Thinking out of the box, by Anat Arkin

10 Jan 08
Business process outsourcing is growing rapidly in local government, as cash-strapped councils agree huge deals with private firms to provide a range of back-office services. Anat Arkin examines the reasons for this expansion and looks at alternative approaches

11 January 2008

Business process outsourcing is growing rapidly in local government, as cash-strapped councils agree huge deals with private firms to provide a range of back-office services. Anat Arkin examines the reasons for this expansion and looks at alternative approaches

Council staff at Milton Keynes used to take 90 days on average to assess housing benefit claims – a level of performance that didn't do much for customer satisfaction. It certainly didn't impress the Benefits Fraud Inspectorate, which described the council's revenues and benefits service as 'poor' in a 2004 report. But much has changed since then, with claims now taking an average of 20 days to assess, with 30% dealt with on the day they are made.

It's a dramatic improvement that Geoff Snelson, assistant chief executive of the council, puts down to 'Lean thinking', a methodology that helps staff focus on their goals and eliminate waste – in this case any activity that stops them from processing claims in the shortest possible time. Developed by Japanese car manufacturer Toyota, this way of working was brought to Milton Keynes by HBS, a provider of outsourced business processes recently taken over by the Mouchel group.

Snelson concedes that the council could have introduced Lean techniques without any outside help – had it known about them.

'Partnering an organisation that has a range of business interests gives you access to a wider knowledge base,' he says, adding that a private sector partner can also bring in the extra capacity needed to get initiatives off the ground.

The outsourcing deal that the council signed with HBS in January 2004, initially valued at £190m, covers finance, HR and IT, as well as administrative support for other services.

The aim was not so much to cut costs, although that was a consideration, as to transform services in an authority judged 'weak' and awarded just one star in its first Comprehensive Performance Assessment. It now boasts three stars and is apparently performing well, with the Audit Commission's 2006 report highlighting the partnership with HBS as a major factor in this success.

Although the early days were tough, with the two partners' expectations sometimes differing, they are now 'very much on the same page', says partnership director Sean Hanson, a Mouchel employee who sits on the council's corporate leadership team. An important element of the partnership is its duration – 15 years, which can be extended for a further three years before the contract has to be retendered. 'That means that if I'm investing in my staff or in facilities here, I can think about the longer term and put in processes that aren't about short-term gains but about improving services over time,' says Hanson.

While some local authorities contract out individual back-office functions, it is the broader-ranging deals, such as Milton Keynes', that account for most of the 20% growth in local government business process outsourcing in recent years, according to Kable, a firm that monitors this market. As these deals are worth on average almost £250m over a typical ten- to 15-year term, they tend to be about more than just streamlining council services.

Richard Marchant, local government strategic partnership director at Capita, which has a 17% share of the BPO market, says: 'There are usually some underlying objectives that we would sign up to over the term of the contract. These can be anything from creating jobs to regenerating an area, as well as delivering service improvements.' He cites his company's 'strategic partnership' with Blackburn with Darwen Borough Council, which over the past five years has helped to regenerate Blackburn town centre by bringing previously underused accommodation back into service, among other measures.

Capita has recently signed major contracts with Swindon and Southampton city councils and has several similar deals in the pipeline. Marchant predicts that the market will remain buoyant for the foreseeable future, a view shared by other providers and independent analysts.

Kable estimates that local government spends £1bn per annum overall on outsourcing, with BPO making up 80% of the current total at £796m – a figure expected to rise to £1.5bn by 2012.

Pressure on local government finance is clearly the main driver behind this growth. Councils' revenue grant settlements have been getting tighter. At the same time, they are expected to increase efficiency and meet residents' demands for better services.

'If you put all those together, you've got fiscal stress, which means local authorities have got to do more with less,' says Phil Pemberton, a member of the local government business development team at Vertex, which has been delivering back- and front-office services for Westminster City Council since 2001.

