Better out than in?_2

31 Oct 11
The expected explosion in local government outsourcing has not taken place. Could it still happen or are there better ways to make the savings? Public Finance and Civica convened a round table to find out
By Mike Thatcher | 1 November 2011

The expected explosion in local government outsourcing has not taken place. Could it still happen or are there better ways to make the savings? Public Finance and Civica convened a round table to find out

Round Table pic 2


It appeared to be a no-brainer. With councils under huge financial pressure, more outsourcing seemed the obvious way forward. We expected a surge in public-private ­partnerships, joint ventures and ­strategic alliances.

The early signals supported this view. One survey in June indicated that outsourcing rates would rise from 20% now to 34% by 2014. Local authorities began to think the unthinkable – Suffolk County Council was preparing to contract out almost all its services, while Birmingham City Council announced the ‘export’ of up to 100 IT jobs to India.

But things have not gone quite as planned. Amid ­internal turmoil and a change of political leadership, ­Suffolk’s ‘New Strategic Direction’ rapidly became the old ­strategic ­direction as it scrapped the idea of becoming a ‘virtual council’. Meanwhile, Birmingham signalled a hasty retreat, asking its contractor to ‘revisit commitments around ­offshoring with a view to discontinuing the initiative’.

The collapse of care home company Southern Cross and the scandal at Castlebeck’s Winterbourne View hospital added more uncertainty to the outsourcing option. ­Councils might have their financial difficulties, but they certainly don’t want to run the risk of service failure.


So what is really happening? Are outsourcing ­companies facing the same pressures as their town hall clients and having to do more for less? To shine some light on this, Public Finance convened a round table of council finance directors, think-tank heads, academics and others.

The debate, run in association with Civica, began with a history lesson from Sarah Phillips, the deputy director of the Centre for Public Service Partnerships. Phillips ran through the developments in the sector, from Compulsory Competitive Tendering in the 1980s through Best Value in the late 1990s to the recent Open public services white paper’s espousal of mutuals and ‘people power’.

‘The market for outsourcing is still there but it is ­increasingly competing with other things,’ she suggested. ‘And the political landscape has changed dramatically. Outsourcing is not opposed in quite the same way as it was. If anything, some politicians expect more than is ­practical from it.’

Phillips also claimed that the amount of ­savings councils needed to find in such a short period worked against the outsourcing industry. Town halls, already six months into the financial year, were realising they needed something more radical than outsourcing to meet their targets.

‘If this government wanted to help the outsourcing ­industry, perhaps front-loading the cuts so dramatically in the first year didn’t help,’ she said. ‘The procurement of large contracts takes a long time and costs a lot and, paradoxically, you couldn’t start designing a big outsourcing contract to make the savings that are required in the first year. I think that put some people off.’

Phillips added that local government was far more ­efficient now than in the days of CCT, making it harder for suppliers to provide the quick wins needed. The poor practices of the past have been all but eliminated from town halls, she said, along with the bad-apple employees who might previously have survived.

‘One of the challenges for the outsourcing industry is that the mad, bad and sad have really gone. If there were big savings from appalling practices and inefficiencies, I don’t think they are so easy to make now. There is much more internal discussion about efficiencies and hard ­talking with union colleagues about the number of sick days.’

Paul Robb, a board member of the National ­Outsourcing Association, agreed that suppliers were facing a tough time and that few large deals had been agreed recently.

‘A number of us were probably thinking that when the trouble bites, people may turn more to outsourcing,’ he said. ‘That hasn’t happened. It may be coming, but in the meantime there are quite a few suppliers who are probably very keen to run a deal or two. My concern is that, in that desire, perhaps not always the best deal is winning but perhaps the best price.’

Robb, who is also lead partner of KPMG’s public ­sector’s sourcing practice in the UK, said that outsourcing was one of the tools available to the public sector, but ‘it was not the tool’. He added that the outsourcing industry would have to change its approach. In order to show their worth, suppliers would need to move to output pricing.

‘The traditional large input-based deal, with ten years of nebulous pricing, is going to have to go,’ said Robb. ‘It’s going to have to be transaction-based. And if you can move to outcomes then so much the better.’

Even the London Borough of Wandsworth, famous for its low council tax and willingness to work with the private sector, has reservations about outsourcing. Finance director Chris Buss said the emphasis was on market testing and that directors were obliged to help staff develop their own in-house bids.

Buss warned that councils often used outsourcing as a way of passing problems on to the private sector. ‘If you outsource the problem, the problem is still there. All you are doing is giving it to somebody else to deal with. It’s a complete nonsense. You don’t outsource the ­problem, you sort the problem out first and then put it out to market.’

