IT Outsourcing: Investing in a tailored approach

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This is the second part of an FT Digital Business panel discussion that is also being published in stages in print. The first part was published on April 12; the third and final part will be published on on May 31.

The discussion is based on issues emerging from PA’s recent global survey of attitudes to IT outsourcing, 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 the FT encapsulated the contents of the study into four propositions, broadly following the four chapters of the study. Proposition One, discussed in Part One, was: Getting things right from the start. Proposition Two concerns: “Investing in a tailored approach”

The panel debated the following statement: “Clients seem to be less aware of the need to pay attention to industry-specific factors than do suppliers or lawyers, or of the importance of making certain that they have chosen the right supplier for themselves. This can increase costs and, as with Proposition One, lead to disappointment in the operating phase.”

Baxter (FT): We earlier talked quite a bit about due diligence, and one of the startling statistics which came out of the second section of the report was that only 42 per cent of clients undertook any form of due diligence. More broadly what this proposition is talking about is the whole issue of ”one size fits all”, or maybe “one size doesn’t fit all” - the fact that, perhaps quite surprisingly, the clients seems less aware of the need to be industry specific and to think about the special features of their particular sector than suppliers did. It surprises me because you would have thought that, from the suppliers’ point of view, the more “one size fits all” you can be with outsourcing the better.

Ian Roy (Capgemini): I can’t agree with this statement at all, that “Clients seem to be less aware of the needs to pay attention to industry-specific factors than do suppliers or lawyers”. It’s not my experience, to be honest. We in the business marshal our market-facing resources along industry sector lines. If you at least don’t have an empathy with what the client’s doing you ain’t going to hit the final solution are you? So we have all the delivery capabilities within our organisation - ERP, CRM, whatever it is - but that capability is marshalled across industry sector lines. For example, ERP in the upstream oil sector is very different from ERP in retail.

Wishart (Whitbread): I agree that things differ by industry sector and the challenge is for a provider of a generic service, for example networks, to understand that at grass-roots level - so that someone in a network operations role understands that if the network goes down between 5 and 7 in the evening, it may be within the SLA [service level agreement], but all of the guests who are trying to check in to the hotels are having a bad experience because the network’s down and that affects their likelihood to return. It is a real challenge for all generic service providers to help their people understand the impact of service failure on their customers.

Hamlett (Wragge & Co): I certainly agree with Ben that most of the clients I work with, the one area they really know is their business and they’re passionate about it. So Ben’s point about 5pm-7pm, that would be the point that’s thumping home to me.

Unidentified speaker: I can accept the point raised in the study about industry-specific risk premiums [that not enough clients accept the need to consider them]. I’m not sure that the clients I’ve worked with have built them into business cases.

Hamlett (Wragge and Co): Do you mean risk premium for the individual client, that the client doesn’t work out where they are most vulnerable?

Roy (Capgemini): I’m assuming this means building into the business case risk premium pricing.

Cooper-Bagnall (PA): Let’s think of a scenario. Take the financial services sector - these are critical times in their business, and there are critical things which impact them. The suppliers will build premiums into their costings to accommodate when clients pick up the phone and call them because something’s gone down on the trading floor, and it needs to be fixed in 30 seconds flat. You can’t explain to a trader “I’m sorry, that’s not in the service agreement”, not unless you want to be ripped to bits. So there’s a premium that goes into the supplier side to make sure they can do just that. If you’re sitting in the client side and you have suddenly got to put a 5 per cent premium straight into your business case to cover for those eventualities so that you can support further in-house resource, or you can pay a premium to the supplier to cover that eventuality, that’s really tough to do. Do financial service firms really sit down and think about what the cost is of making sure they don’t incur those problems and then building that in? In your requirement, Ben, your 5-7pm window, what cost premium would you build into an agreement with an outsourcing firm so that the chances of that happening were hugely mitigated, so you didn’t find yourself in that environment? How do you calculate that, how do you work out what the premium should be, is it realistic to do? It’s a really tough call.

Wishart (Whitbread): Retail is not as sophisticated as that and doesn’t need to be. Occasionally the network will go down, and very occasionally the network will go down at 5pm, but if it happens at that time, five Mondays in a row (which thankfully we have not experienced!), whoever’s running your network - or any other service affecting that customer experience, for that matter - can expect to be spending a lot of time in your office.

Cooper-Bagnall (PA): So, it might be, if you push this point further, that in some sectors, there may be things where a vendor might very well put a risk premium in for some eventuality. But clients find that they can’t do it, it’s not something they are willing to pay the extra for.

