How to avoid making schoolboy errors

If outsourcing is bedevilled by what Reuters’ Ron Jarman calls “schoolboy errors” it makes sense to look closely at the prelude to the signing of the contract. The PA study makes clear that mistakes and misunderstandings at this stage can have all sorts of negative consequences after the deal is done, and can set the tone for the future relationship.

This is the stage, too, where not only clients and suppliers but also lawyers, consultants and other advisers are actively involved. After the contract is signed, it may just be the clients and the suppliers who remain in the fray – unless things get so bad that the lawyers are hauled in again.

The issue of due diligence – and the fact that many companies do not do much or even any on their prospective outsourcing suppliers – seemed for our discussion panellists to encapsulate the mistakes that occur all too frequently when outsourcing deals are being discussed.

As David Hamlett of Wragge & Co, put it: “The biggest risk in IT, when IT is fundamental to your business, is when the IT supplier goes pop….it is the most worrying thing that due diligence is not being done, and it could be done. 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 that the basics are forgotten.”

In partial defence of the clients, PA’s Jonathan Cooper-Bagnall pointed out the difficulty, for those leading the outsourcing project on the client side, of going to their chief executive and justifying the expense of conducting thorough due diligence, when the proposed supplier is a household name and tier one provider.

One of the reasons for clients’ mistakes on this score and many others is resource constraints, says Mr Hamlett. “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.”

This was one reason why many panellists thought consultants and lawyers had an important role to play as intermediaries in the process, getting involved as early as possible. But panellists also had specific recommendations for clients and suppliers, to help deals go more smoothly.

From the client side, Mr Jarman pointed out that suppliers were doing IT outsourcing deals all the time whereas clients did them less often. “I’d like to see suppliers saying to us ‘Look, you’re doing this wrong, you’re approaching the aspect of procurement in the wrong way, we don’t really understand your objectives unless you explain it properly’.”

For the suppliers, Ian Roy of Capgemini said the issue of understanding objectives was a two-way process, and a lot of the procurement process was about the supplier trying to understand what the client was trying to ask for. “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.”

Mr Cooper-Bagnall urged clients to ensure that they have their message straight and that all the various stakeholders in the organisation are singing from the same hymn sheet. The PA consultant recalled taking part in a workshop with senior stakeholders in a client company, which appeared to show they were agreed on the priorities leading them towards an outsourcing decision. Afterwards one-on-one discussions revealed this was not the case.

The importance of interest at senior level within the client company was also stressed. Mr Hamlett said one of his supplier clients had recently introduced a rule that they would not bid for a contract unless their prospective customer had a main board director sponsoring the outsourcing project.

Mr Jarman thought clients should go further: “I’d like to see suppliers saying ‘no more bad deals’. I’ve…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.”

And when deals do go ahead, it is important not to miss a trick in the final stages of negotiation, says Whitbread’s Ben Wishart “When it gets to 3am on the day we sign, people on both sides 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.”

If clients use consultants who can advise on when a good price has been reached, he added, they can concentrate on building a deeper relationship with the supplier rather than wasting three months trying to shave “another nickel and dime” off the price.

The issue of building a relationship has particular resonance within the public sector, as both Mr Roy and PA’s Fons Kuijpers pointed out. If the procurement process is run under Official Journal of the European Union rules, said Mr Roy, the initial phase is run at arms length, with very little dialogue between the client and supplier. As a result, the supplier is trying to interpret written instructions from the client or adviser, which may lead to some initial misunderstanding or incorrect assumptions.

Mr Kuijpers said the intense scrutiny that deals in the public sector faced was the big difference between it and the private sector. “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.”

Given the spate of public sector deals expected in the next few years, that is food for thought for all those involved in outsourcing.

■There is a full transcript of this debate at www.ft.com/dbtranscript.

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