Viewpoint Outsourcing – how to do it right Charles Sinton
Charles Sinton is Commercial Director at Rollright Facilities Management Limited, Chipping Norton, UK
ho is the best person to run your core business? The answer to this one is easy: you are. And who is the best person to run your non-core activities? Careful, you may need to think again because the answer is: you are. But, and inevitably there is a but, this is only true if you have complete control of recruitment, staff development and management, plus a good handle on all the latest legal issues for compliance and Health & Safety, for each of those non-core activities. Importantly, because your energies are best spent working on core business activities, this arrangement will only work if there is a second ‘‘you’’ to concentrate on the non-core side of things. If this is not the case, then the correct answer to the second question will always be an outsourcing partner.
Organizations are often reluctant to relinquish control of core services but the trend in appointing outside contractors to handle non-core activities should and can work well if arrangements are handled carefully. There have been a number of recent disasters in outsourcing deals among well-known companies. Looking at these reveals some very muddied thinking among a group who really ought to know better. In fact, it is among the global players, where there has been an almost relentless drive to outsource some aspects of the business, where the best examples of how to get it wrong can be seen.
Jumping in too quickly The British Broadcasting Corporation (BBC), for example, the ‘‘envy of the world’’ as we are assured by each successive Director General, was at the centre of a global-sized outsourcing debacle. News of the BBC’s disaster spread like wildfire and generated its own humor: ‘‘How many BBC employees does it take to change a light bulb: none, it has to be done by outsourced service provider Land Securities Trillium at a cost of £150 . . . but only after the risk assessment team has paid a call.’’ This old Private Eye joke, as retold in Estates Gazette last summer, highlights the complexity and stupidity built into the BBC’s £828m outsourcing and development deal. It contains more than a kernel of truth and a warning for the rest of us involved in this industry. Whose fault is it that a deal which was supposed to last 30 years and save the BBC at least £124m has been abandoned and the facilities management contract aborted? If huge conglomerates can get it so wrong, where do we look for our best practice benchmarks? On reflection, what emerges from these disasters is that the parties involved simply jumped into bed together too quickly. Government departments in particular seem prone to enormous project overruns and budgetary incompetence. And when commercial institutions get it wrong shareholder value can be seriously undermined. Companies need to find a middle line between the gung-ho approach adopted by some global conglomerates and the timid approach that often stifles smaller owner/managed businesses.
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One way to find the middle ground is by a careful review of the tendering system. Making sure that tendering enshrines an organization’s strategic as well as its operational objectives is an essential safeguard. The BBC maintains it followed a very strict set of evaluation criteria and a process based on European Union procurement rules. All of its short listed providers were scored on a number of factors, such as understanding of the marketplace, technical ability and likely cultural fit. Each of these was then weighted according to BBC core needs. When that process was finished a simple cut was made at the top three on the scoring chart. It was a very formalized procedure according to John Varney, BBC Chief Technology Officer. However, there were some dissenting voices, most notably from the unions. The BBC’s drive to outsource various IT initiatives including the sale of BBC Technology to Siemens business services (a £2bn, ten year partnership deal) attracted strong negative comment from a BECTU spokesman. ‘‘[BBC Technology] is essential to the functioning of the BBC. It’s a bit like selling your nerve system, and we think that’s pretty dangerous.’’
Enhance your core Deutsche Postbank AG (DPB) decided to take a more logical approach when it came to the strategic review of the administration function at their London branch. With a team of just under 100 and a business focused on treasury and property finance, it was clear that the core activity could be enhanced by a facilities management provider to which they could outsource a range of non-core business processes that were costly and time consuming to manage. DPB’s starting point was a clear understanding of what constituted their business and its strategy; their next crucial step was to look for outsource providers who would become partners, able to understand and work within their culture. Following these two simple rules ensured that no one lost sight of the big picture when pitting the nitty-gritty of provider capabilities against the detail of the project requirements. There is undoubtedly a scarcity of outsource providers who have the flexibility and breadth of offering to really serve the mid-market segment described here. Clarel Sookun, Assistant Director – Head of IT at Deutsche Postbank, advises that it can be difficult knowing what to look for if you are new to the outsourced FM market: ‘‘We were looking for a reputable provider who would be flexible enough not only to meet our identified requirements but who would understand our business quickly enough to recommend and implement ideas we had not thought of.’’ The bank retained Rollright Facilities Management to manage building security and bring the required economies of expertise to the facilities management function overall. The real benefit for DPB was that its core management was not distracted from day-to-day objectives. The partnership between outsource provider and client ensured that risk management was improved through tighter financial controls and reportage, and ultimately, FM was allowed to work efficiently in the background.
Simple but effective: know your core business It may sound bizarre but problems often occur when firms fail to appreciate what business they are actually in. The Institute of Directors (IoD) originally outsourced their catering department back in 1989. Since then the value of their hospitality department grew substantially to become a business division with a turnover of £7 million, within an overall company turnover of £32 million. The original tasks required of the catering supplier continued to be fulfilled but the strategic importance of the function had grown out of all recognition from its original inception. The IoD’s core business revenue is comprised by its membership fees followed by income generated by members dining and entertaining at their Grade I-listed London premises. The catering function, from the supply chain all the way to the chef, continued to be outsourced until a strategic review by senior management. Part of the problem, it emerged, lay with the contract being formulated in such a way that management profit lines were not
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clearly defined. There was always a liability, or a perception that proved hard to dispel, that margins could be generated in the delivery of goods. Of more strategic importance, it was realized that a core function of the IoD is to allow its members to entertain their clients. Redefining the catering function as a core business activity and bringing it back in house has resulted in better control of this key area. Ian Campbell, Director of Corporate Hospitality states, ‘‘If we want premium Welsh Lamb I can now be assured that we get it.’’ More importantly, the IoD can source chefs and staff from a hospitality background (restaurants, hotels) rather than necessarily contract catering. ‘‘We have now achieved real management control of this core area of our business.’’
And if it goes wrong . . . If, for whatever reason, the relationship between outsource provider and client company breaks down, then both should look to part company. It will become inevitable anyway. Before that happens, there is a danger that the day either party is simply ‘‘not happy’’ is the day that the operation will begin to fail. Ultimately it is essential to have break provisions in a contract but these must reflect the strategic importance of the business provided. Relationships must always be built on trust – if survival is threatened on either side an unproductive contract will inevitably follow. At a strategic level, outsourcing is about de-risking business process and becoming a fully integrated business partner. However, well-knitted services cannot be easily undone and contracts should reflect the fact that neither party should be able to break a contract arbitrarily without due time and process. Lasting partnerships are those that invest time and effort in both the good times and the bad. A marriage is distinctly different from an affair! Having spoken about disasters within conglomerates, the partnership approach has been a hallmark of many successful companies in the mid-market sector. All companies would be best advised to become comfortable with discussing and sharing their operating processes with their outsource provider whilst remembering to keep a clear eye on their overall business objectives. These steps should lead to the rediscovery of outsourcing’s phenomenal ability to improve the bottom line. Reducing business risk, improving financial control, driving down costs and improving service should then naturally fall into place once the business objectives are fully understood.
Reference Bill, P. (2005), ‘‘Outsource’’, Estates Gazette, available at: www.outsourcemagazine.com (accessed November 2005).
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Published on Feb 20, 2009