Outsource Magazine – why doesn’t Whitehall like outsourcing?

We mentioned before Christmas that the new issue of the excellent Outsource Magazine contains an article I've written which asks why the UK government – the central Whitehall element at least - doesn’t seem very keen on outsourcing. That’s true even in areas such as back office, where the shared services concept has been promoted, but without much private sector involvement, let alone full outsourcing. And that's despite the fact that it would seem an obvious step in the current economic climate.

Well, I racked my brain and managed to come up with no less than seven ideas or hypotheses as to why this might be the case. You’ll have to read the whole article to see them all, but here are a couple to give you a flavour.

Political fear.... there is every chance that the Government is nervous about anything that could be seen to line the pockets of the big firms at a time when the “ant-capitalist” movement is gathering some force and there is increasing focus on inequality. The top executives of firms in the industry are also not known for their meagre salaries. Choosing one firm at random, who do a lot of public sector work, but we won’t name, the top 5 bosses in salary, bonus and exercised options earned over £6 million between them in 2009. And that was substantially down actually from the previous year. So at a time when public sector workers on £15K a year are being asked to increase their pension contributions and real wages are falling generally, the “fat cat” headlines would not be far away if high-profile work was transferred to private firms.

Bad experiences...The outsourcing industry has not covered itself in glory in the public sector to date, perhaps most noticeably in the field of back-office, shared service type programmes and outsourcing – an area that would seem an obvious opportunity for more cost savings. Many of the historic failures are probably down more to the public sector and how programmes were managed, rather than the outsourcing firms themselves. Unfortunately, the bad news does crowd out the good, and recent National Audit Office headlines – for example, about the Research Councils Shared Services programme - do not exactly instil confidence in the whole concept of outsourcing.

As I say, do read the whole article if you’re interested in the topic. Meanwhile, is the situation likely to change? Is a boom just around the corner? Should I sell my Serco shares or buy more? We're certainly seeing more action in the devolved sectors, local authorities in particular, which suggests that they are having to work harder than Whitehall to make the savings they need. Whereas central Departments seem to be hitting savings targets fairly easily, which suggests either there was plenty of slack, or they've just stopped doing things (and nobody has noticed much).

So if I'm right, don't expect to see much coming out of Whitehall in the near future.

I spoke to one major outsourcing firm recently who had a "very positive meeting about innovative outsourcing ideas” with a senior civil servant in Francis Maude's Cabinet Office team (not John Collington I should say). But when they followed it up with more direct questions along the lines of "so, what happens next", they got absolutely nowhere.

So... don't hold your breath, and if you’re a provider, I would be focusing on the devolved public sector rather than the centre.

Voices (7)

  1. Michael Poole:

    A common misconception Peter. Outsourcing back office functions happens during calm seas not stormy ones.
    They’re not outsourcing their corporate services right now because they have bigger fish to fry. If a Whitehall Department spends 1.5% of its (admittedly very large) budget on corporate services (a typical figure according to Cabinet Office benchmarks) and can save 20% of this through outsourcing, they’ll get a total saving downstream of 0.3% of their budget. Not to be sniffed at.
    But at a time when they’re being asked to make savings of 30% or more, this is peanuts. Do they really wish to disrupt their corporate centres when they’re dealing with rounds of redundancy, mergers, site closures etc?

  2. David Orr:

    after 4 years…..November 2011 (not 2010).

    “adapting” not “adapring”.

    “what way back” not “what was back”.

  3. David Orr:

    “Many of the historic failures are probably down more to the public sector and how programmes were managed, rather than the outsourcing firms themselves.”

    Peter, where is the evidence and case studies to back up the above statement? Outsourcing firms and providers that make big promises and commitments on contract signing, that are then not fulfilled, are not on the side of the angels are they?

    Here in Somerset, we are home to a spectacular failure in shared services for the so-called “Back Office” via IBM in a Joint Venture Company called South West One (SW1) that is 75% owned by IBM.