Duncan Whitfield, finance director of the London ­Borough of Southwark, suggested that the private sector had been progressing at a slower pace than the public sector. Suppliers were expecting to make unreasonable margins, he claimed, while town hall staff had made a remarkable effort to achieve the level of savings required. As a result, Southwark had taken in-house its revenue and benefits service.

‘If you have got to find £34m in the next 12 months, you are not going to do it through offshoring, you are not going to do it through IT [outsourcing] in one year, you are not going to do it with a big waste disposal contract. You have got to look to how you can lead and commit to really big things – and outsourcing is absolutely part of that, but there is what we can do ourselves first I think.’

Surprisingly, it seems that insourcing is becoming the next big thing. Paul O’Brien, chief executive of the ­Association of Public Service Excellence, said 100 authorities had brought some relatively large services back in-house ­following disappointing outsourcing experiences.
O’Brien was particularly scathing of councils that ­offshored or outsourced so that jobs were lost to the local area. He compared this approach to Oscar Wilde’s definition of a cynic – ‘a man who knows the price of ­everything and the value of nothing’ – and called for more joined-up thinking. ‘In the current economic climate can you really afford to have that level of leakage from your local economy for the sake of saving a few quid? It’s going to cost you more than that in unemployment benefit in the local area.’
Anna Turley, editor of the Progressive Localism website and former deputy director of the New Local Government Network, said that this analysis was becoming more accepted. Labour councils, in particular, shared Ed Miliband’s concerns over private sector ‘predators’ and, following the demise of Southern Cross, were less willing to take risks on outsourcing.

‘You have got Labour councils now in areas like ­Newcastle that are clear what their priorities are around instituting a living wage, around fairness, and apprenticeships. There is a real onus on the private sector companies that want to work with local government to demonstrate that they are in keeping with these quite politically strong values. Labour councils are coming in and wanting to define themselves much more clearly against the ­government’s agenda,’ Turley said.

However, it’s not just Labour councils that see the ­benefits of such an approach. Andy Burns, director of finance and resources at ­Staffordshire County Council, said that his authority became Conservative-controlled two years ago after 28 years of being run by Labour. Defying expectations, the new administration has not pursued a policy of ­outsourcing. Instead, it has taken the decision to prioritise economic prosperity and encourage spending in the local area.

‘Certainly, for many counties, economic prosperity is increasingly having a higher political priority,’ he
said. ‘Unless there’s a huge financial prize for it, exporting jobs out of the county wouldn’t be sensible.’

But Brian Roberts, director of resources at ­Leicestershire County Council, asserted that it was important to remain neutral about the most appropriate delivery model. Any politics should be taken out of the process by having an objective commissioning system to decide whether to ­outsource services, keep them in-house or share them.

Pressed on the issue of exporting jobs, Roberts said an efficient public sector would promote growth. ‘To some extent, if you take out 100 posts in the public sector, it’s whether that local authority can drive private sector investment and create 200 jobs in the county. It’s not quite black and white about “you must protect public sector jobs”. It’s really linking on to the growth agenda.’

A number of people questioned why there was so little research on the effects of outsourcing in local government. Peter McKinlay, director of New ­Zealand’s Local Government Centre, said studies in Europe had produced ‘indifferent’ outcomes on whether serious savings could be made by externalising services. In the US, the promised gains from outsourcing had not been realised, he said, and there had been a swing back to insourcing.

‘There is quite a sense that outsourcing may be one way of pursuing savings but, over time, improving efficiency internally may be at least as productive,’ he told attendees.

Heather Wakefield, head of local government at Unison, said she had yet to find evidence that outsourcing had led to improvements in services. Any savings made, she ­suggested, generally came from cuts in pay and conditions, and ­pensions in particular.

‘Had the money spent on outsourcing been invested in a serious attempt to create a fundamental culture change to engage the workforce, create a new management culture and invest in good management practice, we would have delivered higher quality and more efficiency and on a more sustainable basis with less fragmentation,’ she claimed.

So, if not outsourcing, then what? All the political ­parties are committed to cutting the deficit. Whether it’s Plan A or Plan B, there will have to be ­significant savings and they have to come from somewhere.

Wakefield said she could see the case for economies of scale in back-office functions such as IT and finance, but that didn’t automatically mean outsourcing. ‘Joint commissioning and shared services across local authorities could and should be a route to savings in those areas,’ she added.

The idea of authorities working together as partners had support from other participants in the debate. Eugene ­Sullivan, chief executive of the Audit Commission, said that it was important to establish partnerships first and then decide what or whether to outsource.

