The Challenges of Second Generation Outsourcing
As many of outsourcing contracts that were signed in the late 90s come up for renewal, clients are facing a new set of challenges as they prepare to enter second generation deals, particularly if they are considering dumping their existing supplier.
Dec 12, 2006
How have procurement processes and the supplier marketplace changed since the original deals were signed off? How do you attract other suppliers to compete for work that is under the control of one of their rivals? And how do you ensure that your incumbent supplier plays ball if you decide to switch over to a new vendor?
Eduard Murray, head of commercial strategy at the BBC, said: "You have to approach a second-generation outsourcing deal in the same way that you would your first deal." Murray was one of the key players within the broadcaster that recently oversaw the replacement of EDS vehicle Medas as its main finance and accounting outsourcing provider with Xansa, earlier this month.
Speaking at last week's National Outsourcing Association annual event in London, Murray said: "There was a tendency to think that because we had done an outsourcing deal before, we were experts at it. But we did some research, and we were amazed at how much the market had changed in the nine years since we signed the original deal. Back then, shared services were at a very embryonic stage, and there were very few suppliers on the market."
Given the greater choice on offer in the supplier marketplace, the BBC drew up an initial shortlist of seven suppliers, and had a total of 25 meetings with each player as part of the selection process. Several of the companies, including India's Genpact and Infosys, were offering offshore delivery as an integral part of their proposition, so the BBC flew 25 key stakeholders within the BBC out to India to prove the case for global sourcing a potentially sensitive issue for a public-funded body.
One of the main challenges for any client that is considering switching outsourcing supplier is to attract sufficient interest from other vendors. Unless the existing relationship has been an unhappy one, the incumbent supplier always starts off in the box seat on any second generation deal as it understands how the client's business works, and it owns the staff that are delivering the service, which means that other bidders need to be incentivized if they are to commit serious resources to pitching for the deal.
Tom Fussell, deputy group financial controller at the BBC, said: "There was no competition on the first generation deal, but this time around, we knew we needed to create a level playing field for any interested parties. Some of the bidders had no experience of public procurement, so we pointed them towards our advisory firm, PwC, for advice if they were too embarrassed to come to us directly. Also, the incumbent had more knowledge of the business than anyone else, and two of the bidders also had existing relationships with the BBC."
Fussell said that they did this by insisting that those vendors already working with the BBC had to create Chinese walls in order to separate the people working on the bid for the new deal from those involved in the day-to-day running of existing contracts. Murray said: "We told them that we would take them out of the bidding process if we found out that they were breaking their promises."
This sounds like a good idea on paper, but is it enforceable at a practical level? Murray insisted that news of a supplier being dumped out of a tender for this reason would spread quickly, and might make other clients think twice before putting them on the shortlist. Marcus Evans, an associate at legal firm Norton Rose, agreed: "The damage that would be done to their reputation in the marketplace should they not co-operate is a pretty big stick."
So accommodating was the BBC's incumbent F&A services supplier, EDS, that it agreed to collaborate with the BBC in giving a presentation to the other bidders on how the service worked. "Your incumbent knows more about the service than you do," said Fussell. He added that one of the keys to keeping the incumbent onside was to keep them in the loop in terms right through the course of their involvement. "We always let them know in advance of any major decisions, before we communicated them
Eduard Murray, head of commercial strategy at the BBC, said: "You have to approach a second-generation outsourcing deal in the same way that you would your first deal." Murray was one of the key players within the broadcaster that recently oversaw the replacement of EDS vehicle Medas as its main finance and accounting outsourcing provider with Xansa, earlier this month.
Speaking at last week's National Outsourcing Association annual event in London, Murray said: "There was a tendency to think that because we had done an outsourcing deal before, we were experts at it. But we did some research, and we were amazed at how much the market had changed in the nine years since we signed the original deal. Back then, shared services were at a very embryonic stage, and there were very few suppliers on the market."
Given the greater choice on offer in the supplier marketplace, the BBC drew up an initial shortlist of seven suppliers, and had a total of 25 meetings with each player as part of the selection process. Several of the companies, including India's Genpact and Infosys, were offering offshore delivery as an integral part of their proposition, so the BBC flew 25 key stakeholders within the BBC out to India to prove the case for global sourcing a potentially sensitive issue for a public-funded body.
One of the main challenges for any client that is considering switching outsourcing supplier is to attract sufficient interest from other vendors. Unless the existing relationship has been an unhappy one, the incumbent supplier always starts off in the box seat on any second generation deal as it understands how the client's business works, and it owns the staff that are delivering the service, which means that other bidders need to be incentivized if they are to commit serious resources to pitching for the deal.
Tom Fussell, deputy group financial controller at the BBC, said: "There was no competition on the first generation deal, but this time around, we knew we needed to create a level playing field for any interested parties. Some of the bidders had no experience of public procurement, so we pointed them towards our advisory firm, PwC, for advice if they were too embarrassed to come to us directly. Also, the incumbent had more knowledge of the business than anyone else, and two of the bidders also had existing relationships with the BBC."
Fussell said that they did this by insisting that those vendors already working with the BBC had to create Chinese walls in order to separate the people working on the bid for the new deal from those involved in the day-to-day running of existing contracts. Murray said: "We told them that we would take them out of the bidding process if we found out that they were breaking their promises."
This sounds like a good idea on paper, but is it enforceable at a practical level? Murray insisted that news of a supplier being dumped out of a tender for this reason would spread quickly, and might make other clients think twice before putting them on the shortlist. Marcus Evans, an associate at legal firm Norton Rose, agreed: "The damage that would be done to their reputation in the marketplace should they not co-operate is a pretty big stick."
So accommodating was the BBC's incumbent F&A services supplier, EDS, that it agreed to collaborate with the BBC in giving a presentation to the other bidders on how the service worked. "Your incumbent knows more about the service than you do," said Fussell. He added that one of the keys to keeping the incumbent onside was to keep them in the loop in terms right through the course of their involvement. "We always let them know in advance of any major decisions, before we communicated them