Outsourcing: the devil in the detail
Steve Bishop is Strategic Director for South Oxfordshire and Vale of White Horse District Councils
Local authority outsourcing has been back on the front pages recently and unsurprisingly the news has not all been good. Well, let’s be honest, none of the news has been good.
Allegations of incompetence and suspicions of fraud have prompted a government review and no doubt the results will make for interesting reading for local government.
At South Oxfordshire DC (South) and Vale of White Horse DC (Vale) we’ve had more than our fair share of experience with outsourcing, both good and bad, and as we see ourselves potentially progress more towards the ‘commissioning council’ model, now seems like a good time to reflect on our experiences and what lessons we can learn.
Before I delve into the mess we found ourselves in some years ago I should start by saying that our contractor, Capita, is now delivering excellently across the full range of services we’ve outsourced to them. We’re now paying bonuses on every aspect of the contract because their performance is so high. Getting to this stage, however, has been far from straightforward, there was a dark age early in the contract.
We signed a seven year deal with Capita back in 2006 which, on the face it, was going to give us, the council, an attractive level of savings across the Revenues and Benefits Service plus investment in technology and was going to give Capita a positive return over the course of the contract.
We chose not to outsource our accounting function at the council but owing to a creaky old system at one council we did ask Capita to provide and maintain a new financial management system. So the outsourced firm would be providing systems support for the in-house team: a little unusual but, we thought, nothing to worry about.
How wrong we were!
South and Vale agreed that Agresso was their preferred choice of software and Capita, who were tendering for the entire contract at the time, agreed. We were already running Agresso at one council and had installed it ourselves so we wanted the other council to use the same software which would both improve their performance and put us both on the same system.
It all looked so very low risk and that’s what we wanted. But here comes the devil in the detail. When Capita won the contract and went to the market to buy in the Agresso system they used their massive bargaining power to get a great deal on the very latest upgraded version of the software – which was not, it turned out, the same version we were already running. We never thought to specify the specific software version in the contract.
So whereas we thought there would be no change for one council and a tried and tested version of the software would be installed at the other, both councils ended up with something that neither knew how to operate and which was unproven. We were basically about to become guinea-pig sites for the new software and, at that stage, we didn’t even know it.
To complicate matters, we made some choices internally about project management that with hindsight we’d have done differently and Capita hired someone to install the software who brought an additional set of complications with him. The demands of the relatively untested new system began to tell on the project team and as problems began to emerge, key players tried to keep a lid on them and sort them out themselves rather than escalate them to senior management.
We’d decided to go ‘big-bang’ rather than run the system in parallel – another mistake – and as we got closer and closer to migration date rumours began to circulate that all was not well. So five months in to a six month project cycle, almost at the eleventh hour I discovered that both councils were about to implement a brand new untested system.
Migration date came, we went live as planned after assurances that everything would be fine, and the system fell over.
Pandemonium swept through the two councils. For the next six months managers and administrators across every service were suddenly spending half their time on financial administration that had previously taken up 5% – 10% of their time, at the expense of their service. Utility companies were threatening to cut off supply because they weren’t getting paid. Customers weren’t receiving invoices, income was under-recovered, financial monitoring reports were unreliable. It was a mess.
A tiny piece of information about an upgrade of software to be used in a peripheral part of our contract compounded by a sequence of missed opportunities to communicate among project teams almost ground South and Vale to a standstill.
So what then were the lessons? Well, in looking forward to future commissions, here’s some of the checklist I use:
- Goal congruence: do both parties at least share goals that complement each other’s? We believed we did but when Capita saw an opportunity to run brand new software and develop its expertise in that area, it conflicted with our goal to keep financial management systems a low-risk area.
- People and communication: you can have the best contracts in the world but it’s ultimately people who talk to each other (or don’t) and that make them work (or not). If you’re unsure about any of the key people on either side of an outsourcing arrangement, you need to address that early in the project.
- Step-in rights: spend some money on a good contracts lawyer. Thankfully we did just that and when every other avenue had been exhausted we were able to temporarily take back control of the situation and rectify the problem. We probably spent £100k on two consultants (one a contracts lawyer) prior to signing the contract and they were worth every penny as they prophesied every ‘doomsday scenario’ and built in mechanisms to cope.
- Payment and performance: we’ve paid Capita well when they’ve performed well and we’ve been able to impose deductions when they haven’t. It’s vital to the shared goals agenda that you agree on realistic performance goals and write them into your contracts. Make sure your partner is rewarded if they do what you want them to. Conversely you need a big stick to hit them with when things go wrong. Outsource firms are profit-motivated which is no bad thing – you can use that to incentivise them far more effectively than you can do with an inhouse team.
- Risk transference: ask what it will cost you to transfer the risk of a project to your partner and weigh that cost up against keeping some risk (and control) in-house. Your decision should be based on who is best placed to control the risk – if it’s you, don’t pay your partner an excessive premium to manage it. But if the risk sits with your partner understand that they’re going to want to be remunerated for it.
Finally I would like to reiterate that Capita and the councils weathered the storm and saw out the dark age, to enjoy many bright dawns since – thanks to learning these lessons and prioritising the need to succeed together over the temptation to try winning every contractual battle.
The devil is in the detail, all right. Would like more detail behind the remark “We’re now paying bonuses on every aspect of the contract because their performance is so high”. Any chance that performance was inadequately defined in the contract? What has been the impact on demand?