Wednesday 3 August 2011

Mega-Relationship Outsourcing - Is it a flawed strategy?

As I'm sure many of you know, Mr Reasonable has major concerns with Barnet Council's outsourcing strategy. Not opposed to the principle of outsourcing, my main issue is that the Council are putting all their eggs in one basket by letting very large contracts to single operators. Now my experience tells me that this is a risky strategy but it was interesting to read that some of the larger outsourcing contracts in the private sector have been going wrong and that it is causing companies to rethink the mega outsourcing contract strategy. The article appears in the Economist

Amongst other examples it gives are as follows: "There has been an uptick in legal disputes over outsourcing. EDS, an IT company, had to pay BSkyB, a media company, £318m ($469m) in damages. The two firms spent an estimated £70m on legal fees and were tied up in court for five months". In another case, "Boeing, America’s biggest aeroplane-maker, decided to follow the example of car firms and hire contractors to do most of the grunt work on its new 787 Dreamliner. The result was a nightmare. Some of the parts did not fit together. Some of the dozens of sub-contractors failed to deliver their components on time, despite having sub-contracted their work to sub-sub-contractors. Boeing had to take over some of the sub-contractors to prevent them from collapsing. If the Dreamliner starts rolling off the production line towards the end of this year, as Boeing promises, it will be billions over budget and three years behind schedule".

What the article goes on to say is that "Companies are rethinking outsourcing, rather than jettisoning it. They are dumping huge long-term deals in favour of smaller, less rigid ones. The annualised value of “mega-relationships” worth $100m or more a year fell by 62% this year compared with last. Companies are forming relationships with several outsourcers, rather than putting all their eggs in few baskets. They are signing shorter contracts, too. But still, they need to think harder about what is their core business, and what is peripheral".

Now this is in the Economist, not some radical left wing publication. It also makes tons of common sense. Barnet Council are proposing to enter into two large contracts, one for £250 million and one for £750 million which will last for between 10 and 15 years.So why on earth does Barnet Council insist on sticking to a strategy which the private sector is rejecting and has been proven unsuccessful.

Sadly I think the answer is that consultants who are pushing this process along have a vested interest in making it as complex as possible so that their contracts continue to generate large slug of fees. Also some officers and councillors will lose credibility if this policy is stopped. But rather a loss of face now than a loss of million of pounds when it all goes wrong.


  1. And the poke in the eye from bloggers when it does will be much more painful than the current nudges

  2. But by the time these contracts go bosoms up, the people responsible for drawing them up and signing them off will have long gone - leaving us to pick up the bill. If only there was a group of people who could stand up and represent our interests. We could call such people councilors.