Successful second-generation outsourcing projects are not predicated solely on the idea of cutting costs. Organizations are turning to outsourcing as a way of getting access to new technology, of replacing cumbersome processes with more streamlined, efficient ones. The resulting projects tend to be larger in scale and more ambitious in complexity.
The keys to transferring responsibility successfully to external suppliers are:
- contractual flexibility;
- speed; - providing an incentive for clients and suppliers to work together through contracts that share the risks and rewards;
- establishing an environment of openness in which people from each side work together as equals.
The supply side is dividing into two distinct, mutually exclusive approaches. Some firms are taking an advisory role, assisting clients to find their way through the commercial pitfalls of large-scale, complex deals. Others are positioning themselves primarily as service providers, making changes to and running a client's processes and systems. From a client's point of view, transparency - being able to tell one type of firm from the other - is essential.
However, overall success is dependent on clients and suppliers overcoming the conventional ‘them and us' distinctions true of many commercial relationships.
Outsourcing deals are becoming more creative as organizations tackle increasingly uncertain requirements. Working with experienced deal-makers is one way of ensuring that organizations get the greatest flexibility and commitment from their partners.
The strategic use of outsourcing enables organizations to focus on their core business, leaving specialists to provide ancillary services. It sounds simple, but many outsourcing deals fail. Offshore and global deals in particular have proved much tougher than anticipated, and the ‘one size fits all' contract approach has largely failed. PA believes that organizations need to look beyond the use of outsourcing simply as a means of achieving savings, and to consider outsourcing in the round. Innovative outsourcing arrangements can deliver competitive advantage, increased stakeholder value and world-class services.
The outsourcing supplier market is constantly evolving as it matures. Innovative deals help to augment the capability and diversity of the market as new business models are proven contract by contract. One deal between suppliers can vastly alter the services the market can offer to clients, changing organizations' options at a stroke. PA's close involvement with groundbreaking outsourcing deals ensures deep and current knowledge of what the market has to offer, while its projects contribute to the very development of the market.
In the case of its work with the Medicines and Healthcare products Regulatory Agency (MHRA), PA's consultants had to deal with two qualitatively different challenges: an existing information management strategy, which had yet to be translated into practical terms, and a commercial environment constrained by capped annual budgets. To meet the strategy, challenge, the PA team had to take the work of one set of information systems professionals and transition it faithfully for the use of another team. To meet the commercial challenge, the team had to rethink the way public sector organizations enter into long-term supplier relationships, reconciling the economic constraints of the MHRA with the formal rules of public procurement and the goals of outsourcing suppliers.
An information business
The MHRA's role is to safeguard public health by ensuring that medicines, healthcare products and medical equipment meet appropriate standards of safety, quality, performance and effectiveness, and are used safely. On the medicines side, MHRA is the UK's licensing authority for pharmaceuticals, responsible for the licensing of medicines before they are brought to market and whenever products are issued in new versions. The agency regulates clinical drug trials, issues safety warnings, ensures compliance to standards of pharmaceutical manufacture and wholesaling, and sets quality standards for drug substances through the British Pharmacopoeia, the authoritative source for drug information. It evaluates approximately 1,000 product applications and up to 20,000 variations of existing licences annually. In addition, the agency deals with around 75,000 adverse drug reaction notifications every year.
Like many contemporary organizations, the agency has discovered that it is primarily in the business of information. Its status as a trading agency means that it funds its activities entirely from sales, rather than from a central government budget. The agency charges fees to the pharmaceutical companies whose products it regulates. However, these fees are fixed by HM Treasury. The agency does not have the option of raising its income simply by raising its fees. Fees are in any case politically sensitive, and make a poor target for revenue growth. Drug developers are naturally wary of paying high or unnecessary fees to regulators, while the government-mandated fee scale could be impacted at any time by wider industry controls.
MHRA's latitude for improving its revenue is focused on the professional interpretation of the information it collects in order to perform its primary role for the industry and the public. As a nexus of drug data and an employer of highly skilled and knowledgeable industry professionals, the agency is ideally placed to aggregate, analyse and disseminate information relating to the pharmaceutical sector. It adds value to its input data through professional interpretation, thereby creating marketable intellectual property. The terms of reference for the organization allow and encourage this activity, so long as any information products and services created by the agency are genuine, non-competitive and open. As well as having a commercial market value, such products and services also benefit wider public health, being used by, for example, the NHS in its planning activities.
The organization had traditionally worked as a paper-intensive business. Submission documents would arrive from pharmaceutical companies and be copied to the various teams who needed to work on their several sections. Although some systems had been installed to help with the work, these had been designed for the use of different departments. These systems also required substantial rekeying of incoming documents. While around half of the agency's staff were technical specialists drawn from disciplines such as medicine and pharmacology, the other half were administrative staff.
Apart from this huge administrative burden, reliance on paper was limiting the speed with which submissions could be processed, and imposing overheads in terms of storage costs: the MHRA has a statutory obligation to retain much of the information it receives. At the same time volumes of applications were continuing to rise as pharmaceutical companies sought to enlarge their product portfolios, leverage new discoveries and target new diseases.
MHRA recognized that it needed a fundamentally new way of operating, based on electronic sharing of information. In this way it could speed up the decision-making process, helping itself to meet the demands of the pharmaceutical marketplace, while still complying with strict regulatory obligations and accommodating new operational demands and any government and EU initiatives. Electronic working would also slash the costs of working with, managing and storing paper records. In addition, modernized information services could stimulate a wider market for the agency's services and so generate additional revenues.
Recognizing that the organization's core business was information, the chief executive commissioned an information management strategy. This articulated the agency's information environment, and illustrated how information resources underpinned the commercial rationale of the organization. However, the information management strategy did not in itself implement any information management capability. The agency needed to find a partner who could make the vision an operational reality. With the pressures of commercial management at work in the business on a daily basis, it also needed to move quickly.
