IT Outsourcing: Managing the relationship

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This article is drawn from a discussion being published in stages on FT.Com, co-ordinating with coverage in the FT Digital Business supplement that began on April 12 and continued on May 10. The discussion covered issues emerging from PA’s recent global survey of attitudes to IT outsourcing, in which customers, outsourcing service suppliers and lawyers were interviewed.

To facilitate discussion at the panel event, PA and FT encapsulated the contents of the study into four propositions, broadly following the four chapters of the study. This article looks at Propositions Three and Four:

Proposition Three, post-contract management issues: the study finds considerable confusion among clients about the necessary size and calibre of the ”retained organisation” whose task is to manage the relationship with the supplier in the operating phase of the deal. Suppliers complain about the immaturity of the people they have to deal with, but some have not helped by suggesting clients do not even need a retained organisation.

(Findings from PA survey: only 51 per cent of respondents took the costs of the retained organisation into account when developing their business cases. Among clients, 45 per cent reported they had underestimated the effort required to manage their supplier while only 4 per cent said they had overestimated it. Sixty-five per cent of suppliers felt their clients had underestimated the level of effort required, while 48 per cent of suppliers thought that clients’ retained teams’ skills were immature.)

This relatively neglected topic stimulated a lively debate among the panellists. While considerable attention has been devoted over recent years to the potential benefits of IT outsourcing, there has been little discussion of what kind of retained organisation companies should establish to deal with their outsourcing supplier.

How many people, and what kind of people, should companies have in these organisations or departments? It seems that this is a difficult issue to get right, and there are pitfalls in doing too much or too little.

Ron Jarman, global head of procurement at Reuters, noted how the advice from suppliers on this issue could vary widely: “I have had situations where a supplier has said, ‘You don’t need a retained organisation and you can cut that cost out.’ I’ve also had examples of suppliers coming in and saying, ‘I’ve got 10 finance people managing this deal on my site and you’ve got a third of a person. I can’t do my job unless you increase your retained organisation.”

Either way, he said: “If you haven’t got a retained organisation in place you will soon learn you need it.”

A retained organisation that is too big can clearly be a problem for the supplier. It will be too much into the detail, managing the service rather than the supplier, said Ben Wishart, group IT director at Whitbread – with the result that the supplier spends the whole time having to explain itself.

“That kind of micromanagement drives suppliers mad. They are put into defensive mode the whole time, having to explain every action,” said Ian Roy, business development director, Capgemini UK.

Another frustration for suppliers, he said, was if the retained organisation acted as a “gatekeeper” whom the supplier had to get past if it wished to talk to the client company and suggest new ideas. “Don’t hold us back, let us talk to your clients, but sometimes that’s seen as a no-no because we are seen as chasing revenue, chasing sales.”

Mr Jarman agreed that there was an issue here for client companies to consider. “It’s about time we recognised that the retained organisation can act as a constriction point between the two organisations and can therefore inhibit the conversations that you need to have. The retained organisation should be there to co-ordinate, consolidate and leverage all of those conversation points,” he said.

The conclusion has to be that, for a retained organisation to succeed, it is “all about quality rather than quantity” as Mr Roy put it, “because if you’ve got too many people [in the retained organisation] they will make things difficult.

But what sort of people? Mr Wishart recommended a mix of skills, covering contracts management, commercial management, technical and business process activities. “It’s very important to have what I call business process designers, really hot business analysts, not just for analysing the problem but actually being able to turn the coin over and say ‘there’s a better way of doing this, now let me go back into the vendor organisation and have them work out how we do the IT bit of this but let us work with you (the business operator) on how to do the business bit’.”

Jonathan Cooper-Bagnall, a member of PA’s management group, felt that organisations needed to think more deeply about the skills they would need in a retained organisation. What was lacking, he said, was a step back to first principles of proper organisation design, to work out functions and capabilities, which took time, effort and resources. The result, often, was a “back of a cigarette packet organisation design that can be top-heavy, which results in micro-management and a failure to retain the controls the client wants.”

On top of this, as the relationships between clients and suppliers developed and matured, the retained organisation may need to change too, he said. Andrew Baxter, of the FT, noted here that many large companies would have a whole range of outsourcing relationships at the same time, at various stages of development and maturity, raising further questions about the composition of the retained organisation.

