This is the third and final part of a transcript of 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 is based on issues emerging from PA Consulting Group’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, held on March 15. 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, discussed in Part One, was: Getting things right from the start. Proposition Two, discussed in Part Two was: Investing in a tailored approach
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.
Baxter (FT): This topic is, I think, very interesting and relatively neglected, compared with the huge amount of analysis into the financial benefits of outsourcing. What sort of organisation you need, as a client, to handle the arrangement going forward when you’re in the operating phase, and what sort of people you should have in that organisation, is of fundamental importance, yet from looking at this survey it would appear that people underestimate its significance. And maybe suppliers to some extent bear the blame for this when they say to clients ‘you don’t need to have much of a retained organisation because we’re going to do it all.’
Kuijpers (PA): Could I start by asking both our customers about this? Both of you joined organisations that had already outsourced some activities. What was the strength of the retained organisation in respect of these organisations?
Unidentified speaker: My experience is that, coming into [previously concluded] outsourcing deals, the retained organisation is there, but that this may not have been the case right at the start. What has happened is that two or three years into the deal, everybody’s realised that they need a retained organisation. It’s actually easier coming into a deal that is already operating because you recognise what skills you need.
Jarman (Reuters): 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.’ So I’ve seen it both ways. If you haven’t got a retained organisation in place you will soon learn you need it.
Unidentified speaker: It would be really interesting to know what the right answer to the question is, what does the retained organisation need to look like? I don’t know.
Wishart (Whitbread): It depends on different situations and cultures and so on. A retained organisation that is too big will typically be too much into the detail, managing the service rather than managing the supplier.
Roy (Capgemini). That kind of micromanagement drives suppliers mad. They are put into defensive mode the whole time, having to explain every action…
Wishart (Whitbread): …and, actually not having the time to do anything, because you spend your life explaining yourself, then after a period of time you don’t have anything to explain and, you know, it’s a very, very vicious circle. I think you need a mixture of some sort of technical and service management capabilities and commercial management. On the client side, 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 ‘well, actually, there’s a better way of doing this business, 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’. And it’s some sort of mix really of those three - contracts management, commercial management, technical and business process activities.
Cooper-Bagnall (PA): I think that’s right because if you look at all the organisational change that happens, you are very diligent thinking about what the organisation’s got to achieve, what it’s got to do, what are the functions and responsibilities, and you say, ‘Let’s work out skills and capabilities and match those against what we’re trying to achieve.’ But when we’re building retained organisations that doesn’t always happen. We say, I’ve got my head of infrastructure over here and my head of applications there, and there are a couple of people I want to retain, and I generally know I’ve got to do some commercial stuff, service stuff and be responsible for technical architecture. Yet there isn’t a step back to first principles of proper organisation design and working out functions and capabilities, because - again - it takes time and effort and resource to do that. So you end up with 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 we want. What we needed to do to stop the mistake happening was ‘right-size’ the organisation, do that proper organisation design. And we need to accept as well, I think, that there’s a maturity curve - as it matures that organisation is going to morph and companies will have to plan for that and adjust budgets accordingly.
Baxter (FT): I guess also there is the problem that in large companies we’re not just talking about one outsourcing arrangement negotiated at any one time, there’s a whole spectrum. Some deals may have started five years ago and they’d be going quite well and don’t require too much attention and there are other more ambitious ones that are coming up now which do require more management time and then you’ve got to decide whether this is all going to be handled by one retained organisation or basically have one overlord and lots of different groups monitoring the individual deals – it’s a serious management issue, isn’t it?
Roy (Capgemini): One of the frustrations as a supplier, possibly, is the retained organisation as a gatekeeper [which you have to get past] to talk to the organisation, because there’s a whole bunch of ideas that Capgemini may have that will benefit your business. 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.
Jarman (Reuters): 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. In any supply relationship, actually, you need to make sure that multiple conversations are going on between client and supplier, but this needs to be done in a joined up way so that you don’t get, for example, 10 people in Reuters giving you 15 different priorities. You get 10 people in Reuters giving you three priorities and it’s the same three priorities for all of them but you get to have the conversation and understand all the business aspects.
Jarman (Reuters): [This proposition and the supporting stats from the PA study] suggests to me that there is an issue here with the quality of the business cases, and that’s not an outsourcing point, that’s a business governance point of view. How can anybody sign up for a business case that doesn’t allow for constant change - whatever you’re doing, whether it’s outsourcing or not - and doesn’t include current costs of delivery? I just find it incredible that business cases are of that quality.
