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Four Ways to Unlock Value in Government Outsourcing
By Samir Jog, Engagement Director, Everest Group
To derive the most value from outsourcing within the government sector, buyers and suppliers need to work together to minimize the inherent risks in the market while capturing new opportunities for value creation.
We recommend four key steps to success:
- Invest in more transparent and upfront communication. Quite often, a government department is fraught with uncertainties outside its control. For example, political changes in the middle of a contract term often result in a change in objectives.
Quite often, these uncertainties may also be self-inflicted. For example, lack of proper base-lining, detailed account/inventory of the existing services to be outsourced, and adequate syndication are common crimes committed by both buyers and suppliers. This was especially true in the post dot-com rush, and such transitions have since resulted in re-bids and remediations.
To minimize risk, both sides should improve transparency in current and future plans. For example, they should settle on a mutually-agreeable baseline, which accounts for potential changes going forward, including government changes, inflation, etc. Similarly, commitment to a timeline and decision criteria early on would help mitigate the uncertainty risk during the pursuit phase.
- Adopt a piece-meal approach that follows a larger sourcing plan. In order to minimize risk and maximize flexibility, both governments and suppliers need to phase implementation and scope in a piece-meal manner. To do so, they must recognize that each process has an inherently different risk-return trade-off at the point the decision is being made, creating a right time for each process to be outsourced.
However, don't confuse this with an ad-hoc transactional approach, where buyers outsource bits and pieces at random without looking at the big picture. The buyer and supplier must put together a sourcing strategy that ties the pieces/chunks together by taking into account technology and outsourcing trends. Once this is established, a piece-meal approach will help reduce risk.
- Focus more on outcomes, not cost. Typically, the procurement process, probity rules, deal drivers, and governance in government deals are quite over-bearing. This is because government agencies audit these deals; this can often result in misguided analysis (e.g. analysis of savings does not take into account changing requirements). A huge cost focus initially helps to win votes, but in the longer term, struggles to deliver high value unless the deal is so structured (which is rarely the case). In fact, the dot-com bust exacerbated this tendency.
Given the budget pressures of most government organizations, this will be a huge challenge to overcome, but governments should keep in mind that without a proper baseline and an output/results focus, contracted services will not meet user requirements. The way around this is to either incorporate a cost focus into a larger output metric or translate output metrics (like quality, timeliness, etc.) into cost terms.
- Prepare well in advance, especially for upcoming transitions. With more contracts nearing the end of their initial term, and greater churn happening in the market, the issue of an exit/transition strategy will become increasingly important.
Given that most clients are facing this issue for the first time, they will need to seek outside counsel at this point. They need help to assess what has changed in the supplier market and what suppliers offer now. They will also need to determine what solution options to evaluate, what transition options to think through, etc. Again, tying measurements to a baseline and knowing what is in scope (inventory, detailed descriptions, etc.) is the key to successful transitions. Without this, and with the trend of shorter terms, the pain and frustration will continue to grow.
If both governments and outsourcers get these four elements right, we are likely to witness a larger number of successful deals in the future, generating longer-term savings and improving service levels. This would improve government effectiveness in most areas, thereby increasing country/city GDP and quality of life for its citizens.
Publish Date: May 2005
Copyright © 2005 - Everest Partners, L.P.
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