Outsourcing was the obvious solution, but the manner in which this could be achieved was far from obvious. To meet its business objectives MHRA needed to see benefits within two years - half the time such a project would normally take. However, the information management strategy was currently defined at too high a level to take to market and the agency's business plan would not allow for the three or four years needed to develop a standard requirements specification. Yet suppliers would need enough detail not only to develop the system but also to identify the business process changes needed to realize its benefits.
PA stepped in to perform two critical functions for the MHRA. First, the team needed to produce a defined set of services that could be used to attract and measure bids from third party systems houses, using the high-level information management strategy as input. Second, the team had to define and manage a procurement process to make the best possible deal to implement and maintain the resulting technical road map. As PA's Graham Beck says: ‘Private sector companies can't respond to a vague requirement. We would take the high-level position to a level of requirements [specification] sufficient for the outsourcing market to bid for. We would take it out of the clouds, make it priceable.'
Down from the clouds
PA installed a team of systems design specialists to add detail and structure to the existing high-level strategy. The team included information architects and network specialists, process analysts and database gurus. A mix of skills at the logical and physical levels of systems development helped to anchor the ‘clouds' of the high-level strategy and relate it to the capabilities of current technology. MHRA appointed a team to the project, so that PA's specialists had full access to the business throughout the project.
Much of the work involved analysing the data and uses from different organizational perspectives. This helped to break down the divisions created by the existing legacy systems, which had stranded information sets on departmental islands. The existing systems forced staff to hold frequent exploratory meetings with each other as they attempted to create bridges. One team would share its interpretation of a document with another's view, and together they would attempt to synthesize their understanding and set direction for the next stage of resolution. It was a cumbersome process fraught with opportunities for duplicated effort and omissions. The organization lacked a single coherent view of current work in progress that could be accessed and shared across functions, and was unable to predict with certainty how long any piece of work would take to complete.
The analysis took into account the different uses MHRA makes of common data at different stages in its work. The team also explored what type of users needed access to the data, and how they would prefer to view and manipulate it. The result was an information management architecture of sufficient detail to communicate with potential suppliers. The architecture stated what the agency needed in enough detail for suppliers to respond with how they would meet those needs. The PA team did not specify the technical strategies, designs or platforms to be used by the eventual supplier, since these are precisely the areas of individual competitive expertise that produce cost savings and quality benefits from the outsourcing market.
While the information architecture represented a static definition of the systems portfolio needed by the MHRA to service its mission, the PA team also developed a complementary, dynamic view of the business context in which the new information capabilities would operate. New systems would not produce benefits without new business processes to feed, support and exploit their functionality. The open nature of the information architecture encouraged new ways of thinking about the agency's processes. An end-to-end, workflow-based view of the organization's activities soon emerged. The new systems would allow incoming cases to be categorized and interrelated on their entry to the organization. New cases would immediately be visible to those who needed to see them, and viewable in the extent and format required by each discipline. As agency staff worked on each case, its knowledge base would be automatically augmented. Detail would no longer be duplicated, lost in the cracks between departments or accidentally misinterpreted. The information architecture's business-based structure would facilitate faster throughput and more flexible methods of working. It would also bring the benefit of helping to release the hidden value of the agency's data. With professional staff now able to collate and analyse their wealth of data, they would be able to create valuable new information products for their markets.
MHRA's requirements of its potential suppliers were sharpened by PA's work on its information architecture. While this created an objective base against which suppliers could be measured, it was not the only factor to be managed in the procurement process. As well as needing hardware, software and integration services, the agency needed a partner who was willing and able to help it exploit its intellectual property. With a limited budget available for securing the optimum arrangement, the deal's financial engineering was also crucial.
The agency needed its outsourcer to work with it in a very open-ended way to define the new systems and processes, and share the risk throughout the contract. Risk-sharing is not an option that a traditional outsourcing contract would usually consider without charging huge insurance premiums to cover its costs. PA therefore worked closely with the MHRA to design a new kind of outsourcing contract that allowed for variation in planned expenditure. The contract would share risk between MHRA and the outsourcer without unacceptable cost overheads for either party. Rigorous governance processes would ensure that the agency stayed firmly in control throughout the projected 10-year life of the contract.
PA produced a commercial proposition that was attractive to bidders, yet recognized that, because the requirement was not yet fully defined and therefore contained acknowledged ambiguities, the contract could not be priced in a conventional manner. The deal was structured around risk-sharing, in a manner that allowed the agency to control expenditure without the need for insurance. For each year of the contract, the requirement and cost detail of each project within the programme would be defined and agreed by the two parties on a project-by-project basis within overall affordability. Once a project was agreed, any resulting actual under-or overspend is shared by both parties on a pre-determined, capped basis.
Effectively, the agency's budget is fixed in any one year. If, during the year, pre-agreed projects deviate from plan, the agency and its outsourced supplier decide jointly on how they will redirect their investment. The variance from plan is shared equally between the two parties. If a review shows an underspend, the agency can choose to invest in further actions on its information management agenda. If, on the other hand, the parties find an overrun during the year, they can rein back, taking an equal hit. Graham Beck says:
When traditional outsourcing arrangements go wrong, they don't have the proper governance [procedures] in place. The client thinks it's all down to the contractor and that they'll get on with it. But now you've got a third party running the core of your business. You can't let them run riot, nor can you tie them down. So there's a degree of play in the arrangement. It's got great flexibility.