Roy (Capgemini): Let’s stick with this example. Surely what you’re talking about is working out that in simplistic terms you might need more IT at that time. If it was a call centre you might say, “Right we’ll need a large number of extra people there at that time”. In other words you’re not into the risk, you’re into the cost of performing service to match the client need. The risk premium might well be paying the client compensation because actually he’s lost 300 or 400 bookings and the SLA penalty mechanism hits you very hard. And that might be when the price goes up.

Wishart (Whitbread): Or you come back to the SLA, it might say that the SLA on any given service may vary by day-part - for example, 99.999 per cent availability between 4.30 and 7.30 on weekday evenings for critical servers or networks in the hotel context may not mean that failure is any less likely to happen but it will mean that, where there is a failure, it is visible in the SLA data and that the right discussions can be had.

Roy (Capgemini): ... but then have the business KPIs [key performance indicators] driving the agenda for the SLA creation, because they’re often built bottom up. A second point on this is that I’ve got clients who are not interested in me handing over, for example, £10,000 worth of compensation, they’re interested in getting the problem fixed. So you create a solution that has extra resilience engineered into it, which may be a bit more expensive, but then you’re avoiding carrying that business risk premium.

Wishart (Whitbread): Because ultimately, giving you a little bit of compensation is irrelevant, you don’t care about that. What matters is the service to the customer.

Roy (Capgemini): And it’s driving the wrong behaviour. You end up spending £20,000 to avoid paying £10,000 in resource requirements. It drives everything towards an adversarial type of relationship.

Hamlett (Wragge and Co): And usually the damages, penalties, service credits, whatever you want to call them, service credits don’t, well, certainly the advice I give to clients is that will never compensate you for what happens. Therefore, why do it? You’re doing it to drive the correct behaviour with the supplier - so the supplier doesn’t say “I couldn’t care less if it’s between 4.30 and 7.30, it says I can take two hours a day, and that’s the time I’m taking it down”. Where this comes up is risk transfer. I’ve got a transaction on at the moment where the supplier is saying ”Look, I can’t take this risk unless I double my price, it’s not my business, it’s yours, and I can’t take consequential loss. What I will take is some pain like a cattle prod to make sure I do the right thing.” And the client cannot see it, and that transaction at the moment is doomed to failure, it will not be signed unless the supplier is so desperate for the business that it says, “Sod it, let’s do it” and it happens. Whereas what they should be doing is recognising that some of the risk stays with the client.

Jarman (Reuters): [Turning to the study’s findings about due diligence] There is a finding here which, to me, beggars belief, that only 42 per cent of clients undertook any form of due diligence when selecting their outsourcing suppliers. I just cannot understand how this can be, that four out 10 did no due diligence at all.

Roy (Capgemini): It’s just not my experience at all. The form of due diligence varies throughout the life cycle. So you may have the client reference visit early on, or it’s a quick call from one CIO to another, something like that. As a supplier I’m obviously not going to put up a client that doesn’t say that we’ve done what we were going to do, so perhaps you want to choose your own references. But yes, it’s just not my experience at all.

Hamlett (Wragge and Co): A little story here that is perhaps rather amusing on that point. We did a pitch recently for a job in which we had to name three clients we’d lost and who were pissed off with us ...

Roy (Capgemini): Wow!

Hamlett (Wragge and Co): … and that was very, very interesting. We had to think very carefully about it, but interestingly what it made us think about is why we had lost those businesses.

Kuijpers (PA): The fact that only 42 per cent carry out due diligence is staggering, and then you think, could there have been something misleading in the way we asked the question? But if you compare this to a second related question in the survey, which is that in hindsight 67 per cent of clients wished they had increased their focus on the supplier’s ability to deliver, it reinforces the first point.

Cooper-Bagnall (PA): For me this is all about people’s definition of due diligence. If your definition is making a few reference calls, going over to see a supplier’s facilities, and talking to one or two of the delivery people and if you believe that’s sufficient due diligence, that’s where the problem comes. That’s where that 67 per cent comes from. To do due diligence properly, yes, references are valuable, but they are only useful to a degree and yes we’ll get candid opinions back. What’s challenging is drilling right down, so the customer says to the potential supplier, “OK, show me your processes, show me how this stuff is done, show me where it’s documented”. I worked through one transaction with one very large supplier and we got into details of how it was going to deliver this particular service. We went down into the process and beyond a surface level view of how they were going to deliver, there was no process, they were going to have to create something custom and they hadn’t thought about how it was going to get created, they had made some general assumptions and priced it.

Roy (Capgemini): And beyond that, how do you [as an outsourcing supplier] manage your own suppliers and your supply chain?

Cooper-Bagnall (PA): For me that’s due diligence. If you’re doing an M&A and you’ve got to do due diligence on somebody it’s an extensive process digging through all sorts of things to uncover what goes on in that environment. Why should it be different when we do due diligence in the outsourcing sector? It’s expensive and it’s hard to justify perhaps, that’s one of the reasons why clients steer back from it, but I think it’s very necessary and can tremendously enhance the deal that comes out at the back end.

