Rupert Soames, the CEO of Serco (and grandson of Winston Churchill), recently gave evidence to PACAC (the Public Administration and Constitutional Affairs Committee). This was part of an enquiry into the work of the civil service as a result of a significant rise in outsourced contracts.
Mr Soames is reported to have suggested that the government was knowingly overloading private sector organisations with far too much transfer of risk to suppliers on some projects.
These are interesting comments. If they are substantiated, what should be done to fairly and equitably balance the scales in complex outsourcing relationships?
Soames is reported to have said:
“What has happened is two things: the government got into a place where it was advised to do massive transfer of state risk onto suppliers… And it became a badge of pride to go and transfer as much risk onto suppliers as you could. At the same time, suppliers, I think, through foolishness and incompetence — certainly on our part on a couple of things — were foolish enough to say ‘yes’.”
Over the last 88 years Serco has grown into a lead player in public sector outsourcing, but in recent times you could be forgiven for assuming that this long-term relationship might have become a little strained. The 2013 tagging scandal on their shared contract with the Ministry of Justice had an undeniable impact on relations.
And Soames is reported to have suggested that the ongoing COMPASS contract – to house asylum seekers – will cost them £120m in losses, due to a combination of ill-considered bidding which made the relationship unprofitable and what Soames described as “greater sophistication and toughness in the Cabinet Office that, in my opinion, led to the pendulum on risk transfer swinging too far”. The implication being that there are elements within the public sector who, on occasion, exert pressure on outsourcing relationships, leveraging their buying power to minimise their own political risk.
Soames did state that this was not a blanket issue as most public sector contracts “work really fine”. But he raises an important point, that while it’s in the public’s interest for the government to do all that it can to negotiate the best rates and terms from their private sector partners, this can be taken too far.
If a supplier feels as though their arm has been twisted and there is not enough in it for them to get excited about the project or to invest their best people and resources, then you’ll get what you’ve paid for – a disgruntled workforce, a lack of innovative input, and an undercurrent that could escalate into relationship issues at any point during the project.
The solution is to (a) educate both the supplier and client in the benefits of acting ‘intelligently’ and (b) to build capability in driving maximum value in these relationships. In an intelligent client/intelligent supplier environment, both sides take stock of their responsibilities to the relationship – recognising both the benefits of doing so and more importantly, the risks of not doing so – and work towards mutual interests that converge on the expected outcomes of the project.
Intelligent Client Behaviour
Soames has said that his company will be covering the losses, which he clearly believes, at least in part, were down to the shift of risk to his organisation in the negotiation process. But it is important for the public sector to appreciate that for any relationship to be successful both sides need to take responsibility for developing, maintaining and repairing that relationship when it goes awry.
Clients do not have the luxury of washing their hands of problems just because they can. If they are to achieve the outcomes they expected from the relationship, then there is a responsibility to contribute to solutions, or at least the investigation of their contributions towards a solution. After all, it is in their best interests to do so.
Part of the reason for the losses Serco is expected to experience on the COMPASS contract, Soames announced, is because of an escalation in the number of asylum seekers they have been required to house. They are well beyond the initial estimates given by the government. Clearly the government have a responsibility to articulate their expectations in detail, but, of course, Serco must also take responsibility for critically reviewing the practical known or expected outcome before agreeing the contract that bound them. It seems this was not the case, as Soames told the inquiry “We just sucked that up” when referring to the additional costs his company would incur as a result.
How should the government drive better value in its complex service relationships?
The eight elements of Intelligent Client Behaviour, listed below, have been formulated by BPG after much research and personal experience of over 500 major service relationships.
- Articulating, quantifying and communicating ‘What Good Looks Like’ for the client organisation once the service has been implemented
- Client Function Skills and Resources
- Delivery Strategy
- Objectives Management
- New Project Prioritisation
- The Management of SMART KPIs
- Managing the Service Innovation Process
- ‘Intelligent’ Contract and Relationship Management
Intelligent Supplier Behaviour
An ‘intelligent client’ is only one side of the solution. The Government needs to encourage ‘intelligent supplier’ behaviour also. It can sometimes be the easier course to simply allow a client, especially an important one, to ride roughshod over your relationship, dictating terms that are weighted in their favour. But to do so would do both of you a disservice. And there is little point in complaining about fairness after the fact if you did not conduct all appropriate supplier due diligence at the outset and speak up as a critical friend that this is likely to drive misaligned behaviour and will impact upon the project’s prospects.
We understand the commercial pressures on both sides to get the best ‘deal’ to look good, to keep costs down or profits up. These have to be part of a balanced scorecard process that puts the business outcomes for both organisations as a shared objective. This will prevent the ‘short-term win’ mentality that can have a long-term negative effect on both the relationship and its potential for achieving expected outcomes.
We’ve done much research into the subject of the intelligent supplier over the years. There are eight key elements that must be present for this behaviour to breed consistent relationship success:
- Understanding, Supporting (and Challenging) the Client’s Business and Operating Strategy
- Supporting the Client’s (changing) Business Objectives
- Evidencing ‘Commercial Trust’
- Constructive Critical Friend
- Managing the Innovation Process
- Contract Terms – Reshaping and Developing
- Client Engagement Function
- Service Areas Domain Expertise
When strategic partnerships between the public and private sector go well they can achieve incredible success stories. And, while the media love a tragedy, these well-run, collaborative engagements do still exist.
One such example would be the Aspire agreement between HMRC and their private partners, Capgemini and Fujitsu. This 13-year relationship has already garnered praise from the National Audit Office (NAO) for its incredibly high implementation success rate (with only 5% experiencing high-priority incidents), the 30% overhead savings it generated in its first 10 years, relatively low investment in turnover terms, and the improvements already seen in systems, turnover and service levels.
Though central government policy has necessitated that this partnership ends this year, this does not take away the immense success the relationship has achieved, and the example it offers to all others when it comes to a well-run and professionally managed collaboration between public and private entities.
Whether the public sector at times leverages its buying position to transfer more risk to their suppliers than they should responsibly do, is something still under review. If this is the case, then it would be beneficial for all parties to remember the importance of the lessons of the intelligent client and intelligent supplier above. Together great things can be fashioned – apart they look far less rosy.
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