PA approached the search phase of the procurement process in a commercial style that helped to cut down on the time needed to create the right deal and that attracted the right kind of responses. Informal approaches to the market were made, keeping the agency's identity anonymous and presenting an outline of the requirements and constraints of the likely contract. Although the procurement process was run through the mandated OJEC (Official Journal of the European Communities) regime, as an independent party, PA could undertake non-prejudicial market soundings to test the feasibility of some of the commercial scenarios under consideration without revealing the identity of the client.
Designing an appropriate commercial framework required unusual openness from the agency when discussing such areas as budgets with all the stakeholders. The spirit of openness was fostered by PA's collaborative approach. PA worked closely with MHRA and its lawyers, Simmons & Simmons, to design and evaluate a number of possible commercial solutions for the proposed outsourcing contract.
Thanks to the ‘market warming' resulting from PA's previous informal soundings, interest was high and 23 formal responses were received; the average quality of bids was exceptionally good. Five bidders were invited to negotiate and three responded with a formal bid. The ultimate winner of the £50 million strategic outsourcing contract was Accenture, who were able to demonstrate the required expertise in systems building and infrastructure installation alongside experience in helping clients market and sell information products and services. The 10-year strategic outsourcing contract was agreed in December 2002.
The outsourcing deal was subject to several kinds of official scrutiny: the OJEC tendering process, the Department of Health formal review process and HM Treasury. PA drew on previous experience of such processes to help the agency move through each phase as smoothly as possible. For example, when negotiations entered a single-supplier phase, the agency had still to be able to demonstrate that the deal would meet ‘value for money' criteria, in order to satisfy its overseers as well as itself. PA resolved this issue by developing a control ‘reference bid', with figures based on what it would cost the agency to effect the step-change required in-house. The reference bid gave the agency a second set of figures against which to evaluate the supplier's proposition and gain greater understanding of the associated cost drivers.
The agency was able to move from high-level strategy to contract signature within 18 months. Such a timescale is unprecedented for a government agency, and even in the commercial arena, three to four years would be more normal. In addition, the innovative nature of the contract provides a model for other organizations to adapt. Its main features are:
For each year of the agreement, baseline expenditure was set in the contract - effectively a joint budget for the MHRA and the supplier.
All budget underspends and overspends were agreed and shared; risk has been spread and is the responsibility of both client and supplier alike.
The contract encompassed financial profiling to match the agency's business strategy and flexibility to deal with the impact of known and unforeseen change.
MHRA will see its operating costs improve by 20 per cent through the lifetime of the contract. Other benefits extend beyond the agency to the UK economy and public. For example, re-engineered processes for licence applications and more streamlined post-licensing analysis will enable better information to be more effectively provided to the pharmaceuticals industry and the healthcare profession. An independent study suggests that NHS hospital costs relating to adverse drug reactions could be reduced by about 25 per cent, saving some £26 million per year.
The implemented information management strategy is enhancing the MHRA's ability to fulfil its regulatory and advisory responsibilities. The Agency is also better placed to deal with:
the ever-increasing volume and complexity of regulatory requirements, including those emanating from the EU;
pressure from the pharmaceutical industry's greater product diversity, technological modernization and improved throughput of medicines applications and changes;
meeting central government e-business targets;
the need to share information with other government and EU bodies;
wider provision of information on medicines.
As well as achieving this range of tangible and intangible benefits, the project also illustrates the transforming power of independent consultants collaborating with professionals from the business. From the outset, agency and PA staff worked side by side. The project's core team consisted of agency and PA staff in approximately equal numbers. PA's Beck says: ‘This assignment demonstrates just how effectively government bodies can modernize themselves through focused use of private sector expertise to complement their own.'
PA was able to analyse and understand the MHRA's business, but also to use its own independence and knowledge of the evolving outsourcing market to get its client the best possible deal. The agency devolved its non-core concerns to its partners, and thereby strengthened its commitment to the information business over which it must demonstrate mastery and competitiveness. A culture of partnership, mutual respect, creativity and commitment to clarity allowed an innovative deal to be successfully created in a challenging timescale - and helped to advance the cause of outsourcing that little bit further.
An agency with a growing real-time information business has designed a novel partnership agreement around measurable business outcomes instead of lists of systems. The new method of defining the client-supplier relationship is adding absolute value and flexibility to each partner, and showing other organizations the way forward in an inherently unpredictable world.
The Vehicle and Operator Services Agency (VOSA) is one of four UK government agencies responsible for improving safety and environmental standards on the roads. The agency also aims to reduce vehicle crime. VOSA was formed on 1 April 2003 with the merger of the former Vehicle Inspectorate (VI) and the Traffic Area Network (TAN) divisions of the Department for Transport. The agency employs around 2,800 staff, 1,700 of whom are based at operational sites around the UK. VOSA's customers include companies from the road haulage and public service vehicle (PSV) industries, as well as the relevant trade associations and vehicle manufacturers. VOSA also oversees garages that perform MOT tests on vehicles, and the general public. The role of staff is very much hands-on. VOSA people can be found at the roadside and at weigh stations, checking vehicles and communicating with their drivers, as well as at over 90 specialist test stations around the country.
Much of VOSA's day-to-day work is concerned with ensuring compliance with commercial operator licensing requirements. The agency's licensing activity targets road safety and environmental improvements, while helping to safeguard fair competition. In practical terms, VOSA's obligations translate into a number of transactional and monitoring processes. These include the processing of applications for licences to operate lorries and buses, and registering bus services. VOSA is responsible for operating and administering testing schemes for all types of vehicle, including the supervision of the MOT testing scheme. VOSA is also responsible for enforcing legally defined drivers' hours, roadworthiness and licensing requirements, and provides training and advice for commercial operators. Lastly, VOSA has a key role in investigating vehicle accidents, defects and recalls.
