Public sector outsourcing – why it may continue to thrive

In part 1 here we gave seven reasons why the major outsourced service providers to the UK government might find that 2013 was the peak of their success. Let’s look today at the counter arguments – why their success and growth may continue.

1. The sheer reach and power of these firms is huge. They employ ex Ministers and ex top civil servants. They have contacts everywhere on the inside of government. And their capability is broad and deep – they can do things that very few other firms can do – look at some of the problems that have emerged when business has been moved away from them.

2. Every time another well-meaning ‘initiative’ is introduced by government – paternity leave, open book accounting, freeing up staff to join the territorial Army – it makes it harder for small firms to compete with the big boys, with their armies of HR advisers, lawyers, government relations  managers and so on. Despite good intent from a succession of governments, it isn’t easy being a small supplier working with government and it seems to get harder every day.  (With my consulting hat on, we’ve seen a great example of that recently – a change in procurement approach that has proved a nightmare for small suppliers - more on the topic one day perhaps)!

Now we’re getting into the area of the public sector’s dirty little secrets. And with apologies to all my friends in that sector, we need to be honest about why outsourcing can still look like a good proposition to many public organisations.

 3. Labour arbitrage can still be significant. There was a real moment of irony in last week’s government Public Accounts Committee (PAC) meeting. Margaret Hodge, the Chair,  raised the issue of a G4S contract for Lincoln police where the supplier were replacing staff who were on £26K with newly recruited staff on £19K (Hodge said £17K but she misquoted the FT article that first reported this).  One worker said she wouldn’t do the job for £19K –“I could get that stacking shelves at Tesco,” she claimed. Tesco Lincoln must have a VERY interesting pay scale...

But back to the PAC  - this reduction in pay was seen by Hodge apparently as a bad thing - but you could see the top procurement guys Crothers and Kelly thinking, "well, Ms Hodge, how do you think outsourcing works? And how else is the public sector going to save all the money we need to, because you politicians failed to run the economy properly"? Well, I was thinking that anyway.

So, private firms can pay market rates, which in many parts of the country and for certain jobs  are – arguably – well below public sector wages.

4. Pension liabilities are killing many public bodies. Annual contributions of 20, 30 or even 40% of salary are not unusual just to stop deficits getting worse.  Now I know, given TUPE, service providers take on many of these liabilities – but over time, they can reduce the costs of the schemes much more easily than the public sector. And if you can cut wages over time too...

5. Linked to this is efficiency. The public sector is still horribly inefficient in too many areas. Sorry to Dave Orr and others, and I don’t mean in every organisation or case, but I have worked in some public bodies where productivity was, in all honesty, probably half that of a comparable private organisation.

Factors such as the impossibility of sacking people, the time wasted over endless training courses and performance reviews (the process for which changes every other year, causing the need for more training...), time off for every conceivable issue, family or health issues, being a JP, a councillor or in the territorial armed forces (the latest great wheeze), a sympathetic view of work / life balance...

Look, I know much of this is admirable, I wanted my daughter to become a civil servant simply because it is such a great job for young woman who may want to combine family and career.  But it isn’t necessarily efficient. So the private sector knows that they don't have to be brilliant to run many tasks adequately with 10, 20 or 30% less resource than the public sector needs.

6. Take these last factors together and then consider the continuing squeeze on public funds, which seems set to continue for most of the my lifetime. The constant pressure on costs won’t go away, so as long as outsourcers can offer savings – and I know, often they aren’t really delivered, but people have short memories, then desperate public organisations will respond.

So, in part 1 we presented the case for 2013 turning out to be the peak of the outsourced service providers’ success. Today we’ve presented the opposite case, and I’m really not sure which way it will go. My suspicion is that their growth will slow, but 2013 won’t turn out to be a real change of direction moment. The drivers in their favour are just too strong.

But ... what do you think?

Voices (7)

  1. Trevor Black:

    What’s all this talk about consensus? Consensus is the process when people vote for a political party during an election, after which it has no relevance. Post election, consensus is replaced by contempt and a two fingered salute to the electorate. The success of this strategy is due to all political parties knowing that the electorate suffer from mass amnesia. I believe the process is called a psuedo-democracy!

  2. John Diffenthal:

    @sam

    Michael Crichton – Caltech lecture titled Aliens cause Global Warming: “Let’s be clear: the work of science has nothing whatever to do with consensus. Consensus is the business of politics. Science, on the contrary, requires only one investigator who happens to be right, which means that he or she has results that are verifiable by reference to the real world. In science consensus is irrelevant. What is relevant is reproducible results. The greatest scientists in history are great precisely because they broke with the consensus.”

    Coming back to your argument sam, the problem they have in PPE is a lack of reproducible results …

    1. RJ:

      And surely the other problem with PPE is the two Ps in it: tying up politics and philosophy with supposedly mathematical and quantifiable arguments serves to highlight how closely economic standpoints are tied to opinion and dogma. Politicians tend to ignore pure economical arguments for what will make a good soundbite and will “ring true” with voters, even where it goes against the consensus of genuine independent expertise (viz. Michael Gove)

  3. Roger Conway:

    This ‘bottom line’ Thatcherite argument totally disregards the concept that everything in an economy eventually rests at the door of ‘Joe/Josephine Public’.

    Without confidence and security for the general populous there is no society and balance. In the short run (and I’m not forgetting that famous Keynes quip) the controllers of wealth get richer in a monetary sense, but without a thriving bottom up domestic market, nothing is sustainable.

    Again in the short run, what does the community prefer?

    A) High employment, possibly focussed in inefficient public sectors (actually, most of private isn’t that good either, except at driving down workforce incomes) but via the multiplier making a positive contribution to the overall market stability and growth or

    B) A highly efficient small economy with large numbers of disaffected, low income, low aspiration and ultimately high state dependent unemployed?

    The biggest threat is the political short-termism where 5 years (or the next election date, whichever is the shorter) is the maximum horizon for national economic decision making.

    Dave Orr, in his numerous contributions to this column has highlighted the lie to the myth that “private good, public bad” Tory mantra. What we need and what we have always needed is a balanced economy in all definitions of those words. It is utter madness to drive on with that Thatcherite “bottom line is the only thing that matters and there is no such thing as society” philosophy. But there again, I didn’t go to Eton or any other public school and I hold a degree in economics, so what do I know?

    1. sam:

      Economics Bah-Humbug!!

      You wouldn’t get a get science degree if you doubted evolution (though this doesn’t preclude becoming a medical doctor) or gravity.

      Yet they all pass their P.P.E degrees, without the prejudices they were born to, being modified

      How can something claim to be a science without a broad consensus?

      Discuss

  4. Dave Orr:

    Ah… The old “race to the bottom” argument.

    Brilliantly expounded by the £600K CEO of Npower who has apologised to 3.4m customers for billing problems with SAP put in by IBM; he then announced the offshoring of 550 UK jobs to India to improve service & cut costs (not his or fellow Directors though).

    No-one defends poor productivity – a by product of bad management surely.? Just look at the productivity of the well paid UK workforce in car plants for Nissan, Honda, Mini and Toyota.

    If an organisation in any sector cannot manage their own workforce, then how will they manage someone else doing it for them?

    Show me any council in a big joint venture outsource where you can unequivocally evidence efficiency ie same for less, better for same or less?

    Finally, who will pay for old workers in retirement without a pension, assets or savings?

    There is such a thing as society…….

  5. Dan:

    I think there remains a large number of influential people for whom outsourcing is ideological rather than a solution to a specific situation (usually think tanks and political advisors). To such people business cases count for very little.

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