Managing Third Party & Counterparty Relationship Risks

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Procedures to Mitigate Outsourcing Risk 9 October 2013 Matthew Flood General Counsel, Support Services
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Procedures to Mitigate Outsourcing Risk

Transcript of Managing Third Party & Counterparty Relationship Risks

Page 1: Managing Third Party & Counterparty Relationship Risks

Procedures to Mitigate Outsourcing Risk9 October 2013Matthew Flood General Counsel, Support Services

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Introduction

What is outsourcing? What are the risks of outsourcing? Mitigation: Planning for successRisk Mitigation: Specific ActionsQuestions?

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What is Outsourcing?

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Why is this relevant?

G4S London 2012 Olympic Games Security Contract£250m contract for 10,400 security staffG4S unable to provide enough staff 4,700 members of the armed forces deployedResignation of CEO

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Definition of Outsourcing

A "typical" definition:

"the process of transferring the responsibility for a specific business function from an employee group to a non-employee group, which may or may not include the transfer of assets and personnel”

Means different things in different situations:● Contracting relationships● Sub-contracting arrangements● Alliances/partnerships

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What does Balfour Beatty do in the outsourcing space?

Facilities Management (WorkPlace) Energy services (WorkPlace) Roads networks (Living Places) Gas/water networks (Gas & Water) Business Process Outsourcing (WorkSmart/WorkPlace) Total Outsourcing (WorkPlace)

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Risks of Outsourcing

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Why is this relevant?

National Health Service – NHS National Programme for IT (NPfIT)

£12 billion scheme to provide electronic patient recordsScrapped after 10 yearsEstimated overruns of £7.4billion, multiple supplier contracts

terminated

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General risks

Vanity Projects Lack of buy-in/understanding

● At executive level● Generally by staff

Working with contractors (especially overseas)● Lack of cultural understanding● Data protection ● Bribery/Ethical risks

Bespoke vs Generic system “Non-outsourcable” responsibility

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General risks: continued

Capability● Do they know what they’re doing?● Losing talent to the contractor? ● Can they take you for a ride?

Intellectual Property● Benefit of developments?● Selling your knowledge to other customers/competitors?

Dependence

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Is this more complex than you think?:Balfour Beatty Living Places’ capabilities on roads Highways and

Transportation Strategic

management of highways and street lighting assets

Network management

Health and safety management and delivery

Congestion reduction

Programme management

Project management

Street-lighting design and maintenance

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Road safety & travel planning

Highways design and maintenance services

Winter maintenance Emergency

response Vehicle

management and maintenance services

Grounds maintenance services

Construction Site supervision Sustainability Environmental

services

Performance and risk management

Change management

Highway asset management

CDM services Street-lighting

design and maintenance

Highways inspection

Traffic control systems including traffic lights

Planned & reactive maintenance

Enquiries from the public

Road space management

Traffic Management Act coordination

Third Party claims management

Tree management Drainage Lighting

management Parking control Travel & information

management Streetworks Network co-

ordination Traffic monitoring Material testing Annual road user

casualty reduction

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Mitigation: Planning for success

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Why is this relevant? US Navy EDS IT Contract$4billion deal for EDS to provide world’s largest intranet700,000 users, 400,000 computers in 620 locationsProject plagued by delays and controversy$550 million in deferred costs written down in 2003Now, whole site being “unbundled”

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What makes it work?: Shared Values

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What makes it work?: Shared Vision

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What makes it work: Organisational Design

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Game changingSTRATEGIC

What makes it work: Critical Success Factors

WorkSmartShared

Services

Executive sponsorship

Business Partnership

‘Working together’

Data-based approach

early identification

of trends Service Management framework

Fielding the Right Team

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What does success look like?

Success is where the outsourcing delivers better value than the client could generate doing the work itself

And, this success can actually be measured

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Preparing for success: Is there an ideal process?

BS11000 Collaborative Business Relationships

Provides a process clients/contractors can use to work together effectively

Auditable

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Risk Mitigation: Specific Actions

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Why is this relevant?

G4S/Serco Prisoner Electronic Tagging ContractsAlleged overcharging of up to £50 million pounds Offenders had been released, were in prison or even

deceasedSerious Fraud Office to investigateBanning from government contracts?

(c. 50% of Serco Revenues)

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BEFOREMitigation

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Contracting: More Haste Less Speed

Rush to “get to contract” Scope poorly defined, terms harsh/unmoving, schedules left

“TBA” Time not spent on:

● current state; ● what is required; nor ● what success looks like.

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Contracting Framework: Roles and Responsibilities

SCOPE! ● Must be clear, consistent, ● If not included, will usually be a variation ● “Kitchen sink” language

Set out clearly what client does vs what supplier must do● Client dependencies ● Outsourcing contracts fail where gap in understanding

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Contracting: Outsourcing life cycle

Beginning, middle and end Leave enough time for the handover Contract operation

● improving metrics/efficiencies over the life cycle

Extension? Termination/hand over mechanics

● Termination for convenience?● Transitional services?● Break costs?