The agency's powers include a power of last resort to impound vehicles that are operating illegally, ie outside the licensing regime. Impounded vehicles are taken to a secure compound where they remain for 21 days. The impounding period enables the owning companies to comply with licensing or safety requirements without endangering the public, and also allows for an appeal process.
VOSA's proactive approach to its responsibilities include Operation Mermaid, a joint police/VOSA national targeted check of goods vehicles coordinated by the Metropolitan Police. The checks are carried out at some 45 locations throughout the country. During 2003, VOSA vehicle examiners checked 6,222 vehicles and issued 651 immediate and 819 delayed prohibitions for mechanical defects. Meanwhile VOSA traffic examiners checked 4,636 vehicles for traffic offences such as abuse of drivers' hours, overloading and hazardous substance infringements.
During 2002, VOSA worked with Atos Origin to create an innovative outsourcing partnership covering a nine-year programme of work. The two parties built a commercial agreement that ties an element of Atos Origin's reward into the agency's ongoing business performance. ‘Shared risk, shared reward' has long been a mantra for partnering organizations in the purely commercial world, but applying such a concept in a public-private setting is unusual to say the least.
VOSA's responsibilities are set to grow in line with the continued rise in road traffic of all kinds. At the same time, the nature of the work is becoming increasingly complex. New types of vehicles, operators, licences and road usage patterns add to the growing challenges. With the pace of change increasing, VOSA found itself constrained by traditional outsourcing arrangements that failed to accommodate shifting business requirements.
For example, if the number of staff based at an office changed, then the relevant core services arrangements had to be amended accordingly. Each modification had to be scoped and costed separately, resulting in huge amounts of work for both VOSA and its suppliers. The cumbersome services regime seriously hindered the agility the agency needed to adapt its presence and capabilities on the ground. Information systems presented the bulk of the problem. Nigel Shenton, Head of IT at VOSA, says: ‘We had found that rigid outsourcing arrangements were making it difficult to evolve our IT infrastructure in line with our business needs. We wanted to structure a relationship that would offer more commercial flexibility.'
A new service model
Traditionally, IT services for the public sector have been procured by awarding a contract to the supplier who best meets a statement of requirements developed by the business. This seems a very sensible approach: define what the business needs, then select those who can meet the requirements at the best price and service levels. But this approach relies on the assumption that requirements are known ahead of implementation, are known in their entirety, and are fixed for all time. Increasingly, few of these attributes can be guaranteed for any information system.
Although it is a relatively young industry, the IT community can point to a number of services that have become commodities. Payroll, for example, has been operated as a standardized, unchanging class of service since the earliest years of its deployment in enterprises in the 1960s. More recent examples include software packages for accounts, or customer relationship management (CRM) systems. Desktop systems and packaged enterprise systems have well-defined operating requirements, maintenance schedules, upgrade paths and integration options. Services targeted at these kinds of applications can be provided readily to an agreed standard via a service level agreement (SLA), which acts as a scope and set of terms. In these traditional situations, planned applications are known and unlikely to change in detail, allowing a schedule of work to be planned well in advance.
For longer-term partnerships, where the future applications portfolio, service levels and schedule of work were potentially unclear, problems quickly arose. A number of high-profile delays have resulted from failures of contractors and government agencies to agree changes to scope (and the corresponding charges) in the middle of large-scale projects. The delays have led in turn to overspending and disruption to service for the public sector, and damaged relationships with suppliers.
The Private Finance Initiative - and more specifically the Public Private Partnership (PPP) - was devised to address these issues. Through the PPP, a private contractor would design, build and operate (DBO) a facility such as a prison or a hospital. This arrangement gave the contractor freedom to innovate, while transferring the risk of project delay and overspend out of the public sector. For the contractor, the prospect of a predictable long-term revenue stream together with complete control over the design and build of the facility made for attractive deals.
However, the PPP model rarely works for soft projects such as large-scale information systems and consultancy projects, where the DBO cycle is often iterative. Computer systems rarely exist in greenfield situations, with the majority of new systems being required to interface with existing systems or replace existing systems. At the same time existing infrastructure, including equipment, buildings and networks are usually transferred to the new outsourcing supplier.
Applying PPP to the IT services market demands a level of creativity to bypass its origins in heavy-duty construction.
The key determinant of success in new systems development is the extent to which a system can respond to changing requirements. While the IT profession has tried in the past to constrain the change cycle to a period of requirements gathering and then a schedule of post-implementation upgrades, experience of the evershortening change cycle suggests that most business systems need to be built to absorb modification as a constant pressure, rather than a periodic event.
In other words, applications are increasingly being architected for inherent flexibility. This can mean that the platform on which the application is deployed changes, or its core database technology is replaced, or its access methods are widened to include access from mobile devices or automated transactions with systems owned and operated by other parties. Traditional contracts necessarily specified items such as platform and interfaces in very strict terms. These are expensive items, and the choice of one option over another has substantial implications in terms of hardware, software licensing, software development and systems support activity.
Tying down the IT options creates excellent financial visibility. But it also closes out opportunities. Where a system's every feature is described in a contract, discovering the cost of moving to a new technology, justifying the business case and amending the contract accordingly can cause the opportunity to be missed. The IT business cycle changes much more quickly than the standard contract renegotiation process.
In the organizational setting, the inevitability of changes to contracted services means that every contract atrophies over time. Just as every new vehicle begins to depreciate in value the moment it leaves the dealership, so every commercial services contract begins to corrode as business change impacts its rationale.
Introducing commercial flexibility
VOSA's response to this situation was to shift away from detailed requirements of how systems were to be delivered to what they were to deliver for the business. At the beginning of the procurement process VOSA produced a statement of partnership outcome requirements (SPOR) for all the potential bidders for the outsourcing contract. This statement clarified the strategic outcomes that VOSA was seeking, and enabled bidders to focus on the real business needs of the agency rather than a mass of pre-defined solutions.
