Checking out: outsourcing under the spotlight

The collapse of Carillion has put public sector outsourcing under the spotlight. Could going in house replace it or are there alternatives?

 

Back in 2005, Southwark Council’s customer services were not in good shape.

Residents would ring the council and, says Fiona Colley, cabinet member for finance, modernisation and performance, “go bouncing around the organisation because we didn’t have a single point of customer service”.

When the council decided to outsource the customer contact service to Vangent, it was, says Colley, a “big positive change”. The long-term aim was that the contractor would encourage people to contact the council in more cost-effective ways.

It didn’t work out like that, however. The council found itself in an inflexible contract with a provider that had intended to expand in the customer services market, enabling it to deliver greater efficiencies, but in practice failed to do so. Despite a large upfront capital investment, Colley says: “We found ourselves in a contract where our contractor got paid every time somebody phoned them or came in a contact centre, and therefore was doing very little to deliver channel shift or reduce the number of times that people phoned up.”

Luckily, Vangent’s acquisition by General Dynamics gave the council the opportunity to terminate the contract two years early and, in 2013, customer service came back in-house. The decision has saved Southwark £4.35m.

The council’s experience is far from unique.

Despite the promises that a private sector organisation can save money, improve services or both, the reality can be very different. Islington Council, for example, found that by bringing previously outsourced services back in house, it could save £3.8m a year on housing and £3m a year on waste, street cleaning and grounds services. Liverpool, Essex and Somerset councils have all brought some services back in house in recent years.

When Carillion collapsed in January, with debts of £1.5bn, it seemed to signal the end of a longstanding public sector infatuation with private companies. Two other outsourcing giants, Capita and Interserve, are also experiencing financial difficulties. The appeal of a resurgent Labour Party rediscovering its left-wing values, coupled with public disquiet about the use of private firms such as Virgin Care to provide NHS services, suggests the tide may be turning.

So, is it the end of the road for public sector outsourcing? Is the model definitively broken, or does it just need some love and attention? And, if more public sector organisations walk away from outsourcing arrangements, what would take their place?

Andrew Cumbers, professor of political economy at the University of Glasgow, says that in the UK, the deregulated nature of the outsourcing market has allowed “a lot of private companies to use these public sector contracts as big deals for leveraging profits and turning them into financial vehicles to make money, rather than being focused on public service delivery”.

Carillion is one of a number of outsourcing firms, he notes, that began life in one sector but transferred its commercial ethos to other sectors that required different skills and values.

Furthermore, Cumbers argues, there is “no real-world empirical evidence that private sector firms run things better than public”.

Many privatised firms that appeared to deliver performance improvements often did so on the back of investment immediately before privatisation – the rail industry being a notable example, he says.

Asked to name areas where outsourcing has caused particular problems, nearly everyone mentions social care.

Samuel Low, head of policy at Unison, describes it as a “really tough area” where “online auctions for individual care packages are regularly won by contractors and agencies at rates so low that they simply cannot comply with minimum wage regulations. This illegality squeezes pay, leads to rushed 15-minute care visits, unpaid travel time, and the constant chopping and changing of carers for many, mostly elderly, people.” Cat Hobbs, founder and director of anti-privatisation campaign group We Own It, agrees: “Social care has gone from being primarily public sector to primarily private, and what that means is that caseworkers are being squeezed to the point where they don’t have time to look after vulnerable older people.”

Long visits add nothing to profits, she notes. “If your service is about giving some time to caring for people, how is that compatible with making the biggest profit that you can?”

Hobbs makes a distinction between goods and services – “we’re not saying the government has to manufacture its own paper clips” – but argues that most public services are, in one way or another, concerned with looking after people. “You have to question whether making a profit for shareholders is a useful driver in that context,” she says.

In January, the Smith Institute published a report arguing that it was time for the public sector to move on from the “love-in” with outsourcing and the private finance initiative. It recommended that public delivery should once more be the norm in government, policing and the NHS, and that a new regulator be created to scrutinise public contracting. A “Domesday book” to provide data on outsourcing and PFI deals that public bodies could consult before making a decision was also urgently needed, the report said.

John Tizard, an independent strategic adviser and co-author of the report, points to several problems with the current use of outsourcing.

One is that many contracts are long term, making it impossible for clients to extricate themselves without a significant financial penalty.

He argues too that public sector organisations entering outsourcing agreements to save money have failed to take into account of the cost of specialist contract lawyers – an essential element in drawing up a contract – and of service experts who can “evaluate quality of performance and change”.

Another hidden cost is the knock-on effect on the local economy if an outsourcing organisation saves money through redundancies and lower wages.

It’s not surprising, then, that bringing services in house can lead to improvements.

Southwark’s private sector woes extended to a poor experience outsourcing its revenues and benefits services to Liberata, leading to it having the lowest council tax collection rate in London.

