If you were offered an opportunity to save your council tens of millions of pounds you might be tempted. The question is, what time and resources would you invest into scrutinising the shared services deal? How much due diligence would you run through to check that what is on offer is realistic and plausible, and how much research would you do to determine whether others have been in a similar position to you and now have lessons to pass on?
The ghosts of shared services past
The area of shared services has a sketchy history with some very public failures, such as Southwest One, and what happened between IBM and BT; which we have discussed at length in numerous articles. And yet the theory that by joining forces with others you may be able to benefit from economies of scale – which could mean stronger negotiating power for smaller entities, pooled resources, and so forth – is still sound. So when public sector news outlet, LocalGov, a few months ago reported that Hart District Council, Havant Borough Council, Mendip District Council, and the district councils of South Oxfordshire and the Vale of White Horse, were about to take the plunge with Capita and Vinci as their private sector partners it wasn’t surprising. But one can’t help but think of the failings of similar arrangements that have gone before without a sense of foreboding.
The article talked about a nine-year agreement between the parties, over which time they were expected to save more than £50 million through outsourcing their HR, IT and finance services to Capita, and their facilities management and property services to Vinci.
The history of shared services shows us that while these arrangements make perfect sense on paper, in the real world, issues such as misaligned agendas, budget pressures, scarcity of resources, and a lack of clarity around business outcomes means that unless handled with the utmost care, such relationships can be doomed from the outset.
Another major issue that has plagued similar relationships is the viability of the procurement process, i.e. the plans and prices offered by the winner. Competition is stiff in the outsourcing market, so the prospect of shared services can encourage bidding firms to overestimate the number of participating or potentially participating organisations. This can easily result in the winning firm having to bid low to win big, but when the number of participants turns out to be low, they struggle to deliver on the promises they made at the procurement stage.
Deputy Leader of Hart District Council, Councillor Brian Burchfield’s statement that this “is a groundbreaking contract and I invite other councils across the country to come to speak to us about joining our group to discover savings for themselves”, echoes sentiments similar to those shared during the birth of Southwest One. Looking back, we can see that Southwest One wasn’t commercially sustainable without the participation of more organisations. We can only assume that the shared services agreement entered into by Hart District Council is based on a more robust commercial model.
If you are considering a shared services arrangement, then it’s important to remember that given the right preparation, due diligence, genuine cooperation, and care by all parties, shared services can deliver on its promises. But be mindful of the following four lessons that other less successful shared services arrangements have left us as their legacy:
Four considerations for shared services success
1. The client function
An increasingly important element of any successful outsourced project today is the intelligent Client Function (ICF) team. A staple feature of many a failed shared-services relationship is a failure to prioritise the needs of their ICF teams, whether in people or capabilities. Larger organisations often have the in-house skills and expertise to draw upon to form a robust ICF team. The challenge for the five councils in this story is their size. It’ll be interesting to see whether they form an ICF team by taking members from each council, and whether external support will be needed to build a team capable of maximising the opportunities of a long-term partnership delivering critical services. If they do decide to build one central ICF team, this hasn’t yet been discussed publicly. One would hope that this is top of mind for them so that they may have the best opportunity to maximise productivity, knowledge and outcomes.
2. Due diligence and commercial sustainability
When Councillor Brian Burchfield reportedly invited other councils into the fold, it might remind you of Southwest One and the allegations that IBM won the contract by undercutting its competitors on its belief that many more councils would join the shared services arrangement. So, in this case, we’d hope that the procurement teams involved will have undertaken a review of the commercial sustainability of the agreement to ensure that the partnership can still deliver the promised outcomes with just these five participating councils. For others who are interested in setting up a shared services agreement, it’s important to ask a number of questions: Is your agreement commercially sustainable based on just the number of confirmed organisations? Did other organisations assess the commercial sustainability of the shared services deal? What benchmarks and mechanisms have they in place to offset the risk of rising prices? What clauses do they have to use as leverage if the supplier fails in their obligations? These are questions you’ll already be asking yourself, but on the off-chance that you require more manpower, this might be the point where a trusted third party should be called in to conduct a full and thorough due diligence and commercial sustainability assessment.
3. Importance of flexible contracts
The agreement between the five councils and Capita/Vinci is to run for nine years, and nine years is a very long time for some sectors. For instance, part of Capita’s remit is to provide IT services to the council, and, as technology can change at pace becoming more efficient and cheaper while offering the same, or improved, capabilities, some mechanism must be put in place within the contract to address this. It’s vital that a bi-annual review clause is built into your contracts so that you can ensure that the service quality and capabilities delivered keep pace with the rest of the market without incurring extortionate costs. These review periods will give you the opportunity to test the market and benchmark other alternative means of service provision to ensure that you’re always getting the best value from your supplier, or the best quality – depending upon your objectives.
4. Benchmarking and performance management
In contracts such as these, because there are multiple parties involved, and their joint spending power creates at least part of the means by which to realise savings, should one party choose to exit the contract due to poor performance, it can be problematic to do so and also make things incredibly difficult for the others. However, clearly quantified and reported performance that holds parties to account for their contractual obligations can work to maintain standards and, therefore, keep parties to the shared services happier. In the case of these five councils it would be important to understand whether they have one binding contract for all parties, or whether they each have their own contract. The goal though is for those in such an agreement to want to stay together, so benchmarking and effective performance management through the fastidious monitoring by your ICF team and regular contract-wide reviews should provide the analysis from which to determine whether standards are being maintained and the relationship is on track.
For all those who are considering shared services as a frugal way forward, be mindful of the need to invest adequately in your ICF team and the vital importance of analysing every aspect of the proposed solution, and to build flexibility into your contracts so that they may keep pace with your project and needs, as well as setting appropriate goals to determine progress by.
Shared services can work but the road to success is littered with opportunities for failure, so proceed with caution.