Understanding and misunderstanding: the debate in full

Edited transcript of FT/PA Consulting Group IT Outsourcing panel discussion, held on March 15 2006.

This discussion will be published in stages on ft.com, co-ordinating with coverage in the FT Digital Business supplement beginning on April 12. The discussion is based on issues emerging from PA’s recent global survey of attitudes to IT outsourcing, “Understanding and misunderstanding”, in which customers, outsourcing service suppliers and lawyers were interviewed. It is believed to be the first time all three sides have participated in the same study.

To mirror the study, PA invited customers, suppliers and lawyers to the panel discussion. Members of the panel were:

Clients: Ron Jarman, global head of procurement at Reuters; Ben Wishart, group IT director, Whitbread

Supplier: Ian Roy, business development director, Capgemini UK

Lawyer: David Hamlett, partner at Wragge & Co

PA: Jonathan Cooper-Bagnall and Fons Kuijpers, members of PA’s management group

FT: Andrew Baxter, senior writer, Special Reports Department

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.

Proposition One: Getting things right from the start

Despite negotiations that can last for months, the clients’ view of what they want to achieve from an IT outsourcing deal is frequently at odds with what suppliers perceive the clients’ needs and wishes to be; suppliers also point to clients’ unrealistic expectations and failure to understand the implications of their strategy. There seems to be more going wrong than simply poor communication – not least of which is the difficulty of getting the procurement aspect right.

Baxter (FT): Maybe this first proposition is the most important. Many of the things that seem to happen at this stage – mistakes, errors and undeclared assumptions – seem to work themselves through to what follows. It’s also the section where clients, suppliers and lawyers are particularly involved – obviously, once you get through to the operation of the deal, I guess the role of lawyers would be less unless there’s some huge problem. [laughter all round]. Maybe the simplest way of starting is to get all four of you [clients, supplier and lawyer] to give your response to the proposition as you see it in terms of your experience and your different backgrounds. Does what you read there actually resonate with you? Does that make sense to you? Do you disagree with it? And then we can take the next step of saying, if mistakes are being made, what can the three parties do to make sure that it doesn’t happen again?

Jarman (Reuters): The last point really resonates for me – this point about the difficulty of getting the procurement aspect right. The thing is, I’m not sure that it is necessarily that difficult to get it right – it’s not easy to get it right either but I think people make it difficult to get it right. We were talking briefly beforehand about outsourcing being a mature market. David [Hamlett] was saying that many of the people going into it might be going into it for the first time. Also, with most of the decisions we make in business, we can probably change them within one to two years quite easily. Companies are famous for reorganising every two to three years…so most of the things we do, if we get them wrong, we can change them in one to two years. But when you go into something like IT outsourcing it’s for five, seven, ten years – you can’t change it quickly enough and I don’t think people understand what the issues are when they go into it. Also, without pointing the finger, I think that suppliers need to recognise sometimes when they’ve got bad business. I don’t think it’s in the supplier’s interest in the medium term to take on bad business, sometimes clients will need to listen and I accept they’re not good listeners all the time, and I’m sure some of the advisers around the room might feel that as well, so clients need to understand what they’re getting themselves in for. I’d like to see suppliers, because you do it all the time and we tend to do it not so often, saying to us ‘look, you’re doing this wrong’, you’re approaching the aspect of procurement in the wrong way, we don’t understand really your objectives unless you explain it properly’. And I think all clients should recognise that these are important sourcing decisions and need proper procurement support, sometimes this already exists within clients but isn’t always used.