Unidentified speaker: I think there’s one element I would add into this discussion of due diligence, and that is cultural differences. Looking at the stats in the report, there is one place where it says 60 per cent or so of clients thought that too much importance was attached to cultural differences, which is what I disagree with, but then we’ve got lawyers and suppliers both saying that there wasn’t enough emphasis on it. It comes back to the fact that it’s a long-term relationship.

Jarman (Reuters): We went into one potential transaction and we did all this cultural analysis. We looked at user tools, what’s our culture, what are the various suppliers’ cultures, and we picked a supplier whose culture was very different to ours, on the basis that that would be great for us and they were very rigid in their process and that would be exactly what we want. But then you try living in that relationship with someone from a very different culture, it’s just really difficult to do.

Unidentified speaker: I think this comes back to the earlier point, that if you go to a tier one supplier they have all got a level of capability, but what you need to make sure is that they’ve got the right type of capability in a specific area, that they’ve got the focus on you, and that you and they can actually work together day in day out for years. So the cultural bit is a really important part.

Hamlett (Wragge & Co): It also means that both parties actually understand the other’s drivers, and help support them. For example, the client has to accept that the supplier’s got to make some money and the supplier has to accept that they have to help the client make some money. You’ve got to stay attractive to each other and recognise people think from different angles. It’s when you think you’re all the same that the problems start.

Cooper-Bagnall (PA): And it’s not just business-to-business either, it’s also individuals. We tend to think of the cultural bit at an organisational level and set all sorts of wonderful goals for how we can work together culturally in an organisation. But what do you do when you’re at the coalface at an operational level and you just can’t stand the service delivery manager of the supplier, and he or she can’t stand you either and neither of you can go and tell your respective executives that this is the case and you are just at loggerheads with each other? I’m not sure right now that there is a really constructive way of identifying how people need to think about this relationship, think about the culture of the organisation and set about some of the changes that may be necessary. There’s lots that’s written about relationships or encompassing them but not yet a lot of work done about how do we make that better.

Jarman (Reuters): In that case we’d say “we don’t like your service, change your service manager”, but it’s a lot harder for the supplier to say you’ve got the wrong people in your retained organisation. We should listen to that, and I know we don’t but we should.

Cooper-Bagnall (PA): One of my clients had a service manager who was in just that spot and the supplier really was doing everything that they could to overcome that, but they did have to end up changing their service manager. It was horrendous, because it sent all sorts of political messages across the organisation.

Jarman (Reuters): It’s very unusual to hear about this in a client organisation. Among service providers it would not be the end of your career, but for it to happen in a client organisation is so unusual that it becomes a mark against people, I think.

Wishart (Whitbread): I’ve worked on both sides of the fence, and sometimes it is right for a supplier to send somebody in to deliver the unpalatable message knowing that the client won’t like it and may not want that person around in the future. But when the message is delivered it is delivered and that may well add a lot of value to the relationship so having somebody who is willing to push the client that far is sometimes a good thing.

Roy (Capgemini): It’s a tough decision to make, though, to step up to.

Hamlett (Wragge & Co): It is but I think that in the long term, suppliers who do that - and counting us lawyers and suppliers as well - don’t lose out in the long term. You might lose out in the short term but in the long term [if these issues are not addressed] all you’re doing is delaying the inevitable, and you end up with more disputes and more troubles. Also [if these issues are faced head-on] you get a reputation for straight taking. It’s one of the things that came up earlier on, i.e, why is it that the suppliers and lawyers aren’t being more proactive with their clients? Sometimes it’s because you’re in a subservient position, whereas if you can move it to a genuine teamwork approach, I find sophisticated clients are the ones who actually say “Come on David, tell me what you know that could help here and take some risks”, and actually that’s what I enjoy. If they say “shut up, do this”, well…you know!

Ian Roy (Capgemini): As the survey finds, 67 per cent of clients want access to skills and opinions.

Wishart (Whitbread): And we do! (laughter). It is easy at the senior leadership level on both sides to understand each other at a high level of detail, but operationally the people who have to work together in a crisis from both outsourcing vendor and retained organisation need to leverage each other’s strengths extremely well so that the knowhow in the client’s retained team is best matched with the ability to get tasks executed behind the scenes. This can be a source of conflict.

Roy (Capgemini): It’s that mentality of the supplier managing to the SLA rather than managing for business outcome.

Jarman (Reuters): Yeah, doing the basics, just keeping the wheel turning.

Roy (Capgemini): I think you as the client need to induct those people into your organisation because they could be there for three to five years or however long it’s going to be.

