Central and local government face a time of both crisis and opportunity. When you look at the combination of a public funding crisis and growing dissatisfaction with “top down” services there are two possible scenarios, those of destruction or renewal: large-scale closure of and withdrawal of public services and amenities (e.g. libraries); or the opportunity to re-think structures and priorities leading to a new style of community and privatesector- based service provision.
The public sector is certainly not new to outsourcing; since the days of Compulsory Competitive Tendering (CCTs) in the 1980s, we’ve seen successive waves of services tendered out: around 50 per cent of Local Authorities’ (LAs) refuse collection is outsourced; private companies run approximately ten per cent of the prisons in this country; a significant chunk of back office IT is outsourced; some police stations are operated by private firms; and increasingly healthcare provision and care homes are run by private sector organisations. Private firms even guard Britain’s nuclear weapons. Oxford Economics estimates the current market for outsourced public services has an annual turnover of £82bn, representing around 24 per cent of the total spend on public services in the UK.
In the NHS, the proportion of spend on external contracts delivering frontline care is around 30 per cent, set to rise to 60 per cent soon. In local government it is above 40 per cent, while over 90 per cent of full day care places are provided by private and voluntary sector providers.
Virgin’s brand-new healthcare offshoot runs dermatology, health-visiting and sexual health services; National Savings and Investments is run by Atos; the processing and issuing of UK passports is done by Steria, and so the list goes on… Capita runs the recruitment services for the British Army, operates the BBC’s HR operations and license collection and provides radios for Britain’s emergency services. Serco offers out-of-hours GP services, is a co-operator of Merseyrail and the UK’s largest train franchise Northern Rail, runs the Boris Bike scheme in London as well as the capital’s Docklands Light Railway, manages two immigration removal centres and is now running the welfare-to-work programme for the government which is an outcomesbased contract.
The Financial Times reported recently that public service tenders amounting to £4bn have been advertised in theOfficial Journal of the European Union this year alone. The reality is the UK is already the leader in terms of the percentage of goods and services purchased versus in-house provision in the public sector – ahead of those staunch advocates of free markets: the USA, New Zealand, and indeed the whole of Europe.
‘The Open Public Services White Paper’ has been designed to open the public sector even further; from NHS restructuring to the Localism Act, public services are being opened up faster than ever before through words like choice, empowerment, diversity and big society. It paves a path to a range of options, from “privatisation”, “outsourcing”, “PPPs”, “shared services” and anything in between.
What you find when you talk to the general public – and what the unions happily continue pushing – is the idea that outsourcing and privatisation are the same. Clearly there are similarities, but also many significant differences. The public perception of privatisation of public services is one of rising costs, increasing liabilities on the taxpayer and in some cases deterioration in service quality. There is a general distrust that pervades this model. I guess it should not be surprising after the G4S shambles over the Olympics, and when private equity firm Blackstone walk away with £500m on the back of the near-closure of Southern Cross care homes.
Much of the current debate in the NHS is about privatisation, yet it is being labelled as outsourcing. The general distrust of privatisation is spilling over into the outsourcing world. Adding fuel to the fire, Blair’s legacy of PPPs, PFIs and similar private financing arrangements has put some hospitals close to being insolvent.
I think it is fair to say we are likely to see outsourcing increase, but whether it is the whole hog that many suppliers were wishing for is debatable. Firstly, the scale of cost savings required cannot be achieved through outsourcing – certainly not when offshoring is frowned upon; secondly, unions and local activists have been able to launch successful anti-outsourcing campaigns; and thirdly, commissioners are increasingly viewing in-sourcing and shared services as an attractive alternative.
The recent sacking of Cornwall’s Tory leader highlights these tensions: Alec Robertson, former Tory leader of Cornwall County Council, was sacked over his attempts to push through a £300m outsourcing deal that would have seen in the region of 2,000 public sector jobs moved to the private sector.
London Barnet Council has also voted on whether to oust its leader in a revolt over a plan to outsource 70 per cent of council services. The leader of the Council’s Labour opposition said “Given the level of risk involved in the procurement… and the gambling of £1billion of council tax payers’ money, Council resolves that the Executive Leader be removed from office.” Barnet UNISON Branch Secretary fuelled these sentiments by writing that “the council’s outsource was designed to divest itself of responsibility for public services…we are concerned big business views Barnet Council services as simply a line on a spreadsheet”. The leader survived the vote – just. The first contract will be signed in December, with a second to follow in the early part of the New Year.
Then we have the financial failure of Somerset’s Southwest One deal with IBM, with Somerset County Council now being sued by Southwest One for lack of cost savings supposedly promised. There will be others I am sure.
What these deep divisions show is the need for more transparency (not using commercial confidentiality to hide the details from scrutiny), more public engagement in the debate (more than suggesting the 2010 election was effectively a consultation), more robust decision-making (with a robust financial case for alternative options as a comparator) and robust governance of these deals pre- and post-contract (ensuring promises are kept and value is delivered).
In looking at the various options, we appear to have a choice between or a combination of: in-house provision; shared service centres; collaboration or partnership with other public agencies; use of the voluntary and community sector; creating staff-led social enterprises; using JVs with the business sector; in-sourcing; devolution to communities; co-production with service users and communities; payment by results models and traditional outsourcing.
You may get the impression from the above that I’m suggesting outsourcing isn’t important or doesn’t work. This is far from the truth. There is evidence from both the private and public sector that outsourcing works and is good for the public and the wider economy. However, outsourcing does carry risks and these must be identified and managed effectively by both parties. This may seem a throwaway statement, but the fact remains the public sector generally lacks the commercial skills and certainly the outsourcing skills required to get the best deal for the longer term. The ability to manage and align the diverse goals and ethos between the public sector with the “ethos of public good” and the private sector ethos of “sustainable competitive advantage and profit” needs to be aligned, if these deals are ever to deliver.
