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In the driving seat, by Paul Bentham

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18 November 2005

Public sector organisations are racing ahead with outsourcing – but all too often are dependent on just one or two suppliers. Paul Bentham says it's time to get a grip and inject a bit of competition

The public sector is becoming one of the largest users of outsourcing in the UK, second only to financial services. But this burgeoning activity, expected to amount to some £67bn worth of services by next year, is set against the background of several large-scale disasters. Why is this?

One of the key reasons cited is the lack of competition in the outsourcing market. This is partly explained by the long time it takes the public sector to make decisions about supplier arrangements, particularly when an extended partnering relationship is involved, as in outsourcing. The tendering process tends to be lengthy for good reason – if a public sector organisation joins up with a commercial business, it has to ensure that it is making the right decision.

However, this protracted process narrows the choice of suppliers. Few smaller firms can afford to stay the distance. As a result, public sector organisations can be left with a choice of just one or two behemoth suppliers. This, in turn, can adversely affect the competitiveness of the pricing – if there is less competition, suppliers might be less willing to negotiate on cost.

But price is not the only issue when evaluating supplier bids. Culture is important, too. The success of the outsourcing agreement depends on a harmonious relationship with the supplier – so organisational cultures have to be compatible. Public sector organisations could be compromising this through narrowing the competition.

It is another given that once a supplier has won a contract and has an established relationship with the public sector organisation, it can start to increase prices. In the cut-throat business world where maximising revenue is often the aim, this is to be expected. However, if the customer has little choice of outsourcer, its price negotiating position can be seriously weakened.

Several public sector outsourcing projects have gone belly up. The Inland Revenue electronic tax returns system is a case in point – a deluge of tax returns filed via the Internet brought the system, very publicly, to its knees. The Child Support Agency (CSA) is another high-profile example – the government agency has endured innumerable problems with its systems, but, despite its problems, has recently renegotiated its contract with EDS.

And this problem isn't confined to central government organisations. Local government bodies and other decentralised public sector organisations have had similar experiences. A recent example is Bedfordshire County Council. Four years into an IT services contract, the relationship between the council and its supplier, HBS, broke down and Bedfordshire paid HBS £7.7m to terminate its contract.

Every outsourcing project is different and there are various reasons for failure. The sheer scale of some public sector projects is one of them. Outsourcing massive projects to a single supplier can be a recipe for disaster. Some companies have specialisms in particular areas, but no one company can claim to be expert in multiple fields.

Limited supplier choice could be another contributory factor. With public sector outsourcing problems creating such newsworthy stories, government organisations must start to think laterally about how they can maximise competition in their outsourcing supplier contracts and use their private sector partnerships to make outsourcing work.

So in the light of restricted supplier options, how can public sector organisations achieve effective and efficient partnering with private organisations?

One answer could be for the customer to retain control of the outsourcing environment. This would involve an in-house team managing the outsourcing of different parts of the same process (such as in large-scale IT projects) or different processes (for example, human resources and payroll, finance and accountancy) to multiple suppliers rather than just one.

This is commonly referred to in the industry as 'smart sourcing' or 'multi-sourcing'. Fundamentally, it is an intelligent approach to service delivery that protects organisations from becoming dependent on one supplier. The team can also judge whether to keep a process in house or contract it out. The challenge is to use a blend of outsourcing and insourcing to provide the best service for the best price possible.

This approach might seem a little daunting to some public sector organisations. In the past, many have viewed outsourcing as a way of passing problematic processes on to another company to deal with. But this is a mistake. Customers might suffer if they fail to retain an element of control in-house, whether in a single-contractor or multi-contractor environment.

Using multiple contractors has a number of advantages for the public sector. First, it can make it easier to maintain competition. It also gives smaller suppliers the chance to bid for certain parts of the contract. In conjunction with other small or larger suppliers, they can work in tandem on projects. This could prove more cost-effective and might provide a better quality of service.

It can also reduce the risks of delivery and provide for a wider range of potential suppliers, giving access to more skills and resources than in a single-contractor environment. Suppliers themselves can play to their strengths, rather than having to cover a whole spectrum of needs and requirements in which they might have little experience.

Obviously, this approach does need tighter control and more stringent management, as integrating deliverables from separate contracts can be problematic. The public sector organisation also has to ensure that the divisions of responsibility between suppliers are clearly drawn. If there is any blurring, problems might arise for the end user, as suppliers might be reluctant to admit liability should things go wrong.

The contract costs of multiple suppliers might be greater, but end users can still make such a set-up economically viable. A key objective should be to avoid getting locked in to any one contractor in the short or long term, as this will help to maintain a competitive environment.

Public sector outsourcing can have catastrophic fallout when it goes wrong. But when it goes right, the benefits can be substantial. Organisations have much to gain by taking a smart approach to outsourcing – the mix of using internal expertise to manage a multi-supplier environment can bring untold benefits. However, it must be supported by the right contract. In a multi-supplier environment, it is especially important that public sector organisations keep their eye on the ball – if they slip up, it can have serious implications for the success of the project.

Paul Bentham is a partner in the technology and outsourcing group at commercial law firm Addleshaw Goddard

PFnov2005

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