Anatomy of an Outsourcing Initiative

In July 1996, National Savings, as it was called at the time,^[1] was changed from a government department to an Executive Agency of the Chancellor of the Exchequer. This shift increased management autonomy, and more importantly, created an opening at the head of the organization for an executive CEO. Peter Bareau, an experienced banking leader from Lloyds, stepped into the post in July 1996.

What Bareau found as he surveyed the agency was somewhat daunting. The staff numbered 4,650 civil servants with an average tenure in the organization of some 20 years. Products and services were supported in three separate operational sites—Glasgow, Durham, and Blackpool—but each site managed only one segment of the product line. For example, if a member had invested in three or four products and wanted to transact with someone at NS&I, she or he would have to contact all the relevant physical locations; these were not connected in any way. If the product was an ordinary savings account, the facility at Glasgow was responsible; if it was a Premium Bond, the customer would have to deal with Black- pool (see Exhibit 1.1). Telephone support was minimal; most inquiries had to be conducted through written correspondence. Products could also be purchased through the nation’s 19,000 postal offices, making NS&I products highly accessible to individuals in even the most remote regions. However, the postal service transferred customer orders to NS&I through a largely manual process. Twenty million of the agency’s 55 million annual transactions were processed without substantive automation. The computer systems infrastructure had suffered from under investment and was no longer up-to-date, according to one executive. NS&I had invested scarce capital elsewhere, where demands were greatest. With an unwieldy legacy systems environment as its toolset, NS&I had introduced only three new products in the past eight years. Noted Bareau: ‘‘Our image was old. We weren’t regarded as being dynamic.’’

Exhibit 1.1: Amounts invested in National Savings and Investments products at March 31, 2000.

Early on in his tenure, Bareau set about charting a course for the organization. His first initiative was to clarify the organization’s mission. He established that one of the traditional aims—to make savings products available to the populace—was well managed by the private sector. The merits of its second aim—to provide a cost-effective source of funding for the national government—hinged on whether or not NS&I’s all-in cost for raising funds was lower than that for gilt, the UK government’s name for its Treasury bills.

During 1996–1997, with the help of outside consultants, Bareau and his executive team worked closely with the Treasury to develop a strategy. They looked at a full range of possible futures for the organization. This process established that NS&I created 100 million ($166 million) in value per year by being able to raise funds for an all-in cost that was lower than the cost of gilt. However, no one in the organization was under any illusions about whether this could continue without substantial investment in organization, systems, and infrastructure. If NS&I could not ably compete, it would not be able to replace an average of 10 billion ($16.6 billion) per year in redemptions with new sales. In this case, it would place a substantial drag on the government purse. Said Bareau: ‘‘If we didn’t dramatically lower costs, improve products, build a customer database so we could market better, change our image, and add professional capabilities, our risk would grow and grow until we had no value left.’’ On the positive side, Bareau now had a clear, visible metric with which to drive performance.

Again with the help of private-sector experts, Bareau and his team set a new strategy for the organization with an aspiration not just to survive but also to leapfrog private-sector competitors in the personal savings market. A senior member of his team pointed out the depth of the challenge: ‘‘We didn’t have all the skills; we didn’t have the technology; and we didn’t have all the resources required to fulfill our mission. We were capital-constrained. It sounds perverse, but we even found it difficult to reduce staff numbers at the desired rate because we had limited financing available for redundancy payments. To succeed, we needed to transform the business very quickly in a way that was self-supporting. So we looked at the outsourcing model.’’

Bareau’s small senior team, most of whom had significant private- sector experience, satisfied themselves that an outsourcing business model could work—that a private sector company could invest at the level they required and make a profitable business out of the opportunity. Through a unique process, they decided that the outsourcing would best be done in one comprehensive, radical deal rather than a series of smaller arrangements. Explains Steve Owen, the outsourcing project manager at the time (now partnerships and operations director): ‘‘We looked at our four key stakeholders: our staff, the Treasury, our customers, and ourselves as a strategic business. We identified what each stakeholder group would be looking for in detail, and assessed each option against these needs.’’ That drove the decision toward a single provider to offer the single customer view, integrated systems, and investment commitment that NS&I needed for wholesale transformation (see Exhibit 1.2).

Exhibit 1.2: NS&l’s objectives for the deal and its requirements of a private-sector partner to meet those objectives

They went through the legally prescribed procurement process and posted a very broad tender offer in the OJEC, the Official Journal of the European Communities. From over 80 expressions of interest they received, the team qualified four groups—two companies and two consortia—as capable of moving to the next stage of the process. However, at that time, they still had not determined exactly where to draw the boundaries between what would be outsourced and what would not.

Rather than provide a detailed tender specification at that point, NS&I chose an innovative approach that still met the European procurement regulations and issued an Information Memorandum to the four groups. Recalls Owen: ‘‘We realized we had a lot to learn, so we didn’t issue a formal tender at that stage. We described our business, our challenges and constraints, and invited them to come back to us with creative solutions. It was a deliberate attempt to draw in information and ideas.’’ Between the summer of 1997 and the spring of 1998, NS&I talked with potential partners, evaluated proposals, and learned.

In April 1998, NS&I invited both General Data Services (GDS) and Newport Systems (not their real names) to negotiate further. The agency issued a formal tender specification that articulated clear requirements, a business model for the partnership, and even a draft contract. By this time, the NS&I executives had arrived at a fairly radical conclusion about core and noncore activities. In the core, they included owning their stake- holder relationship with the British government, and their product, marketing, and channel strategies. Everything else was considered noncore. ‘‘We had to get over the organization’s mind-set,’’ said Bareau, ‘‘that we couldn’t possibly outsource operations that would impact the customer. People believed that to control those things, we had to own them.’’

