If your outsourcer’s shares had taken quite a beating, with the company’s value dropping by a quarter or more over a matter of days, you might be encouraged to start asking questions of those in the know as to whether this was an indication that your service delivery may be impacted as a result of whatever it was that caused the market’s view of the business to change.
News that outsourcing goliath Mitie had suffered such an event in September was enough to make us ask ‘why’ and to reconsider the age-old question of what to do when you’re worried that the outsourcing firm you rely so heavily on may be going through challenging times?
Mitie’s success over the last few decades is well documented. This outsourcing and energy service FTSE 250 company, founded in 1987, has grown under its current stewardship from a £566m to a £2.2bn a year turnover business, while at the same time tripling its profits. It’s an international business with tens of thousands of staff based across the UK and Europe. And, it has fingers in a number of pies.
However, the recent profit-warning announcement, stating that operating profits to the end of September would be ‘very significantly lower’ than expected, caused the company’s share price to dip by 26%. From 268p per share on Friday 16 September to 191.1p per share on Monday 19 September (according to the London Stock Exchange), in one fell swoop, a reported £240m was wiped off the value of the company, and the long road back to normality began.
So why (in the operational sense rather than the legal requirements of the Stock Exchange sense) was this announcement made? What happened to this company which proudly announces on its own website that it’s “one of only two FTSE 250 companies to have grown earnings per share for over 29 consecutive years” to bring it to a point where the market appears to have lost so much confidence all at once?
Numerous reasons have been offered for a decline in profits. These include Brexit and contract delays to cuts in social housing rents, social care budgets, and low growth rates in the sectors the majority of their businesses are grounded in. But the two most discussed across the media seem to be:
- Vulnerability to wage inflation. Given the number of those working for and through Mitie, their demographic and the salary levels they command, this is an organisation where a number of its services run on tight margins. Therefore, when any upward movement on wages takes place, it is bound to have a significant and adverse impact on their bottom line. On 1 April 2016 the national minimum wage rose from £6.70 to £7.20. This rise will almost certainly have been uncomfortable for an organisation such as Mitie.
- Shifting sector aspirations. One of the fundamental issues that has been cited as reasoning behind the situation that led to the recent profit warning announcement, is the company’s shifting sector aspirations. Starting out in cleaning, engineering and painting, the business expanded into facilities management, maintenance, waste management, security, compliance services, document management, catering, landscaping, PFI, and pest control. This all sounds like a blossoming and diverse organisation. However, in 2013, the company exited from its mechanical and electrical services. Energy consultancy, once a flagship service for the organisation, has become marginalised over the last few years. And in September this year it was announced that they were to review their long-term plans for their healthcare business.
In September, after the profit warning announcement, Mitie’s Chief Executive, Ruby McGregor-Smith, told the Telegraph: “It’s been a really unusual start to the year. We’ve had a significantly challenging first half, but we are expecting some rebound in the second half. The group has a really good pipeline and order book, and we have some really great work lined up.” So, an upbeat response to the market’s reaction to their situation.
However, at the beginning of October, Lady McGregor-Smith announced that she would be stepping down to be replaced by Phil Bentley, the former chief executive of Cable & Wireless Communications (CWC). With the profit warning still ringing in many ears it would be reasonable to assume that any more surprise announcements that come to light might increase worries as a senior management change can sometimes be a traumatic experience for an organisation. But change can also be a good thing, and the markets seemed to react positively to the news, with Mitie shares increasing in value by just over 2.5% on the day of the top job shuffle announcement. Mr Bentley seems confident that things can be turned towards a rosy future again in his statement: “Although it is a challenging time for the sector, we have a strong platform from which I am certain we can now prosper.”
There are many potentially ‘traumatic’ events that may cause you to worry about your outsourcer’s ability to maintain focus on your service delivery needs, from a profit warning to a takeover or management buy-out, legal issues, or even media obsession with a failed relationship impacting on a company’s reputation. If you have reservations about your outsourcer’s ability to maintain service delivery consistency, there are four steps, gained through the evidence of dealing with hundreds of these relationships, you can follow to assure the delivery process:
Step 1: Gain true insight into your outsourcing partner
The media can blow things out of proportion when a relationship starts to wobble. Rumours can be unfounded and dips in market confidence can be short-lived. The first thing to remember is not to jump to conclusions. Instead, assess your outsourcer’s situation based on considered and careful analysis.
Key to this analysis is the depth to which you know your outsourcer. And this should start right from the outset of your relationship with the help of your carefully selected Intelligent Client Function (ICF) team, structured and assembled to work closely with their outsourcing counterparts.
Your team will consist of talented individuals gathered from in-house departments or externally sourced for the task, with operational, technical and specialist knowledge relevant to the relationship. Formed at the inception of the business case to outsource certain aspects of your service delivery, this team’s consistent presence through procurement, production, implementation, ongoing relationship management, and as the client-side face of the project, places them in a unique position to build strong, trusting, working relationships with all involved in the supplier’s organisation.
Because of the closeness of your ICF team’s relationship with them, they are far more likely to be the first to know of successes and failures, trials and tribulations which could impact on the wide outsourcer/outsourcee relationship – the early knowledge of which could help to minimise risks and maximise opportunities for success.
So Step 1 is to make sure that your executive management team remains committed to supporting a skilled and adequately resourced ICF team to be your early warning system for issues that could challenge both supplier and your service delivery relationship. As part of your governance, your head of ICF should have a seat at the executive table, providing you with a valued voice so their analysis is factored into the determination of whether news of your outsourcer’s troubles is, in fact, cause for concern.
