9 January 2009
The one part of the public sector that has resisted outsourcing is central government. Would-be suppliers need to take a different approach to change this, says Rod Aldridge
Outsourcing has been instrumental in transforming many organisations for the better. In the private sector, for example, life and pensions companies have put it centre stage, restructuring their entire back offices to be more competitive in the market place. In the public sector, increasing numbers of local authorities are using this approach to improve efficiency. But central government is most definitely not.
The reason for this lies not at the door of civil servants but with the solutions being offered by the private companies involved. The fact is that, even after more than a decade, the intellectual argument has not been won for outsourcing. Bid opportunities in central government stand at the lowest level ever while they are buoyant in other markets.
There are no signs of this changing, irrespective of the need to transform back-office services to release more money for frontline services. Most civil servants and politicians still believe it is easier and safer to use management consultants for short-term support than to go through what they see as the more risky and expensive option of a long procurement to choose a partner for potentially ten years.
My fear is that in the current financial climate some might now consider outsourcing services simply for cost cutting. This could see the return of short-term, price-driven contracts that look more like the discredited Compulsory Competitive Tendering of the 1980s than the best of outsourcing partnerships. But to enter into an agreement with only cost in mind would be a huge mistake. Reducing costs should be a natural priority, reviewed constantly by managers and linked to improving productivity, rather than a knee-jerk reaction when times are tough.
The reason for embracing outsourcing is to gain partners that are specialist providers. This enables key personnel to focus on core activities and to transfer some risk. The partner can bring project management capability, economies of scale through existing business and IT infrastructure, a depth of operational delivery skills, innovation and levels of accountability for performance improvement. Providers might also be able to offer upfront capital funding with repayment over the life of the contract, and annualised savings that can help meet short-term financial pressures
Sir Peter Gershon’s renowned 2004 report, Releasing resources to the front line, documented the extent of the inefficiency in government departments caused by paper-driven processes, over-staffing and duplication. It spoke of a gross reduction of 84,000 posts in administration and support services by 2008 and pointed to more than £20bn of efficiency savings by 2007/08. While the numbers can be challenged and many will claim that the savings have been achieved, the extent of the change needed cannot be underestimated.
However, disappointingly, the culture of resistance to address this still prevails and the momentum for transformational change presented by the report has been lost.
A further example of the lost opportunity to involve the private sector is the shared services agenda. The Cabinet Office has estimated that central government and local government could save £1.4bn annually through greater sharing of corporate services. But despite its elaborate and extensive consultation with support service companies, government departments effectively decided to go it alone and to develop these centres themselves. The feeling was that these could then eventually be outsourced but that government would achieve all the savings first rather than potentially passing these on to the private sector to benefit from.
The problems with this decision were illustrated by the report of the Commons Public Accounts Committee, Shared services in the Department for Transport and its agencies, published on November 17. The department decided to go it alone rather than select a service provider to work with. It initially estimated that it would cost £55m to set up the programme and the benefits over the first ten years would be £112m, yielding a net benefit of £57m. Current forecasts show the programme will cost £121m, benefits over the first ten years will be £40m and the net cost to the department will be £81m, thus effectively missing its target by £138m. The report refers to inexperienced project management, unreasonable timescales and a lack of economies of scale to be able to match performance measures achieved in the private sector.
Such specialist skills and capacity would have been available in abundance from an outsourcing partner and would have avoided the need to engage consultants to help or to appoint a separate IT provider. The major point is that despite having the skills and capability, companies were not formally invited to bid and therefore were never evaluated against the in-house option.
So how do we move on from here? I believe that progress can be made only if the traditional outsourcing model is fundamentally changed to reflect the real concerns and barriers to bringing in the private sector. Many in central government still distrust these contractual relationships and believe that the allocation of risk and reward is wrong. The term partnership is too loose and not robust enough to enable the parties to maintain shared objectives over a long period. The model has had its day and companies need to rethink it. While it might work for them, the customer, particularly in central government, clearly does not find it sufficiently compelling.
One answer would be to develop joint-venture structures. The government or local government would hold an equity stake and a pre-determined formula would set out the exit routes for both partners. All stakeholders would be represented on the board overseeing the venture, including unions. There would be a non-executive chair if the venture was of sufficient size to warrant it. Employees who transferred would be given the opportunity to hold a stake in the venture, similar to that on offer to employees in publicly quoted companies. Open book accounting would be a prerequisite, and not as now, used as a sales tool to create competitive advantage over those that are not prepared to declare the profits they will make. All parties would need to sign up to shared outputs and performance measures, along with six-monthly performance updates for all stakeholders.
This would create a structure of trust and common goals rather than mistrust and disconnected objectives, as sometimes happens now. This structure would also allow any additional consultancy support commissioned for certain transformational skills to be more effectively managed than now, since it will be linked to measurable service delivery targets and efficiency improvements. Equally, any controversial aspects of change, such as offshoring, could be discussed more openly.
What would go hand in hand with this change would be a more sensible approach to procurement, from both bidders and those awarding the contracts. A ‘loss leader’ rarely becomes a ‘profit generator’. There are cases of companies signing up to deals where they will make a loss for at least the first three years of operation and then only modest profits going forward. This means that when things do not go to plan, as is inevitable, there is no money in the contract to resolve the issues. This style of bidding might give the instant euphoria of winning but once realism hits, it merely provides a major long-term operational headache for both parties. In some cases, it has even caused the overall financial failure of the company itself.
The bid process therefore needs to include greater due diligence of any potential partner, with a full review of the financial stability of the company undertaken before the contract is signed. In the current financial climate, this is even more vital. Those letting contracts must also spend more time understanding the underlying philosophy of bidding organisations, including the directors’ policies on issues such as staffing, investment and operational performance. These are vital since the failure of a contract brings about a loss of reputation to all concerned and affects the development of the market.
Another deterrent to the market developing is a shortage of suitable companies on a bid list to test out alternatives. For example, some companies construct consortiums to comply with the bid requirements, which might answer the need for a broader service offering but loads risk on the contract going forward. Others are either too small to offer economies of scale or do not have the financial robustness required. Currently, the company that is the market leader is very much the market leader by some way. The industry needs to address this through mergers and acquisitions to propel others into the circle to be able to bid for large, complex central government contracts.
This will create greater competition and greater choice. Equally, it will increase the intensity of the need to engage sooner with potential partners rather than to continue to act in isolation or to slavishly follow traditional solutions.