To keep the competitive process lively and informative, NS&I actually negotiated a full contract with both suppliers. This forced discussions and analysis to an unusual level of detail and ensured that NS&I achieved the best possible terms and conditions. Bareau remarked, ‘‘We were very clear about what we wanted: investment, job creation for our people, a total transformation of the operational systems, a huge culture change, and risk transfer. In the end, everyone underestimated the cost, complexity, and risk of the transformation; but the alternative of having to do it ourselves kept us on track.’’

It was clear from the outset that modernizing NS&I would mean dislocating staff. Owen commented, ‘‘We had been getting smaller for a long time. In the 1960s, we had 15,000 staff. By early 1999, we were down to about 4,500. With an average length of service of over 20 years, many of our people had lived through the shrinkage. They didn’t welcome it, but they did recognize the business reasons for it.’’

The executive team believed that, despite the disruption, a good outsourcing model would provide the best chance for workers to continue employment. According to the transfer of undertakings protection of employment (TUPE) regulations, an outsourcing provider would have to maintain workers’ current terms and conditions at the transfer. Further, under UK law, if it wanted to make redundancies following the transfer, it would have to start a consultation process with employees prior to taking action. But NS&I sought a contract that would encourage the provider to win new outsourcing accounts that would utilize transferred workers. According to Owen: ‘‘If it worked the way we hoped, the provider would have a valuable asset—an operations center with robust infrastructure and trained staff—with which to gain new business. That’s how we sold it to our people, the unions, and the local politicians in Glasgow, Durham, and Blackpool.’’

The NS&I team started communication with the staff from the beginning of the process. Owen explained, ‘‘We started with a very light touch, and as we learned more about the shape of the deal, we began to open up more robust discussions with the staff and the unions. We didn’t say, ‘This is good for you,’ but we said, ‘This is the best thing for the business, and we will do everything we can to protect you.’ We were very open.’’ They held ‘‘road shows’’ to address staff fears about pensions, pay, and new work expectations. Each session eased some concerns and opened up the next tier of issues. Because the business case for the outsourcing was very strong, the NS&I executive team believed that ultimately the staff would recognize the need for change. And they managed to avoid press coverage to ensure there was no misunderstanding in the public’s mind. ‘‘We kept a low profile,’’ said one executive. ‘‘This was not the privatization of NS&I. This was a simple business case.’’

The competing bidders both knew that creating new jobs for outsourced NS&I employees would be central to the winning strategy. A provider executive noted: ‘‘NS&I wanted to outsource the delivery of massive change, which they knew would require investment and expertise that they did not possess. In addition, they were unable to create new jobs to offset the reduced need for staff to service their own business. So they asked, ‘What can the private sector do to create work for the people who will no longer be needed to support NS&I and its customers?’’’ GDS and Newport Systems took different routes to reassure the government, the unions, and the employees that employment prospects were improved by the outsourcing. Newport Systems framed the NS&I deal as a strategic acquisition: it would acquire 1 million square feet of space and thousands of people that would form the core of an administrative services center outsourcing model. This showcase deal would enable Newport to demonstrate its deep outsourcing capabilities, and it would provide a center through which it could service new outsourcing clients. GDS, on the other hand, claimed that it had the scale to absorb NS&I employees into its organization through normal business processes.

Newport Systems also recognized that its success would depend on winning the hearts and minds of the people. It insisted on having access to the NS&I staff during contract negotiations. It mounted a concerted communications campaign to explain what outsourcing would mean to the affected people and their families. These road shows were designed to demonstrate that ‘‘we weren’t two-headed dragons,’’ one executive remarked.

The NS&I team did have some concern about Newport’s level of experience in both business process outsourcing and the banking industry. ‘‘GDS was much stronger in IT outsourcing,’’ explained Bareau, ‘‘but what we were doing was at the radical end, and even GDS didn’t have much experience in that.’’ To mitigate the risk with Newport Systems, Bareau and his team established a relationship with Newport’s headquarters management, which guaranteed the contract.

By the time both providers’ contracts were negotiated, the NS&I team had invested a great deal of time to determine exactly what the organization needed. Again aiming for a balanced view, they based the final decision on their assessment of the needs of the four key stakeholder groups. They identified four primary objectives for each stakeholder group and developed a total of 64 evaluation criteria in all. For example, it was important to minimize the cost of raising funds, and customers wanted their phone calls answered by a human being within 20 seconds. Owen recalls, ‘‘It was not just a list of vague wishes; we had laid out an explicit transformation program based on the sort of business we wanted to be.’’ No matter how the criteria were weighted, one clear answer emerged: Newport Systems. (Exhibits 1.3 and 1.4 compare GDS’s and Newport’s proposals.)

Exhibit 1.3: Comparison of Newport Systems and GDS bids.

Exhibit 1.4: Other significant differences between the final bids from Newport Systems and GDS.

In December 1998, NS&I announced it would award a ten-year contract to Newport Systems, with an option to extend for five additional years (see Exhibit 1.5 for a comparison of the winning bid with in-house alternatives). The total value of the contract was 635 million ($1.56 billion). All of NS&I’s operations, customer service, technology, and transaction processing, along with 4,153 largely unionized civil servants, would be outsourced to Newport, effective April 1999. NS&I would retain 120 full-time civil servants on the payroll to handle strategy, marketing, and product design and to manage the relationship with Newport.

Exhibit 1.5: Comparison of NS&I’s forecast cast budgets, the Public Sector Comparator, and Newport Systems’s bid.

^[1]The agency was named National Savings in 1969. It adopted its current name, National Savings and Investments, in early 2002. For simplicity’s sake, we will refer to it as NS&I throughout the document.