Design a Good Business Model, Not a Good Deal

A good deal satisfies the parties the day it is signed. Ten minutes later, the world starts to change. Whether the deal will remain good for both parties is unclear; but the contract often keeps them locked into the arrangement despite the changes. Since transformational outsourcing focuses on making change, not contracting around it, its structure must be different. Partners in transformational outsourcing must design a business model that recognizes the dynamic process of creating value over time for both organizations. No one can predict all the changes that might take place, but a good model will establish structures and processes for taking advantage of change.

What does it take to design a business model? It’s harder than it looks. We’ll talk in more detail about this subject in Chapter 5, but let me go through the highlights here. First, you have to understand your stakeholders and what they value. These include investors, the management team, current and potential customers, and employees.

You must articulate exactly how each organization will generate value from the arrangement you envision. For example, in the National Savings and Investments example, Newport may or may not earn a profit from that particular relationship, but it created a showcase relationship that enabled it to win business from Barclay’s bank and the UK passport agency that it might not otherwise have won. Some of the profits from these relationships can also be added to the National Savings and Investments tally (see the sidebar, ‘‘Newport Systems’s Follow-On Opportunities,’’ below).

Newport Systems’s Follow-On Opportunities

The showcase NS&I initiative helped Newport Systems land these two outsourcing contracts.

• Barclay’s Bank. Newport Systems manages all back office services on behalf of Barclays bank. The contract includes business process outsourcing, provision of new back office processing equipment migration, consolidation and reengineering of 140 branch-based customer service units and the already centralized Regular Payments Processing Centre. It also involved redeployment of 600 Newport–NS&I staff and transfer of 120 contractors/staff.

• UK Passport Agency. We have developed a new automated passport application system for the UK Passport Service, which has been rolled out to all seven of the organization’s offices as part of a ten-year contract. On-site, our staff is responsible for the front-end processing of applications, the scanning of the documentation, and the cashiering of monies.

  Source: The Web site of the company we are calling Newport Systems

Finally, you must identify the positive and negative dynamics in the process—the factors that will build and destroy value for both parties—to ensure the model actually works in practice. For example, when a large U.S. insurance company outsourced its IT infrastructure to a major outsourcing provider, executives assumed that the provider would be motivated to keep the technology up-to-date in order to continue to improve its own costs and profits. This turned out not to be the case. Why? This particular provider was having some earnings trouble at that point in time and valued short-term income so highly that even investments with a two- year payback looked unattractive.

Striking a good deal relies on negotiating skill and situational leverage; crafting a good business model takes ‘‘whole of business’’ thinking. That means the strategists must see indisputable value from the initiative when they look at it through their partner’s eyes as well as through their own company’s eyes.

For example, in 2000, the central government of Australia mandated that all of its IT infrastructure would be outsourced. It created clusters of government agencies that seemed to make sense—revenue agencies together, justice with police, and so on. Each cluster went through a tendering process to let its contract to a single provider or consortium of private companies. When the first clusters were going through this process, it was quite clear that others would follow. Many of the private companies that participated in these early tenders believed that winning one bid would almost guarantee substantial follow-on business from other clusters. In these negotiations, therefore, the public sector executives had enormous price leverage.

However, the benefits from this policy approach were very slow to materialize. By 2002, the government had abandoned its mandate and authorized agencies and departments to make their own independent decisions about what and when to outsource. In fact, the architect of the policy publicly admitted that the idea had been a mistake. The result? The prospect of follow-on outsourcing business for the existing outsourcing providers dropped substantially and immediately. And the government executives’ leverage took a nosedive as well. Not all outsourcing companies would take this approach, but some of the involved providers are aggressively lobbying to renegotiate their contracts and dragging their feet in preparing documentation that would allow other companies to take over. In some cases they are allowing service levels to slip in a kind of passive-aggressive blackmail to make sure their government counterparts understand exactly how dependent they are on these suppliers. The government executives that struck these deals got very good prices. As they struggle to sort out how to disengage, they recognize that they did not design sustainable business models.