By Alison Moore
29 July 2010
It might not be immediately obvious to residents and businesses in Hartlepool, Redcar & Cleveland, Stockton and Middlesbrough, but radical changes are taking place to policing in their area. From October, bobbies on the beat will be backed up by a web of support services provided by outsourcing company Steria.
Under a ten-year, £175m contract with Cleveland Police Authority, Steria will provide call handling services (though responses to calls will remain under police control), support for preparation of criminal case files, finance, human resources, payroll, commissioning and fleet management. The deal is expected to save £50m over the length of the contract. It will help the force to maintain and even enhance frontline services, according to police authority chair David McLuckie, who calls it a ‘transformational model for other UK forces’. Steria chief executive John Torrie claims the company’s shared services approach is a ‘fundamental answer to today’s combined budgetary and efficiency challenges’.
These challenges are common across the public sector – and are the reason why outsourcing is expected to soar over the next few years. It will be boosted by a government that is ideologically at home with the idea of private companies providing public services. Even back in February, Serco's chief executive Christopher Hyman talked of ‘more opportunities than we are able to bid for’, although this included worldwide contracts. Richard Marchant, Capita’s head of local government strategic partnerships, told the Guardian this month that his company had ‘probably seen a 100% increase in opportunities and I suspect we will see another 50% increase [next year]’.
Government policies on decentralising health and education could open up more opportunities. GP consortiums and academy schools are likely to outsource many routine functions, while outsourcing companies also hope to provide some frontline services.
However, some experts suggest that predictions of a private sector bonanza could be overstated. John Tizard, director of the Centre for Public Service Partnerships, points out there will be less money for services in real terms. There could be fewer outsourcing contracts in the short term as the public sector struggles with the reduction in funding. ‘But the expenditure pressure will be here for a decade and I think we will see greater use of the private sector to reduce costs and to shift risks,’ he says. ‘The world will be different and so will outsourcing markets; so we cannot simplistically predict the size or share of markets.’
Kerry Hallard, a board member of the National Outsourcing Association, says members are ‘massively positive’ about the future opportunities but do not expect a doubling of business even in the lifetime of this Parliament.
The Public Services Industry Review, commissioned by the last government, calculated that, in 2007/08, £79bn of public money was paid to private and third sector enterprises to provide services to either the public or the government itself. Close to half of this was on ‘managed services’, with another £5bn going towards business process outsourcing.
This spending had increased rapidly after 1997, with growth then slowing from 2003 onwards. But government policy has now shifted towards outsourcing, influenced by a change of administration and a crisis in public spending of a magnitude unseen when the review was written. Susan Anderson, director of public services at the CBI business lobby, argues: ‘We are seeing a government which believes that public services need not only be provided by the public sector. They see the value that external providers can bring.’
Pragmatism might also play a part in this. David Furness, head of strategic development at the Social Market Foundation think-tank, says: ‘If you look at any business in the private sector you would outsource functions that could not be done efficiently internally. We need to get away from this idea of four legs good, two legs bad. People have to realise that we need to squeeze every penny out of the public sector.’
The extent of savings from outsourcing can be substantial. For example, the PSI Review said outsourcing could reduce costs by 10% to 30%. And NHS Shared Business Services, used by over 120 organisations, says its costs are 20% to 30% less than trusts doing the work themselves.
But the outsourcing models that emerge could look very different from the contracts of today. In the past, the focus has been on back-office functions outsourced by individual councils or NHS
bodies. Now, however, it is likely that this will involve frontline services – including ‘white-collar front-office work’, according to Tribal, another big player in the market. Business development director for health Kingsley Manning expects ‘transformation rather than evolution’, as organisations realise they can no longer provide services in the same way.
Shared services and joint ventures – involving multiple public sector bodies and often a private sector partner – will be a major strategy, offering both medium-term savings and the prospect of ’doing things differently’. This re-engineering of services provision is seen as crucial to making the vast savings needed.
For example, NHS SBS, which is 50% owned by Steria and 50% by the Department of Health, recently returned more than £1m in profits to the DoH and expects to have shaved £50m off NHS costs by 2014.
Capita's market director for central government, Patrick Smith, says he expects more joint ventures ‘which rely on genuine collaboration between public, private and voluntary sectors’.
Many people expect opposition to outsourcing to diminish as councils, in particular, stare into a financial abyss. Fiona Capstick, chief executive of Southwest One, a joint shared services centre, says standardisation of processes has been important, while the economic situation has made the public sector look at what could be done externally. Some council leaders have even suggested the government could make shared services mandatory.
