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Continuing rise of public sector outsourcing?

It is just over 30 years since outsourcing became a policy of the Thatcher Government. Senior civil servants were determined to minimise its impact and, in central civil government, ensured that outsourcing applied only to security guarding, cleaning, messenger services and catering – the most junior and lowly paid staff.

Outsourcing of these services was mandatory, but I estimated that by 1990, less than £10 million of services had been outsourced. It may go against the conventional wisdom, but outsourcing only took off in central government when John Major came to power. Having risen up through ministerial ranks, he understood the levers to make things happen.

The “creation” of the private finance initiative in 1989 and the growth in IT initiatives provided a further impetus – buy now pay later seemed a good policy in the austere economic times of the 1990s – and with it came a requirement for much greater contracting skills in the public sector. Also, from the mid-1980s, the Department of Environment took a strong line with local government, pressing for a wide-ranging programme of outsourcing through opening up in-house services to competitive tendering – compulsory competitive tendering – the criterion for contract award being lowest price.

Since the early-1990s, the public sector approach to outsourcing has become increasingly sophisticated and it has become a key means to deliver public services. The benefits have extended to the UK economy. I visited Capita in 1986, when it was five people in a small office off Chancery Lane in London, offering training programmes; now it is a multinational company with an annual turnover of £4 billion a year.

By the time of the 1997 New Labour Government, many local authorities were outsourcing significantly and the criticism that quality had suffered through focusing on price alone was countered by “best value” being introduced, which took into account quality and service. Local authorities became more sophisticated and the accusation by industry that, in competitive tenders the in-house team almost always won, became muted. In the last years of the Conservative Government led by John Major, the outsourcing of the Benefits Agency was being contemplated, which would have affected some 100,000 staff.

So, why does the outsourcing industry appear to be on the defensive with its public sector contracts?

There have been problems with contracts and UNISON provided a list of allegedly problematic local government contracts to MPs on the Communities and Local Government Select Committee for a recent inquiry into local government procurement. On the other hand, the National Outsourcing Association, in its written evidence to the committee, argued that outsourcing could save more than 20 per cent.

Outsourcing will continue to increase, whatever the colour of the government after the 2015 general election, though there could be a short-lived hiatus

The definition of public sector outsourcing is rather vague – essentially contracting with an external organisation for the provision of a service that would have traditionally been done by the public sector. Applying this definition, the value of public sector outsourcing amounts to some £90 billion a year – half of all public procurement spending.

This includes the outsourcing of prisons, but also offender tagging and getting the unemployed back to work.

In local government this includes functions as diverse as waste collection and social care, as well as back-office services. It also includes partnership with private sector organisations, a classic example being SCAPE, a local authority construction consortium, partnering with several companies such as Wilmott Dixon. The consortium is expanding its activity beyond local government and claims to be delivering problem-free construction, average savings of 14 per cent and much local employment.

An NHS hospital, Hinchingbrooke, has been largely outsourced and it will be interesting to see how this works out. Progress is promising, but had it not been outsourced, its losses were such that it would have been closed.

So, why the bad press for the outsourcers and what does the future hold?

In local government, there have been several high-profile failures, starting with the outsourcing of many of Bedfordshire County Councils’ functions to HBS in 2001. I looked at it in 2003 and discovered that in-house staff were duplicating some of HBS’s work and there were a huge number of performance measures – management of the minutiae.

While in central government, we have the alleged frauds by Serco and G4S over tagging contracts, and by A4E over the number of unemployed people getting back to work. In addition, a recent Public Accounts Select Committee hearing condemned the management of outsourcing companies.

Outsourcing is popular because it can reduce costs, inject new investment without the public sector organisation having to invest up-front, introduce new ways of working and innovation, and sometimes improve quality. It also means that public sector organisations carry fewer staff on their books, which always looks good to the Treasury, as there is no long-term commitment or hefty redundancy payments and there is greater flexibility due to not having to decide what to do with staff if their function changes or disappears.

So, why the well-publicised problems with contracts?

One reason may be the reform of public sector procurement. The creation of the Crown Commercial Service (CCS) and the promotion of “lean” procurement mean that much greater expertise and attention is beginning to be paid to significant contracts, the major common suppliers and the pre and post-contracting phases. The latter, the contracts management phase, has always been neglected by the public sector. Paying greater attention to this is bringing to light irregularities that might not hitherto have been discovered.

Local government is also stepping up its act and there is an initiative to boost the quality of procurement in the NHS. Increasingly, unsatisfactory supplier performance will get flagged up publicly.

More troublesome for some existing suppliers, particularly those in the IT and back-office services industries, will be the CCS’s search for new, innovative suppliers, which will mean its breaking up its vertically integrated contracts into chunks. The new European Union procurement directive encourages this.

Also, someone may draw comparison with the UK water and waste water industries which are expected to reduce total costs of ownership by between 15 and 18 per cent over the next five years. To solve this, the companies are seeking innovative suppliers, as innovation seems to be the way forward towards delivering such savings.

So, what is the future for the public sector outsourcing industry?

Outsourcing will continue to increase, whatever the colour of the government after the 2015 general election, though there could be s short- lived hiatus. It has become accepted as one of the key means of delivering public services and a training programme in commercial leadership skills for senior public sector officials, initiated by the CCS, emphasises this.

However, the government will aim to create a more competitive market, standardisation of specifications will increase, councils will increasingly look to be “commissioning” councils, and there will be more coherent management of contracts and suppliers with an expectation of higher standards of contract performance.

The possible risk to this scenario is that as the economy increases, potential outsourcers may decide they do not care for the increased transparency expected of public sector contracts and find that they can make more money by focusing on the private sector. The counter is that good suppliers to the public sector will increasingly begin to use this business as a badge of honour.

An adviser to government, and public and private sector bodies, Colin Cram is managing director of Marc1 consultancy and chief executive of Open Forum Events Ltd. He initiated the continuing drive to improve management of public sector procurement and, in January 2013, he recommended to a parliamentary committee the creation of the Crown Commercial Service, which the government accepted. Colin also advises on academic research at Manchester and Bangor universities.