Generation game

Don’t forget these key considerations when undertaking a second-generation procurement exercise in the public sector

Outsourcing is, at its heart, a part of business that is built on people. The core of any outsourcing largely depends on the management and motivation of the people delivering service, so managing human resources correctly is crucial.

Outsourcing that involves the transfer of staff between a customer and supplier presents complex legal and industrial relations issues. A so-called second-generation outsourcing that involves the transfer of staff between one outsourced supplier and a second replacement supplier is even more problematic – both for the employer and the organisation seeking to change its outsourcing supplier. Continuity of the people delivering the service is crucial to continuity of the delivery of the service.

As the wave of outsourcing contracts signed in the mid-1990s begins to expire, the focus of the outsourcing industry is shifting increasingly to what happens in a second-generation situation. Recent examples of high-profile second-generation contracts in the public sector include the DVLA in 2003 and the Inland Revenue’s ‘Aspire’ IT project in January 2004 to establish a new technology partner.

To ensure service delivery is not affected before, during and after transition of the contract, a balance between the commercial and people imperatives must be achieved.

Legacy contract issues

Termination assistance is usually dealt with contractually. However, in older outsourcing contracts, these provisions are often absent because their impact was not fully recognised.

When starting a project to re-tender an existing outsourced organisation it is important to ensure the termination process for the old contract is settled.  The service recipient has a huge interest in ensuring both the smooth transfer of staff and the protection of staff rights between the old and new contracts.

The terms and conditions of employment for outsourced staff in the UK are protected by the Transfer of Undertaking (Protection of Employment) Regulations 1981 (TUPE). Under TUPE, there is no legal requirement for the first-generation supplier to provide information, such as salary or benefits, concerning the affected employees to either the service recipient or any prospective new supplier.

However, it is in the service recipient’s interest to obtain this information from the incumbent supplier in order to curtail a new supplier’s ability to argue for a change to contract pricing after the contract is signed.

If the old contract has no termination provisions, this should be addressed by the service recipient before the procurement process is commenced, ideally by way of a contractual commitment from the incumbent supplier. This should include agreement to provide certain anonymised employee information at least 12 months before expiry if a large number of employees are involved, a restriction on the incumbent supplier’s ability to move key employees off the account before expiry of the contract, providing suitably skilled replacements where employees are moved, indemnities for apportionment of risk of employee claims and other obligations to ensure the smooth transfer of staff to a successor supplier. 

It is easier to negotiate these provisions before a contract is awarded than when it is approaching expiry. However, where the incumbent supplier is one of the bidders in the retendering process, it is not in their interests to be too uncooperative at the start of the procurement process and this can work to a service recipient’s advantage.


The time taken from the start of the procurement process to the eventual transfer of staff is often grossly underestimated. The Inland Revenue’s Aspire procurement process for example, started in late 2001 and it will be 2005 before the last staff transfer takes place. Within the public sector, large procurements must be carried out in accordance with an official procedure. However, practical considerations will generally mean that the time taken necessarily exceeds official minimum time limits.

The Inland Revenue’s four-year timetable included time to identify the scope of the contract, prepare the invitation to tender (ITT), conduct parallel negotiations with the bidders, prepare and evaluate the bids and time for consultation with employees and service transition.  Typically, employment issues impact the timetable at two points.

The first is the preparation of the ITT documentation. Consideration should be given before the preparation of the ITT for the collation of employee information to be included in the ITT. Collection may be impeded if the incumbent contract does not contain end-of-contract provisions. 

The second point of impact is before the transfer of the services to a new supplier. While in a second-generation outsourcing the service recipient has no TUPE obligations, the incumbent supplier and the new supplier will have statutory obligations to provide information about the transfer to representatives of the affected employees, and to consult if the new supplier proposes to take any measures in connection with the employment.

This provision of information (and consultation) must take place long enough before the transfer to allow meaningful consultation to take place – and remember if there is no recognised trade union or suitable employee forum then additional time should be built into the timetable before change of suppliers to allow employees the opportunity of electing employee representatives.

