Insights | January 13, 2016
Funding transformation part 1: The starting point
Identifying the ‘fat’ in old, large supplier contracts and renegotiating to free up savings removes some of the major, common barriers to funding digital transformation.
However, offering a view on how to go about this is tricky, as every public sector organisation faces different variables, including pricing start point, contract end dates, service requirements, politics, and supplier relationships, although there are likely to be common themes and considerations.
Firstly, since the 2009/2010 Spending Review, ICT costs have been closely scrutinised, as government departments continue to face 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 funneled into the next more complex round of savings initiatives, but the savings might have been spent elsewhere. If so, then organisations will find themselves in the difficult situation of having to ‘save to spend’ rather than ‘spend to save’.
A high number of large ICT contracts with central government, signed in the early 2000’s, are coming to an end, with either no further options to extend or government policy preventing a like-for-like renewal. Most organisations will be operating in an environment where there is limited chance of a renewal, so there is little incentive 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, businesses may feel their bargaining power has been 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. 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 view this with a degree of scepticism. While suppliers do often overspend on change programmes, take a closer look at the profit and loss statements of these companies and everything starts to look much healthier.
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 in an attempt to 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 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 the supplier.
Alternatively, staff may not want to move away from the existing buying model because they haven’t experienced a different approach. In addition, 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 firstly, because in-house staff and the supplier may not be on the same page as to where money can be saved. Secondly, the ‘easy wins’ have been carried out and the savings banked, meaning they cannot be reinvested in other cost saving initiatives. Thirdly, if you outsourced, staff just haven’t been given the chance to learn new ways of doing things (perhaps for fear of change). Lastly, 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 where older services continue to be funded yet not transformed, will leave you between a rock and a hard place when the time come to move, because budgets are under pressure.
If the situation is this bleak, why are people still advocating to look at these deals? Presumably it’s because that is the only pot of money available. However, 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 who are experts in the provision of ICT services and bundle all your ICT requirements together to achieve economies of scale and gain some impressive double-digit savings. Sign a long-term deal with a supplier that understands your business and can provide innovation and partnering behaviours.
In reality, the initial procurement did bring incredible savings. Whereas in the original procurement the balance of power is clearly with the buyer, once it is ‘business as usual’, the power shifts to the supplier.
This is because many 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, in 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 numerous uncompleted change control requests have gone through the contract, it doesn’t seem unreasonable to assume 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.