of your control will have an impact on how your organisation conducts its business and it is likely that you will need to alter your approach to keep pace.
Unfortunately, many organisations take a purely ‘legal’ (protection) rather than business outcome view (enabling) when structuring a contract. It’s quite common for suppliers or clients to provide generic terms, sometimes partially altered to suit the project; but these will often be poorly aligned meaning that they are less likely to (a) drive the right behaviours between each of the parties, and (b) provide the right foundations to include the right pre-contractual due diligence to ensure the perceived business outcomes will be achieved in the most accelerated time that is practical.
As for internal and specialist external legal teams, we often find their technical knowledge of contract law is very good. However, we also often find that they need operational support in order to understand how to structure contracts to drive best behaviour in relationship management, changing objectives and project management. It’s important that when drafting a contract for long-term projects, that allowances are made for change. As we stated earlier in this article, we recommend that a contract allows for such revisions and changes at least bi-annually. Even if you are receiving a fantastic service, objectives can change and increase over time, so flexibility in your contract structure is fundamental to project success.
If you’re finding an outsourcing relationship is going awry, but would prefer things to go more smoothly than the Southwest One Termination, download our ‘Failed Outsourcing Relationship‘ white paper for free.