    I have the latest papers that show that Somerset County Council (SCC) paid IBM £50m for “transformation” (hate that in-word these days) that was mainly in the form of a very expensive SAP implementation for around 6,000 seats. SCC borrowed £30m in 2007 to pay for all of this. Procurement savings were predicted by IBM (after all due dilgence) to be £192m over 10 years.

    The SW1 web site still makes those claims: “One of the main drivers for creating Southwest One was formalised collaboration across the three organisations to radically transform the Procurement Service into a centre of excellence tasked with delivering savings of around £200M over 10 years on a combined annual spend of more than £500m.” Ian Conner, Chief Procurement Officer

    IBM built SAP in their Indian subsidiary in Bangalore. The implementation of SAP in 2008 was disastrous, well reported in the IT & National press and many problems remain over 3 years later. Public domain report by SCC on:

    http://www1.somerset.gov.uk/council/board9/2011%20December%208%20Item%209%20SAP%20Update%20Appendix%20A.pdf

    Research into those large Councils (Dorset, Derby etc) that in-sourced outside expertise to implement SAP and then handed over to in-house IT did the job for around £7m. Not £30m.

    It was reported in November 2010, 4 years into the contract, that cashable savings (of the £192m target) are just £7.6m! Yet IBM/SW1 operate “category-based” procurement using their own implementation of SAP?? SW1 were even awarded a prize for their procurement plans (before a penny was saved)! Was that CIPS?

    Add to the £50m charged by IBM (through SW1) for “transformation”: £4m to let the contract and form SW1, £3m for interest on the £30m loan and £5m to staff the contract management team (over 10 years) then you have the equation that:

    Costs to Date = £62m whilst promised savings are just £7.6m. Do the maths.

    Could that be in part blamed on an avaricious multinational company like IBM focusing on their profits (as their shareholders quite properly expect) and playing along with the idea that this was in any sense a partnership of equals?

    Go on Peter, look in depth at Somerset County Council, Suffolk County Council and Liverpool City Council and tell that oustourcing works.

    I believe that for any large organisation intent on changing & adapring that for agility People, Places (property) and IT need to be seen as strategic services rather than being lumped together as so called “Back Office”.

    Once these underpinning strategic services are outsourced (like in Somerset), then what was back is there from a failed or under-performing outsource?

    I look forward to your response, informed by research and facts & figures please.

    1. Final Furlong:

      David – very good. And you’ve done a sterling job digging out the facts (I’ve noted the FOI requests…).

      Still, IBM, and firms similar to them, are ‘recipients’. And it is their business to embrace these contracts (and to make money out of them). Still, Government likes to outsource its problems (and one should never outsource a problem…) in the belief that private sector will sort them out and hand back to them much more efficient (operating) models.

      I do agree that there is a prevailing notion that the private sector is more efficient (“they’re more ‘joined-up’ than we can be”) than public sector, but when one gently ‘kicks the tyres’ on some (but not all) of these large outsourcing firms, this notion rapidly deflates…

      1. Huhh?:

        Private sector’s no more efficient than Public. A cursory glance at Dilbert cartoons should tell you that…

  4. Final Furlong:

    In private sector, the success of outsourcing is 50/50, at best. Largely due to rushing the strategy piece and/or poor implementation (especially ‘poor planning’).

    In public sector, it’s 10/90, at best. Largely due to taking an eon to do the strategy piece (once they’ve completed the Policy piece…) and/or woeful implementation (especially ‘over-planning’). Only by, say, the 5th generation outsourcing of the same category does one see any real improvement, largely due to better understanding and management of risk, rather than doing everything possible to avoid it.

  5. bitter and twisted:

    Peter, you describe all sorts of problems with public sector outsourcing, yet still cling to the ideology that Outsourcing Is Good?

Discuss this:

Your email address will not be published. Required fields are marked *