Roy (Capgemini): For me I think the issue of understanding objectives is a two-way process, and a lot of the procurement process is about the supplier trying to understand what the client is trying to ask for. Initially the discussions about an outsourcing arrangement may be expressed in terms of availability of service and cost. But as a provider we need to know what impact the IT has on the business to determine what kind of service and what commercial arrangements would be right. There is an enormous range of possibilities, and for a new relationship to be successful, it’s important to get to the bottom of the business priorities. For a manufacturer it could be the impact of the IT service on the supply chain, or it could be about how IT supports growth aspirations. But getting this level of understanding is made more difficult if a procurement process starts as adversarial. I tend to spend a lot of time in the energy/utilities sector, where there is a pseudo public-sector style procurement process. If the process is procured under OJEU (Official Journal of the European Union) rules, the initial phase is run at arms length and can often be by means of correspondence alone e.g. PQQ, RFI issue and response. This means that there is often very little dialogue between the client and supplier, which means the supplier is trying to interpret the written instructions from the client or adviser. This may lead to some initial misunderstanding or incorrect assumptions. It’s hardly surprising that when we come in we’re not going to understand what each other is saying if we’re doing it by written communications. One of the things I would like to see is an intermediary sitting in the middle of this that can helping the client get to a sensible number of suppliers that would enable a meaningful dialogue to take place. And we like clients to be represented across the board: we want the genuine stakeholders - not just the CIO, not just the head of procurement, the people that will actually be benefiting themselves – consumers.

Jarman (Reuters): It’s all about relationships ultimately, the process leads to ways we can build those relationships as you go along.

Hamlett (Wragge and Co): Could we just have a look at what we mean by client? Because, I think suppliers tend to get their team sorted, you spend time working together, you know how to operate and you know what you have to achieve. I find with clients it’s not homogenous: you’ve got the financial director saying: ‘I want this off my balance sheet by the year-end’, not thinking about how long it takes, and that’s a very common problem. But often what is lacking is stakeholder engagement from all the relevant functions within the client company, and so when we’re actually with the client what we try to do is engender that. Sometimes we’re told to get back in our box and shut-up and just do the job, and you find there is a lot of inter-office politics, and the thing is that if the client doesn’t get their message straight, there’s no hope in hell of them engaging the supplier as to what they really want. I can think of one particular [supplier] client whom I’ve done quite a bit of work with and they spend something like a million pounds winning each job. They’ve got a new rule, which is this: they will not bid for a contract unless the client has got a main board director who is sponsoring them, and sometimes they lose out because of this rule, but they say otherwise we are just wasted. We talked earlier about the clients being almost like virgins in this, but the thing is that the client’s people change jobs within the organisation probably less frequently than will the supplier’s, although you might find that the people negotiating on behalf of clients will change, they will say: ‘Oh my next project is this, I’ve got another one on the way,’ so the lack of continuity is an issue. The danger of course is that you end up with an ossified procurement agreement that only looks at price, and I’m thinking about the public sector now rather than the private sector.

Baxter (FT): That leads us on to another problem that is highlighted by the study and covered by our proposition. You have this phenomenon where there’s a very lofty idea formulating somewhere in the client’s organisation, related to what they want to do with the IT outsourcing, but somehow when it gets translated into a contract, those ideals or principles get lost in the detail of what is a legal arrangement, and everything comes down simply to getting the lowest-price deal.

Hamlett (Wragge & Co): And sometimes the lawyers are partially to blame for that, some lawyers try to stop their clients taking risks. My view is that my job is to point that out, and to suggest some mitigation strategie.

Jarman (Reuters): Let us decide which risks to take.

Hamlett (Wragge and Co): Yes, if you’re the client, it’s your decision. You have to take some risks. And that’s why I think it is import to have senior people who are experienced in negotiating, they don’t necessarily have to be skilled in IT, but they need to be skilled in negotiating long-term contracts. You can’t correct your mistake in two years time, you’re in it for say 10 years on average.

Roy (Capgemini): I think you can change it in two or three years’ time; suppliers recognise that the contract will have to change to meet the changing needs of the clients business.

Hamlett (Wragge & Co): Yes, you can make changes, but they would be within a contract so you’re changing it with almost one hand tied behind your back because it takes both parties to agree to a change. Whereas, in the non-outsourcing world you could probably just cancel the contract and go somewhere else, or if it’s internal you would just do your own reorganisation.

Baxter (FT): Ben, How does it work at Whitbread in terms of ensuring that your initial ideas of what you wanted to achieve from an IT outsourcing deal are actually achieved and put into practice?

