August 3rd 2011
It’s time to dispel a few myths around outsourcing
Before councils rush to outsource public services they should ask themselves why those who tried it years ago are now bringing them back in-house, says Paul O’Brien
Is outsourcing on a wholesale basis the best way of delivering public services? Based on experiences over the past couple of decades, mainly in England where there is a much more mixed economy of provision, I would have to say the answer is no.
But a number of authorities may wish to pursue this as an approach and it’s important to explore where some of the problems sit from a local government perspective and identify key lessons learned.
Looking at the current financial climate for public services it is obvious that we need to do something in terms of transformation and achieving ongoing efficiencies, but is outsourcing the way forward – especially when it can take a number of years to get from the drawing board to completion?
Tony Travers from LSE expanded on this very point recently in Public Finance magazine when commenting on Suffolk Council’s approach. He stated that it would take between five and ten years to get such a programme of outsourcing off the ground and current financial pressures don’t allow you that length of time.
Strategic decisions need to be analysed by looking at the tangible evidence, thought through in terms of long-term outcomes and whatever happens making sure organisations are in control of their own and their citizens own destinies. Local authorities need to stick to a long-term sustainable approach to transformation brought about by sweating out efficiency, pursuing income generation opportunities and innovating where benefits are achievable at a minimum of risk. They also need to be prepared to work more cooperatively in partnership across the public sector.
A whole host of people are suggesting that the best way of ensuring efficiencies is by outsourcing everything to the private sector. But for a long time we have suspected or known that marketisation of public services is flawed in many ways.
We have seen the failed privatisation of the railways, the government having to bail out the banks and take them into public ownership, and we have seen the government having to intervene yet again to the tune of billions of pounds in order to ensure that PFI came off the critical list.
Another argument put forward in favour of outsourcing is that the private sector is more innovative and entrepreneurial, or can achieve higher levels of performance, creating greater customer satisfaction. The tangible evidence needs to be considered on some of these widely held and lightly challenged orthodoxies. When the Audit Commission last published its annual scores on council performance, it demonstrated local authorities had performed exceptionally well.
THE GROWING APPEAL OF INSOURCING
Apse has carried out research into why so many local government services are now being insourced following a period of having been carried out by the private sector. This came about because there appeared to be so many instances of this occurring across the UK and because of a report by Deloitte in 2005, which showed that many major American companies were now insourcing services previously outsourced as a result of the reality falling far short of living up to expectations.
President Obama’s administration is looking at insourcing key services as well since he feels that in many government agencies outsourcing has gone too far and eroded their core capacity to manage contractors effectively.
Again, this is a key lesson if anyone is considering pursuing the über enabling council model dreamed up by Nicholas Ridley in the 1980s where the council meets up once a year to hand out contracts over a hearty lunch – organisations who deliver nothing quickly erode their capacity to manage anything.
President Obama’s administration feels that in many government agencies outsourcing has gone
too far and eroded their capacity
to manage contractors effectively
The research showed that in over 50 case studies examined the reasons behind the insourcing were pragmatic and not dogmatic. It also followed on from the Audit Commission report, For better: for worse, which raised concerns and highlighted the complexities involved in outsourcing and strategic partnering. It questioned some of the reported efficiencies arising from outsourcing.
Authorities who had entered into large scale, long-term strategic partnerships found it difficult to negotiate efficiencies required under the Gershon targets, as they were contractually committed with private sector partners unwilling to give up profits. I’ve heard a few horror stories recently of authorities who are signed up to long-term deals going back to their partners and saying ‘the situation has changed, what can you do to help us with our 28% cuts?’.
They received a short sharp response – they have a contract that is binding. The pain and cuts then fall back onto the rest of the authority to realise the efficiencies through the flexibility offered by the in-house services.
This is also the case when circumstances change. Think of where local government was 25 years ago with its approach to environmental matters, for example, and fast forward another 25 years: could a authority write a contract with any confidence that it would still be valid at the end of that period?
A key lesson here is partnership working is required where the public sector client retains control of its own destiny and where the approach is flexible enough to adapt to the dynamic world we live in, without the cash register chiming at every little variation or partners unwilling to share the pain of cuts.
IS THE PUSH FOR OUTSOURCING OUT OF TOUCH?
