Look before you leap

12 Jun 09
In a difficult financial climate for public services, the offer of a private sector solution might be tempting.
By Dave Prentis

9 January 2009

In a difficult financial climate for public services, the offer of a private sector solution might be tempting. But, Dave Prentis argues, any apparent savings come with hidden costs, including more work for public bodies themselves

We are entering a very challenging time for public services. Economic instability and rising unemployment will increase demands on service providers just as central government funding slows down as a result of the 2007 Comprehensive Spending Review. And it’s not going to get any easier. After 2010, budgets could be squeezed even harder as the Treasury tries to balance the books. In these circumstances the sales pitch of the outsourcing industry will no doubt tempt many public sector commissioners. ‘Leave it to us’, they’ll say. ‘We’ll take those worries off your mind, at a price that suits your budget.’

But the commissioners would be well advised to think very carefully before signing on the dotted line. For there is mounting evidence that outsourcing ‘solutions’ typically fail to live up to their promise and often turn into major headaches.

Deloitte, which conducted a major review of US outsourcing experience across the public and private sector in 2005, warns that ‘outsourcing is an extraordinarily complex process, and the anticipated benefits often fail to materialise’. It introduces ‘increased cost and friction into the value chain, requiring more senior management attention and deeper management skills than anticipated’.

The supposed risk transfer is often illusory, with organisations ‘discovering that their contracts will never fully protect them against customer damage and business loss caused by service disruption’. That’s why, according to Professor Mildred Warner of Cornell University, there is a global trend towards de-privatisation of local service provision, as authorities realise the value of retaining strategic capacity in major service areas.

Here in the UK, a similar pattern is emerging. The Audit Commission’s review of strategic service delivery partnerships found that ‘purported benefits from economies of scale and transferred learning between sites have been slow to emerge’. Some deals ‘have proved inflexible, hindering councils’ ability to respond to changing circumstances’. A few have already had to terminate their agreements completely, incurring substantial additional costs. Bedfordshire County Council had to pay out several millions of pounds to end its disastrous contract with Hyder Business Services.

There are also difficulties in the health service. A new report by the Office for Public Management, commissioned by Unison, found that ‘little hard evidence is available to suggest that outsourcing impacts positively on value for money or quality of care’. In many cases the impact has been demonstrably negative.

OPM’s assessment of the NHS Shared Business Services initiative is particularly damning. Although promoted as a way of reducing the need for ‘back office’ staff, trusts have found that the system was so poorly suited to their needs that ‘no such cost savings have been possible’.

The extra costs of ensuring contract compliance can offset expected savings. In the words of one trust, ‘we have paid more for the system and we have had to keep the staff in the finance department to make sure we are getting what we want out of the system’. Even with this extra cost and effort, ‘the strong consensus among interviewees was that quality has deteriorated in the trusts concerned rather than improved’.

Some hospital trusts have been wooed by companies promising free trials and huge financial savings if they allowed medical typing to go abroad. But, as one consultant put it, ‘it might have saved secretarial time, but it meant a lot of extra work for me. I had to correct facts, spelling and grammar. And, in some cases, I had to get patients’ notes out and dictate letters for a second time’. Many trusts have stopped outsourcing; it was simply more efficient for the medical secretaries to do the job themselves than to send it abroad, wait for its return, then check it and marry it with the patient’s notes.

But the great danger of outsourcing is that by the time problems such as these become apparent, it is often too late. So, having signed away control on the basis of unrealistic promises and expectations, the commissioning authority is left with an uncomfortable choice. Either it lets the contract fail, with all the additional costs and disruptions to service that can involve; or it throws more and more money at the problem to try to keep the show on the road. These risks could be exacerbated by the recession, as providers collapse or withdraw from the market, thus narrowing choices and pushing up costs.

So how can all this be avoided? Local authorities, health trusts and other public bodies need to look at what they want to achieve. Crucially, that means talking to the users and communities they serve about their needs and aspirations. It also means involving their own workforce. Because it’s the staff that keep services running, who know most about what the problems are, and where the opportunities for improvement and innovation lie.

Trade union branches have a pivotal role to play in this process. The independent support and advice that the union offers is what gives staff the confidence to participate. Sometimes this might involve robust debate and hard negotiation. But overall the benefits of effective staff and trade union involvement for any organisation are enormous. A wealth of international evidence, from across the public and private sectors, shows that the energy, flexibility and creativity this unlocks can bring about huge gains in performance and productivity.

In the health service, it has been shown that trusts with the highest levels of staff involvement have been most effective in improving patient outcomes, from shorter waiting times to lower mortality rates. And in local government there are outstanding examples of councils who have beaten all efficiency targets by letting their in-house workforce lead the change process within a framework of security and mutual trust negotiated with the union.

This is why Unison sees a key role for the NHS social partnership forum in the coming period, as trusts look to protect staff morale and service quality in a tough financial environment. It is why some local government branches have negotiated protocols that commit employers to informing and consulting staff and trade unions as they look for ways of improving services and making savings.

Unison believes that employers who get the best out of their own workforce, who look seriously at in-house improvement plans and include in-house bids in any tendering process, will find they can avoid all the extra costs and inherent risks of outsourcing.

But where external providers are used, we think it is essential that staff and their representatives, along with users and all relevant stakeholders, have an opportunity to shape procurement plans, scrutinise bids, and play a part in the monitoring of contracts. And if we are to prevent short-term, cost-cutting measures that compromise long-term quality and sustainability, it is vital that employment standards are written in to outsourcing contracts. That means comparable terms and conditions, access to a quality pension scheme, and good practice around training and consultation.

We’re pleased to report that we have made good progress with some of the major private contractors in securing a fair deal for staff working in outsourced services. But regrettably, implementation and extension of agreements to eradicate the two-tier workforce remains unfinished business. The resulting loopholes mean outsourcing is still used as a device for undercutting decent employment standards. This has to be a concern for anyone who cares about the ability of our public services to meet the challenges ahead.

The financial crisis showed what can happen when everything is left to unregulated market forces and public authorities abdicate their responsibility to secure the public interest. Excessive reliance on private providers has already exposed public services to similar risks, for which the taxpayer always ends up picking up the bill.

This should be a time when we reappraise the role of a more active public sector that can steer us through these difficult times towards a more balanced economy and a more cohesive society. And that means using its powers of provision and procurement to ensure that we retain, invest in and empower the workforce we need to deliver the public services that must be at the heart of that new settlement.

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