Wishart (Whitbread): Three things come to mind in terms of ‘getting it right from the start’. One is about the procurement process: I think this inevitably gets ever so focused on what the financial elements are, and when it gets to 3 a.m. on the day we sign people will agree to small points to get the deal done, and that actually happens to be the key thing that we beat each other up about most in seven years time. But if you work with PA or one of the other advisers who can say to you ‘This is a good price’ probably you don’t need to spend the next three months trying to chip off another nickel and dime. Instead you can spend that time getting right into the relationship and establishing how it’s going to work at a deep level, not just ‘We’re going to have a steering committee that meets once a quarter etc. etc.’ but really deep down.

Second point: when we are looking to outsource IT we definitely want it to be cheaper so we’re looking for somebody who can deliver economies of scale on IT services. But, if they’re going to really deliver economy of scale they’ve got to do it their way not our way, and we want them to do it our way, and in three, four or five years time we forget that we wanted leverage and low cost and all we really remember is that certain processes are not being done the way we want it to be done. For example, our retail hospitality is very seasonal, and this is a big issue because often the leverage model is not built to understand seasonal variation.

The third point is, how do you plan for the unknown? We might decide to outsource with a company that has experience with IBM mainframes running bespoke systems, but in three years time we decide to go mid-range running say SAP, but that supplier may not have the same depth of skills at that particular point which means bigger decisions have to be taken.

Hamlett (Wragge & Co): I think part of the challenge also is that we do have a tendency to look at outsourcing agreements as one big holistic entity with everything bundled into it, rather than as something with different elements, all of which can be treated slightly differently. There are pieces within the outsourcing contract where, yes, cost is absolutely an issue if we want to drive delivery down to the lowest possible cost, and there are other elements of service delivery in the contract where we’re expecting innovation and suppliers to come to the table with new and creative thinking, and that doesn’t get coupled with low cost. Part of what needs to happen to solve some of these problems is to break these agreements down into their components. We have to start to help clients and suppliers think about why some of those disagreements and disconnects happen, and how we are going to solve that type of issue by getting common understanding on both sides of the table.

Jarman (Reuters): I think David [Hamlett] hit the nail on the head earlier when he said that as a client in any procurement exercise we need to make sure that all the stakeholders are lined up and we’re really clear about what it is we actually want. There’s always a multiplicity of requirements and a multiplicity of objectives, we’ve got to line those up and square those into one set. I think your point was that you often don’t see that in engagements. I think it’s a lot harder in outsourcing because the scale of the decision is a lot bigger, but I do recognise that clients do need to get it together upfront and be really honest with themselves on which one of perhaps five objectives has primacy.

Cooper-Bagnall (PA): I think you’re right. Here’s a fairly cautionary tale: we had a workshop with one of our clients - much like this discussion - we got all the senior stakeholders together and we were talking about whether outsourcing was right for that organisation, or not as the case may be, what were the key drivers and so on; we had a great discussion for an hour or so about what was driving the company and they came out with a bunch of priorities that seemed to be driving them towards an outsourcing decision. Afterwards, we met one-on-one with each of those stakeholders in another session, asking the same set of questions about what’s driving the transaction, what are your priorities. Then we pulled all that information back together and it was completely divergent, they had agreed on what the primary drivers were in the one-hour workshop but it turned out they didn’t really agree with each other at all. Somebody thought cost was the most important, someone else thought innovation was the most important, and a third participant was very worried about the risk of the transaction. When we pulled all that together and brought the same group back to show them the results, they realised ‘Oh, we’re not quite all in the same place’, so this brought about some new discussion and we got to a better outcome.

Roy (Capgemini): A lot of the deals I find myself working on are second- or third-generation outsourcing deals and one of the challenges I have from my point of view is that the prejudices of the previous relationship are brought to the table. Suppliers can do that as well, we’re not perfect, the challenge is trying to break down or get them to unlearn that if you like, and lose the baggage before we enter that sort of discussion, then we can start to build on the collaboration we’re about to enter into to. We use a bunch of tools and things to help us, such as collaboration workshops as I’m sure PA do, but I find that this, particularly in the second- or third- generation outsourcing deals, is a real issue - and it prolongs the whole discussion process as well.

Baxter (FT): Do you think there is a greater onus on suppliers and lawyers, given that you guys have been involved in all sorts of deals in all sorts of industries, to kind of tease out from clients what it is that they really want? Do you find yourselves doing that because they may not be sure themselves, or their views may diverge internally?

