Thursday, July 05, 2007

Cost control key to outsourcing deals


Predicting the financial benefits of an outsourcing deal is a challenge for any organisation, as the BBC found to its cost.

The Commons Public Accounts Committee (PAC) last week reported the BBC told its Board of Governors that savings from a 10-year contract with Siemens Business Services were guaranteed at £35.2m per year, but it has delivered only £22m.

‘There was no provision for the BBC to share profits above an agreed level. Indeed, the BBC has not checked on how profitable the contract actually is for Siemens,’ said PAC chairman Edward Leigh.

Details of supplier profitability are becoming standard in any outsourcing contract, as making too much money might mean the provider is cutting corners.

‘A supplier needs to have transparent pricing, and the BBC should have been studying the books carefully to make sure Siemens was doing things correctly, as well as having a measure of control over internal policies,’ said Mark Kobayashi-Hillary, director of the National Outsourcing Association.

The PAC report also criticised the BBC for buying from other suppliers outside the contract. This is a significant danger in large organisations, where some departments might have trusted vendors they are unwilling to change.

‘With a huge contract such as this, there is a lot of bureaucracy involved in procurement. Sometimes it’s cheaper and faster to buy through other routes, undermining the monitoring and control of IT spending,’ said Kobayashi-Hillary.

To prevent this, all departments must understand the contract’s long-term value, and procurement through the supplier should involve as little red tape as possible.

Companies must also ensure their original analysis of IT spend is accurate, and take into account falling technology prices when calculating savings.

Companies also often forget to factor in the money that will be spent managing the contract. This can be as high as five to nine per cent of the contract value,’ said Lutz Peichert, vice president of consulting at analyst Forrester Research.

These are all common mistakes for first-time outsourcers, and combined they can make a huge difference.

A well-conducted analysis should be accurate to within one to two per cent, significantly closer than the BBC’s 38 per cent margin of error.