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Contracting: Risk and Reward

Client risk or contractor risk?● Who is best placed to pay for it?● Do you REALLY want the contractor to take it?

Pain/Gain share mechanisms Claims/investigations? Specific risks

● Bribery/data protection/HSE/personal injury etc● Indemnities?

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Contracting: Policing Mechanics KPIs Service Credit regimes/Liquidated damages

● Should this apply across all KPIs?● Exclusive remedy?

Reporting requirements/Escalation Procedures● Governance structure?● Consistent data/data overload

Termination Rights (on default, change of control etc) Step In Rights

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DURINGMitigation

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Planning is no good if actual implementation is poorTransformational shift in culture ●Safety ●Efficiency●Redundancies?●On-going employee engagement

Data in agreed form ready to be producedContract summary

Mobilisation/Ongoing review

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• We measure WorkSmart only and End-to-End performance metrics, and embed in Service Agreements

WorkSmart service management

Wor

kSm

art

Onl

yEn

d-to

-End

Data based and

Baselinedmetrics

Drivingaccountability

and E2E improvement

Our Service Management framework has assured performance transparency and enables collaboration with our clients

‘You cannot manage what you cannot measure’ Bill Hewlett (co-founder of HP)

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WorkSmart service managementPerformance reviews are held monthly with each Client, chaired by BBWS Account Manager and incl. WorkSmart Only and End to End performance.

• End-to-End achieved 66% GREEN SLA compliance (Mar)

• AP invoices POT % + Level of aged Debt compared to baselined expected and minimums varies by OpCo

• Payroll accuracy + Timeliness + Payslip distribution compared to baselines

• % addressable spend going through SCM agreements + % of forecast benefit achieved + % rebates collected

End-

to-E

nd

Insights: • End-to-end comparative metrics are a catalyst for change• Stronger client relationships accelerate benefits and value-add 31

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HEAVEN/HELL

Paperless system

Open book supply chain orders

New innovations process/ IT

Property portfolio stable (optimal)

Dateline

Achieve Zero harm target

7% efficiency to tender contract

Engaged workforce 62+ (79)

8+ look ahead work & design

Fit for purpose tendered structure

in place

Customer score 8.5

Meet budget

All BB employees

Exceed mains replacement target

Front end focus not backend loaded

Acknowledge / Learn

Staff churn

Poor relationship with stakeholders

Succession planning – losing key talentEmployee attrition

Development plans not in place

S74 performance not improving

High customer complaints and

enquiries

Lack of confidence in the reinstatement

process

Increase in staff numbers to

manage inefficient processes/

systems

Low Employee engagement results

Efficiency programme < 4%

People issues – relationships; competence

blocker on delivery; succession planning

Ops not delivering - programme adherence

H&S performance declines

Communicate & Celebrate

Year two Design submitted

Developed sustainable

manpower strategy that covers winter/

summer requirement

Year 2 programme in place

All staff have objectives linked to

Biz plan

Relationship with local authority

improved

4% efficiency challenge to

tendered outputs

Year 1 workload target & risk

removal delivered

10% of 8 year programme by

December

IT systems delivering eg audits

MI capability

Innovation – mains lining; asbestos

insertion

Employee Engagement

survey

Subcontract reinstatement

HSE consultation cuts too deep – unsafe network

BMS non compliant

GDFO issues WIP >55m

Reputation on 3rd party reinstatement

£££

Stakeholder relationship not

improved

Transformation team/ projects delayed due to

consultationNWGA pack completion

No Section 74

Improve external stakeholder relationship

Contract KPIs delivered

D42 achieved

Robust MI/ contract measurement &

environment

WIP < 155 days <50mil

Customer Sat > 8.05

Accumen live NW GDSP & Data

Hit Zero harm target

Restructure complete

April 2014 April 2015

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Benchmarking

How often?What criteria? Outcome?

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Insurance/Security Consider what insurance policies required

● Who should insure (client/contractor)● For what (design, physical damage etc)?● Ensure currency of coverage

Security● Bank guarantees/insurance bonds● Parent company guarantees

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AFTERMitigation

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Risks on retendering

Demobilisation can be expensiveYour current supplier is in the best positionCulture●People can take their eye off the ball

Transition●Expect to pay twice●Does the contract still work 5 years on?

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Mitigation of risks

Intellectual property – who gets all the handbooks, manuals, IT etc

Staff●TUPE – does it apply? It can help (OR NOT!)● “Golden handcuffs”/bonuses?●Non poaching/confidentiality clauses

Branding solutionsBuy out the company?

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Why is this relevant?The Truceless War, Carthage, 240 B.C.Hanno outsources infantry to 20,000 mercenariesFollowing contract losses and poor demobilisation, Tunis

seized by mercenary army Previous manager, Hamilcar Barca, reinstated Resolves the matter out of court by killing them all

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Questions?