Steria says it is increasingly being approached by councils looking for shared options for multiple services, rather than one specific service. This tactic has been used controversially at Essex County Council, which recently signed a contract with IBM to look at alternative ways of providing all of its services. Essex aims to save 20% of the county’s £1.2bn budget over the next three years.
But, while some enormous contracts might grab headlines, there could be a substantial growth in smaller contracts, reflecting the move of power away from the centre to local bodies. Barry Brookes, Tribal's strategic development director for education, believes confederations of schools will be commissioning work in future, rather than councils. This will be a challenge to companies, which will increasingly need to target their services on individual purchasers, according to different needs.
Something similar will happen in health, as 500 GP consortiums replace 150 primary care trusts. As well as outsourcing many processes, they are likely to seek commissioning support from the private sector.
But in this cash-strapped environment, contracts with the private sector for frontline services are increasingly likely to specify results to be achieved rather than just tasks to be undertaken. An example of this is the Department for Work and Pension’s use of contractors to help people back to work, where payment is based on sustained success. The DWP hires prime contractors, which then sub-contract with local firms and voluntary organisations specialising in particular geographical areas or groups of people.
By using a wide number of specialist sub-contractors, the scheme fits in with personalisation policies and the use of prime contractors reduces the DWP’s cost of running the scheme. However, John Medhurst, research officer at the Public and Commercial Services union, questions the viability of these small initiatives, given the loss of national support and ‘big picture’ knowledge. He also raises doubts about the enthusiasm of companies to operate on a ‘payment by results’ basis as unemployment soars.
The willingness of the private sector to take on risk is crucial as public sector bodies look for certainty over their costs. Private providers will seek reward for taking on risk, potentially leading to large and politically embarrassing payouts for good performance.
But if the public sector becomes more of a commissioner and enabler of services, rather than providing them itself, the quality of contracting and performance management will become vital. The public sector needs to be an informed customer rather than a passive recipient of services.
Mark Fox, chief executive of the Business Services Association, says that even if the public sector commissions rather than provides services, it will still be responsible for the quality of the end result. This will require better evaluation of contracts’ value for money than in the past. ‘We expect to have challenging conversations around value for money,’ suggests the CBI’s Anderson. e
But public bodies might want short-term contracts with immediate savings, rather than longer-term ones where savings could come later. This could lead to the abandonment of quality considerations. Most contractors fear a position where cost is the only consideration – the return to local government’s dreaded Compulsory Competitive Tendering scenario.
There are other pitfalls for private firms. Building up shared services has been slow. For example, Southwest One, a partnership between IBM, Taunton Borough Council and Avon & Somerset Police, has struggled to attract new partners.
On the other hand, some companies face multiple opportunities at the same time, stretching their capacity and possibility limiting the expansion of outsourcing in the short term.
Private ownership is also still controversial, with continued union opposition and concerns about the transparency of some deals. Social enterprises might be seen as a more palatable alternative. And there are other issues when new markets are being created, such as the need to ensure continued service provision in the event of contractor failures.
Could offshoring – used by many private industries for everything from call centre work to IT – be used more widely, with cheaper labour costs and highly educated staff? Previous attempts to offshore have often foundered on issues such as public acceptability of ‘exporting jobs’ and weaker data protection laws.
However, NHS SBS sends some processing work to India; its sites there are accredited to a high level for information governance. ‘We recognise that we have to be particularly strong in that area if we are to offshore activities,’ says managing director John Neilson, who thinks a greater proportion of work might eventually be done there.
Electronic transfer of data opens up possibilities for more clinical tasks to be done abroad - University College Hospitals London uses radiologists in Australia to read out-of-hours scans, for example.
National Outsourcing Association board member Mark Kobayashi-Hillary believes that opportunities for offshoring are limited, especially when the ‘paymasters’ are elected and don’t want to be seen to be exporting jobs. But there could be some internal functions that could be sent offshore – IT help desks, for example. Steria’s managing director for local government Frank Morris says there is a growing recognition that not all services require a local presence and there could be opportunities abroad.
And if the public can largely accept discussing their bank details with someone in Bangalore, will they eventually accept their rubbish collection problems being sorted out from Cochin?
