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Out and proud, by Martyn Hart

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13 May 2005

Public sector outsourcing is expanding fast. A good thing when it's done well, argues Martyn Hart, but bad news when the going is anything but smooth

Public sector outsourcing is set to soar over the next three years, with an extra £20bn worth of services likely to be farmed out to private sector suppliers. This means that by 2006/07, some £67bn worth of services could be contracted out, compared with just under £45bn this year.

Growth will be fastest at the Ministry of Defence, which has recently signed a £4bn outsourcing deal with a consortium led by EDS. The NHS should be the second biggest growth area, with a predicted increase of more than 150% set to bring the total value of contracted-out services to £16.4bn over the three years.

These figures will come as no surprise to those who have been following moves to slim down the public sector. Last summer's report by Sir Peter Gershon on public sector efficiency, which projected a 104,000 cut in jobs, sent shockwaves through every government department and agency.

With annual savings of £21.5bn called for by 2008, the aim was to highlight areas of excessive expenditure and inefficiency and come up with solutions, primarily through job cuts and the establishment of on-line services. Initially, this left many civil servants and members of the public wondering how the government would be able to maintain public services with such massive staff reductions.

The answer, as is the case for many commercial sector organisations, is outsourcing. The basic premise behind this is that providing non-core services in-house can be expensive and resource-heavy. Sharing provision with other organisations (jointly or through outsourcing) can be more cost-effective and free resources for core business areas.

IT has traditionally been a major area for public sector outsourcing, for example, in the run-up to e-government deadlines, with departments using external expertise to help meet targets and fulfil agreements. However, the area that is growing most rapidly is business process outsourcing. This involves public sector departments outsourcing other business functions, such as payroll, human resources administration, finance and accountancy, and customer management services.

Research by BPO analysts NelsonHall has earmarked the public sector as one of the biggest growth areas. European figures for public sector BPO has been estimated at more than £1.5bn in 2004 and this is set to grow by 20% this year, according to NelsonHall.

Some public sector organisations have outsourced very successfully. An example is Westminster City Council, which in 2001 embarked on one of the biggest local government outsourcing contracts of the time. In 2005, the central London local authority won a National Outsourcing Association award for best practice. The council used BPO supplier Vertex for multiple council services and customer management services as part of its 'Civic Renewal' project. This aimed to cut the cost of contacting Westminster residents while improving their experience of dealing with the council. It was hugely successful, taking Westminster's overall customer satisfaction rating from 50% to 90% within a year.

Unfortunately, many other public sector outsourcing contracts have been anything but smooth. The Inland Revenue's tax credits debacle is a prime example. In 1994, the IR set up a partnership with IT services firm EDS in a ten-year £4bn deal. But last year EDS was dropped on the grounds that it had failed to deliver a successful tax credits system.

The IR had promised the timely delivery of an 'intelligent customer' project, but the system fell down. Rightly or wrongly, EDS was collared as the main scapegoat and the 'Aspire' contract was handed over to a consortium consisting of CGEY, Fujitsu and BT.

Another example of a troubled deal occurred at City and County of Swansea Council. In a battle that has lasted for almost a year, the Welsh authority has finally decided to go against the wishes of its staff and outsource its entire IT division to Capgemini in a £150m deal. Since its staff first learned of the deal in the summer of 2004, they have vehemently opposed it. Insiders alleged that council decision-makers failed to consult with the unions at the most suitable juncture, the outset of negotiations with Capgemini.

The council suffered many setbacks when, first, the IT division went on strike for two months. This was followed by a demonstration and walkout by more than 2,000 council workers in support of their IT colleagues.

Unison, hoping for some room for negotiation, lobbied the council over transferring the IT staff to work for Capgemini under a secondment agreement. Under this deal, the workers would remain council employees. However, the council opted to override the union and staff opposition and transfer the workers to Capgemini under the Transfer of Undertakings (Protection of Employment) regulations.

This has numerous implications – employees usually opt to work for the public sector for specific reasons and the benefits that are associated with public sector work. The council is again facing industrial action, which could further damage its relations with existing employees and have negative implications for the success of the outsourcing project. After all, it is the same disgruntled workers who will be running the council's outsourced IT division, albeit under the unwanted guise of Capgemini employees.

So the spectre of problems past hangs over the large number of new outsourcing deals in the pipeline. In this environment, each public department and agency considering outsourcing would do well to learn from Swansea, the Inland Revenue and other outsourcing disasters, and also learn best practice lessons from successful projects such as Westminster council's. There is no foolproof blueprint, but certain considerations should be borne in mind before embarking on outsourcing of any kind. These can be summed up as: weighing up the options; negotiating properly; ensuring that PR and personnel procedures are watertight; and making sure everything is transparent.

Weighing up the options is vital as outsourcing is not a silver bullet solution for every efficiency log jam in the public sector. Organisations must find the solution that is most cost-effective, best matches resources and fits from a cultural perspective. If employees are so opposed to outsourcing that they are prepared to wreak havoc in the organisation, perhaps an alternative would be best. However, this level of opposition arises rarely, usually only when the consultancy and negotiation stages have been badly handled.

Secondly, therefore, public sector organisations need to involve employees and the unions at the earliest stage of decision-making. Any relationship problems with the unions must be addressed before a final decision is taken. Unions are rarely so protectionist that they are prepared to bring an organisation to a grinding halt. Their knowledge of outsourcing deals and how they are broached is also quite profound and their knowledge of the staff will be important in smoothing the path for an outsourced process.

Thirdly, public relations and human resources procedures have to be extremely well planned. Strike action is usually the result of poor communications and a breakdown in negotiations. The first rule is that information is clear and concise and delivered frequently. If the information flow is stemmed, staff will wonder what is happening and draw their own conclusions. This can be highly detrimental to relations with employees.

Finally, intentions have to be crystal clear from the outset. Cloaking outsourcing plans in secrecy does more harm than good. Rumours about intentions can be hopelessly off the mark and can cause widespread unease about job security.

Outsourcing can bring a variety of benefits to an organisation. Employees might be against it at the start – working for a private organisation is psychologically different from working for the public sector. However, if it is managed properly and organisations follow best practice procedures, it can help achieve Gershon's objectives. Organisations need to research and formulate projects to the best of their ability. They should not be afraid to seek advice and should comply with all the correct procurement procedures, including consulting unions at the strategic decision phase. An outsourcing decision won't always please everyone, but, if it is handled well, the fallout can be minimised.

Martyn Hart is chair of the National Outsourcing Association

PFmay2005

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