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A fresh look at managed services and outsourcings by the public sector
In Ireland, the prospect of outsourcing public sector work to the private sector has long been a highly controversial Government policy issue – to such an extent that, to date, the Irish public sector has not undertaken any large strategic managed services or outsourcing deals but has conducted a number of small selective managed services. This is in direct contrast to other countries where for more than a decade the UK, the US, Australia, Canada and many other countries have outsourced a very substantial component of back office or ‘non-core’ public services and functions to on-shore (domestic) as well as off-shore locations in order to reduce costs and to improve service quality. In addition to IT services, outsourcing work can cover call centre services, transaction processing, HR & payroll services, accounting, administration, treasury & finance, claims management, logistics support as well as cleaning and catering services.
The need to plan a course of action now
The alarming rate of increase in the budget deficit and the consequent need for significant savings in public sector spending means that serious consideration must now be given by the Government to larger more strategic on-shore (domestic) managed services and outsourcing deals than has hitherto been the case. The Irish private sector has both the expertise and the resources to take this on and would very much welcome this work.
Finding a middle ground
Those fundamentally against public sector outsourcing have tended to view the associated industrial relations issues as insurmountable and often cite the UK as an example where some large outsourcings have failed to deliver on expectations. However, when this argument is examined it can be seen that the UK Government is due to increase public sector outsourcing by a further £20 billion or 50% over 3 years arising from the Varney Report in 2007 which made it clear that on the whole over the past decade strategic outsourcing had worked to deliver substantially better value for money for the UK taxpayer.
On the other hand, some proponents of outsourcing see only the immediate potential cost savings and arguably do not appreciate how much planning needs to be completed prior to going to tender for these complex arrangements – apart altogether from the difficult industrial relation issues that need to be managed.
As a middle ground, it is probably more reasonably to ask what types of Government services should be outsourced and to what extent should the private sector be involved in the provision of Government services. Other practical questions might include “what services can successfully be outsourced so that the required cost savings and service quality will be achieved?” and “what measures can be taken to mitigate the risks associated with outsourcing?”.
Before embarking on an outsourcing, the potential risks need to be carefully reviewed. The characteristics of a successful public sector outsourcing might include the following:
- a well planned procurement including a transparent competitive procurement in line with EU procurement rules,
- a carefully managed employee consultation and transfer process getting buy-in from key stakeholders and protecting employee rights,
- significant cost savings,
- increased service accountability through an appropriate well drafted contract,
- better service quality with service levels and service credits,
- improved work and management practices,
- access to greater skills, knowledge and technology,
- better use of capital and equipment and
- greater service flexibility
Conversely, the features of a poor or failed outsourcing might include the following:
- an unlawful or poorly managed public procurement,
- a poorly managed employee consultation process leaving discussions to the last minute and not involving key stakeholders from the outset,
- a deal that fails to deliver value for money,
- an unsuitable inflexible contract,
- loss of control by the government over the contracted services leading to reduced accountability, reductions in quality of services, and
- increased cost and reduced control over costs.
Statistics show that organisations have mainly fallen foul of poor outsourcing because they have pressed ahead without adequate planning, have selected a supplier that was not ‘up to the job’ or have badly structured contracts. The following are some practical steps to help mitigate those risks and to increase the potential for a successful outsourcing:
- Pre-Contract Preparation and Due Diligence
At the outset it is important to plan the outsourcing by conducting a detailed examination of the processes and functions that make up the services or functions to be outsourced - identifying the strategic objectives and priorities for the outsourcing including a consideration of what to outsource and what to keep in-house. Questions should be asked such as “what level of savings can reasonably be expected over the life of the contract?” and “what level of service is delivered today and will this be adequate in the future?”.
Needless to say an early assessment of all relevant industrial relations issues should be undertaken and consultation with stakeholder should commence at the earliest opportunity. Employees currently engaged in providing the services to be outsourced are likely to have rights under the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 and under other pieces of legislation so a full review should be undertaken as to which employees are within the scope of the transfer, the terms and conditions of their employment, the costs associated with those employees including pensions and other benefits etc.
Any other legal, regulatory and compliance issues that may impose restrictions should also be considered at an early stage and the procurement process should be planned and involve a transparent and rigorous competitive process in line with the appropriate EU procurement rules.
The tender documents should be carefully prepared to elicit all pertinent information and a thorough due diligence should be conducted in relation to the prospective supplier(s) including site visits and discussions with some of the existing and previous customers of the chosen supplier(s).
- Preparing a suitable Outsourcing Contract and service level agreement
The heart of a successful outsourcing or managed services contract is a clear definition of who does what for whom and for how much. In other words, there needs to be a clear and detailed statement of supplier and customer responsibilities and a clear delineation between the two as well as a clear description of the services and the commercial agreement of both parties.
It is recognised in the outsourcing industry that transactions of this complexity require a bespoke contract to cater for the unique requirements of each deal and that using a ‘one size fits all approach’ is a recipe for problems either in negotiations or further into the parties relationship. For instance, the contract should be made ‘market ready’ in the sense that it should be prepared with an awareness of how the likely suppliers might react to it including the likely commonality of their approaches.
It is important that the service level and service credit regime is properly designed so that it is easily understood and incentivises good performance rather than institutionalises poor performance. Service credits are not a perfect solution to non-performance and they have to be engineered with care in conjunction with other mechanisms (such as reporting requirements and escalation and other classic signatures of good corporate governance) designed to identify and mitigate poor performance.
Ideally, the contract (once drafted) should be included with the tender documents and each potential suppliers’ compliance with the draft contract assessed by the public body as a part of the ‘most economically advantageous tender’ criteria set out in the tender which will also assess the suppliers response to the tender in terms of quality, cost, ability to meet deadlines etc.
It must now be recognised by the Government that the risks associated with outsourcing can be mitigated so as to place the debate firmly within the middle ground discussed above and so that the Irish public sector can move towards significant strategic in-shore (domestic) outsourcing over the coming years. While this will require major changes in the public sector, the time is right and this strategy will benefit the country as a whole.