Hamlett (Wragge & Co): It just depends on how well run the client businesses are generally because this is a project like any other project. And if they’ve got the proper financial model and understand the effects on the business, it’s an awful lot better. I can think of one particular example: what we often find [in the UK] is that TUPE (Transfer of Undertakings, Protection of Employment) intervenes here, because 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. So one of the things that I stress is to the clients is, again, the contract’s great but it doesn’t work without a relationship. Relationships are about people and the right people, so the retained organisation is crucial. There was one deal I did which was worth £500m over five years, we are now renegotiating it, it has been extended, and the key factor for the client was that previously there had been a team of three of people, two of them had transferred [to the supplier] and one of them had stayed. I knew the head of the legal department very well and I said, ‘Look, you’ve got to put some golden handcuffs on this guy.’ And they did, they made a superb package for him, they kept him. I’m so glad they did because he has made this outsourcing work - he’s just done the renegotiation and it’s brilliant. He’s made sure the supplier is aligned in the right way, he’s got a terrific relationship with them, he’s saved his company a huge amount of money - and they’ve got the service delivery right.
Roy (Capgemini): I would contend that that was the right solution for both parties, because the outsourcing provider and the client have got a working deal. To go back to point number one about miscommunication between the parties, you’ve got to nail that right, and identify the priorities for each side: for us, taking the service on, you may take on 20 people, of which two or three will make a difference.
Kuijpers (PA): You’ve got to think people, not money. That’s such an important point.
Roy (Capgemini): The conclusion here is that it’s all about quality rather than quantity because if you’ve got too many people [in the retained organisation] they will make things difficult…
Hamlett, (Wragge & Co): …they get in the way, yes….
Kuijpers (PA): …you’re managing the supplier, you’re not managing the task any more.
Baxter (FT): I guess the thing that links this with the fourth and final proposition which we have taken from the PA study is the issue of control - how much control the client wants to have of the deal going forward and this seems to be an important factor in developing the concept of transformational businesses. So here is the fourth proposition.
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.
Baxter (FT): So, what comes out from the survey is that a significant number of clients want to retain control of their business transformation activities, they’re not too happy about pushing that sort of business towards suppliers, meantime suppliers are keen as mustard to get into that business because they see it as higher margin.
Roy (Capgemini): It’s not just that: if you look at Capgemini’s organisation and see the strapline below the Capgemini’s name it’s consulting, technology and outsourcing so, business transformational outsourcing deals encapsulates what we do. Actually the bulk of the deals we do are in individual silos, which is maybe why there’s 79 per cent of suppliers pushing it as opposed to 35 per cent of clients wanting IT to be used for enabling business transformation in the future. I find a lot of transformational outsourcing deals are actually ‘refresh’ or tech upgrade-type deals rather than business transformation deals. Every deal if it’s going to go for any sensible length of time is going to go through a whole lot of change, because a company in five years’ time isn’t going to look like what it does on day one. So that to me isn’t a transformational deal, it’s a technology change deal. A business transformation deal, to go back to my sector, utilities, might involve a local grid company, for example, with a bunch of engineers that used to go to depots to collect jobs, do repairs to whatever it is. Now they use technology to enable them to do that job without going back to depots, they could have the job details despatched to their homes. That then drives the business benefits, so that’s a business transformational outsourcing.
Hamlett (Wragge & Co): You’ve got to know your client’s business well, haven’t you, to be able to come up with those sorts of ideas, and the client’s got to let you in…
Roy (Capgemini): …all of which takes us back to the point about understanding the client’s business.
Wishart (Whitbread): It’s pretty rare though, isn’t it, that a third party can go into an organisation and say, ‘We’ve got this great idea, let us go and sort it.’
Hamlett (Wragge & Co): No, but sometimes people listen to outsiders more than they listen to insiders. We’ve all got experience where you can 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. That might not the case in your organisation but it’s certainly happened in mine.
Cooper-Bagnall (PA): I think it’s not that [the suppliers] are bringing new ideas but 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. If you want to change technology, if you want to go into different areas and do something fundamentally different than you do now, 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 – I think that would be where it comes from. I’m not surprised though that not many clients want to do it because if you go through the rest of the report there are issues with non-transformational outsourcing. So I buy the logic of [a company saying] it wants to go to somebody for transformational change then I’m certainly not going to use a supplier that is failing to deliver in standard non-transformational areas.
Wishart (Whitbread): I think it’s a pretty rare organisation that can deliver real high performance in consulting, technology and outsourcing in one industry sector.
Kuijpers (PA): However, when we go and talk to the supplier community and we ask them 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?
Baxter (FT): It sounds there’s like a disconnect there, between where suppliers want to go and where clients are prepared to go.
Wishart (Whitbread): I think everybody’s ambitious, aren’t they? The consulting environment, and I can say this as somebody who worked for a reasonable period of time in consulting, tends to take learning from the real industry innovators and roll it out to everybody else.
