Commentators are increasingly suggesting that outsourcing may be the answer to the government’s public expenditure cuts. We are told that public sector chief executives and senior managers, as well their political leaders and non-executive chairs, will be flooding the European Journal with procurement notices.
There can be no doubt that for some services and activities in some public sector agencies, outsourcing contracts with the business and/or third sectors may offer a viable and sustainable solution when they are seeking to reduce costs. However, this will not always be the case. It should not be the automatic and unthinking default option, for without a clear vision about how outsourcing can contribute to strategic goals, less effective services may well be the outcome.
There are so many variables: What are the objectives? What was the starting point – quality, cost or previous investment in the service? What influences outcomes and how much can the outsourcer control them? And what is the effectiveness and competency of the public sector client? Public services are not homogeneous. Any consideration of outsourcing has to recognise this.
There are many significant examples of successful cost reduction and service transformation being achieved through in-house management of services, and of effective public agency partnership arrangements. Outsourcing can offer the solution in the right circumstances but it is not the only one that should be considered.
At a time of major uncertainty, there is little merit in an irrevocable commitment of ever-reducing financial resources to long-term inflexible contracts. Given the immediacy of the financial pressures and the massive resultant change programmes, caution must be given before committing money and senior executive time to long procurement processes which will not (whatever the hype) yield immediate cost savings (remember the cost of procurement and client management in any calculation). In any event, first priority must be to give consideration to how existing contracts might be extended or renegotiated to secure sustained value for money.
I do accept (even if some in the public sector, given their behaviour, are still in denial) that the expenditure pressures and constraints are not simply a one off. These cuts (which far exceed the language of ‘efficiency’ savings that many in the public sector still seem locked into) and pressures will continue throughout this and probably the next spending review – and thus for the best part of a decade. This is a paradigm shift – which requires the rule book and past attitudes to be thrown overboard, and a whole new approach to what public services deliver and how they do it.
Accordingly, longer-term outsourcing or other forms of partnership with the business and third sectors, in the right circumstances, play a long-term role. The form of engagement with these sectors will not be the same as it was in past decades. This is inevitable. If this is the chosen route, experience ‘strongly’ indicates that benefits may be greater when these arrangements are focused on new service set-up or on service re-design and transformation and not simply on cost reduction.
The danger is that without some far-sighted thinking and planning in the pursuit of short-term cost reduction, I foresee a serious risk that there could be a return to some elements of the long lamented ‘compulsory competitive tendering’ processes when price was driven down at the expense of quality and good employment practice.
I am not arguing for inaction (quite the reverse). Neither am I arguing for delay or undue caution. But I am arguing for the need to ‘engage brain’. There are some key strategic questions to be asked before an expensive procurement process should be started. The overarching process should be led and driven by a strategic commissioning process, which must address, at minimum, the following questions:
- what outcomes are required?
- what wider social, environmental, workforce and economic goals should be taken into account?
- how does this service and/or activity fit the long-term strategy and community vision?
- what are the options for securing these outcomes - in-house provision; setting up an employee-led co-operative; partnering with another public sector agency; setting up a public sector shared service; grant-aiding a third sector organisation; a competitive procurement process; or indeed transferring the service and/or purchasing to service users individually or collectively? There should be no prejudice for any one solution at this stage.
- have we adequately evaluated these outcomes against the desired outcomes and the longer-term strategic vision?
- are users, staff and other stakeholders sufficiently and effectively engaged in these processes?
If the answer to these questions continues to suggest that outsourcing is likely to be the way forward, these further questions must be answered:
- what alternative providers are available in the supply market (indeed, are there any?) and how competitive is it, or does it need to be developed and if so how?
- what is the overriding objective for the outsourcing – is it cost reduction, service redesign and transformation, transferring a problem or some combination?
- in light of the above, what form of outsourcing relationship is required – long-term strategic partnership, short-term price-driven contracting, joint venturing, shared procurement with one or more partners or ‘in-sourcing’ of expertise with limited risk transfer?
- what are the experiences of others in outsourcing these services and is there a real understanding of the market and results?
- is there the client capacity and competency to procure and then to client manage?
- can we secure a contract that is flexible enough for the period of uncertainty that is faced? How easy will it be to renegotiate smaller volume and/or lower price, change of specification and good employment practices while achieving the service and wider social and economic goals sought? Is the OJEU notice suitably written to allow for these and for scope reshaping?
- is there time, and are resources available to undertake a major procurement given the immediate budget pressures – or is this outsourcing more realistically a medium-term strategy?
The template and methodology for how to address these 13 questions would be too lengthy for a blog entry and must be the subject for future articles. However, in the meantime, for those of you seeking to navigate your way through treacherous shoals, I hope and trust they prove to be a lucky 13.
John Tizard is director of the Centre for Public Service Partnerships (CPSP@LGiU)