VOSA stated up-front their budget for the services together with a set of expectations from the new contract. Potential contractors developed a number of business propositions aimed at enhancing VOSA's business in line with the SPOR statement. Transition from the existing supplier to winner Atos Origin took place over Christmas 2002 and live service began on 1 January 2003.
The flexible partnership struck between VOSA and Atos Origin shares risk and reward so that each organization is left free to focus on what it does best. All projects are fixed price; the risk of cost overruns attributable to them is borne by Atos Origin, while VOSA is required to meet a set of obligations to ensure that the projects proceed to plan. Project costs are incorporated into a managed service payment profile which, while penalizing any late delivery, is not designed to be unduly harsh or destabilize the partnership.
Project successes are assessed by published key performance indicators (KPIs) that measure the business benefit delivered by each solution as it beds into VOSA's operations. The risk of failing to achieve the KPIs is borne by both parties. As the projects are performed by business consultants, systems integration experts and managed service staff, the realization of the business opportunities presented by new technological advances are integrated into each proposition.
Shifting back to the example of car maintenance contracts, we can compare the VOSA/Atos Origin partnership with traditional outsourcing deals by looking at how services can be expressed in terms of customer benefits. While a traditional maintenance contract might specify that the garage will provide an oil change every 40,000 miles, a VOSA/Atos Origin-style contract would assert that the garage will guarantee the car's trouble-free performance throughout its lifetime.
Atos Origin's Simon Albutt says: ‘Our experience with VOSA has proved that if the scope of a project is expressed in terms of a desired business outcome, and we are empowered to choose the most appropriate method of implementation, then we can manage risk effectively.' Atos Origin is free to decide the level of resources put into any particular project. If the team does not apply enough resources, it shoulders the burden when the project goes off-track. If the team oversupplies in any one area, it can scale back on preventive maintenance. The ability to match and trade variances across projects is made possible by the size and diversity of the IT portfolio at VOSA, and by the length of the contract.
The shared risk and reward approach also means that traceability and accountability within the organization improve dramatically.
One example is the provision of knowledge management services, the success of which is measured by ‘dwell time': the amount of time users spend looking at a page of information from the knowledge management system. The system maintains details of known vehicle faults and developing trends, such as a spreading method of falsifying tachograph readings. ‘Obviously we're not in control of how long users spend looking at the information,' says Albutt. ‘But we believe that if we keep the system relevant and up to date, we can ensure that it makes a real difference to VOSA's business.'
Underpinning the partnership is a commitment to offer a consistent business focus rather than one based on technology. The terms of the contract mean that any deviation from pursuit of VOSA's business objectives will result in neither party reaping the potential benefits of the risk-reward arrangements they have devised.
Building an effective and enduring partnership requires seamless working at all levels of both organizations. VOSA has consistently organized work in joint teams across the agency from the Partnership Board to the Partnership Leadership Team and throughout the operational areas touched by IT. Albutt is clear that this style of operational partnership is not for show: ‘It's particularly important that we work alongside client teams if we are to be measured against their performance.'
The partnership has enabled each organization to evolve beyond the traditional lines of customer and supplier to a more integrated way of working. Nigel Shenton agrees that the blurring of organizational ‘home' is a key part of the partnership's effectiveness: ‘Our teams are badgeless. At the top level we are working to coordinate a number of initiatives, some of which don't even involve Atos Origin. The end-user is the same, so it's critical that we work together to turn these into a coherent programme of work.'
The governance structure devised for the partnership enables the team to monitor progress across projects, with a clear process for managing and escalating risks. Interdependencies are identified so that the team can prioritize and focus resources according to need as issues develop. A weekly ‘dashboard' showing the status of key measures is produced in Microsoft PowerPoint format.
‘The governance arrangement we have with Atos Origin has been a model for managing complex programmes of change more efficiently,' says Nigel Shenton. In fact, this model marriage has been so well received that the same disciplines are being adopted by all VOSA projects regardless of whether or not they are IT related.
Technical and business innovation together
The VOSA/Atos Origin partnership agreement provides a framework into which a range of technology initiatives can fit, many of which serve the needs of a highly distributed workforce and IT estate. Key requirements for the business are flexibility and scalability, so the systems architecture is designed to evolve to meet future business and technical initiatives. For example, one of the business propositions identified during the procurement process was to support VOSA's key business objective to increase the numbers of defective vehicles stopped at the roadside. The Targeted Enforcement Programme aims to increase the effectiveness of spot checks by enabling VOSA to target time and resources on people most likely to offend rather than on random drivers. VOSA and Atos Origin have collaborated to design and implement a package of new business processes, intelligence information and training for enforcement officers in order to meet the objectives of the programme. A key enabler is a state-of-the-art handheld devices that will convey real-time information to enforcement officers at the roadside.
The deployment of mobile devices to the roadside is a good demonstration of the alignment of business goals with technological capability. Such an initiative is rarely visible at the initial planning stage of an outsourcing contract, and amending an existing contract to embrace the project could fatally erode many of its business benefits. VOSA's commercial architecture lets it drive critical business information systems forward without loss of momentum. Meanwhile, Atos Origin's flexible technical architecture ensures that new functionality will continue to be welcomed in the VOSA operational armoury. Albutt says: ‘When we signed the contract, VOSA effectively transferred significant risk to us. In turn we have the flexibility in the way we deliver services. Overall, our relationship with VOSA is characterized by trust.'
VOSA's Finance and IT Director, Jeff Belt, echoes these words, and adds that the partnership acts as a signpost to other agencies: ‘The partnership model is giving us the freedom to work together for mutual benefit. This contract is fixed for a substantial period of time. What we're doing with Atos Origin is building a model for outsourcing services in the future.'