29 July 2010
The government’s tough austerity measures could create a potential bonanza for outsourcing firms as the public sector looks to cut costs in education, health, local government and police services. But this will also bring serious risks and challenges, as Alison Moore discovers
It might not be immediately obvious to residents and businesses in Hartlepool, Redcar & Cleveland, Stockton and Middlesbrough, but radical changes are taking place to policing in their area. From October, bobbies on the beat will be backed up by a web of support services provided by outsourcing company Steria.
Under a ten-year, £175m contract with Cleveland Police Authority, Steria will provide call handling services (though responses to calls will remain under police control), support for preparation of criminal case files, finance, human resources, payroll, commissioning and fleet management. The deal is expected to save £50m over the length of the contract. It will help the force to maintain and even enhance frontline services, according to police authority chair David McLuckie, who calls it a ‘transformational model for other UK forces’. Steria chief executive John Torrie claims the company’s shared services approach is a ‘fundamental answer to today’s combined budgetary and efficiency challenges’.
These challenges are common across the public sector – and are the reason why outsourcing is expected to soar over the next few years. It will be boosted by a government that is ideologically at home with the idea of private companies providing public services. Even back in February, Serco's chief executive Christopher Hyman talked of ‘more opportunities than we are able to bid for’, although this included worldwide contracts. Richard Marchant, Capita’s head of local government strategic partnerships, told the Guardian this month that his company had ‘probably seen a 100% increase in opportunities and I suspect we will see another 50% increase [next year]’.
Government policies on decentralising health and education could open up more opportunities. GP consortiums and academy schools are likely to outsource many routine functions, while outsourcing companies also hope to provide some frontline services.
However, some experts suggest that predictions of a private sector bonanza could be overstated. John Tizard, director of the Centre for Public Service Partnerships, points out there will be less money for services in real terms. There could be fewer outsourcing contracts in the short term as the public sector struggles with the reduction in funding. ‘But the expenditure pressure will be here for a decade and I think we will see greater use of the private sector to reduce costs and to shift risks,’ he says. ‘The world will be different and so will outsourcing markets; so we cannot simplistically predict the size or share of markets.’
Kerry Hallard, a board member of the National Outsourcing Association, says members are ‘massively positive’ about the future opportunities but do not expect a doubling of business even in the lifetime of this Parliament.
The Public Services Industry Review, commissioned by the last government, calculated that, in 2007/08, £79bn of public money was paid to private and third sector enterprises to provide services to either the public or the government itself. Close to half of this was on ‘managed services’, with another £5bn going towards business process outsourcing.
This spending had increased rapidly after 1997, with growth then slowing from 2003 onwards. But government policy has now shifted towards outsourcing, influenced by a change of administration and a crisis in public spending of a magnitude unseen when the review was written. Susan Anderson, director of public services at the CBI business lobby, argues: ‘We are seeing a government which believes that public services need not only be provided by the public sector. They see the value that external providers can bring.’
Pragmatism might also play a part in this. David Furness, head of strategic development at the Social Market Foundation think-tank, says: ‘If you look at any business in the private sector you would outsource functions that could not be done efficiently internally. We need to get away from this idea of four legs good, two legs bad. People have to realise that we need to squeeze every penny out of the public sector.’
The extent of savings from outsourcing can be substantial. For example, the PSI Review said outsourcing could reduce costs by 10% to 30%. And NHS Shared Business Services, used by over 120 organisations, says its costs are 20% to 30% less than trusts doing the work themselves.
But the outsourcing models that emerge could look very different from the contracts of today. In the past, the focus has been on back-office functions outsourced by individual councils or NHS
bodies. Now, however, it is likely that this will involve frontline services – including ‘white-collar front-office work’, according to Tribal, another big player in the market. Business development director for health Kingsley Manning expects ‘transformation rather than evolution’, as organisations realise they can no longer provide services in the same way.
Shared services and joint ventures – involving multiple public sector bodies and often a private sector partner – will be a major strategy, offering both medium-term savings and the prospect of ’doing things differently’. This re-engineering of services provision is seen as crucial to making the vast savings needed.
For example, NHS SBS, which is 50% owned by Steria and 50% by the Department of Health, recently returned more than £1m in profits to the DoH and expects to have shaved £50m off NHS costs by 2014.
Capita's market director for central government, Patrick Smith, says he expects more joint ventures ‘which rely on genuine collaboration between public, private and voluntary sectors’.