But why should private sector companies be any better at delivering good, low-cost services than local authorities themselves? Pemberton believes it comes down to simple things such as good systems for managing employees' performance or reducing absenteeism. 'You just come in with a new mandate to make things happen, so you are not overburdened by slow decision-making processes,' he says.

The sheer size of the major outsourcing providers also gives them an edge, says Bob Gogel, chief executive of Liberata, one of the eight companies that account for 75% of the local government BPO market, according to Kable.

Dismissing the old idea that the private sector is simply smarter, Gogel says: 'We can get efficiencies because we can create shared service centres and move people around more easily. We have more flexibility than a single local government entity would normally have, just because we are larger.'

Private sector companies can also bring much-needed investment to cash-strapped local authorities, recouping this from savings made through more efficient services. In Pendle, for example, Liberata invested £5m in a new business centre as part of a 15-year partnership with the borough council, an arrangement that also commits the company to creating 300 new jobs in the Lancashire town.

But some of these advantages can also be gained by local authorities joining together to set up shared service centres. Some are beginning to do this, with the government's encouragement. In Hertfordshire, for example, Dacorum and Watford borough councils and Three Rivers District Council are exploring the possibility, after an initial investigation concluded that bringing in a private sector partner would offer no obvious benefits.

Other authorities turn to the private sector when they are performing badly but lose interest in outsourcing once things start improving. That was the case with Walsall Council, which pulled out of a proposed partnership with Fujitsu Services at the last minute after achieving strong service improvements on its own.

Unions representing local government workers naturally prefer councils to go it alone. 'Our view is that public services are normally of higher quality and more effective when provided by the public body involved,' says Simon Watson, national officer for local government at Unison. He argues that problems can be sorted out more easily when services are directly controlled by democratically accountable councils.

The union is also concerned about employees' terms and conditions, claiming that while the Transfer of Undertakings – or Tupe – regulations provide some protection for those initially transferred from a council to a contractor, people recruited subsequently often end up worse off.

Some councils, however, have found ways of tapping into private sector expertise and finance without transferring their people and services lock, stock and barrel to external suppliers. For instance, Somerset County Council, a four-star authority, has just formed a joint venture company with IBM and Taunton Deane Borough Council. The new company, which Avon and Somerset constabulary is also expected to join shortly, will provide support services to its shareholders, as well as to other authorities in the Southwest wanting to buy them. But the county council and its partners will be seconding, rather than transferring, employees to the joint venture.

'We wanted to maintain a degree of control and to keep connected with our staff from a business continuity point of view,' explains Roger Kershaw, corporate director of resources at Somerset.

'The ethos of the authority wasn't just to float a number of its staff off.'

A similar model is already operating in Liverpool, where the city council set up a joint venture company with BT – Liverpool Direct – more than six years ago. Around 1,050 employees were seconded from the two organisations to this company, which now has around 15 external customers, including central government departments.

According to Andrew Bacon, client industry executive for local government at BT, the joint venture's success in attracting external business has enabled the council to fund services and initiatives it might otherwise have struggled to provide.

BT is involved in several other joint ventures, which are beginning to trade with each other, as well as providing individual services to smaller authorities.

If an authority's council tax payments or benefits claims can be processed at a shared service centre at the other end of the country, there is no technical reason why they shouldn't be dealt with even further away – in India, perhaps, where so much of the private sector's back-office work has already migrated.

Offshoring, however, is politically sensitive and probably accounts for less than 10% of outsourced local government services, says Stephen Biggs, BPO director at services company Serco. 'But the economics of it are pretty clear and the world is changing,' he adds.

It's changing in more ways than one, with Mouchel's takeover part of a wider trend for consolidation in a market that favours providers of a full range of services. Biggs points to Serco's own takeover of ITNet, along with that company's major BPO contracts with Hertfordshire and East Sussex county councils.

'The question now is whether some of the big, cash-rich Indian players will start to buy up UK operators,' he says.

Whether they do or not, business process outsourcing in its various – sometimes controversial – forms looks likely to remain a feature of the local government landscape for a long time to come.


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