Many outsourcing deals done in the early "noughties" were hailed as the great solution – they would deliver savings and ensure continuity of and improved service levels. Now, as businesses, local and wider government all focus in on cost reduction, can outsourcing be a useful tool in their armoury as they seek to tackle the challenges of the credit crunch?
In the private sector we are seeing outsourcing deals that were considered great value several years ago coming under close scrutiny - so many businesses are looking at the tools available to them to renegotiate, break up the scope of services originally passed to the service provider, market test or benchmark. The softer contractual levers that we dreamed up in better times (and which many thought would never be used) are proving unexpectedly useful in a number of cases.
In the public sector we are seeing major announcements around sharing of services both north and south of the Border. In Scotland Sir John Arbuthnott has looked into the savings that can be generated across eight local authorities in a bid to save up to £70 million over five years. In London we have three local authorities looking to merge back office functions and other services. All of this comes over and above the existing outsourcing activity already going on within individual local authorities in areas such as culture and leisure, waste etc. Single buyer outsourcing has its challenges, for shared services where there are several procuring authorities it will be even more critical to get some of the softer aspects of the deal right.
But this is not a case of all outsourcing being necessarily "failed" – there is no doubt that outsourcing entities often over estimate what a service provider can deliver for them both in terms of cost savings and improved service levels. Equally, service providers often take time to get to know the business they are providing services to and need to be given the time and opportunity to do just that. Over the years, however, the outsourced business model has forced changes into the management of key service areas, has changed working practices and business processes and has allowed everyone involved to challenge the status quo – following an outsourcing of a key business service, it should never be possible to argue that service provision needs to be carried out in a certain way "because that's how we have always done it".
So, as the outsourcing market has matured so have the attitudes of outsourcer and service provider. New deals are still being done but the market feels very mature. Parties on both sides of the table know the types of things that can cause problems in these long term relationships - contract negotiations can be better informed as a result (and also harder fought). As a lawyer involved in these relationships we constantly need to strive to get the end product right - a contract that creates the right balance between certainty and flexibility. A contract that allows the relationship to develop with the changing needs of the outsourcing business. Critical to this is to ensure the person writing the contract documents and the person who understands the service being outsourced work well together and both truly understand what the other needs to produce a set of documents that works well over time.
I would be pretty rich today if I could bank the number of times a client has referred to the fact that the contract will be "put in a drawer" or "is not relevant". For me, however, it is the definition of defeat. Our job is to put not just the detailed commercial deal on paper between two very different organisations, but to do so in a way that feels like a handshake between trusting friends who have common goals - perhaps that is an impossible task but the project team on every outsourcing should challenge itself to achieve just that. Standardisation of documents has its place, but it is no substitute for understanding the specific needs of both the client and the service being outsourced.