‘We’ve got 33 London boroughs – that’s 33 times ­everything. We’ve got ten authorities in Greater Manchester, and yet we seem happier to outsource than we are to work with our neighbours,’ he said. ‘There are huge cost ­differences between neighbours. I think there is a big agenda there.’

KPMG’s Paul Robb said he was wary of the terms ­‘partnership’ or ‘joint venture’ when applied to deals between the public and private sector. But he could see the value of partnerships between authorities that then bring in a private supplier using an effective contract.

‘If you wanted me to be your partner and manage a number of local authorities or bring some sort of board guidance, I would say “no”. Are you the joint venture of the supplier or the customer? It’s quite hard to be both. I would like to see the local authorities partnering. That’s where there is some value. You guys partner. Then you write a really good contract, put the suppliers in a box and say I want this to be delivered on an output basis, x pence per transaction, and away you go.’

Tim Magness, a director at Civica, said that the type of outsourcing was important – the ‘lift and shift’ generalist type of outsourcing was unlikely to be successful in the age of austerity. ‘It’s the specialist understanding, the local level of understanding, that unlocks the real value. There is a definite potential to make significant savings, but only from that sort of approach,’ he suggested.

Mike Suarez, the director of finance and resources at the London Borough of Lambeth, offered a perhaps more radical approach. Lambeth has styled itself a ‘co-operative council’, aiming to give more power to residents and using mutuals and citizen engagement to improve services. It was, he said, about ‘turning citizens from passive ­recipients into active shapers of services’, such as the ‘broom army’ that helped clean up after the London riots. ‘We had wonderful examples of communities getting out there, sweeping up the streets, getting active and involved.’

But he admitted that Lambeth’s staff had a mixed ­reaction to employee mutuals. ‘Some people are very excited about continuing their service in an alternative scheme. Others are saying “this is not for me”.’

Smaller-scale, micro-mutuals that bring together groups of service users were proposed by Anna Turley. She also thought that authorities could learn lessons from the Total Place pilots, which have now morphed into Community Budgets. ‘They have real potential for showing how if you start with the citizen, start with the family and build services around their needs, you’ll make real efficiencies in the public sector.’

But could any of the alternative solutions really make the required level of savings? Stephen Fitzgerald, director of finance at the London Borough of Hounslow, said that any realistic assessment would conclude that the ‘magnitude and spread of services’ would have to reduce.

‘The answer is not going to be cutting the pay of a few chief executives. I don’t think it’s going to be setting up some joint venture vehicles. The thing that officials and officers are having to say to people is that there has to be a reduction in the service offer and this is an incredibly ­difficult message to give,’ he added.

 Sarah Phillips suggested that the financial black hole was so huge, most of the ideas put forward would only skim the surface of what was needed. ‘On current trends, in five to ten years, your whole budget will go on adult social care. It’s almost too difficult for members to discuss in councils. They’ll talk about back office, they’ll talk about sharing a chief executive, but that’s not going to deal with adult social care in a county council.’

So, if the solution is not outsourcing, insourcing, shared services, joint ventures, combined chief executives or joined-up budgets, do we have to question whether the cuts are actually achievable? Phillips was not optimistic.

‘One of the difficulties in all this is that people are losing sight of the scale and where the costs really are. That’s the scary bit for me – the savings aren’t there to be made.’  

Attendees


Andrew Bedford, strategic director of finance, Rotherham Metropolitan Borough Council
Paul Bradbury, director, Civica
Angela Brown, secretary, Society of District Council Treasurers
Andy Burns, director of finance & resources, Staffordshire County Council
Chris Buss, director of finance, London Borough of Wandsworth
Stephen Fitzgerald, director of finance, London Borough of Hounslow
Peter Gillet, director of resources, Gloucester City Council
John Harrison, director of strategic resources, Peterborough City Council
Tim Magness, director, Civica
Peter McKinlay, director, Local Government Centre, New Zealand
Paul O’Brien, chief executive, Association for Public Service Excellence
Sarah Phillips, deputy director, Centre for Public Service Partnerships
Isabell Proctor, director of finance & support, Northampton Borough Council
Paul Robb, board member, National Outsourcing Association
Brian Roberts, director of resources, Leicestershire County Council
Mike Suarez, director of finance and resources, London Borough of Lambeth
Eugene Sullivan, chief executive, Audit Commission
Mike Thatcher, editor, Public Finance (chair)
Anna Turley, editor, ProgLoc
Heather Wakefield, head of local government, Unison
Duncan Whitfield, finance director, London Borough of Southwark
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