An anecdote from the leader of a large county council in middle England highlights the pitfalls. The council had entered into a major multimillion pound partnership for back office services and after a period of time realised that it was not achieving the improvements or efficiencies promised by the private sector partner. The relationship quickly deteriorated and began moving towards termination. The partner then decided to criticise the council in the press and when the council decided to hit back it found its press office unwilling to do so as they were employed by the partner. A key lesson: don’t outsource your communications team.
There are numerous other examples where councils were promised the earth in terms of employment and the regeneration and returning dividends back to the local authority through joint venture companies and strategic partnerships that have failed to emerge. This was before the downturn so this has become even worse now.
A key lesson: don’t outsource
your communications team
Many bought the back office regional business centre model and have not seen many or any new jobs promised materialise. The key is to make sure any promises of significance are contractual with recourse and not purely aspirational.
The Apse research found services right across the scope of local authority delivery were being insourced from administrative and back office to streetscene services such as grounds maintenance, street cleansing, refuse and waste. A number of these, although not exclusively, were in southern England and it is perhaps noticeable that this area embraced outsourcing more freely than the rest of the country and has therefore gone through the lifecycle of outsourcing the contract, hitting problems, investing time trying to make the thing work and then ultimately realising that the only guaranteed solution is to bring the service back in house.
A high proportion of these councils are Conservative, Liberal Democrat or no overall control, which demonstrates the point about this being done for pragmatic reasons and not ideological ones.
The four most quoted reasons for bringing services back in-house were poor contractor performance, a need to improve the quality of the service being delivered in order to achieve value for money, workforce problems encountered including poor career development opportunities and a lack of motivation among staff, and finally a need to address poor customer satisfaction levels. An example of this is in Oldham where the refuse collection contractor slashed the terms and conditions of staff, used a fleet of trucks that were that old they were creating a pollution hazard to the local environment and public satisfaction was through the floor. Is it any wonder the council took the service back?
The benefits that authorities felt they had achieved by insourcing were improved performance, enhanced governance capability, significant cost efficiencies, higher degrees of citizen satisfaction and a greater ability to influence the local economy both directly and indirectly, a point backed by our research with Cles and Inlogov in Swindon which looked at the procurement and employment spend of a large multi-functional direct service organisation.
This showed that for every £1 a local authority spends directly on its services an additional 64p circulates in the local economy. This is because of the lack of leakage locally with 96% of the Swindon services workforce living in the Swindon area and spending 53p of every pound of earnings in the local economy and the council’s usage of the local supply chain with 51p in every pound being spent with suppliers with outlets in the town.
Other benefits identified as part of the insourcing research included the flexibility of service delivery and the added value created by the ability to shift resources quickly to tackle local needs and emergencies. Synergy and service integration, in areas like the environment, where authorities can focus on recycling, collection, education and enforcement on a local basis, were some of the other issues cited as benefits, together with employment, quality of services and sustainability.
Despite all the myths and attempts to portray in-house services as old fashioned, monolithic and bureaucratic, against a private sector capable of innovation, entrepreneurship and achieving value for money, it is often the case that in-house services can be equally as dynamic and efficient.
English local government has also had some recent evidence of high profile market failures, with Connaught and ROK going bust in the housing maintenance sector along with care home operator Southern Cross. One authority had just signed a ten-year deal with Connaught the month before it went bust.
Another authority’s members went ahead with a major outsourcing contract despite the Section 151 officer’s advice that it did not represent value for money to the council. The week after the contract was signed the company announced it was subject to a takeover bid and in the short term it would have to refinance £170m of debt to stay afloat. The members apparently didn’t want to back out as they believed they had spent that much on the process they would be criticised for withdrawing. Again, a key lesson here is about choosing your partner carefully by doing due diligence properly and if something starts to smell a bit, then not being scared to step aside.
The private and voluntary sector have a key role to play in the delivery of public services as suppliers, additional providers of new or non-core services and where services are struggling to cope with demand.
However, they are not a substitute for core public services delivered directly and democratically accountable to citizens and service users. Collaboration with the third sector is growing in importance and should be facilitated, supported and developed to deliver in areas where it has expertise and can provide additional provision. However, it isn’t a substitute for often complex core public service provision.
In terms of transformation, local government must stick to the plan; work on continuously improving public services while ensuring economy, efficiency and effective provision. Continually challenge processes, look at re-engineering service delivery mechanisms and plan for a long-term sustainable future. Also continue to expand cross-public sector partnership working where it can produce efficiencies and look at new ways of working with the private sector that do not involve ‘all or nothing’ outsourcing.