Why ‘insourcing’ should always be considered

26 Apr 18

Councils are increasingly looking to ‘in-house’ services that previously been outsourced. Finance directors intending to do this need better information about contracts, say David Walker and John Tizard.

Finance professionals across the public sector are increasingly alert to the need to rethink outsourcing. Conservative as well as Labour councils are ‘in-housing’ services previously tendered to companies. The likely results of next week’s council elections in England will up the ante.

Even before the collapse of Carillion and shareholder panic at Capita and Interserve, questions were being asked about what is now a dated model of cost slashing contracting. There’s as much unease at the practical limitations of old-style outsourcing as objections in principle to inserting profitmaking into public service – a complaint now being loudly voiced by Jeremy Corbyn and the Labour leadership.

Contracts reduce financial flexibility at a time when budget makers need to be fleet of foot: councils and other public bodies can’t afford to be locked into longterm, unvarying contractual schemes. The old doctrine of risk transfer now sounds like deceit: the state retains ‘last resort’ responsibility and the reliability of contractors cannot be guaranteed.

We spoke at the recent CIPFA Public Sector Leaders’ Retreat at Warwick University, drawing on our recent Smith Institute pamphlet: Out of Contract: time to move on from the ‘love-in’ with outsourcing and PFI.  Our message to finance professionals is that, with revisionism in the air, they have a central role in shaping the future of service delivery arrangements.

‘Insourcing’ is no easy option, even if contracts are either reaching the end of their life or contractors have not performed well. Yet it can create public value. The public sector has been hollowed out during the years of austerity and rebuilding capacity will take time and resource. But inhousing must now be an option and finance directors can offer strategies and advice to ensure both elected members and officer colleagues have both the information and conceptual tools.

CIPFA is uniquely placed to steer today’s conversation, because its members span health, police, local government, the devolved administrations and Whitehall and can mobilise precious comparative data and experience. We are urging the preparation of a UK-wide ‘Domesday Book’, listing significant public service contracts across all sectors. Next comes evaluation of contractor performance, which means sharing data and abandoning old norms of ‘commercial confidentiality’. CIPFA and the other professional associations might create a standard for independently auditable ‘open book’ accounting and help fashion tools and systems to test contractors’ or potential contractors’ ethical standards, employment record, tax and remuneration practices, governance, ownership and business models.

A key point is that one part of the public sector should not seek cost savings at the expense of another or another part of the same organisation. With outsourcing, it’s vital to consider unintended consequences for the wider fiscal and community well-being. If a contractor cuts jobs or pay, there may be increased tax credit or benefit payments, hitting the Department of Work and Pensions budget; reduced employment or deskilling may harm the local economy, pulling down council tax and other local authority revenue, as well as damaging communities and households and undermining council ambitions towards place shaping.

The Treasury insists on this point. In its Green Book it says financial decision making must be based on ‘relevant costs and benefits for UK society overall, not just to the public sector or originating institution’. This includes being aware of contractors’ tax profiles. In Managing Public Money, the Treasury says public bodies ‘should not engage in, or connive at, tax evasion, tax avoidance or tax planning. If a public body ‘were to obtain financial advantage by moderating the tax paid by a contractor, supplier or other counterparty, it would usually mean that the public sector as a whole would be worse off’.

At the CIPFA retreat debate was lively. Some finance directors still believe in traditional public service outsourcing and seem to discount the effect of changing political mood. But there is much that they – and probably only they – need to do. First and foremost is better information. Not all councils and other public bodies have full schedules of existing contracts – their value, life span, performance, break clauses and/or flexibility for significant renegotiation.

Public bodies including councils should review their contracts and need criteria for renegotiation or termination, including value for money (defined broadly to include effects on public revenues and community wellbeing at large) and public value tests. Politicians face strategic ‘make or buy’ decisions, for which they need 360 degree analysis of both the long-term and short-run effects of outsourcing, not just on the balance sheet but the health and wellbeing of communities and places. Such strategic ‘make or buy’ decisions need to be based on evidence and full analysis. The default should be publicly managed services and other delivery models need to be tested robustly and only pursued when this in the public interest.

To anticipate in-housing, finance directors need to look closely at contract management – during the life of a contract and at its end as well as in contract letting as part of their professional duty of ensuring local services are delivered with maximum efficiency and effectiveness.

They have both a duty and opportunity to advise politicians and others on how they can bring services back in-house and manage them in the public interest.

Read PF's write up of CIPFA's February round table debate on the future of public service outsourcing here

  • David Walker & John Tizard

    David Walker was a director of the Audit Commission. John Tizard is a former director of Capita and leader of Bedfordshire County Council.

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