G4S and farming out today

As the scale and severity of the issues being experienced by G4S are becoming clear, not least as a result of the scrutiny of its CEO before the Home Affairs Select Committee, politicians and commentators are starting to call into question the utility and appropriateness of the outsourcing of technology, functions or business processes.

For Margaret Hodge, chair of the Public Accounts Committee, the G4S issue is one of transparency and accountability, especially where public money is being used. At the heart of this concern are confidentiality clauses and the constraints of our freedom of information law, which is impeding scrutiny.

Other commentators are using the debacle to sound the death knell for outsourcing by coining an expression of a former US president – ‘privatising the profits and socialising the losses’, the perception being that outsourcing companies take the benefits and we pick up the pieces.

While it is undoubtedly the case that greater transparency would have provided early warning of the issues experienced by G4S, any call for the end of outsourcing misunderstands its true nature and value.

In common with all these arrangements, the outsourcing of Olympics security to G4S was essentially a contractual hedge: in this case, an agreement seeking to replace Locog’s security responsibilities with a payment obligation and the passing of delivery responsibility to G4S. Outsourcing arrangements, however, do not eliminate risk. Rather, they create supply-side risk and transpose customer-side risk into a different form, the precise terms of the arrangement being at all times a matter for commercial negotiation.

The art of negotiating an outsourcing relationship is a balance between securing the delivery of an outsourced obligation in return for payment to the supplier while ensuring the residual risks on both sides are understood and commercially palatable. Seen this way, rather than a panacea for removing all customer-side risk, outsourcing is a powerful tool in allowing businesses to grow, provided the appropriate deal can be negotiated.

In the G4S scenario it appears there was a disconnect between the requirements of Locog and the solution capable of being provided.

When the negotiated deal fails to address any disconnect and the contract is not managed accordingly, the outsourcing is destined to fail. As for the criticism that outsourcings privatise profits and socialise losses, G4S will almost certainly disagree: any profits it might have enjoyed when the contract was let will be overwhelmed by the value immediately wiped off its share price, as well as the promised reimbursement for the costs of the estimated 3,500 military personnel and police required to remedy G4S’ shortfall.

This provides a salutary lesson for all engaging in outsourcing relationships: risks extend beyond what can be agreed contractually.

If requirements are not fully understood, the contract is not managed effectively and the solution is not delivered, the resulting fiasco will affect reputation, market value and the pipeline.