Both parties are incentivised to act in their joint best interests

2.2  National Savings and SBS are incentivised to act in their joint best interests through the sharing of specific profits and cost savings:

a)  SBS is incentivised to win third party work.

SBS saw the acquisition of the operational service as a strategic asset which, with skilled and experienced staff already in place, provided an opportunity to develop services for other customers. Its bid was therefore priced to reflect the creation of at least 1,200 jobs for former National Savings' staff on such third party work. The unitary charge negotiated with SBS reflected this and was some £37 million less than it would otherwise have been. If SBS is not successful in creating these new jobs, any potential redundancy costs will be for its account.

b) National Savings will share in SBS's success in winning third party work.

Although SBS plans to use at least 1,200 staff on third party work, the contract price included a time-limited contingency of £45 million in the event that SBS was not as successful as expected in winning third party work Any part of this contingency provision which is unused will be shared in a ratio of 70:30 between National Savings and SBS. The reasons why an amount may remain unused and the impact on SBS are explained at Figure 5. This arrangement acts as an incentive for SBS to complete its business transformation programme by a target date of 31 December 2000 and to re-deploy staff who would otherwise be required for National Savings work. To allow SBS time to develop third party work and in recognition that many staff cannot be released until the appropriate stage of the transformation programme is complete, National Savings agreed to defer taking a share of any unused contingency provision until the end of the first three years of the contract.

c)  National Savings will share in SBS profits from some third party business.

Where SBS uses staff and other assets which remain employed on National Savings business for third party work, National Savings will share in profits and receive rebates on accommodation and redundancy costs included in the unitary charge. National Savings will not be liable for any losses. SBS profits on other third party work undertaken at any of the three sites will not be shared, although National Savings will be entitled to rebates of accommodation costs and the contingency provision (Figure 6).

d)  National Savings will share savings on the costs of introducing new products.

Within the contract price SBS is required to facilitate the introduction of four new products in each of the first two years and two new products in each subsequent year. SBS and National Savings have agreed a maximum price for new products. If costs are higher, SBS will carry the risk. However, both partners are incentivised to drive costs down to the lowest commercial level: SBS through the direct impact on its profit margin and National Savings via direct gain sharing if costs are below the maximum agreed price.

e)  But SBS is not guaranteed additional work from the introduction of fundamentally different products or new sales channels.

In the future, National Savings might enter new areas of business through the introduction of fundamentally different products (such as a pension product) or develop fundamentally different sales channels (such as digital television). Under the terms of the contract, SBS is required to assist National Savings in the design and development of fundamentally different products and new sales channels. However, to preserve the ability to use competition to get good value, the contract allows National Savings to go out to tender for the operations needed to deliver and maintain such products and channels.

f)  National Savings will share with SBS any net profits from rental income.

Under the contract, the running costs of the sites chargeable to National Savings will fall in line with the expected reductions in office space needed by SBS. This is another incentive for SBS to reduce the number of staff required to run the operational service, as it will not be able to recover accommodation running costs in excess of the levels detailed in the contract. In addition to third party work, SBS is allowed to recover running costs by sub-letting space to other employers, including other Siemens AG entities. In such circumstances, National Savings will receive 50 per cent of both the net profit from rental income and the amount by which the running costs of space occupied by the operational service fall below stated levels in the contract.