Devil's Advocate: Who’ll do the dirty work?

Narrowing your focus and outsourcing what you're not best at can only go so far, Martin Brampton argues this week. After all, shouldn't we always want to understand what we're buying?

Outsourcing is all the rage. Companies claim they need to concentrate on whatever they perceive to be their core skills. Government seems to think the only way to get anything done is to contract it to the private sector. Yet the spectacular failures ought surely to give us pause for thought.

An example close to my heart is the railways, the quality of which very much affects my regular journeys. For a long while Railtrack was the villain of the piece. Set up as a key part of a rushed privatisation, it seemed Railtrack saw its core skill as making money out of railway assets. The top management consisted primarily of accountants with scant knowledge of railway operation.

To start with, everything seemed rosy and the shareholders were happy with substantial dividends. But these were achieved by abandoning traditional railway engineering skills and contracting all the work to a range of private companies. The ill effect this was having on the railway infrastructure only became apparent slowly, as high profile crashes occurred, and the names of the private sector contractors received a lot of unwelcome publicity.

Now we have a clear indication from the son of Railtrack that even a well established technology like the railway takes skill and knowledge in its management. The new, not-for-profit company has decided it will maintain some stretches of line with its own directly employed staff. It says this is the only way it can really understand what is involved and what the costs really are. Otherwise, it is at the mercy of contractors who possess the only relevant expertise.

It is much the same in IT. If you don’t understand what it is you are buying, it is extremely difficult to manage the process or to be clear whether you are getting value for money. The problem has been especially acute with PFI projects, the initiative that is supposed to see the private sector shoulder the risks of tricky development and deployment projects.

That this doesn’t work has been demonstrated repeatedly, the most recent example coming from the Libra project for magistrates' courts. It was costly at the outset, with a price tag of £184m. But when the project fell apart, everything had to be renegotiated. The cost has risen by a staggering £134m and the Public Accounts Committee has described Libra as one of the worst IT projects ever seen. And it isn’t finished yet.

If the risk has been handed off, how can the cost rise by such astronomic amounts? Unfortunately, there are two factors that leave the poor taxpayer with the dirty end of the stick. One is that PFI does not genuinely transfer risk, it merely provides financial engineering. In a well run commercial company, costly projects are decided by reference to some quite simple financial principles, known collectively as the capital asset allocation problem.

It seems that many a PFI project claims to provide financial gains, when the reality is simply that the costs and returns have been shuffled around. One consultant in the sector told me: “Most of the public sector customers don’t understand capital allocation problems.”

The other issue is who bears the risk. I asked my helpful consultant to explain transfer of risk by giving me an example of a worst case scenario for a contractor. He didn’t seem to be able to give a convincing answer. The Libra project certainly seems to have left the risk of failure primarily with the taxpayer, who will have to find the extra millions.

In the end, it seems, you can only narrow your perspective so much. You need to know what you are doing across quite a wide range of areas that are important to the success of the organisation. In government, this means that you cannot shuffle off the responsibility for effective and efficient delivery of services. Nobody will pick it up.

** Martin Brampton is a director and founder of Black Sheep Research (www.black-sheep-research.co.uk ), an independent consultancy providing research, writing and speaking services on a wide range of business and technology subjects. Martin was previously a director at Bloor Research, and has worked with IT as a user and analyst for over 20 years. He can be contacted at silicon@black-sheep-research.co.uk.

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