VOSA is now set to get the information systems it needs for its future growth, while Atos Origin is incentivized to make those systems work. Outsourcing contracts have traditionally been about the letter of the law: this deal manages to encapsulate the spirit of partnership in a practical mechanism that is as much about relationships as it is about technology.
Replacing a long list of failing systems and plugging key information gaps has provided Sainsbury's with a platform for reinvigorated competitiveness.
Food retailing is one of the most fiercely contested sectors in the modern business world. For those who succeed, the prizes are immense. There were more than 100,000 independent grocers in the Britain of the 1960s, but only 20,000 were left by the end of the century. Concentration of the industry has continued to drive ever-greater numbers of purchases through the main chains. Criticized for encouraging out-of-town developments that disadvantage people without their own transport, supermarkets have returned to the high street with neighbourhood stores. Each store group continues to add to its offer: clothing, coffee shops and credit card accounts are as much a part of contemporary supermarket shopping as the smell of freshly baked bread and the gleam of fresh produce. But behind the inducements to shop, and the efforts to nurture customer loyalty, is a technological arms race. Customers may not necessarily see the weapons being deployed on their behalf, but the weapons are real nonetheless.
Sainsbury's is one of the UK's largest and most successful grocery retailers, but it has slipped some way from its historic heights. Established in 1869, the company now has 16.2% of the UK market, with more than 535 stores, 238 filling stations and 145,000 employees serving 13 million customers per week. As well as its prominent food stores, Sainsbury's runs a bank.
During the 1990s, Sainsbury's faced stronger, consolidated competitors that fell into two categories: those that emphasized value, like Tesco and ASDA/Wal-Mart; and those that based their offers on quality and service, like Waitrose and Marks & Spencer. Sainsbury's market position fell between these two markers. This strategic problem registered as a downward trend in sales and while Sainsbury's profits continue to be large in absolute terms, the company is recognized to have fallen behind its competitors.
In 2000, with its share price falling and a 23.3 per cent decline in operating profits, the company recognized something radical needed to happen to improve its performance. Business as usual was not working, and small fixes made at random would not address the fundamentals.
Radical change was led by CEO Sir Peter Davis. Davis and the Sainsbury's board saw three areas that needed fundamental change. These were:
stores and customer service;
supply chain performance and efficiency;
The company wrapped these areas into an umbrella initiative called the Business Transformation Programme. The board set six key strategic objectives for the programme:
Establish a differentiated market position and deliver sustainable shareholder value.
Dramatically enhance the customer shopping experience through a clear understanding of target consumers and of each store's operating model and service drivers.
Create a step-change in customer shopping experience through a radical change in the roles of store managers and their teams.
Remove complexity and drive up effectiveness by taking out all processes and activities that do not add value to the customer experience or to shareholders.
Create a high-performance organization and infrastructure that is rigorous, nimble and customer-centric, where quality is not negotiable.
Leverage new capabilities and opportunities in e-commerce, business-to-business and business-to-consumer channels, maximizing the synergies of the group.
In short, the company aimed to transform all its vital business operations and to accomplish the overall transformation, the board believed its underpinning technology systems also required radical change. The company's technology infrastructure had failed to keep pace with the demands of a truly customer-oriented business. Systems were isolated from each other, and unable to share information. Introducing amendments to systems was painful and time-consuming. Above all, the existing systems portfolio did not support a more flexible attitude to running the business. It may be an overused and often vaguely used word, but Sainsbury's needed to re-engineer its platform for doing business and therefore outsourced its IT transformation to Accenture.
Focusing on the customer
Sainsbury's overriding goal was to make the customer the heart of the business. A joint Sainsbury's and Accenture team created a series of projects to deliver superior and differentiated service to Sainsbury's shoppers. The programme was designed to impact every aspect of the shopping experience at Sainsbury's through the intelligent application of IT.
The first project saw the development of a customer data warehouse and customer value management (CVM) application. The system became one of Europe's largest consumer databases with information on more than 13 million shoppers. The data warehouse provides insights into what customers buy, when they buy and from which store. This data drives key retail marketing and trading decisions, in particular the mix of products supplied to each local store. Granular profiling allows the CVM application to develop customized marketing campaigns, has cut down the planning, analysis and execution of campaigns from months to days and has delivered a massive reduction in data processing costs. The system has also enabled Sainsbury's to target product development better in response to customer demand. Improved customer segmentation is yielding increased mailing volumes and increased response rates to campaigns.
The new customer information systems immediately clarified the existing fragmented customer view, but they did not generate any new raw data of their own. With the aggregated customer information platform in place, the team could now turn to stocking the warehouse with further and better data. The team worked to transform the company's existing reward card loyalty programme into a novel national multi-company loyalty programme known as Nectar. Launched in September 2002, Nectar was Europe's first multi-partner loyalty programme and quickly became the UK's largest loyalty programme with more than 13 million active users.
Nectar enables customers to earn better rewards, faster. Cardholders can collect and redeem points with partner companies including BP, Barclaycard and Debenhams's department stores. From the point of view of its partner operators, Nectar acts as a gateway for acquiring customer intelligence. Individual shopping preferences registered through Nectar are fed directly into the Sainsbury's customer data warehouse to provide further insights on buyer preferences. These insights in turn help shape customer offers both in the direct channel and in-store. With the success of Nectar, the company has added around 1 million additional customers to its direct marketing campaign population.
