Across the UK public sector, hard choices have to be made. Pet projects abandoned. Traditional expectations put aside. Redundancies announced.
For the next several years, at every level and in every service area, the public sector faces the deepest cuts in financial resources for 80 years. Whilst one can, politically and intellectually, challenge the government’s macro-economic policy – the fact is that most local government politicians, public sector managers and commentators are coming to understand (albeit slowly and reluctantly) that there will need to be radical solutions, including new approaches that, not long ago, would have been off the agenda for political or other reasons. That said, there is a consensus that different organisations must shape their own individual destiny. However, it’s vital that the totality of decisions are understood.
The business sector has for some time included the use of facilities and staff employed in international economies, such as India, as part of their cost-reduction and service improvement programmes. There are some examples of similar practice in the UK public sector – for example NHS shared administration services (over 30% targets have been agreed), National Savings and smaller elements of other administrative activities. However, this represents a very small proportion of the public sector activity.
It can be argued that much of the public sector’s financial and other administrative activities can be taken into an offshore outsourcing arrangement. These processes can be from the front office, like customer services and contact services (though in truth, there is evidence that voice related services are being repatriated in the financial services sector) to mid office, like ticketing and HR, to back office like financial administration and accounting, billing, payments , payroll and IT support.
Experience in the private sector and the limited experience in the public sector would suggest that offshore outsourcing typically provides real savings over a five-year period of 40% to 60% against similar UK-based in-house processes. EXL, a leading off-shoring provider to the private sector, claims these savings plus 15% service improvements.
Proponents of offshoring argue that there are other operational benefits too, including: greater flexibility of supply capacity; economies of scale based on shared services that can better accommodate seasonal peaks and troughs; secure resilience; and access to a more highly skilled labour force – for example, more graduates (over 75% in most Indian BPO centres); data security is as robust as it would be for an UK- based operation; and the services are likely to be based in modern, purpose-built premises of the highest international standards. Indeed, the Indian BPO offices that I have visited offered much better working environments than the UK public sector usually offers.
The favoured UK private sector offshore location is India – where language is less of a barrier than in some other countries. However, there is also UK offshoring to China, the Philippines, Vietnam, Brazil and Mexico. There is also some near-shoring to Ireland, Romania, The Czech Republic, Slovenia and Hungary. Although these locations offer greater cost savings to on-shore outsourcing, they do not quite match the offshore outsourcing locations cost base.
Cost inflation is growing in these countries but costs remain below those in the UK. There is rising competition for labour but in economies such as India, there are a significant number of new graduates looking for this kind of work leaving university every year.
So if offshoring is so financially and perhaps operationally attractive, why has it not been embraced as a standard option by the UK public sector? And what are the wider implications?
There are many reasons including inertia, a sense of 'we don’t do that', and probably little understanding of the actual operational and financial implications. There are also serious concerns, whether evidenced or not, about data security – though these can be overstated and indeed there are notorious examples of data being lost within the UK. There are particular concerns that the public would be uncomfortable with their data being sent abroad – though again, many banks already use international data centres. More significantly, there are concerns about voice services and communication soft-skills – and as noted earlier, there has been some repatriation of banking and insurance contact centre services of late and increasingly, corporate advertisements that boast about UK-based centres.
However, the overriding reason that the public sector has been slower than the financial and other private sectors to consider off-shore solutions relates to the implications for employment and industrial relations in the UK. Interestingly, when Siemens reached agreement with the then Labour government and the Public and Commercial Services union to offshore elements of the National Savings back-office services, commitments were given to: avoid compulsory UK redundancies; re-invest elements of the savings in UK staff development; and to work with the trade union during the transition period. Given the scale of the public expenditure cuts now prevalent across the public sector, such agreements might be more difficult to secure.
Many local authorities have ‘maximising local quality employment’ as a key strategic objective. Shifting work offshore would be counter to this.
If as a result of offshoring there was to be a net increase in local unemployment, there would be financial and economic implications for the wider public sector and local economies. Tax revenues would fall and benefits expenditure would increase. There would also be less spending in local shops and the local service sector. These factors should not be ignored.
However, some local authorities such as Westminster and Hounslow already have services such as benefit administration delivered from locations in the Northwest of England – so the principle of delivery from outside boroughs has already been breached. Other public agencies have used offshore provision to address a short-term local capacity issue – for example, the Criminal Records Bureau.
So is the next step to move more delivery or elements of it offshore for the long term?
When and if a local authority or any other public sector body is considering any service delivery option, it needs to evaluate the full social, economic and financial cost benefits. All too often, they do not. Consideration of offshoring should, I suggest, be based on an approach that is holistic and not only focused on just one public agency. It must take account of employment and total costs to the UK public purse. Accordingly, the government has a role to play in addressing wider national economic and financial interests.
Over the next five years, the pressures of public expenditure cuts will be massive. The demand for resources to be diverted to frontline services will increase – and thus offshoring could rise up the agenda. If it does, my advice to public commissioners, procurers and politicians is:
- be open and avoid offshoring by stealth
- fully understand the options and evaluate them – consider all options including local and UK-based ones, and avoid jumping for any one solution without considering the full range
- ensure that this evaluation takes into account the short and longer term wider social, financial and economic implications for the nation and the locality as well as the agency
- fully consult and involve service users and the wider public
- fully engage and consult staff and their trade unions
- seek agreements with staff and trade unions similar to that reached between the Treasury, Siemens and PCS
- identify the services/activities that might be in scope and their interface and balance with the indigenously based service
- ensure that any offshore provider and its supply chain have excellent workforce practices and pay and conditions (perhaps recognising local trade unions), good working environments and effective management
- understand the full scope of the potential supply market – not just UK-based companies with offshore capacity but also international and offshored based businesses – and their track record
- ensure that the control on location and the consequential handling of workforce and service issues remains with the public sector and not the provider
- only select locations with acceptable human rights and political conditions
- ensure that there is a considered and resourced transition plan
- consider independent advisors to broker the views of the stakeholders, and to identify and evaluate the options
Globalisation has significantly affected the UK manufacturing and financial services industries. Can public services consider themselves exempt and protected from such trends? I suspect that pretending that offshoring options don’t have to be considered is not sustainable – but there does have to be an informed debate that focuses on the wider national and local economic and social impact.
Most critical of all, decisions must be taken openly and based on what will best secure holistic long-term public value – not simply what might be the cheapest for an agency at one moment. Government cannot and must not abdicate its responsibility to ensure fairness and wider social and economic gaols are addressed.
John Tizard is the director of the Centre for Public Service Partnerships
