In a survey carried out last year by PA Consulting, 49 per cent of respondents stated that they had only realised part of the benefits that they had expected from outsourcing. Worse still, 17 per cent had not seen any benefits from their outsourcing. This survey highlights the need for careful advanced planning for any company contemplating outsourcing an in house function, particularly where it involves the transfer of employees. Forward planning is an essential part of the timetable in order to minimise disruption in the provision of the existing service.
Right at the outset, it is important for not only the customer but also potential bidders to clarify the objective of the outsourcing. For example, is it to:
- improve standards;
- change the method of the provision of services;
- save costs;
- reduce head count.
Clarifying the purpose will reduce the risk that potential bidders for the contract get a confused message.
Furthermore, it is critical, at an early stage of discussions, for the customer to identify who within its organisation is responsible for "managing" or "owning" the contract and then assessing how much support he (or she) will have from colleagues during the negotiations of the outsourcing.
In addition, where any staff are to be transferred to the potential supplier, it will be necessary to identify the individuals in the relevant business unit. Having identified the employees, it is necessary to ascertain whether TUPE (The Transfer of Undertakings (Protection of Employment) Regulations 1981), will apply.
If the activity being outsourced contains the necessary elements of a business and can be separated from the other activities of the outsourcing company's business and therefore forms a discrete part of the business, there is a likelihood that TUPE will apply. When TUPE applies to a transfer of a business (or part of a business) those employed in the business will transfer automatically to the supplier on the same terms and conditions of employment.
As a general proposition, TUPE is likely to apply in outsourcings. Any contrary approach would be likely to be controversial; particularly with recognised trades unions, and might well be subject to challenge.
Assuming TUPE applies, it will operate to transfer the employment of those people who are employed in the business at the completion of the transfer, upon completion of the transaction. Accordingly, it will be necessary for both parties to consider the following issues:-
- will the key staff involved in managing the contract automatically transfer to the customer service provider? If so, steps need to be taken for the service provider, the outsourcing customer and the relevant staff to agree that certain key staff will be retained by the outsourcing company so the customer does not lose the "brains" or corporate memory to manage the contract;
- are there any staff who also work for part of their time elsewhere in the group?;
- are there relevant staff in other divisions of the company (for example employees in the IT division who are wholly devoted to supporting the unit being transferred)
- does the supplier or service provider have existing specialists which mean some of the outsourcing company's staff will not be required by the service provider?
Unlike with a sale of a business where the staff permanently transfer, it is important to remember that TUPE can also apply in the expiry, or termination, of the outsourcing contract. The customer will not want to find that at the end of the contract twice the number of staff that it originally transferred to the supplier return back under TUPE at double the original rate of pay. So it will be necessary to impose, in the legal documents, restrictions on the supplier from hiring additional staff and increasing pay rates. Provisions obliging the supplier to keep the customer informed of these matters will also need to be included.
Pensions is another issue that needs to be addressed early in the process. The pension "mantra" is "think of the "Past, the Present and the Future"". For example, the customer will need to consider whether the employees can take with them a transfer of past pensionable service; or whether the employees' accrued pension "pot" will remain with the customer so that the supplier will have to set up a new pension arrangement.
If the pension "pot" is to go over then, in order to avoid last minute all night negotiations over the value of the existing pension fund that is to be transferred, the customer will want to impose a condition on potential bidders to provide broadly comparable benefits to employees, in the future. Pension 'pitfalls' can frequently be 'deal breakers' and will be dealt with in more detail in a subsequent article.
Another result of the application of TUPE is that the transferor has an obligation to inform and consult. While this may just sound like good business sense, it is important because it affects the project's timetable. Information must be supplied "long enough before a relevant transfer" to enable proper consultation to take place. A generally accepted period is 4 weeks but in completing transactions it may be necessary to factor into the timetable a period as long as 3 months.
If the company transferring the staff fails to consult, any affected employee may obtain what is known as a "protective award" of up to 13 weeks' actual pay (unlike redundancy and unfair dismissal compensation, there is no statutory limit on the amount of the week's pay). Consultation should take place with "appropriate representatives" of a recognised trade union (where one exists) or, in other cases with representatives elected by the workforce.
