Industry voice: Funding Transformation. Part 1 – The Starting Point

22 Dec 2015, 12:10 am

Identifying the ‘fat’ in old, large supplier contracts and renegotiating to free up savings removes some of the major, common barriers to transformation, argues Bromley. 

SqueezeSpongeOne of the issues touched on in the last blogs from from Chris Chant and Denise McDonagh was where you find the funding to deliver transformation. They put forward the view that incumbent large supplier contracts can be a rich source of savings.

Giving some definitive views on how to go about this is going to be tricky as I fully acknowledge every public sector organisation is going to have different variables including pricing start point; contract end dates; service requirements; politics; and supplier relationship.

However, there are definitely going to be some common themes and considerations.

Firstly, since the 2009/2010 Spending Review, ICT costs have been under a greater degree of inspection as most government departments are under pressure to deliver savings. I’d be willing to bet that most central government organisations have already picked the low-hanging fruit in terms of cost savings for example, single device, auditing invoices, turning off unused phone lines, cutting projects and decommissioning unused applications.

Ideally those savings would be funnelled into the next more complex round of savings initiatives, but potentially they have been banked elsewhere. If that’s the case, then organisations will find themselves in the difficult place of having to ‘save to spend’ rather than ‘spend to save’.

Central Government is approaching a peak in the larger contracts signed in the early 2000’s coming to an end (with either no further options to extend, or government policy preventing a like-for-like renewal). Most organisations are going to be operating in an environment where:

  • if there is limited chance of a renewal, what’s in it for the supplier to co-operate with cost saving initiatives, when the forecast for the financial year has been set?
  • with the contract expiring and the need for a smooth transition to a new arrangement, you may feel your bargaining power is reduced.

Limited room to manoeuvre?

Larger ICT suppliers tend to reinforce the view that there is limited room to manoeuvre to deliver savings, unless there is an extension. Certainly a common message across many large ICT supplier contracts is that they are running at a low margin or at a loss when measured over the life of the deal.

I always view this with a degree of scepticism. While no doubt suppliers do often overspend on change programmes, move one or two layers up the profit and loss statement of the account to the returns the company is making, and everything starts to look a lot rosier.

Given the lack of transparency in most of the large complex deals, it’s hard to tell where costs are coming from.

Are you 100% certain the supplier isn’t just booking staff bench costs to the profit and loss statement of your account? Do internal recharges from the wider company’s cost centres truly reflect costs, or is your account forecasting a loss, while the cost centres are performing quite healthily?

The cynic might suggest that this is done to drive a certain behaviour from staff on the account to try and increase revenue and profit and offset the supposed loss (how many of us have seen eye-watering costs for quite simple tasks?).

I’d also place good money on contract staff or commercial staff feeling slightly frustrated when someone outside of day-to-day contract operations turns up saying; ‘we need 20% savings by date x’; or ‘just tell the supplier to give me x million off the bill next year,’ with neither supporting evidence nor an idea of how to leverage on the supplier.

Alternatively, staff may not be entirely on board with moving away from the existing buying model, primarily from not having had the opportunity to experience a different approach. Also, their day–to-day work is focused on managing the incumbent supplier.

So to sum up, your renegotiation is happening in a world where:

  • there is potentially limited support as in-house staff and the supplier may not be on the same page money can be saved.
  • the ‘easy wins’ have been carried out, the savings banked and are unable to be reinvested in other cost saving initiatives.
  • if you outsourced, staff just haven’t been given the chance to learn about new ways of doing things (perhaps for fear of change).
  • you’re under pressure to deliver a smooth transition away from one contract to another with limited bargaining power.

Rock and a hard place

However, not tackling this situation of continuing to fund the older services, while being unable to transform, is going to leave you between a rock and a hard place when the time comes to move as budgets are under pressure.

If the situation is this bleak, why are people saying to look at these deals? Well presumably it’s because that is the only pot of money to do something with. But also, consider the features of the ‘mega-deal’ buying model and where it has left us.

On paper, it was a fantastic promise:

  • sign up with global providers, experts in provision of ICT services.
  • bundle all your ICT requirements together to achieve economies of scale and gain some impressive double-digit savings.
  • sign a long-term deal to allow for a supplier who understands your business and can provide innovation and partnering behaviours.

In reality, the initial procurement did largely give some incredible savings. Whereas in the original procurement the balance of power is clearly with the buyer, once into business as usual, the power shifts to the direct opposite and is with the supplier.

This is because a lot of the larger deals set themselves up to award more work via projects to the provider, effectively moving from a competitive environment to a monopoly.

So taking a situation where a quasi-monopoly has run for a number of years, a supplier’s staff have been encouraged to recover to the actual cost base (rather than honour the risk transfer under the original deal) and where numerous uncompleted change control requests have gone through the contract, it doesn’t seem an unreasonable hypothesis that there is ‘fat’ in the older, larger contract.

That said, it is still going to be a challenge to reduce these costs.

But more on that in the next blog.

Daniel Bromley works with niche consultancy Rainmaker Solutions. He has worked in commercial roles within the public sector in Defra, Rural Payments Agency and the Home Office and also undertook a secondment to the private sector to understand outsourcing from the supplier’s point of view. 

Top image credit: Mick Stephenson CC-BY-SA via Wikimedia Commons