Roy (Capgemini): We try to tease out from the client the optimum solution, I suppose from the client’s perspective, they need to balance receiving this advice whilst running a fair procurement process. I agree that the needs of one stakeholder will often be different from some other key stakeholders in the process, and because of the process we’re forced to go through. As a supplier the cost of sale can be very high. I’m burning up a big budget just to get where I want to be in order to stay in the game, to reach the point where meaningful dialogues can take place. Perhaps there is a role for intermediaries here.

Kuijpers (PA): I think that’s the big difference between the private sector and the public sector, because in the public sector the customer has to show that it is absolutely super clean and must not give any supplier an advantage over anybody else. There are so many levels of scrutiny which are built into those deals, as there is a strong desire to demonstrate that tax payers’ money is well spent. As an adviser we understand what ‘scrutineers’ are looking for and understand the need for total impartiality. Therefore we sometimes say to suppliers ‘no, you cannot go directly to the client, give us the data first. This allows us to go from a long list to a short list and only then the parties can start talking in an open dialogue’. With the private sector it is easier and quicker.

Roy (Capgemini): I think that under new OJEU rules coming in next year, buyers are going to be compelled to actually spell out what the selection criteria are. If we second guess that, chances are we get it wrong.

Hamlett (Wragge & Co): It’s a good thing in some ways, it’s a bad thing in others because looking into some of the public sector procurement I’m involved with, I know that red tape is actually constricting the customer when it comes to appointing the person they want. As was said earlier on, relationships are key in outsourcing, we all agree with that but actually there are no objective criteria for relationships and very often, when it comes down to who you choose, it’s ‘Who do I believe is going to do it right?’ I remember very clearly a situation [in the private sector] where I’d been part of the selection panel to secure a supplier. We talked about who to go with and there was one very slick organisation, they were terrific, but we didn’t trust them, and there was another that was not as organised, but we were dealing with the managing director and he was going to deliver. A year later a problem came up, we got the MD back and said ‘This isn’t working, don’t you remember our meeting of so-and-so’, and he says ‘You’re quite right, I’ll fix it’. On a public procurement we couldn’t have done that, and that’s a very big difference.

Andrew, you asked whether consultants and lawyers have got a responsibility to educate, and suppliers too. I think the answer is yes, very much so because we’re the ones who have been through it, but you do find that certainly in my case you say to clients ‘Get me involved early because it will cost you less.’ It’s not often that a lawyer tells you how to cut your bill, but this will cut your bill and you will be happier in the end. If we lawyers could get in right at the beginning we could give some open advice as to how to go about it, before the straight-jacket of the procurement process begins.

Jarman (Reuters): I do think as a procurement professional that you’ve got good process and bad process. The public sector is constrained, but it does have some flexibility; I know a number of people in the public sector and they work hard to get as good a process as they can within the constraints. I think the procurement process for outsourcing sets the relationship you’ve got on day one. You can change the relationship afterwards but that takes time. It’s the way in which you work with the potential provider up to the decision point that actually sets the relationship going forward. A good procurement process will deliver all the things we need it to and in many organisations does. The worrying thing is the other organisations don’t learn, it’s a mature market but people aren’t learning from the mistakes of others and are tending to make the same mistake themselves.

Hamlett (Wragge & Co): When I’m using the word procurement, I’m using it in the narrow sense where it’s the office at the end of the hall that has to approve the deal but never gets involved in what’s going on. I don’t blame the procurement people, I blame the main board for allowing that to happen on a strategically important procurement.

Kuijpers (PA): I think the challenge for us as consultants and you as lawyers is that customers think we just want to come in early to sell them some business, and sometimes these commercial considerations override the value that we can bring by pointing out the mistakes that could be made very early in the process. So please allow us to advise on how to do it properly or better.

Jarman (Reuters): I’d like to see suppliers saying ‘no more bad deals’. I’ve dealt with some companies which only get involved when they see some senior sponsorship in place, I’ve also been in situations where we have gone out to three potential suppliers and two of them have declined to bid. That feels uncomfortable on one level but actually is exactly the way for them to behave, as it reduces the risks of both sides having a problem later.

