Whether you are a global corporation running a field force of tens of thousands or a local business with a handful of employees undertaking work in the field, efficiency savings and better performance are objectives that will be at the top of your agenda.
This article sets out the main issues that require to be taken into account by any company seeking to contract successfully with a third party supplier in relation to its field force operations, whether as part of a first generation outsourcing agreement, contract consolidation exercise or as part of a re-tendering process.
1. What is ‘in-scope’ and how much does it cost you at the moment?
Before any company can consider a third party supplier’s offer, it must understand what the scope of the transaction will be and what its own cost base is for the current work that is undertaken internally.
This can appear obvious but more often than not, an internal organisation has never been required to undertake a serious and detailed review of its operations.
The company needs to assess how much of its own field force’s activities will be passed over to the new supplier. Will the supplier be given the exclusive right to provide the services or will the company retain its own internal field force to perform some of the ‘business critical’ functions?
Once the scope has been agreed, the company will then need to work out the current cost.
There are a number of factors that will need to be taken into account, including personnel costs, materials, premises, IT and associated administration costs incurred.
Further, the way these costs are divided up to reflect the constituent elements of the services provided will be an issue. So, for example, how much does it cost to dig up a road, lay a pipe, test it and make good the works? And is there a differential in cost if the pipe is laid during normal working hours or half way up a mountain at the weekend?
Such nuances, spread across a field force undertaking multiple activities, will take a considerable amount of time to document but this is essential in order to understand the potential for cost savings on a ‘job by job’ basis which could then be translated into macro savings across the network.
These would be documented within a statement of work. This document should be used to form the basis of any tender provided to third party suppliers to enable them to bid against it and it will also be attached to the final contract. It is important to note that it must be structured in such a way as to match the relevant unit cost that would be contained in a related pricing schedule.
Prospective suppliers can then easily understand the service requirements at a detailed level and provide competitive pricing that the company could review to decide whether there was a deal worth doing in the first place and then which supplier to choose.
2. What level of service do you receive?
If the current field force operation records its service history and has an internal level of service which it attempts to maintain, then this information would be the benchmark for any third party to compare itself against.
The company would provide this information in any tender document and would expect, at the very least, the same level of service to be supplied by the third party within the price proposed.
More often than not, however, internal service levels are not measured and recorded at a detailed level and some companies make the mistake of asking third parties to supply services at a reduced rate but with enhanced and contractually binding service levels, which is often unrealistic to expect.
It is also unrealistic to expect the Supplier to measure and report on every single constituent element of the service. This would result in an administrative ‘overkill’ which would take more time and money to perform than necessary. A company looking to transform its service is much better advised to concentrate on the most important levels of service that it wishes to be measured and met.
After the correct measures have been identified, the next issue to consider is what happens if the service levels are not met. The most common approach is to combine the measures with a service credit regime.
A well drafted service credit regime will have the effect that if the company is not receiving the service at the level that it is paying for, it can then reclaim a ‘credit’ against the next invoice because of the lower level of service that has been provided during the relevant measurement period.
This type of approach would certainly focus the supplier’s mind on what requires to be delivered but a well advised customer may also seek to incentivise good performance by providing the supplier with the ability to ‘earnback’ credits, as a result of good performance, that it has already ‘paid’ to the company.
Service level agreements are thus a vital component of any agreement in this area and they must be drafted in such a way as to combine with the statement of work and pricing schedules in order to be effective and in order to meet the company’s performance objectives.
3. The workforce
If the company wishes to outsource the field force services to a third party, then this will probably result in the application of the Transfer of Undertakings (Protection of Employment) Act 1999 (“TUPE”) to the transaction.
This means that current employees will have a statutory right to transfer to the new service provider on broadly the same terms and conditions of employment. There are exceptions in respect of certain rights under occupational pension schemes.
The HR related issues need to be handled with care as ensuring a stable workforce up to and following the outsourcing of a business function can be critical to the success or failure of the project.
TUPE imposes a statutory obligation on the employer to inform and consult with recognised unions, or in their absence, employee representatives elected for the affected workforce.
However, apart from these statutory obligations, the company must decide what strategy it should pursue regarding consultation. The unions are likely to seek guarantees in terms of protection of terms and conditions for a guaranteed period following transfer and push for a commitment that redundancies will be minimised and pension rights will be protected. The company must cost carefully any guarantees it agrees with unions and be mindful of the precedent it may set for any future outsourcing projects.
It is important to note that during what is often a tense period prior to the transfer of the workforce, those employees essential to the continued delivery of the service should be identified and re-assured to prevent any serious disruption of services.
However, most workforces remain highly suspicious of any discussions that may impact upon their employment rights and therefore a company would have to take particular care to follow procedures and practices necessitated by the law and with any unions in order to ensure the future success of discussions with any third party supplier.
4. Regulated environments
Companies acting in regulated environments will still be on the hook for compliance with laws notwithstanding the contracts that they may enter into with third parties.
The contracts will, therefore, need to be drafted in such a manner as to ensure that the third parties perform the activities so as not to place the company in to a position of default.
For example, Traffic Management Act issues relating to the performance of street works in order to reduce, to the maximum amount possible, any traffic congestion will still need to be followed and fines levied by local authorities passed through to the third party supplier.
As with most large, complex agreements, the initial period of handover is a period of time that requires special attention as the parties will not get a second chance to ensure that the initial transition is performed successfully.
A fully developed transition plan with its own milestones and associated payment structures should be used to provide the third party supplier with sufficient details on what it needs to complete and by when.
This is usually a joint plan but from a contractual perspective, the responsibilities and obligations of both parties needs to be recorded so that, amongst other things, there is no confusion as to who should be doing what.
To the extent that the company requires the third party to take the existing field force operations and change the way it works over the term of the contract, then this requirement will need to be understood and recorded in the agreement.
It is extremely easy to go to the market requesting that third parties should provide a ‘transformational’ solution but what does this actually mean?
A company should, therefore, spend some time analysing what ‘good’ looks like. What sort of transformed service would best fit its requirements and is this achievable, within its price requirements and within its timescales?
Such an analysis and the way that this is linked in to the contractual obligations with regards to service performance and service levels is time well spent if a meaningful agreement is to be entered into.
In the absence of this, all too often the company will not receive anything ‘transformational’ at all and will end up with an agreement that does not meet its requirements.
7. Change control
One thing that is certain over the term of such contracts is that things will change.
A well drafted change control procedure will provide both parties with certainty as to what will happen as field force operations change and extra services are required or existing services dispensed with.
To the extent that the pricing schedule provides for fixed prices for new services, this should be encouraged from the company’s perspective so as to promote certainty. Where such certainty cannot be provided, then a regimented regime for dealing with change and providing for an agreed outcome is the recommended route.
Field force operations are not unique to the extent that they are one of many business processes that takes place within an organisation.
However, the subject matter of what the field force is engaged upon and the way that each ‘job’ is priced will require a great deal of analysis and time spent on drafting contractual schedules in order that the parties understand the nature of what is being required.
If this is not followed, then the likely result will be a contract that does not meet either party’s needs and the opportunity to gain the necessary benefits will have been wasted.