Many people expect opposition to outsourcing to diminish as councils, in particular, stare into a financial abyss. Fiona Capstick, chief executive of Southwest One, a joint shared services centre, says standardisation of processes has been important, while the economic situation has made the public sector look at what could be done externally. Some council leaders have even suggested the government could make shared services mandatory.
Steria says it is increasingly being approached by councils looking for shared options for multiple services, rather than one specific service. This tactic has been used controversially at Essex County Council, which recently signed a contract with IBM to look at alternative ways of providing all of its services. Essex aims to save 20% of the county’s £1.2bn budget over the next three years.
But, while some enormous contracts might grab headlines, there could be a substantial growth in smaller contracts, reflecting the move of power away from the centre to local bodies. Barry Brookes, Tribal's strategic development director for education, believes confederations of schools will be commissioning work in future, rather than councils. This will be a challenge to companies, which will increasingly need to target their services on individual purchasers, according to different needs.
Something similar will happen in health, as 500 GP consortiums replace 150 primary care trusts. As well as outsourcing many processes, they are likely to seek commissioning support from the private sector.
But in this cash-strapped environment, contracts with the private sector for frontline services are increasingly likely to specify results to be achieved rather than just tasks to be undertaken. An example of this is the Department for Work and Pension’s use of contractors to help people back to work, where payment is based on sustained success. The DWP hires prime contractors, which then sub-contract with local firms and voluntary organisations specialising in particular geographical areas or groups of people.
By using a wide number of specialist sub-contractors, the scheme fits in with personalisation policies and the use of prime contractors reduces the DWP’s cost of running the scheme. However, John Medhurst, research officer at the Public and Commercial Services union, questions the viability of these small initiatives, given the loss of national support and ‘big picture’ knowledge. He also raises doubts about the enthusiasm of companies to operate on a ‘payment by results’ basis as unemployment soars.
The willingness of the private sector to take on risk is crucial as public sector bodies look for certainty over their costs. Private providers will seek reward for taking on risk, potentially leading to large and politically embarrassing payouts for good performance.
But if the public sector becomes more of a commissioner and enabler of services, rather than providing them itself, the quality of contracting and performance management will become vital. The public sector needs to be an informed customer rather than a passive recipient of services.
Mark Fox, chief executive of the Business Services Association, says that even if the public sector commissions rather than provides services, it will still be responsible for the quality of the end result. This will require better evaluation of contracts’ value for money than in the past. ‘We expect to have challenging conversations around value for money,’ suggests the CBI’s Anderson. e
But public bodies might want short-term contracts with immediate savings, rather than longer-term ones where savings could come later. This could lead to the abandonment of quality considerations. Most contractors fear a position where cost is the only consideration – the return to local government’s dreaded Compulsory Competitive Tendering scenario.
There are other pitfalls for private firms. Building up shared services has been slow. For example, Southwest One, a partnership between IBM, Taunton Borough Council and Avon & Somerset Police, has struggled to attract new partners.
On the other hand, some companies face multiple opportunities at the same time, stretching their capacity and possibility limiting the expansion of outsourcing in the short term.
Private ownership is also still controversial, with continued union opposition and concerns about the transparency of some deals. Social enterprises might be seen as a more palatable alternative. And there are other issues when new markets are being created, such as the need to ensure continued service provision in the event of contractor failures.
Could offshoring – used by many private industries for everything from call centre work to IT – be used more widely, with cheaper labour costs and highly educated staff? Previous attempts to offshore have often foundered on issues such as public acceptability of ‘exporting jobs’ and weaker data protection laws.
However, NHS SBS sends some processing work to India; its sites there are accredited to a high level for information governance. ‘We recognise that we have to be particularly strong in that area if we are to offshore activities,’ says managing director John Neilson, who thinks a greater proportion of work might eventually be done there.
Electronic transfer of data opens up possibilities for more clinical tasks to be done abroad - University College Hospitals London uses radiologists in Australia to read out-of-hours scans, for example.
National Outsourcing Association board member Mark Kobayashi-Hillary believes that opportunities for offshoring are limited, especially when the ‘paymasters’ are elected and don’t want to be seen to be exporting jobs. But there could be some internal functions that could be sent offshore – IT help desks, for example. Steria’s managing director for local government Frank Morris says there is a growing recognition that not all services require a local presence and there could be opportunities abroad.
And if the public can largely accept discussing their bank details with someone in Bangalore, will they eventually accept their rubbish collection problems being sorted out from Cochin?
