G4S was appointed as the Official Security Services Provider for the London Olympics in 2010. The original contract was to provide 2000 security personnel. In 2011 after a review of security arrangements a contract variation was agreed where G4S were to provide an additional 8000 staff. As the large media coverage has shown G4S were unable to meet this requirement and the Government had to draft in military and police at very short notice to provide the shortfall. How can outsourcing risks be managed?
Check out the supplier
One of the issues with G4S was the disconnect between the requirements of LOCOG and the solution G4S could provide. It is essential to perform sufficient due diligence on your proposed supplier. Could this have highlighted earlier that G4S did not have sufficient resources? Outsourcing contracts usually contain a clause stating that the provider has considered the scope of the services and has sufficient resources to meet this, but for critical contracts it may be worth making further checks on this. In the early planning stages it is essential to consider the key risks of the contract, ensure all due diligence is completed and appropriate contractual clauses are included to address any perceived risks.
Is outsourcing the only option?
Outsourcing has been a buzz word in recent years but are some services so business critical that they should stay in-house or can more than one supplier be appointed? This may bring with it its own challenges on pricing and ensuring suppliers who are likely to be competitors can work in parallel, but again the risks must always be considered from the outset and an appropriate contractual structure put in place to protect against this.
Often organisations outsource functions as they don’t want to micro manage the supplier but this is often critical for key arrangements. It may be advisable in the early stages of an outsourcing arrangement to have frequent meetings and reporting, and once the arrangement is working to reduce the frequency of these. In the G4S contract, would more stringent contract management have identified the issue earlier allowing alternatives to have been put into place quicker? It is undoubtedly the case that greater transparency would have provided early warning of the issues experienced by G4S.
The G4S variation for an increased number of security staff was significant in the failure of the contract. It is important that the change control provisions are robust - allow again for appropriate due diligence; make provision for changes to timeframes; ensure that risks associated with the change are identified, and again place an obligation on the supplier to confirm that they have sufficient resources in place and capacity to meet the requirements.
Incentivise the supplier
Termination should usually be of the last resort in outsourcing arrangements. If the only remedy available to LOCOG would have been termination, then this would not have helped the practical need to have the number of security staff in place. Service credits and the service level regime must be well thought through, together with the liability provisions and any specific types of loss which may be relevant to the contract and the type of services.
Step-in rights are often the source of much negotiation and their benefit depends very much on the nature of the outsourced services. However, in the G4S scenario such a clause, would allow a customer to take action quickly and source an alternative provider or even provide the services itself to ensure business continuity.
There are huge benefits in an outsourced solutions including cost drivers, an improved level of services and the ability of the customer to refocus on its core business. It must always be remembered that outsourcing arrangements do not eliminate risk and the residual risks must be fully considered and contracted for. Outsourcing can be hugely successful but it is important to ensure that the contractual framework is robust. It is not sufficient to have a “one size fits all” approach to outsourcing contracts and the particular risks in each situation must be addressed.
Rather than signal the death of outsourcing, the G4S fiasco has highlighted the need for well managed relationships and robust contracts. If requirements are not fully explored, the contract is not robust and managed effectively and the solution is not delivered, then reputation and business continuity is at stake.