Roy (CapGemini): Consultants do have a role introducing clients to new technology, such as RFID (Radio Frequency Identification). Everybody jumps on the bandwagon so it is important to differentiate your particular point of view and then take it to clients.
Wishart (Whitbread): People write to me every day about RFID and it’s quite clear from what they write to me that they haven’t got a clue - they might understand RFID very well but they don’t understand the application of it at all well – particularly in the retail hospitality environment.
Hamlett (Wragge & Co): [Talking to Ben Wishart at Whitbread] Given that you’ve been on both sides of the fence, do you think that there’s very much that you can gain from consultancy other than specific things that you identify, i.e you want an expert in a particular field. Basically, surely, you’ve got to come to a decision rather than someone come along to you and say, ‘Hey what about this great new idea?’ because if you’ve kept on top of your business you’ll be aware of the idea anyway.
Wishart (Whitbread): I think it depends on the environment. If it’s a project management issue then it’s in the first box, if it’s more that ‘I’ve got a feeling about something and I don’t really know if I know what I think but I’ve got to come at it in an emerging direction,’ then putting client and consultant together can forge an extraordinary partnership. I’m very much a supporter of using consultants but I think you’ve got to be realistic about what is brought to the party. A lot of what consultants bring to the party is about process discipline and control with some content. My experience has been that when client and consultant get together and leverage each others’ skills you’ll get something very special.
Roy (Capgemini): During your time at Capgemini you took part in some accelerated solutions workshops and things like that. So that’s a great tool to bring ideas out of the organisation because you are experts at running your business. But I was also going to add that 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.
Fons Kuijpers: Relating that to outsourcing and the development of the retained organisation, you can’t just say, ‘Here’s my IT, take it and run with it for 7 years, you cannot abdicate that responsibility.
Cooper-Bagnall (PA): There’s some level of threat in there as well. The client says, ‘ I’m going to engage with somebody to help me transform’ and there’s an agenda for them to carry on and take over and run that business going forward. But whilst that concern exists there’s a hands-off approach towards bringing people in to talk about the transformation. The client does not wish to get suppliers too deeply involved until some of the trust issues have been resolved.
Baxter (FT): There’s a nice point in the report itself that is relevant here. Some clients, it says, may be right to drive their transformation programmes in house but at the moment it appears too many clients are freezing their supplier out of the process, underlining their mistrust in suppliers’ ability to deliver. I guess this repeats the point you made earlier, Ron, that this is a consequence of all the other problems that have come before.
Jarman (Reuters): I think in some cases people should be doing it themselves. But I could well believe 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.
Wishart (Whitbread): this comes back to what I was saying earlier about outsourcing one set of services but mid-way through the relationship making a change to something that is not a specialism of the incumbent supplier, so the deal or the relationship hooks the two partners together in a less than optimal way.
Roy (Capgemini): Can I give you a discount? (laughter)
Baxter (FT): I guess one of the risks with a discussion like this is that we can end up spending an hour and a half, hour and three-quarters, focusing on the problems and you sometimes lose sight of the fact there is an awful lot of outsourcing that actually goes well - otherwise we wouldn’t be here.
Roy (Capgemini): I think the ones that go well actually do what we said they should be doing. The [client and supplier] spend time on that relationship-building up front; they build a relationship between each other; they understand what each other’s all about and use that as a basis. I think that’s where those deals go well…
Jarman (Reuters): …which is exactly why it’s so frustrating that you still get 40 per cent of clients not doing due diligence - that’s what’s so frustrating – but the factor is time, isn’t it? Time, and – it’s important to add – resources, quality resources. Another point here is that companies like Capgemini are organised around putting together bid teams, and there is a difference in the sort of scale of resources. We’re not organised around putting together project teams to run these large exercises so therefore we cobble them together and people have the day job to go back to. That’s just a fact of life, I mean we’re going to do these things infrequently, and maybe we [client organisations] don’t quite understand the magnitude of what we’re getting ourselves into and how difficult it is because I think it is difficult to change direction. You can build in flexibility to change a contract; but if you’ve entered into bad business with your supplier, let’s say he misunderstood your expectations, that’s a very difficult problem to get out of.
Kuijpers (PA): And the other thing is that 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. 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. I don’t think people start off with mistrust, if you go into it they think, ‘It’s going to be a great deal, great for the supplier, great for the client’ and then somehow you make one or two unintentional stupid mistakes and then suddenly you have these two organisations not gelling.
Wishart (Whitbread): 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 its 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.
Baxter (FT): Well, I think that has covered all the issues we wanted to raise very well and on behalf of the FT I would like to say thank you very much for your time – it’s been brilliant, most enjoyable.