Outsourcing is no licence to save money, DVLA learns

Companies often have unrealistic expectations of outsourcing deals because the wrong people are consulted when contracts are...

Companies often have unrealistic expectations of outsourcing deals because the wrong people are consulted when contracts are drawn up.

The recent news that EDS struggled to deliver a proposed 30% cost saving to the Driver and Vehicle Licensing Agency (DVLA) after implementing a new system for registering vehicle details should serve as a reminder to companies about the harsh realities of outsourcing contracts.

The anticipated cost reduction was a key feature of a proposal for the £5m Vehicle System Software (VSS) prepared by EDS in January 1997. The saving was to be delivered "once VSS was implemented" in October 1999, according to the outsourced services giant.

Experts believe that it is too simple to point the finger at outsourcing companies and accuse them of under-performing. Robert Morgan, chief executive of outsourcing consultancy Morgan Chambers, said, "We see this all the time. In 80% of the cases it is the client who is wholly responsible for the savings not being achieved."

He estimates that less than 10% of the problems that occur in outsourcing contracts can actually be blamed on the outsourcing company.

Charles Symons, director of Software Measurement Services, highlighted the need for IT experts to become involved in drawing up the contracts.

He said, "Generally the problem is that when organisations outsource, the contract is drawn up by lawyers and accountants who haven't a clue about controlling value for money in the likes of software acquisition."

According to Morgan, one of the biggest problems in outsourcing deals is that clients do not have sufficient control mechanisms to cope with changes in their contracts with outsourcing companies. With his company undertaking in the region of 40 outsourcing audits for businesses each year, Morgan feels that users need to push for more transparent contracts to prove that the supplier really has delivered what was ordered.

There is a pressing need for companies to devise procedures to measure the effectiveness of outsourcing deals. Even some of the biggest deals are not without their problems.

Last year a report from the National Audit Office (NAO) on EDS' £2.4bn 10-year deal with the Inland Revenue warned that it was difficult to prove that the contract had delivered value for money. The report, which was generally positive about the partnership between the two organisations, also suggested that benchmarking against other IT service providers could give an indication of the comparative value offered by EDS.

This is an important point; the report advocated the use of external expertise to address what it described as "difficulties in obtaining usable comparative information from other information technology providers". Companies should be prepared to compile information from a range of sources to help work out the ongoing value of outsourcing deals.

For long-term deals such as the one between EDS and the Inland Revenue, it goes without saying that companies need to do some serious forward planning. The NAO warned, "Although there are incentives in the contract to improve efficiency, these may be insufficient to keep pace with the market over the 10-year life of the partnership."

Businesses should always set up their contracts to ensure that they are getting the value for money they originally envisaged. Symons argued that there are a number of procedures that businesses can employ to guarantee this, especially where software is concerned. He believes that there are three main components of value that need to be measured and controlled, namely productivity, speed of delivery and quality. Symons admits that productivity usually gets the most attention but warns that businesses need to measure and control all three parameters.

When it comes to measuring the value for money delivered by a specific software, Symons advocates the use of a technique called function point analysis. First developed in the late 1970s, the system involves classifying the components of the software requirements and specifications, and weighting them according to specific rules. "In a long-term outsourcing contract, use of these methods combined with checking performance against external benchmarks is the only way to ensure continuing and improving value for money," Symons said. There is no excuse for not doing so, especially when large sums of public money are at stake, he said.

On a more basic level, companies should make sure that they have done all their homework before a deal is even signed. There are many eventualities to consider before putting pen to paper. These range from delays in the project delivery to external factors such as unforeseen events that could affect the project. Morgan said, "Preparation and understanding are pivotal to what you are trying to achieve."

If businesses don't prepare properly there is a good chance that they will end up with egg on their faces.

For its part, the DVLA argued that it seeks value for money in all its contracts. A spokesman explained that the agency rigorously scrutinises all IT proposals to ensure that the solutions provide "value for money and fitness for purpose".

And a spokesman for EDS told Computer Weekly last week that the original contract for the VSS system was not predicated on the 30% potential reduction.
This was last published in September 2001

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