Baxter (FT): Well, we have been talking about some of the problems raised in IT outsourcing but there are a lot of IT outsourcing deals which have gone well and which have produced the goods. There’s a lot of information out there about these deals and yet at the same time we seem to have this quite surprising and disappointing record of errors that are being made. What kind of processes could and should be developed to ensure that the learnings from the successful projects get transferred and disseminated more widely? I guess an event like this is part of that process.

Kuijpers (PA): This is part of the role that PA and TPI and Morgan Chambers and other companies have, they’re trying to sell themselves to do. The first thing you can do is make that scary decision about who’s going to be your adviser and the next scary decision, which you can take with the adviser, is about who’s going to be your outsourcing partner, and you trust your adviser not to be on the side of one of the vendors.

Jarman (Reuters): The PA Report really does reveal some schoolboy errors and some of the stats are quite frightening. I think everybody involved in this industry, which is we as clients, suppliers, advisers, needs to demystify IT outsourcing and stress that there are some simple steps that you need to take. You need to include due diligence, you need to include the costs of transition in your business case. They’re simple things and everybody has a role in ensuring that they are included in the process and somehow we need to get that message out.

Hamlett (Wragge & Co): One of the things which is depressing and that sticks in my mind from surveys such as this is the question of due diligence. Do you take credit checks on your supplier on day one, when you appoint a preferred bidder, when you contract, and then during the life of the contract? We found a very small number of people did, and yet the biggest risk in IT, when IT is fundamental to your business proceeding, is when the IT supplier goes pop, and soon you’re dealing with the receiver who says ‘you’d like to buy some software licenses would you’, trying to do a deal! You don’t hear about this very often for very obvious reasons because people don’t like to hear about the bodies that have been buried. It is the most worrying thing that due diligence is not being done, and it could be done. I don’t know why people won’t learn the lesson; maybe part of it is pride because you get a lot people, both on the supplier side and client side, who actually want to beat the other one up. They say, ‘I want to prove to the main board that I’ve done this fantastic deal, I want to show off what a great deal we’ve done,’ and the result is we forget the basics.

Roy (Capgemini): I find that this sort of activity [due diligence] comes too late in the process, it’s that moment when someone on the client side says: ‘I’ve forgotten to do the assessment’. And it’s not just a credit check, it’s environmental policies, health & safety, all these sort of things.

Cooper-Bagnall (PA): If you look at the IT outsourcing suppliers, the tier one players, I can absolutely understand the clients saying: ‘Why do I need to do this kind of due diligence on an HP, IBM, or Capgemini because these are big organisations, aren’t they? Why do I need to do this due diligence?’ So when it comes to justifying to your chief executive why you need to spend money to do thorough due diligence on organisations which are household names and tier one providers, I can see why that is difficult. The context of the diligence has to be: ‘We have to be assured that our specific set of requirements can be delivered through the things that the supplier is proposing to do and the way they’re proposing to customise their processes to work for us in our sector and in our environment.’ How’s that going to be delivered? What’s going to be done? That’s where I think the due diligence investment has to be made, and then there’s the whole series of standard things which need to be done as well which are good business practice and good discipline to do.

Jarman (Reuters): Very few companies are homogenous, so they might be a successful organisation overall but it doesn’t mean that the bit we’re dealing with, to do the things we need, is successful within the organisation.

Cooper Bagnall (PA): You negotiate a transaction with a tier one provider in the UK and a tier one provider in the US, and you’re signing an international transaction. And you do your diligence on that provider in their dominant country. But now you’ve got a problem because you need to do diligence in all the countries where the service is going to be delivered, and you need to worry about whether you are going to get failure in one of your remote but critical geographies.

Jarman (Reuters): And you find they don’t do Africa?

Cooper Bagnall (PA): The supplier might say: we have a sub-arrangement over there and actually we didn’t to the credit checks on the sub and they went under.

Roy (Capgemini): These are the questions we have to ask ourselves during the qualification process, can I answer these questions positively?