Finally, David Hamlett, partner at Wragge & Co threw another issue into the mix, the question of people transfer, which in the UK might occur under TUPE (Transfer of Undertakings, Protection of Employment) legislation. “You usually find that the people you want as your retained organisation, certainly on a first-generation outsourcing, may well actually transfer to the supplier, and you’ve actually got to go through a mechanism to retain them. That’s a legal mechanism, but also the human element comes in here: do these people want to stay with the organisation which is saying ‘I want to outsource you,’ or do they want to go to the supplier who can offer these wonderful opportunities for the future?”

As ever with successful outsourcing, having the right people in place and forging the right relationships is just as important as getting the contract right.

Proposition four: Missed opportunities in business transformation: suppliers want to take more and more of this higher value work and less of the ”bread-and-butter stuff”, but many clients are reticent, as they are worried about suppliers’ ability to deliver and often prefer to keep their business transformation programmes in-house. A lot of this stems from dissatisfaction about the results achieved from earlier, less ambitious outsourcing projects, which in turn stems from all the above misunderstandings.

(Findings from PA study: only 32 per cent of clients have used IT outsourcing to deliver business transformation. Of the remainder, just under two-thirds said they preferred to maintain control of their transformation programmes. Sixty-three per cent of suppliers said they did not get transformational contracts because clients perceived the risks as too high. Only 35 per cent of clients thought IT outsourcing would be used to enable business transformation in the future, compared with 79 per cent of suppliers and 72 per cent of lawyers).

There is little doubt that transformational outsourcing is – at least from the suppliers’ point of view – flavour of the month. As Fons Kuijpers, another member of PA’s management team, put it: “When we ask the supplier community about where the market is going, and where their product services offering is going over the next two to four years, this [transformational outsourcing] is what they will come out with. It’s great that the suppliers are thinking about this, but what do clients actually want? What service do they want to buy?”

The discussion suggested that there was a disconnect between where suppliers wanted to go with transformational outsourcing and how far clients were willing to let them. At present, said the FT’s Baxter, the study by PA showed that many clients were freezing their supplier out of the transformational process, underlining their mistrust in suppliers’ ability to deliver.

Jarman at Reuters said that in some cases clients should be handling transformation programmes themselves. “But I could well believe,” he added, “that there are other cases where there might be opportunities that we are missing out on because the problems with our current suppliers are holding us back.”

The dilemma over whether to handle a business transformation in-house, or to entrust it to a supplier, was encapsulated by Cooper-Bagnall at PA. It was not surprising, he said that clients were unwilling to outsource their business transformation when there were already issues with non-transformational outsourcing. On the other hand, he said: “If you want to do something truly transformational then the chances are that you haven’t already got the capabilities and skills to do that ... you’ve then got to make a choice about whether to invest in the new skills and build that capability in-house or go to somebody who’s already got the capability.”

As with other areas of outsourcing, collaboration is seen as the key to success. “In any sort of transformational deal no client would say ‘There you go, transform my business and give it back to me when you’ve finished,’ it’s a completely collaborative approach that leads to success,” said Ian Roy at Capgemini.

There is also the phenomenon, common to many organisations, in which outsiders’ organisations are listened to more than insiders, and this can help the supplier who is involved in proposing a transformational outsourcing deal. As David Hamlett at Wragge & Co put it: “We’ve all got experience of situations where you bring in an external consultant to put some training programmes on, and you all say, ‘Isn’t that absolutely marvellous?’ The idea was there already and you all knew it beforehand, but because an outsider’s said it it’s sort of listened to.”

Even so, said Mr Hamlett, a supplier does have to know the client’s business well to be able to come up with the right sort of ideas. Quite how often they can really do this is debatable, however, and Ben Wishart at Whitbread was sceptical: “It’s pretty rare…that a third party can go into an organisation and say, ‘We’ve got this great idea, let us go and sort it.”

Conclusion: The panellists then looked at the merits of using consultants before some concluding remarks emphasising the paramount importance of building a good relationship from the start of an outsourcing arrangement, one of the key points to emerge from the PA study. “If you start off badly and the relationship is not good you’ve sewn the seeds for something, which you’ve then got to endure for the next two to four years,” said Mr Kuijpers. “It is very difficult then to fight your way back from that. I think this is at the root of the mistrust that often exists between two parties.”

Mr Wishart summed up the discussion with a plea for realism on the part of customers: “Maybe you have to accept that it isn’t all going to be easy. It doesn’t matter which supplier you deal with, change is just fraught with stress and difficulty and it’s unfortunate that at the beginning of every one of these relationships you’ve got a period of change, so it is guaranteed that you are going to get off on the wrong foot. If you don’t go into [an outsourcing arrangement] with that understanding and some discussion about how you’re going to handle [this period of change], then life’s going to be hard forever.”

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