Step 2: Intolerance for SLA deviations
Should you not have an ICF team to give you forewarning of issues that may affect your project, you will get an indication of problems brewing once they start to manifest themselves in the form of falling standards or more strained relationships.
Careful monitoring of progress on your project will start to reveal that deadlines are being missed, productivity issues are uncovered, a lack of innovation becomes apparent, or you gradually recognise the absence of quality staff you’ve been accustomed to relying heavily on for their efforts and input to date.
Your ability to recognise these signs as part of a larger problem, which if left unchecked could spiral out of control, can make all the difference. In turn, the manner in which you address these issues with your supplier will also have an impact. Go in too strong and this could compromise the relationship you have painstakingly built so far. Do too little and this could be seen as a weakness to be taken advantage of.
It is vitally important to make clear that you are aware of a fall in standards within your delivery process. It is also fundamental to be aware of how the contract can encourage really strong behaviours to drive better value in these circumstances. Where behaviour remains poor, it is also vital to be aware of the acceptable damages you can wield in discussions with your supplier.
Use damages as a last resort (albeit you will have to follow the contractual issues escalation process to make sure you comply with the contract, otherwise you may lose your right to escalate formally if service delivery does not improve). Note that if you do use them, these may be the only way to ensure that your supplier recognises the seriousness of your intent to not tolerate material and consistent deviations from agreed service delivery standards.
Discussions held from a strong, informed standpoint, rather than blind threats, are more likely to reveal the true reasons behind why your supplier’s standards have slipped. From this knowledge you can then better determine how to proceed for the good of your relationship.
Step 3: You don’t have to be a legal eagle to know your contract
Your contract should be a clear and concise guide to how to achieve the goals each party agreed to at the outset of their relationship. It should also be a step-by-step escalation tool if service delivery objectives are not being achieved as they should.
Recourse through your contract can be perceived by both client and service delivery partner as an aggressive move. However, a well-structured contract that has its first principles in driving really good behaviours between parties, that is followed up with a well-managed operational management process, will have seen both parties discussing and agreeing on not only the rewards of a successful relationship, and the route to achieving them, but also a sensible, logical and fair way of resolving disputes, alongside the circumstances in which they should be invoked.
While wobbles arise in any service delivery relationship, the spirit of this cooperative aspiration should be upheld during your discussions regarding productivity levels or standards.
- Know your contract. Understand intimately what clauses help to drive really good behaviours, and those that do not. Know your roles and responsibilities of what you are and are not allowed to do, the circumstances in which recourse is not only allowed but expected and always review areas you are unsure of before speaking to your supplier about them.
- Service level agreement. Know what your contract expects from your supplier, but also what it expects from you. Have you been complicit in the fall in standards or productivity through your action or inaction?
- Use your contractually agreed escalation/damages process sparingly, but do use it if there is no other choice, because empty threats can encourage downward-spiralling behaviour patterns.
- Supplier replacement. Any good contract has provisions for ‘step-in’ when your service delivery has become so consistently poor, that no other practical option is left available to you. However, it is important to appreciate that this is an ‘everything else has been tried and nothing has worked’ option, used in the event that it is the only way to protect your service delivery from terminal decline. The reason for this is that either step-in, or an early exit from your contract, can be a very costly, time-consuming and painful experience. Make sure your business case to activate either of these options is evidenced objectively.
Step 4: Fail to prepare and you’re preparing to fail
There are many ways in which you can encourage the right behaviour to drive on-going real value and head off the risk of poor performance:
- ICF team. As already mentioned, or at least implied, your intelligent client function team should have been selected to drive success in your relationship. When recruiting for this team you will need talented individuals from an operational and project-specific background (often technical), but you’ll also need them to have the personality to rapidly build trusting relationships in the workplace, and the insight to recognise issues several steps ahead from which they can assess the remedial steps.
- Contract development. Also mentioned above is the importance of a deep understanding of your legal agreement. But it is the formation of that contract, the depth of consideration that has gone into thought about the best routes to success, clear performance management and the clearest path to dispute resolution that will keep the subsequent relationship on the straight and narrow. Take your time, ask the right questions of the right people, and consider very carefully the temptation of adapting a standard contract template for outcome/objective led services, as it will rarely offer the flexibility or detail that you require from an agreement designed around your specific relationship’s chances of success.
- Have a ‘Plan B’. Should you worry about your current supplier – because your ICF team are telling you that you should – you’ve recognised that the signs, or financial damages have not made a jot of difference to falling standards – you are perfectly within your rights to have a ‘Plan B’. As part of your ongoing governance, you should always be talking with alternate suppliers to get new perspectives on everything from how service delivery innovations in the market are moving, through to investigating the outline complexities of potentially moving the relationship, in part or as a whole, to another provider (or even in-house). While the process of changing the process or supplier of service delivery may be painful, there will be times when this is the only sensible option open to you. So be prepared and do your homework so you can approach this option from an informed position.
While Mitie shares are today still not up to the level they were, we believe there are some significant changes afoot which may see this outsourcing giant recover from the profit warning aftermath. Promises of millions of pounds of cuts and a change in the top job – with Lady McGregor-Smith to be replaced by ex-CWC chief Phil Bentley in November 2016, who is reported to be very upbeat about the company’s prospects – could provide the means for recovery. We’ll have to wait and see.
Should your supplier be going through challenging times, remember the four steps listed above. Some of the lessons noted will require you to have considered them well ahead of time, building them into everyday relationship development with your suppliers. All of them are important for minimising risk, maximising holistic issue awareness, and for improving your prospects for discovering or developing a solution for resolving any material disputes or potential strains that affect your outsourcing relationship.
Photo Credit: iStock, Andre Berezovskii