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Securing Value for Money in Public Sector Outsourced Contracts

Government organizations, like their private-sector counterparts, need to actively manage their outsourcing arrangements, or risk falling short of the targeted benefits they expect from these agreements. Based on ISG’s experience evaluating IT and business process third-party agreements, we know that organizations can assure appropriate value for money throughout the life of the contract by incorporating benchmarking, contract review and pro-active Service Integration and Management (SIAM) best practices in their outsourced contract governance processes.

Like many other public sector organizations, UK local authorities have a particular incentive to achieve the desired benefits from outsourcing contracts in the face of ongoing reduction in central government funding, as well as the increasing pressure to provide improved public services at a fair price. That’s why public- and private-sector organizations alike should focus on spending wisely, rather than simply spending less. Proactive management and an end-to-end review of service delivery, including governance and SIAM processes, are the keys to achieving the right results.

Specifically, organizations that take the following approach are able to control their outsourcing journeys and achieve the expected benefits:

  • Benchmark each service tower within the contract against market prices to assess whether services really are providing the appropriate value for money. Even if a bundled set of services has a single fixed price, it is still useful to compare the price to a reference group of similar organizations by understanding the quantity consumed for each service element, multiplying this by a market price and aggregating the total prices. Remember that both IT and business process services show a general downward trend in market pricing over time, which needs to be taken into account when contracts are renegotiated.
  • Review the contracts. Ensure all contract terms are fit for purpose and that they provide sufficient agility and flexibility to meet changing market and budgetary demands, as well as the appropriate metrics to evaluate all aspects of service against the anticipated value to be delivered.
  • Assess the retained organization for capability, efficiency and maturity in the way it manages the provider relationships and assures full realization of the benefits of the sourcing arrangements.
  • Utilize centrally negotiated services (such as G-Cloud for UK public sector organizations) to benefit from the best possible prices for outsourced services.

This ISG white paper describes how one UK local authority followed these guidelines and achieved a win-win outcome for both the service provider and itself.