A particular difficulty in consultation is confidentiality. Regrettably, this is not addressed in the TUPE regulations - but does need to be considered in advance. In practice, an employer may be willing and able to agree to impart information to the representatives on a confidential basis. An obvious example would be the identity of the buyer. But there are two potential difficulties with this. First, there can be no guarantee that the representatives will not breach the confidence, and if they do so there will be no obvious recourse. Secondly, the employer might be vulnerable to an argument by an affected employee "left in the dark" about the identity of the buyer that it had failed properly to consult.
When assembling the documentation for potential bidders to review, make sure that the data protection rules are considered before disclosing information on employees. In practice, this will mean ensuring that individual employees are not identified. This may involve deleting the age and gender columns, banding salaries and generalising job descriptions in the materials made available to all bidders. A later article will summarise the data protection issues in more detail.
During the bidders' investigation of the business, ensure that there is no "careless disclosure" through fraternisation with bidders at a junior level. In addition, a company which is considering outsourcing the service may want to establish rules on the use of ex-staff by potential bidders on site visits, to avoid breaches of confidentiality.
Before negotiating the legal agreements, the HR and other departments of the customer need to ensure that they are each given time to review the other side's comments in good time so that the relevant comments can be made to the outsourcing company's "team leader". This procedure is to minimise the risk that critical commercial points are not ignored, or casually "thrown away" in negotiations, thwarting much of the effort put into the project's planning.
Set out below is a checklist for the internal manager to consider, to assist in project managing the early stages of an outsourcing.
INTERNAL PROJECT MANAGEMENT ISSUES CHECKLIST
- Who are in the core management team and who is going "over the wall"?
- Identify at an early stage who is responsible for "managing" or "owning" contract and assessing how much capacity they will have during the deal then get them to:
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- tell lawyers what is wanted at the start to make them feel more responsible
- avoid subsequent "changes of mind" entailing additional drafting
- identify among themselves who will resolve internal "turf wars", so lawyers do not get involved in internal issues
- establish an umpiring procedure to settle any internal issues between business units particularly if this is the first "off the runway" as part of multiple outsourcing
- Business issues
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- What is the objective of the outsourcing
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- improve standards
- change method of provision of services
- make money
- reduce headcount
Get this clear at start to avoid giving muddled message to bidders
- Employees
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- pension obligations
- identifying staff in the business unit; for example
-
- seconded staff
- relevant employers in other divisions
- ensuring proper consultation (for example with the unions)
- maintaining confidentiality
- Data room
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- before assembling information - check internally what has been compiled elsewhere
- consider data protection rules before disclosing information on employees
- identify business to be transferred
- financial adviser's information request list - tailor it to the deal and ensure that the in-house team understand what's wanted and why
- identify a "chaser" and verify that adequate internal resources are available in the different departments, so lawyers aren't brought in at last minute to:
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- identify what is and what is not material
- assist in assembling and copying information
- Due diligence
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- establish whether information requests to be dealt with in-house
- ensure central control point
- avoid "careless disclosure" through fraternisation at a junior level
- establish rules on use of ex staff by bidders on site visits
- Document handling - aim to cut down legal fees in drawn out negotiations
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- get as full as possible drafts to early bidders - ideally as part of documents in data room
- put in system for ensuring that team leader gets comments from relevant internal commercial colleagues and "stakeholders" (either a signing off procedure or "speak up or shut up")
- ensure that internally all are "on side" before the documents go out to potential bidders
- Preparation for negotiations
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- make sure all internal team understand commercial significance of mark-ups received from bidders when assessing each bid - and line them up to be on standby for bidder's comments
- make sure that bidder will be expected to bid on basis of mark-up
- has the key team given itself enough time to analyse commercial impact of amendments before preferred bidder selected
- use opportunity to negotiate unacceptable changes before appointing preferred bidder(s)
- Negotiations
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- exclusivity - keep tight
- who will conduct negotiations
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- check that they will be available
- will they have to "live" with the other party - if so, do others need to negotiate
- are they aware of all policy issues (ie they don't wreck any other future outsourcings)