Early commitment to staff issues is essential and the value of appointing a senior member of the commercial team to oversee HR-related issues throughout the project cannot be overstated. Too often, personnel issues and TUPE obligations are addressed too late in the process.

Clear expectations

It is important for service recipients to state clearly their expectations from the bidders in the ITT. Under TUPE, all the affected employees will transfer to the new supplier on identical terms and conditions of employment as a matter of law, apart from some occupational pension benefits that are not covered by TUPE. However, in public sector outsourcing contracts, the government Statement of Practice, Staff Transfers in the Public Sector sets out a framework of expectations regarding the provision of occupational pension benefits where public sector staff are contracted out. All public sector transfers need to follow this framework.

The net result being that, in relation to occupational pension benefits, public sector employees are better off than their private sector counterparts. However, whether a public or private sector outsourcing arrangement, pensions are always a contentious area particularly in the current economic climate when many employers’ occupational pension schemes are in deficit. 

A prudent service recipient will always obtain contractual commitments from suppliers that they will comply with the law and good practice. In addition to contractualising legal obligations, service recipients may wish to consider imposing additional obligations – for example a requirement that no redundancies are made for 12 months following the transfer or, if there are redundancies, that the severance package available will be better than the current employer or the new employer.


The likelihood of the procurement process affecting staff morale, no matter which bidder is eventually successful, is another issue to be managed, not least because of the likely impact on service delivery. Open staff communications clearly need to be balanced with the commercial sensitivities of the ongoing negotiations but time spent in managing staff communications, for example by creating a frequently asked questions page on the intranet, pays dividends in the long term.

Ultimately, affected employees are real people with real jobs. A realistic approach to timing, clear expectations and good communication are vital considerations that must be accounted for when carrying out a second-generation outsourcing.

Kirsten Fox is an employment associate at Shaw Pittman LLP
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The law

The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) implement the EC Acquired Rights Directive (77/187/EEC), as amended (the Directive).

TUPE provides protection for employees when the whole or part of their employers’ business is sold or transferred as a going concern to another employer. This includes an employer outsourcing all or part of its responsibility for its operations to a third party.

Employees are protected because where TUPE applies their contracts of employment automatically transfer to the new employer. The new employer inherits all the rights, powers, duties and certain liabilities in respect of those employees. Employees are entitled to the same or no less favourable contract terms with their new employer and their continuity of employment is preserved.

A dismissal in connection with the transfer will automatically be deemed to be an unfair dismissal, unless the employer (usually the new employer) can demonstrate that it had an ‘economic, technical or organisational reason for the dismissal which entailed a change in the workforce’.

A change to employees’ terms and conditions of employment in connection with the transfer will be deemed to be invalid notwithstanding that there is an economic technical or organisational reason for the change.

There is a duty on the existing employer and the new employer to inform and consult the appropriate representatives of employees who may be affected by the transfer. Such information will be provided long enough before the transfer to allow consultation to take place.

Failure to inform and consult may result in an award of compensation of up to 13 weeks’ pay per employee.

Key points

  • Understanding the legacy contract’s terms and its termination provisions when commencing a retendering exercise for outsourced services is vital. These terms will govern how much information you can obtain about the incumbent workforce, if any, and when you can expect this information.

  • Allow sufficient time for the process. The amount of time needed to gather and evaluate information about in-scope staff and their benefits, to prepare the invitation to tender (ITT), to evaluate the bids, to conduct contract negotiations and to complete consultation with the affected employees is often underestimated.

  • State clearly any expectations in relation to employees in the ITT – particularly regarding benefits that do not transfer by operation of law under TUPE such as some pension benefits.

  • The importance of strong end-of-contract provisions cannot be over stated. Do not ignore the termination provisions when negotiating a contract.

  • Consider imposing additional obligations on the service providers to ensure harmonious industrial relations post-transfer, such as imposing a requirement that no redundancies are made for 12 months following the transfer.

  • Plan your communications. Early, transparent communication alleviates stress and is less likely to impact adversely on service delivery.

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