Keeping it Boxfresh…

I was recently with a client and the strategic partner that I helped them to procure. There was a palpable sense of anticipation on both sides in the run up to services transitioning – big things have been promised.  There was also a sense of relief that the procurement, which was intensive and high profile, was finally completed and the services could transition.

The first flush of enthusiasm is crucial in any relationship.  I have seen deals signed in the past with some of the key team members on each side barely speaking to each other by the end of the negotiation.  Generally this tended to be borne out of the frustrations of an extended preferred bidder period under the negotiated route and I think the adoption of competitive dialogue as the preferred route for complex procurements has been a tremendous step in the right direction.

Also crucial in any relationship is the need to retain the excitement at a partnership’s initial potential through to maturity of operations.  It might be argued that interest levels should be particularly heightened as the relationship nears the end of its term.  Yet this often doesn’t happen.  We have seen the termination of major service delivery partnerships (in whole or in part) attributed to a failure to provide ongoing value for money as circumstances change.  Sometimes the causes are environmental – economic slowdown, reduced capital expenditure etc. – but often these are exacerbated by a structural mode and contract that is fit for purpose on Day One – but not flexible enough to deal with the three thousand or so different days that follow.

Day One is usually great for the client because generally there is an immediate saving to go with the promise of guaranteed service levels which should increase as transformation takes place.  Of course an immediate reduction against baselined costs is generally a necessity given the current financial pressures on public sector organisations.

I completely get the suppliers’ point of view as well – how can they invest the sums required to provide genuine transformation and the Day One savings if there is not the security of a ‘run-out’ period at the end of the contract where they can extract their return?

Traditionally, large service delivery partnerships have been characterised by an imbalance between cost and price in order to satisfy these competing pressures. At the start the supplier is effectively funding the Council’s transformation, possibly across a range of services and typically involving investment in change resource, technology and the costs of headcount reduction/redeployment.  As the operating costs of services are reduced and the investment repaid there will be a point where revenues earned match the cash outlaid to date.  From that point onwards the supplier is essentially taking the difference between price and operating expenditure as pure profit.

All very reasonable if looked at over the term.  But political terms tend to be measured in cycles of 4 years or so – in a local authority for example.  An incoming administration in year 7 of a 10 year contract is perhaps less interested in historical benefits but wonders why its officers are telling them that supplier fees will not fall in direct proportion to proposed volume reductions, or the rate card for equipment and consumables is more expensive, but they can’t spot purchase from an internet supplier.

So how to retain that ‘box fresh’ view of a services partnership from both sides throughout the term?  I think the key things to get right are:

1 – realign the cost/price curves so that there is less disparity and, in particular, a clear link between operational efficiency improvements and changes in (unit) price.  The latter’s profile should generally be downwards throughout the term.

2 – Incentivising effective service integration whilst at the same time retaining the ability to incorporate, exit, or transfer components between supply chain partners depending on a continuing demonstration of value for money.

In other words any partnership contract must find the right balance between the delivery of short and longer term benefits and embed commercial levers to keep suppliers on their toes. 

In practice this is not always easy.  Clearly there will be a balance between a client being able to retain the flexibility to shop around from time to time, whilst maintaining a partners stake in delivering overall strategic transformation as an outcome.  This is partially addressed by standard form change and benchmarking provisions, but the application of these tools is still limited by the basic structure of paying a single supplier for monolithic blocks of provision.

An alternative might be to look again at service integrator models.  These have become the vogue in the current tranche of ICT re-procurements in central government departments.  Plans for tower models of delivery and SIAM (Service Integration And Management) abound – and clearly there is a strategic intention on the part of the Departments to reduce their exposure to single large scale delivery partners.   The Government clearly believes that by following this tower model approach it can inject regular bursts of improvement impetus into the supply side and avoid the embarrassment of being tied into disconnected pricing structures and poor value sourcing of equipment and consumables.

The model in essence involves the engagement of a prime contractor as integrator for discrete components of ICT provision e.g. applications, desktop provision, networking etc. which may be supplied by other best of breed providers.  The benefits of this approach can include:

  • ·         Increased competition from a wider supply chain (including SMEs)
  • ·         Ability to choose best of breed within an overall package
  • ·         Retention of overall risk transfer to the prime contractor

Balanced against that is the potential for additional management overhead in driving collaboration and also the risk of margin on margin taken by the lengthened supply chain as costs flow through a number of different books.  Clearly the proposition that benefits will generally outweigh the risks for mature ICT outsourcings has been accepted wholesale by this Government given the approach is being adopted across a range of current ICT re-procurements.

Is this approach suitable for other parts of the public sector such as local government, blue light services, or regional health commissioners and providers?  And can it be extended beyond ICT?  I believe the answer is a qualified yes on both counts.  Indeed one can look at construction/property partnerships, highways maintenance contracts, LEPs etc. to identify examples of where a prime and supply chain structure has been created to deliver specific components of a contract. 

The qualification is that these contracts tend to be of scale – often involving distinct build and operational phases and to all intents and purposes minimal design risk.  Design though is a fundamental part of the response to any transformation requirement, irrespective of the capital investment involved.  And in some areas (corporate and transactional services for example) the market would argue that they have developed a single supplier offer which can accommodate the totality of risk transfer from design through to operations and avoids the margin on margin effect of sub-contracting components.

Adopting a ‘Tower’ model across wider local public services thus becomes a challenge to scope an effective integrator or managing agent role for the traditional BPO firms, whilst maintaining vendor neutrality over the individual services or service components.  The business case for such an approach therefore rests upon the additional value that the managing agent can extract through collaborative efficiency, smarter sourcing and the management of volume, over and above the direct savings from individual service transformation which can be achieved with a more simple model.

Our argument in favour of exploring this concept is supported by the evidence of a recent procurement, where we extracted a commitment from bidders to substantial additional savings from the inclusion of a managing agent role within a wider package of corporate and customer services.

The best way to test potential models is of course through a competitive dialogue with the market based on carefully drafted requirements covering flexibility, continuous improvement and collaboration.  Investing time in designing a procurement route that allows a range of traditional or tower solutions to be tested in the early stages, before narrowing to a preferred option is highly beneficial.  As ever, it also helps to seek advice from a specialist procurement advisor on retaining this flexibility within the constraints of a timetable and good procurement process.

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