Liberata disputes this account and points out that it continues to work successfully with the public sector. In 2011, Southwark brought the service back in house, resulting in a huge increase in revenue for the council.

Within the past few months, Southwark has also brought IT services back in house after its contract with Capita had run its course.

A more optimistic view of outsourcing, however, would suggest that the model isn’t intrinsically flawed. Instead, what is required is a shift in focus from cost-cutting to scrutiny and transparency.

Tizard argues that the public sector has become much more efficient and that, while early outsourcing contracts might have brought some economies, most of the “low-hanging fruit” is no longer available. So a public body’s desire to keep driving down costs at each contract renewal is unrealistic.

“There comes a point when you can’t stretch the elastic,” he says.

Kerry Hallard, chief executive of the Global Sourcing Association, agrees.

Thirty years ago, outsourcing was principally about delivering cost savings: now, she says, it should be about “added value, flexibility, innovation”.

She has an unlikely ally in Unison’s Low, who says: “Public contracting should be done on the basis of quality, as it is in the rest of Europe and in many North American cities, not the lowest cost as it usually is here.

“That means setting out pay and conditions in the initial tender, based on the internationally agreed approach at the United Nations known as the fair wages clause.”

While the UK government was the first to adopt this approach, he says, it then abandoned it in 1983.

Ed Mayo, secretary general of Co-operatives UK, would like to see a requirement that private sector contractors have Fair Tax Mark accreditation, which confirms that the company is paying the right amount of tax, and would help to ensure “that the level playing field wasn’t being distorted at the expense of the taxpayer”.

He points out that Carillion set up a front non-profit company, Cultural Community Solutions, to manage outsourced library services and enable Carillion to pay less tax.

Hallard firmly believes that the outsourcing model isn’t broken. She sees Carillion as something of an outlier, with blame for its failure largely resting on the company’s poor management of its books. There is plenty of opportunity to do things better, she says.

“On the whole, the government is a really unintelligent customer for the outsourcing sector and I think the fact that we’re now going through a scrutiny of how the public sector buys and manages its complex service arrangements is a good thing, because they’re not buying or managing them incredibly well in that many instances,” she says.

GSA’s research has found that when outsourcing arrangements fail, in 85% of cases this is down to poor relationship management. Both customers and service providers need to take a more mature approach to making the contract work so that there can be some flexibility if requirements change, Hallard argues.

In poorly managed contracts, new proposals and costs have to be drawn up every time a change request is made. “It’s about having a really strong cultural environment, being grown up when things aren’t working, and sitting around a table – not getting the contract out and hitting your supplier over the head and saying something’s going wrong,” she says.

Even Southwark hasn’t completely turned its back on the private sector – but its approach now is that, every time a big contract comes up, it considers the merits of both using in house services and outsourcing.

Leisure services are outsourced and, says Colley, the contractor is both providing a better service than the council could and “delivering great savings”. Outsourcing works best, she believes, in areas where the council lacks expertise. In areas that are core to the business, such as collecting council tax, then having proper control is “vital”.

There is also a third way.

Charities and social enterprises often have expertise that public sector organisations lack but are not driven by the need to create value for shareholders.

Cordant, for example, a company providing technical, recruitment, security and cleaning services, became a social enterprise in 2017, offering services to the NHS at cost rather than for profit. “At best,” says the Smith Institute report, “charities and social enterprise can innovate and experiment, doing things that councils and public bodies can’t.

They can reach and involve communities and people alienated from or missed by public bodies.”

Good examples abound.

Mayo cites the Foster Care Co-operative, a non-profit fostering organisation that has a placement stability rate six times the national average and an excellent track record of children leaving to go into further education or employment.

The particular advantage of the co-operative approach is that it takes a long-term view, aiming to place children in foster homes where they can stay for several years.

Similarly, Choices4Doncaster is a social enterprise made up of local care organisations that uses the economy of scale from being part of a cooperative to bid for contracts to provide, for example, support to elderly and disabled people.

The charity Core Assets has a successful contract with Birmingham City Council to offer intensive support to foster carers and their foster children, keeping children out of residential care for longer, and saving the council money in the process. Although it’s an outcomes-based model – the council only pays if children are kept out of residential care – it is financed by a social impact bond, which means that private investors bear all the risk. A similar approach, which involves working with vulnerable families to keep at-risk children out of care, is now being adopted by five London councils.

Few people believe that all public sector services should be brought back in house. But there does seem to be a growing feeling that there are some places where the private sector simply does not belong. That includes services involving people, argues Mayo.

“Fundamentally, there is a complexity to services such as social care that you simply cannot capture in a contract,” he says.

“If you set up the incentives as about essentially finance, if you’re contracting to a company that is owned by investors and therefore operating to that calculus, then you’re always going to be led astray.”

This article first appeared in Public Finance.

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