Hamlett (Wragge & Co): One of the issues here, when it comes to explaining why clients make these mistakes, is resource constraints within client organisations, because how many client organisations have got some good executives with spare time to do this project? They’re usually far too thinly spread out, the result is you’ve got people saying ‘I’ve got to go and do my day job now’ all the time. If clients have got the internal people, use them, because there’s no one better than good internal people, they know the business. But clients do need to recognise that where there’s a gap, they should work out the cost of bringing in consultants, lawyers etc, and make sure they end up with a team that will work. You need to build in the costs of doing this upfront, and almost, in a way, if you can’t stomach that, well don’t do it.

Kuijpers (PA): I 100 per cent agree with what you just said. Two other points: first, why do some of these schoolboy errors occur? One is that we talked about sourcing being a business commodity, and then we had a point saying a little bit of knowledge is a dangerous thing. If you have someone who is really smart and has perhaps gone through it from afar and thinks he or she can run the process, that’s one danger: treating outsourcing like a commodity. The second is the thing about getting the right people, with the right character and the right capabilities to run with the sourcing activities. This is absolutely key and you are right, too few people recognise that money invested during the early stages is money well spent: What is the cost of the planning, RFP and negotiation process in relation to the total cost of the transaction - 5 to 10 per cent of the total cost of the contract? You go to the board and say ‘we are going to save you money through outsourcing’ but we need to spend 5-10 per cent of the total deal on the procurement process, then that is a huge amount of money to ask for. However, we know that this also is money well spent in terms of getting a deal which will deliver.

Jarman (Reuters): I think if you’re outsourcing purely to save money you’re doomed to failure, because the danger is that the more you get into just looking at cost, you’re actually setting yourself up for failure, it just won’t work. You’ve got to look at all the other things, and you’ve got to put it into your business case the fact that you’ve still got to manage the contract after it has been signed.

Baxter (FT): Talking about cost, one of the interesting findings in the PA study was that 100 per cent of suppliers thought clients wanted cost reduction from IT outsourcing, whereas only 76 per cent of customers saw this as an objective of the contract. Does that ring true?

Roy (Capgemini): It’s almost a given that what we do has to cost less or at least be cost neutral. If you can deliver some of those things below the cost line and make it cost neutral, great. The starting point is do it for the same or less, and we have the global capabilities to help us do that so that services for a London headquartered client are not all delivered from London but they could be delivered from Scotland or further afield, whether from eastern Europe, India or China. I fundamentally believe unless you’re same as or better that doesn’t get you across the start line. Jarman (Reuters): It’s the same as or better, and the other things, not just cost.

Roy (Capgemini): My comment would be, are you measuring the cost item properly so there’s genuine business benefit there? Not just, ‘I’ll run this IBM mainframe cheaper than you will, which in turn will lead to some benefit down stream’. It’s important to measure the benefit across the supply chain, rather than just the pure unit price. A lot of our clients’ procurement processes actually drive the supplier to respond on a unit pricing type, commodity, basis and it’s kind of missing the point of where we’re trying to get to. It’s what we discussed earlier about the need to understand what clients needs from IT before we can design the right solution.

Wishart (Whitbread): Actually, I struggle with why IT outsourcing would deliver business benefits?

Roy (Capgemini): Commodity IT outsourcing may not do that, but there are different IT outsourcing models, such as transformational outsourcing, which moves into the business space because it uses outsourcing as a means to achieve a step-change in performance and agility.

Cooper-Bagnall (PA): One of the reflections I had on the statistics as we were talking was about advisers and their role in all this. An awful lot of what happens is that we tend to provide, or the advisory community tends to provide, pretty narrow-band advice. So they’re advising on the transaction, and advising on how do we reduce costs to get the right contract in place. There isn’t a broader mandate to advise about topics such as business transformation, changes in direction and how you get IT to really underpin business change, or whether or not it’s better to do that in an outsourced environment or an insourced environment. A lot of the mistakes that get made which were transparent in this report don’t sit just within this narrowband procurement transaction, but sit in a much wider strategic business context. So there’s a wider responsibility, I think, for suppliers, lawyers and consultants to be thinking about how to advice clients in this wider business context and get business stakeholders to understand what’s going on and how these transactions can help transform their business and give them opportunities that they didn’t have before. I’m not sure that always happens and then clients are disappointed by the outcome.

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