Outsourcing of ICT services was very popular in the 1990s and, a decade later, many of these contracts are coming up to expiry. With an increase in the number of re-tendering exercises (often referred to as a ‘second-generation’ outsourcing) there are some timely lessons that can be derived from the experiences of the early movers.
Outsourcing was already an established practice in many industries when business started to outsource ICT services. However, there is a significant difference in the nature of the services supplied under an ICT contract to those of, for example, a facilities management contract. The most significant difference is the very complexity of the subject matter and the effect this has on the ease with which the service can be transferred between suppliers. Consequently, the biggest issue for an ICT re-tendering exercise is the availability of time or, more frequently, the lack of it.
It is common to discover that the original managed service agreement makes limited provision for exit management. Some contracts may have provided for the development of an exit plan, though these are frequently either inadequate or the parties have failed to comply with the obligation to develop a plan. The lack of an exit plan is not insurmountable, provided that there is adequate time and the parties are willing to work to the common goal of a smooth service transition. However, where contracts do make provision for exit management, this activity is frequently limited to a time period three-to-six months prior to expiry.
Since even modest ICT solutions will require a period of at least six months to make a controlled transfer, the customer will have a number of preliminary problems to resolve.
Whether a re-tendering exercise is in the public or the private sector, it will take a reasonable period of time to select a replacement supplier and agree the terms of a new contract. This exercise is likely to be regulated in the public sector by the Public Contracts Regulations 2006 (“Regulations”), which means that the selection of the replacement supplier can add a further eight to 12 months onto the process. Although private-sector customers have the freedom to set their own procedure it will still require a reasonable period of time to select a replacement supplier, and a similar period would not be atypical.
Consequently, it would be prudent for any customer to commence a re-tendering exercise at least 18 to 24 months prior to the expiry of an existing contract. This highlights one of the big differences bet-ween the public and private sectors: it is open to the parties to agree a contract extension in the private sector if there is insufficient time to complete the exercise. Such an extension has been deemed to amount to the award of a new contract which can force public-sector customers to choose between some unsavoury alternative strategies.
For the public sector, or in the private sector where a contract extension cannot be agreed or where it is not strategically appropriate, an immovable expiry date creates a hard stop to the re-tendering exercise.
Bidders may seek to use this as part of a negotiating strategy, making it important for customers to retain control over the bid process. Public-sector customers are assisted in this respect by the procedural steps required under the Regulations; the private sector would need to utilise a process that retains competitive tension for as long as possible.
The transfer of an outsourced ICT service will require the legacy supplier to provide its replacement with a wealth of detail on the operation and management of the services. A service transfer is also likely to operate as a relevant transfer for the purposes of the Transfer of Undertakings (TUPE) regulations. These regulations have their own specific timelines which do not sit comfortably with those of a re-tendering exercise.
Much of this information is also required for a bidder to prepare its pitch. A good exit plan will ensure that the legacy supplier provides all of the information that is reasonably necessary for bidders to understand the service requirements as part of the related due-diligence process. In the absence of a plan, the customer will need to manage the re-tendering exercise carefully to ensure that it achieves the same output.
This highlights another timing issue: the re-tendering exercise may start a year or more before the exit plan obliges the legacy supplier to provide this information to the customer. Except in cases of termination (where a different set of rules applies) it is likely that the legacy supplier will also be invited, or eligible, to bid for the replacement contract, which can be used to ensure that relevant service information is provided in time to support the re-tendering exercise.
The timely supply of bid information is important to both public and private-sector customers. There is a general procurement obligation in the public sector to treat all bidders equally. Without access to this information it would not be possible to create positive neutrality; the incumbent would always have the advantage of greater knowledge about the customer’s needs and requirements. It is equally important for a private-sector customer to create equality between its bidders and the present incumbent if the customer is to receive realistic price estimates from the competing bidders.
Additionally, in the current economic climate, potential suppliers are measuring the cost of bidding against the likelihood of success in deciding whether or not to bid for an opportunity. Ensuring access to full information on the legacy services is one of the activities that will provide assurance to all bidders.
Dealing with the inequality in cost of a service transfer is another positive step towards levelling the playing field. A public-sector customer will need to consider these issues as part of its evaluation strategy but both public and private-sector customers should also consider the effect that service transformation might play as part of the re-tender.
Service transformation does, however, bring its own timing issues and the customer will need to ensure that a replacement supplier has mastered the legacy services before allowing it to alter the service or its infrastructure. Part of this will be satisfied by assurance testing during the transfer process but it may also be necessary to insist on a phased approach to moving from the legacy to transformed service. Phasing has the advantage of providing a mechanism to ensure that the transformation is successfully delivered in full.
The transfer of an ICT service is a complex exercise that needs to be conducted in a careful and considered manner. The planning for this needs to start a long time before the existing contract is due to expire and begins by developing a clear exit strategy. Customers need to take control of this strategy and should not depend on the supplier. However, by engaging with the incumbent at an early stage of the process it is possible to ensure equality between all of the bidders and achieve the best possible value for money.
A recessionary period is also an opportunity for customers to reduce service costs by creating the right competitive marketplace for them. Again, this can be done only by planning the timing and the -process for the re-tender exercise.
About the author:
Stewart James, DLA Piper
Stewart is a partner in the Technology, Media and Commercial group and is based in the Leeds office. He is also the group head for the Public Sector. Stewart's areas of expertise include: PPP/PFI projects, ICT services, outsourcing and re-tendering, business process re-engineering, information assurance (including strong authentication solutions and electronic signatures), data protection and freedom of information, and intellectual property issues.
Stewart has advised on a variety of public sector projects, primarily on behalf of public sector clients. His clients operate in a range of sectors, including the health sector, emergency sector, education sector and utilities. Stewart has also advised a variety of private sector clients in the financial sector, technology sector, information sector as well as in respect of design services and e-commerce.