Kuijpers (PA): You outsource because you want access to different skills or different people and what you get is many of your own people back [i.e, in situations where client employees move across to the supplier] and you know what they’re like. You don’t necessarily get an injection of higher level or better quality people. I talked to somebody a while ago who slated his supplier on the basis that he expected a step-change in capability and he didn’t get it. And he didn’t quite say that, but there’s something there about the capability of some of the people provided by the outsourcer.

Wishart (Whitbread): And it’s the way in which they’re motivated, too – sorry Ian, I wasn’t having a go at you.

Roy (Capgemini): Clearly Capgemini doesn’t apply to any of this stuff – that’s other suppliers! (laughter).

Wishart (Whitbread): But how many account teams are paid a great bonus for delivering a like-for-like cost saving for their client? It’s common sense to a buyer of services that that would be a fantastic event, but it is “uncommon sense” in the service provision side. Imagine how loud clients would be happy to shout in the event that their service providers routinely and unprompted acted that way – it has the potential to transform a vendor’s new business sales performance to have that sort of reputation – less revenue from current customers but a reputation as the business that proactively saves you money, everyone would want to buy from you. Sadly I don’t think this is how account teams are generally motivated and that is a lot to do with the difficulty that is seen in so many relationships – simply said the partners have different motivations.

Roy (Capgemini): Then you go back to defining the risks and rewards and I find that some clients like risks and rewards as long as it applies to risk and not reward. But if you actually get into a genuine risk/reward deal with your supplier, it ripples down through to KPIs, to personal KPIs based on individuals’ involvement, and that’s the way they’re motivated. And actually when you do talk about reward, so we do something that reduces Capgemini’s revenue, for example, but saves money for the customer’s business, there’s a gain share in there. But the problem I think is that the client has sometime agreed to gain share mechanisms but hasn’t budgeted for them. So you get no chance of getting the money out, and again this drags you back into that adversarial type of relationship.

Cooper-Bagnall (PA): What I’ve found is that clients and suppliers don’t have to be at odds with each other. If you’ve got revenue-focused account managers, rather than profit-focused account managers, absolutely, those behaviours are there and that’s how the majority of the models are structured. If you had account managers targeting profitability of those accounts rather than revenue you would start to solve some of the dilemma, and you’re not a million miles away then from a workable model. You [the customer] get your cost savings, you [the supplier] get a higher rate of profitability albeit with some decline in revenue.

Ron Jarman (Reuters): We do budget for risk and reward. But if you took a million off my budget and I had to pay you a quarter of a million to do that I’d be crying about it. If you took a million off ten other budgets and I had to pay you a million pounds, that’s when you start getting into problems. Somebody once said to me that people find it a lot easier to reward individuals who work for them, and a lot harder to punish them. With suppliers it tends to be the other way around, we find it much easier to punish them for things they’ve done wrong and a lot harder to reward them, you will give your staff bonuses, but you don’t often give suppliers bonuses. You’ll penalise them with service credits etc so I think there is something here, we need to be more mature about risk and reward.

Roy (Capgemini): It is difficult sometimes for suppliers to actually create a mechanism that ripples down to the individual rather than the organisation.

Jarman (Reuters): It also gets back to the first point about understanding expectations, if you understood the expectations at the start, the deals should be built on the basis that these are the sort of things that the customer wants, if the supplier hasn’t understood up front then they’re never going to deliver a successful outcome.

Hamlett (Wragge & Co): I’ve got an example which is highly relevant to this and it’s a slightly different business model, alliancing. This is something we’re doing at the moment with the Ministry of Defence on two new aircraft carriers, and the whole area there is about contracts always being overrun, they never produce what you want – exactly the same as you’ve got here – there are competing interests - all the different sub-contractors are trying to blame other people, and what the MOD has tried to do, and this is public knowledge, is to adopt an alliance model, which we have crafted. We have had great fun doing this, because what you’re trying to do is move away from everyone being driven by different factors, so that, for example, you find that one contractor needs to lose, and another one to gain, for the client to make a big gain. We’ve constructed things whereby we get everyone together and say: “This is a long-term project and it’s going to change as we go along. You have got to accept - we will guarantee certain minimum costs coming through and certain minimum profits - but subject to that, you’ve got to allow everything to be moved around, across budget, across everything else”, and getting people into that mindset is very difficult, particularly where certain companies are totally driven by their personal bonuses.

Cooper-Bagnall (PA): Encouraging contractors to work collaboratively together is very important.

Hamlett (Wragge & Co): That, I think, is something that really can make a difference in the right context, but then you’ve got to invest a huge amount of time and effort in making sure everyone’s drivers are aligned. And that means leadership from the top of each organisation, which is not always easy.

Baxter (FT): Well, at this point, let’s move on to our Proposition Three, based on the PA study, which is as follows:

“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.”

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