The team now needed to ensure that customer information would flow to all the appropriate parts of the organization. Accenture developed a customer information system for Sainsbury's to collect data from all touch points including the customer contact centre and in-store customer service desks. The system provides a consolidated picture of all formal customer interaction with Sainsbury's. As a result, service representatives can view a history of every interaction a customer has had with the company and respond more effectively. The system has enabled customer service representatives to resolve an increased number of customer enquiries during the first telephone call, driving down costs and improving the company's image.
The customer service desk representatives at each store also have access to Connect, the company's new knowledge management system. Connect provides answers to all frequently asked questions, which are now fully documented to expedite customer response time and ensure consistent handling.
Meanwhile the team conducted a complete upgrade to the Sainsbury's-to-You home shopping Web site, delivering a scalable, more flexible site better able to accommodate future transaction growth. The site has already allowed Sainsbury's to expand orders per week by over 300 per cent, and the system now has the capacity to handle significant future volume growth. All the site's key performance metrics of sales, customer satisfaction and retention have improved.
At the back end of the operation, the team has implemented a new dynamic routing engine for booking home deliveries from the Sainsbury's-to-You site. The routing engine constantly optimizes the daily delivery schedules. When a customer requests available delivery times the engine calculates the economic viability of delivering to that customer, taking into account all other deliveries scheduled for that geographic area. This strategy allows Sainsbury's to decrease costs by clustering deliveries and to increase service levels by adjusting average road speeds and doorstep times. The result is an accurate route plan with achievable delivery times, leading to a decrease in late or missed deliveries.
In each of these projects, technology has been applied to improve Sainsbury's understanding of its customers so that it can serve them better, now and in the future. These projects demonstrate how customer information has developed from a nice-to-have feature lobbied for and funded by marketers to a central plank of today's business operations. Knowing the customer is directly shaping the offers made to him or her. Knowing how to get customers into stores, and deliver the goods and services they need, is the next factor in Sainsbury's transformation.
Changes in store
Sainsbury's was keen to reinvigorate the customer experience. The company continued to explore new store formats and generate new ideas for customer interactions. But away from the models and plans the team faced a major obstacle to implementing in-store change: the systems used to make financial transactions with customers. Sainsbury's had 12 different electronic point of sale (EPoS) systems, a situation that impeded the delivery of uniformly high levels of customer service and made systems upgrades difficult to plan and implement, and slow to roll out. To make the whole system simpler and more cost-effective, the team standardized EPoS systems throughout more than 700 outlets including supermarkets, gas stations and convenience stores. The EPoS system from Retalix and NCR was selected and installed over a 13-month period, rolling out to 18 stores per week at peak. More than 14,000 EPoS checkouts were standardized and 100,000 employees were trained on the new system to provide a seamless service transition in all outlets.
The business benefits resulting from the new system were huge, enabling Sainsbury's to deliver a competitive service offering and realize immediate reductions in the total cost of operation. The single platform structure paved the way for future systems changes, including a self-checkout application.
To keep store features fresh, the team created a template for a ‘store of the future'. This site would serve as a model for innovation for the entire store network, and exploit technology as much as possible. The Hazel Grove store, located just south of Manchester, was chosen for this role. It was designed around the wants and needs of actual shoppers, with requirements captured through surveys and focus groups. The results were articulated in three sharp customer statements:
‘Get me out of here!'
‘Make it fun for me and my kids.'
For customers who want to move quickly through the store (the ‘Get me out of here!' group), Hazel Grove includes a Quick Shop that stocks 2,000 essential products and has ‘countdown parking' that allows for 20-minute stays and alerts customers when time is up.
There is also a Sainsbury's-to-You pick-up area for those who want to pick up online shopping items without leaving their cars. The store has served as a public trailblazer for the retail marketplace and was named Retail Week magazine's ‘Retail Launch of the Year.' Customers also rate the store favourably. Eight out of ten customers surveyed report they are ‘extremely satisfied' with the new environment. Within its first six months of operations, Hazel Grove was twice the company's top-performing store.
Store formats can be designed to meet particular customer preferences for service, but if the right mix of staff is not in place in those stores then products will not sell as effectively as planned. To manage the scheduling of more than 100,000 total store workforce, a joint Sainsbury's/Accenture team selected the TempoSoft scheduling solution. The application provided a full range of labour planning and scheduling capabilities, matched the company's technical architecture and could be deployed at scale. Sainsbury's TempoSoft implementation was to be the largest of its kind in Europe.
To ensure buy-in from store personnel, the TempoSoft system was integrated with local employee programmes. The scale of the project meant that the solution required extensive testing to ensure that it would work with all of the integrated systems. The TempoSoft solution required the most up-to-date employee information and was designed to link with a new Oracle/Workbrain HR system to avoid costly double entry of information. The system also linked to the data warehouse and the time and attendance systems, providing a 360-degree view of employee information. TempoSoft went live in 480 stores in April 2003 and contributed to an improvement in front-end service levels. Staff scheduling mismatches have decreased significantly, allowing resources to be redirected to areas of critical need, further boosting customer service levels.
Honing trading capabilities
The ability to buy the right products, distribute them to the right stores and sell them at maximum profit is critical to any retailer's performance. The team quickly recognized the need to update buying and merchandising systems substantially, and chose Marketmax planning systems to support range and space planning functions. The application enables traders to plan which products to place in individual stores and shows how the products should be positioned for optimum sales. The insights provided by the system are generated by information from the customer data warehouse and from a new trading data warehouse.
The team conducted extensive testing alongside existing and newrelease merchandise management systems before the first release of the product to users. The Marketmax solution has given Sainsbury's a unique opportunity to simplify and overhaul its entire product range.
To handle the merchandising around Sainsbury's products, the team chose the Retek Merchandising Systems (RMS) tool to help the trading community drive sourcing, pricing, promotion and stock management operations. Using the consolidated data in RMS, traders can make better decisions about range, space, promotions and pricing by supplier and by store.
