The public sector has never seen anything quite like it before. While government departments and other public service organisations have been outsourcing some of their back-office functions for years, National Savings has gone much further. In a new kind of “public service partnership”, 4,000 employees have been outsourced to Siemens Business Services (SBS). But the sheer scale of the deal, which took effect on 1 April, has not been its only groundbreaking feature. “The whole executive played a role, but the process was orchestrated by purchasing,” says Jeannie Bevan, sourcing director at National Savings and deputy chair of the CIPS board of management. “That’s very different from other examples of outsourcing I’ve seen, which are often driven by people who have little connection with the profession.” Bevan joined National Savings last September, and was part of the executive team that analysed the various sourcing options available to the agency. Formerly purchasing director of NatWest Group and more recently director of purchasing at British Airways, she was attracted to this public-sector job not so much by the outsourcing project itself, as by the opportunity to help transform National Savings into a modern business in which purchasing is recognised as a core competence. The model that the agency has adopted is similar to the one used by many of the recent entrants to the financial services field, including several of the leading supermarket chains. They have tended to outsource their non-core activities, while retaining a small team at the centre to design and develop products, handle the treasury management function and manage suppliers. “That’s how you would structure National Savings if you were setting it up today,” says Bevan. “You wouldn’t recruit 4,000 people. You’d probably recruit about 150. However, we are unusual in that there are not many traditional organisations that have turned themselves around and adopted this model.” Nor are there many traditional organisations that have given purchasing professionals a central role in running the business, she adds. “We have not been used to playing centre stage. We have often had important supporting roles, and we’ve often had very important bit parts, but this is definitely playing centre stage, which is a big challenge for our profession.” National Savings’ decision to take up this model and outsource some 97 per cent of its business to SBS is part of a modernisation drive designed to maintain the agency’s position as a leading player in the fast-changing and increasingly crowded retail savings market. A major review launched shortly after the appointment of Peter Bareau as chief executive in 1996 had identified the agency’s fundamental aim and objectives - as well as the gaps between where it was at that stage and where it needed to be. The review showed that National Savings needed to extend its range of products, and increase their appeal to customers. It also highlighted the importance of upgrading the agency’s systems and processes in order to improve the quality of operational services. As a first step, National Savings reorganised itself around three core activities or competencies. First, a funding directorate was set up to support the government’s savings policies and to deal with the Treasury. A commercial directorate was given the task of handling product development and marketing. And a sourcing directorate, headed by Bevan, was given responsibility for managing relationships with service providers. “We said we wanted to run this business by purchasing in whenever it made sense to do so,” says Bareau. “Today, we are 120 people managing a business of around £64 billion, so sourcing has to be a core competence. If you don’t buy well, if you don’t manage relationships with service providers well, and you approach the task with an in-house mentality, then you are dead.” Despite the commitment to buying in services whenever this was the best solution, the outsourcing of all operational and administrative services was not a foregone conclusion. The agency looked at an in-house option, but concluded that private-sector investment in leading-edge technology would lead to lower operating costs and more flexible services for customers. The possibility of outsourcing just a few operating functions was also examined - and rejected. “We came to the conclusion that that would be far less satisfactory than outsourcing the entirety of the operations, but with a contract that gave us a lot of clout and a lot of flexibility - and that’s what we’ve got,” says Bareau. In evaluating rival bids for the contract, National Savings considered the interests of each of its key stakeholders, including customers and taxpayers. Since a large number of employees would be transferred with the contract, it was important that they, too, should get value from the deal. Their terms and conditions of employment would, of course, be protected by Tupe, the transfer of undertakings regulations. But Tupe was seen as a bare minimum. The contract eventually signed with SBS allows the outsourced operation to serve clients other than National Savings, and gives the supplier strong incentives for creating new jobs. With at least 1,500 employees facing redundancy because of long-planned moves to less paper-intensive information systems, this was an important element of the deal. The £1 billion contract with Siemens, which was signed in January, is for 15 years, with a break point after 10 years when either side can walk away. As well as employing former National Savings staff, Siemens has taken over the leases on buildings at three regional sites in Blackpool, Durham and Glasgow. Customers continue to deal with National Savings in the same way as they have in the past, and the Treasury’s guarantee of the agency’s savings products has not been affected by the deal. But, over time, the partnership is expected to allow National Savings to respond more quickly and flexibly to customer demands, and to provide a better service. This may include the sale of savings products over the telephone or on the Internet. The agency claims that by facilitating investment, driving down costs and transferring some of the risks it previously faced, the partnership will also give taxpayers value for money. Under the terms of the agreement, SBS has to work to rigorous service standards, covering the delivery of existing services and the development of new systems. There are also built-in safeguards for volume and product changes, while provision for benchmarking is intended to ensure that costs and service standards are among the “best of breed” throughout the life