Public sector outsourcing – why it may have reached its peak

 

After much discussion about the major outsourced services providers to the UK Government, we asked last week whether the recent NAO reports, and all the issues around contracts (such as the tagging investigations), might mean we have reached the high water mark for government outsourcing, or certainly for the giant firms who dominate the market. Today we’ll argue why this might be the case. Then in part 2 we’ll argue against – it is a finely balanced question, I’d suggest, hence this hedging of the bets. So here are seven reasons why Serco, Capita and the like might not find life as public sector providers quite as easy or successful from now. 1. The issues around the Serco and G4S contracts now under police investigation raise some fundamental questions around the drivers for these firms. It doesn’t have to be institutional corruption or bad behaviour that is uncovered. Even if it is just a small number of their staff who have behaved in this way, it may suggest that the private sector simply cannot be trusted to deliver key public services. 2. In addition, as Chris Lonsdale argued here, we may have reached the point where certain contracts are just so large and complex that they become unmanageable by the public sector clients. Or they are simply so expensive to manage given that inherent difficulty, that the cost of doing so (or trying to do so) negates any other savings and benefits. 3. If the current opinion polls hold firm for another 18 months, then the Labour Party will be in power by the middle of 2015. Whilst there are no signs that Labour are going to take a stand and announce some huge philosophical opposition to all outsourcing, it is hard to imagine that they are going to be real enthusiasts either, particularly if the strong public sector unions are still key to their funding. 4. This government has made a lot of noise about greater use of mutuals, joint ventures, third sector organisations and similar. There has been more talk than real action – MyCSP still gets quoted whenever the topic comes up, because it is one of the few real success stories. But eventually, a wave of these organisations may build up, offering a real and more socially acceptable alternative to the current private sector giants. 5. One of the better sections of the Public Accounts Committee hearing last week with senior government procurement executives was a brief debate around the need for more competitive supply markets and more SMEs. Whilst it is hard to see how you can stop the big firms acquiring interesting small firms, we have seen the beginning perhaps of a mood shift with Steria and Arvato wining the two government shared service contracts. Although they are not small firms, they weren’t the “usual suspects” either. So a conscious attempt by government of whatever political persuasion to develop more competition obviously wouldn’t be good news for current leaders. 6. And more focus on these issues  – perhaps including use of open-book contracts – might drive down the profit margins on this type of contract. That could lead to the market valuation of the big firms declining, making it harder for them to acquire other businesses, and reducing growth rates, leading to lower share prices… and so on. A spiral of slow decline maybe? 7. More emerging examples and more focus on where private involvement hasn’t delivered benefits may make public organisations more sceptical of the claims made by outsourcing providers – the claims that then form the basis of the business case for more activity. Again, I should emphasise I’m not predicting these things will happen. As we said earlier, these are just possible drivers that could lead us to look back in a few years and think, yes, 2013 was the peak for these firms. And in part 2 we’ll put the opposing case – why outsourced services provision may continue to thrive in the UK public sector. – See more at: http://spendmatters.co.uk/public-sector-outsourcing-may-reached-peak/#sthash.mGNI8Qam.dpuf

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