At a wider economic and certainly political level, there are arguments against outsourcing, including those put forward rigorously by unions: loss of jobs; poor quality service due to profit motive; high transition costs; loss of control and so on. I would agree that high transition costs and potential loss of control are issues that need to be looked at, but I think these are manageable, or at least should be manageable. I however have reservations around some of the other arguments. Loss of jobs is a spurious argument; what you may have is a transfer of jobs from the public to private sector, but not a loss of jobs – TUPE is designed to protect this very concern.
Poor quality service because of a profit motive is again a spurious argument: some of the outsourcing is being done by charities and social enterprises that have no profit motive. Having a profit motive is not a bad thing in its own right; what you need is aligned goals that enable “sufficient” profits to be made whilst delivering value for money. Clearly the greed and bonus culture that we have seen within the banking industry driven by short-term profits cannot be allowed, but a more tempered longerterm profit motive is no bad thing. If we look at most of the failed deals, we find some common themes:
Unrealistic assumptions from both sides
You cannot have massive cost savings with all the risks borne by the provider; you cannot have a partnership deal with massive change request charges; and you cannot have a public body abdicate responsibility for the provision of services or the strategic direction of these, as I found recently with a London Council outsourcing its IT function, to the extent that anything remotely resembling the use of the words “information technology” gets redirected to the service provider.
Wrongful pressure and dodgy deals
We’ve seen the documentary from Channel 4 exposing the links between private sector companies and ex-politicians and leaders of quangos – leading to less than rational and sometimes questionable deals.
Ten-year deals make sense from a pure economic and profit perspective for suppliers, and may seem appropriate to some council leaders when faced with massive budget cuts, but these inflexible contracts may drive inappropriate behaviour and may make the deal past its sell-by date in a few years. At a time of unprecedented uncertainty, many politicians and CEOs are worried about locking elements of their budgets into long-term contracts that have historically proven so inflexible and expensive to change or re-negotiate.
Inadequate control and governance
Unfortunately many outsourcers pay lip service to the area of control and governance – as custodians of the public purse this should be of the utmost concern to public sector outsourcers. Driving the deal with a procurement mindset may give the impression of control through contracts, but what is needed is real hands-on, realtime governance. The scale and complexity of the interaction has meant there has been little real oversight and even less insight into what was happening on the ground.
You cannot have the same old staff with the same old mindsets driving a commercial deal where innovation, some element of flexibility and risk-taking is an undercurrent. You cannot have staff managing the deal with the old facilities procurement hat on – they will not enable the relationship to flourish; this is not the same as being soft, but being commercially robust with a relationship management hat on.
Lack of trust on both sides
“Partnerships” have been bandied around for a while as a way of conveying trust, when the relationship that actually remained was a contractual one. The reality is that most of the current arrangements, however labelled, are based on contracts that have not changed fundamentally since the days of CCP. Partnerships are always attractive but are very difficult to define, design and deliver in reality. Partnerships imply common objectives, which are not easily reconciled when multiple and diverse goals and expectations of the various stakeholders drive the partners in different directions.
Many public sector organisations and certainly the Local Authority landscape is littered with examples of service provision run in silos. This may have worked when all the services were delivered under one umbrella organisation and where such inefficiencies were absorbed, but this is no longer tenable. Often the social goals that the public sector is seeking will require contributions from a variety of local authority delivery areas and cannot be simply siloed. Diverse interests have led to little collaboration or knowledge-sharing. The reality is when working in an environment with much uncertainty, where contribution and help is sought from a diverse set of departments, functions and delivery partners, a much more collaborative arrangement is required.
No clear guiding principle
Both parties have diverse objectives and interests, yet there is nothing that attempts to gel these into something that resembles a vision or mission that both parties buy into wholly and fully. This lack of motivation towards the achievement of the vision means strategies and policies never get translated into action and outcomes. The Social Value Act places a duty on public bodies to take the wider social impact of the services it procures and commissions into account. This should be used by both parties to align interests, values and goals.
A programme or project management approach is used to manage the new initiative
This usually means the partners persevere to the end, even if it is the wrong end – guided through a technical focus, without strategic insight. This drives the focus on action rather than outcome.
The public sector must approach and manage the outsourcing initiative through what it is supposed to be good at: governance. Good governance must steer the deal and the relationship: it must be proactive, it must balance compliance and conformance with performance and passion. It must integrate strategy, action and mindsets to the enduring vision that is provided by those that “govern”. It must integrate systems, structures, strategies, silos and styles of behaviour. And more than that it must seek a joint governance framework working with the outsourcer – whether private or from the voluntary sector – to turn the rhetoric of partnerships and collaboration into a living and breathing entity. The decision-making process must also be equally comprehensive, robust, yet transparent. It must seek to build consensus rather than fuel the differences that exist between the various stakeholders.
Outsourcing is a vital toolkit within the armoury of the public sector in the age of austerity. These unprecedented circumstances must be used as an opportunity to design and redefine the public sector business models, structures and delivery models. Outsourcing with a real partnership approach can help deliver those vital cost savings, whilst improving service design and delivery. But there are some fundamentals that must be in place for this to happen. Too often the zeal for doing something, has meant that the outsourcing decision has been rushed, leaving behind a stream of angry stakeholders who blame outsourcing rather than the decision-making process.
About the author
Dr Bharat Vagadia is a Board Director of the National Outsourcing Association. He is also Managing Director at Op2i – an outsourcing research, advisory and implementation support firm; and the founder of GovernanceDirector.com.