The integration of Marketmax and Retek RMS has had a huge impact on Sainsbury's operations, enabling faster and more efficient demand forecasting and store replenishment. The systems are additionally supported by Retek Demand Forecasting (RDF) and the Advanced Inventory Planning (AIP) system. Together, RDF and AIP enable Sainsbury's to calculate accurately the demand for every single product across its entire range and plan the appropriate store orders to meet inventory requirements. The sophisticated replenishment engine within the system allows the company to run a highly efficient supply chain. The system also allows Sainsbury's to predict accurately what customers want and respond accordingly. While these systems work silently behind the scenes, better product ranging and availability have made a great impact on customer service.
To give Sainsbury's a competitive edge in its development of new products, the team installed a collaborative product development (CPD) solution. This application enables Sainsbury's internal teams to collaborate effectively with a vast array of stakeholders, from product development people, chefs, manufacturers and third-party suppliers, to lawyers and marketers. Through the CPD system, all parties in the development process have access to the same information. This makes collaborative working easier and makes better use of resources.
The new regime introduced by CPD triggered other business changes, including training of employees and a communication programme to ensure that all involved parties across the supply chain were fully briefed. Training was delivered online and linked to a 24-hour helpdesk. Another part of CPD is the Idea Bank: a repository of ideas relating to new product development.
All private-label Sainsbury's products, representing some 40 per cent of all goods sold, are now developed on the CPD platform. Time-to-market has been cut by 50 per cent and development costs are down 30 per cent. Life cycle revenues for new products are expected to rise in the region of 20 per cent. Peter Strode, Sainsbury's business-to-business coordinator, says: ‘CPD has changed radically the way we develop products. It has taken the strain out of managing the masses of information across a wide network, and has freed us to focus on quality and innovation instead.'
Rebuilding the supply chain
One goal that all of the Business Transformation Programme projects strive for is simplification. Nowhere has this been more apparent than in Sainsbury's efforts to re-engineer its supply chain. Retek Demand Forecasting (RDF) was implemented to manage the supply chain, supported by Infolink software to detail the progress of future deliveries. These two applications plus new warehouse management systems from Manhattan Associates are key to enabling Sainsbury's to implement the core of its supply chain initiative: four automated warehouses, the largest of which is 700,000 square feet.
The re-engineered supply chain process starts when pallets are received from suppliers and put on to a conveyor system. Cranes take goods to a reserve location where they are later chosen by ‘pickers' based on store demand and fed through another conveyor belt. Products are then sorted and loaded in ‘family groups' with other products from related store areas. This sorting cuts down on handling as products are taken directly off trucks and placed on their appropriate shelves.
By Spring 2004, the new network was servicing 60 per cent of Sainsbury's total network volume, allowing the company to close less efficient facilities and achieve significant savings. The smooth operation of the warehouses is only part of the story; Martin White, Supply Chain Director of Sainsbury's says: ‘Systems are at the core of our new supply chain, but the success comes in connecting our people with these changes.'
To manage the ‘last 50 yards' of the supply chain, the team designed and implemented Shelf Availability Monitor (SAM), an in-store system that provides critical information on sales patterns of each individual store. Through point-of-sale data capture, SAM monitors what a store would expect to sell against what it is actually selling. Where discrepancies appear, SAM highlights problems that may relate to shelf availability, or to service and staffing issues. In the first five months after its implementation Sainsbury's gained more than £22 million in extra sales, in addition to increasing its on-shelf availability by half a percentage point.
Connecting to knowledge
Sainsbury's has more than 145,000 full-time employees working in retail outlets, warehouses and corporate offices. The team developed a sophisticated yet easy-to-use knowledge management system to gather and organize the collective experience of all of the company's staff. Connect is a portal using Vignette's Epicentric technology on the Web front end together with a document management system and search engine. The application allows staff with diverse and unpredictable needs to access the information they need when they need it, and in a format that makes the information instantly usable. Connect holds information on the status of different company projects, provides links to critical online technical resources and hosts discussion forums. The portal is also used in-store to centralize business-critical applications like labour management spreadsheets and retailing procedure documents.
Finance also received an IT boost. The team developed a suite of financial systems that allows for greater control of reporting, accounting and project management. The applications include an enterprise reporting application based on Microstrategy and a project accounting application based on Oracle Financials.
The IT support organization's infrastructure was also upgraded in the course of the Business Transformation Programme. The local area network (LAN) infrastructure was renewed and Microsoft Office suite and e-mail delivered to more than 3,000 users. The head office was moved to a fully equipped desktop environment.
Finally, to drive down costs and improve effectiveness in the area of HR, a payroll system built around solutions from Oracle, WorkBrain and Rebus solutions was implemented to give staff selfservice access to their own personal information. This cuts down on the paper trail traditionally associated with personnel issues. Head office staff can use the system to undertake a variety of tasks from making claims for variable payments such as mileage, to booking training courses and updating personal development plans. The system is additionally used by stores to manage staff holidays and absences.
Savings and earnings
Sainsbury's Business Transformation Programme has modernized the company's information systems capability, and given it a stable platform for renewed vigour in its highly competitive sector. The benefits to date have been measurable as cost savings. After the company launched the programme, it's primarily achieved six consecutive half-year profit improvements, increased the dividend paid to shareholders and grew its sales. The company expected to realize cumulative cost savings of £710 million by March 2004.
The struggle for excellence in the supermarket rarely pauses. The team at Sainsbury's is now looking to reap top-line benefits from the use of technology, as further systems projects target increases in sales volumes and values. The Business Transformation Project shows eloquently how information technology has become a core part of business survival. Perhaps the biggest change the team has achieved is an enduring readiness for change.