of the contract. But Bevan stresses that this is not a relationship where the customer holds a stick over the supplier, but a genuine partnership in which both risks and rewards are shared. To make this partnership work, National Savings has had to change the way it operates. In the sourcing directorate, for example, every stage in the development of any new product affecting the Siemens contract now has to go through a process known as “change control”. Another new process involves building cost models to help clarify for staff the cost drivers behind the contract. There is also a new process for managing the relationship between National Savings and Siemens. Whereas, traditionally, an account management team handles all aspects of the client-supplier relationship, the two parties recognised that, in this case, a single group of people was unlikely to have all the necessary skills. Direct contact between specialists from the two organisations is therefore a feature of the partnership, with product development people from Siemens, for example, dealing directly with marketing staff from National Savings. Facilitated by a relationship management unit on the National Savings side and an account management team on the Siemens side, these contacts proved their value when two new products, an Individual Savings Account (ISA) and a new Pensions Bond, were launched in the first three months of the contract. Retaining operational competence Referring to the ISA, Bevan says: “That was not just about launching a product. It was about bringing in a new IT system on time and on budget. Siemens deserves a lot of credit for that, but it couldn’t have done it on its own. It could only do it by working closely with our people.” This contact between the two sides should also put National Savings in a strong position to hand the operations business to another supplier or take it back in-house if need be. “Recompetability”, as Bevan calls it, was built into the contract, which requires SBS to share information about decisions affecting the partnership, and in certain circumstances gives National Savings a right of veto. “Whatever changes happened in the life of the contract, we wanted to make sure that the entity that worked for National Savings was clearly defined,” explains Bevan. “So if something went wrong - for example, if the company was taken over - we would still have a recognisable entity. The structure of the sourcing directorate is also designed to prevent National Savings from being locked into its relationship with the supplier, in the way that so many organisations are when outsourcing contracts end. The 30-strong directorate includes employees who worked in operational services before they were outsourced. Sitting with the supplier on a day-to-day basis, these individuals will ensure that National Savings understands how SBS works and retains some operational competence internally. According to Bareau, the whole process of building the partnership with SBS and defining roles and responsibilities so that the outsourced business remains a recognisable and viable entity has imposed a useful discipline on the slimmed down National Savings organisation. “It has enabled us to identify what we want, to codify it, to measure it and to get the performance measures and indicators in place in a way that we never had before,” he says. All the planning that went into the project seems to have paid off, and there have been no real problems so far. But the troubles surrounding several other Siemens ventures in the UK could lead some people to question whether the partnership with National Savings will run smoothly. Last year, the company announced the closure of its semi-conductor plant on Tyneside, with the loss of over 1,000 jobs. Built with government grant aid, the plant had opened little more than a year earlier. The private finance initiative (PFI) deal between SBS and the Immigration Service fared no better. The new workflow and document management system, which the company claimed would “significantly reduce the backlog of 56,000 asylum cases”, was delivered late and continues to be dogged by problems. Then there was the fiasco at the Passport Agency, where a new Siemens computer system installed under another PFI deal has been widely blamed for this summer’s long delays in processing passport applications. Given this track record, will Siemens succeed in creating new jobs for former National Savings employees and meet its other undertakings to the agency and its stakeholders? Bareau is confident that there will be no repetition of the disasters that have struck the Passport Office and the Immigration Service. “I think we’ve chosen the right partner and that we have the right people internally to manage the contract,” he says. Arguing that the problems at the Passport Office have not all stemmed from the new computer system, he adds: “Any project, any contract, has two sides to it, and they either rise or they fall together. It’s far too easy to say it’s all the supplier’s fault or for the supplier to say it’s all the customer’s fault when things go wrong. They’ve got to work together and that is why you have got to be constantly managing the totality of the contact.” Bareau also points to a major difference between Siemens’ partnership with National Savings and its contracts with the Passport Agency and the Immigration and Nationality Directorate. Both deals were primarily about building new software systems, rather than taking over an existing operation’s business. And, as Bevan says, it is rare for any organisation either in the public or private sector to realign its own internal structures and operating methods to meet the challenge of a major outsourcing project. If National Savings has indeed got it right, its partnership with Siemens Business Services could well provide a model for a new way of doing business - and a model for strategic purchasing skills to play the more dominant role in business that the profession has long been seeking. National Savings What is it? National Savings is the UK’s second-largest savings organisation, behind the Halifax, with an 11 per cent share of the non-risk personal savings market. It is 100 per cent backed by the Treasury and sales from its products finance 20 per cent of the national debt. What’s it famous for? Premium Bonds - aka Ernie, the machine that randomly picks winning numbers. In the past five years, the number of bonds bought has risen from 3.3 billion to 12.5 billion. How many customers are there? More than 30 million. They bought products worth £12 billion last year and total funds invested amount to more than £63 billion.