Public sector outsourcing – why it may have reached its peak

After much discussion about the major outsourced services providers to the UK Government, we asked last week whether the recent NAO reports, and all the issues around contracts (such as the tagging investigations), might mean we have reached the high water mark for government outsourcing, or certainly for the giant firms who dominate the market.

Today we'll argue why this might be the case. Then in part 2 we'll argue against - it is a finely balanced question, I'd suggest, hence this hedging of the bets.

So here are seven reasons why Serco, Capita and the like might not find life as public sector providers quite as easy or successful from now.

1. The issues around the Serco and G4S contracts now under police investigation raise some fundamental questions around the drivers for these firms. It doesn't have to be institutional corruption or bad behaviour that is uncovered. Even if it is just a small number of their staff who have behaved in this way, it may suggest that the private sector simply cannot be trusted to deliver key public services.

2. In addition, as Chris Lonsdale argued here, we may have reached the point where certain contracts are just so large and complex that they become unmanageable by the public sector clients. Or they are simply so expensive to manage given that inherent difficulty, that the cost of doing so (or trying to do so) negates any other savings and benefits.

3. If the current opinion polls hold firm for another 18 months, then the Labour Party will be in power by the middle of 2015. Whilst there are no signs that Labour are going to take a stand and announce some huge philosophical opposition to all outsourcing, it is hard to imagine that they are going to be real enthusiasts either, particularly if the strong public sector unions are still key to their funding.

4. This government has made a lot of noise about greater use of mutuals, joint ventures, third sector organisations and similar. There has been more talk than real action – MyCSP still gets quoted whenever the topic comes up, because it is one of the few real success stories. But eventually, a wave of these organisations may build up, offering a real and more socially acceptable alternative to the current private sector giants.

5. One of the better sections of the Public Accounts Committee hearing last week with senior government procurement executives was a brief debate around the need for more competitive supply markets and more SMEs. Whilst it is hard to see how you can stop the big firms acquiring interesting small firms, we have seen the beginning perhaps of a mood shift with Steria and Arvato wining the two government shared service contracts. Although they are not small firms, they weren't the "usual suspects" either. So a conscious attempt by government of whatever political persuasion to develop more competition obviously wouldn’t be good news for current leaders.

6. And more focus on these issues  – perhaps including use of open-book contracts – might drive down the profit margins on this type of contract. That could lead to the market valuation of the big firms declining, making it harder for them to acquire other businesses, and reducing growth rates, leading to lower share prices... and so on. A spiral of slow decline maybe?

7. More emerging examples and more focus on where private involvement hasn't delivered benefits may make public organisations more sceptical of the claims made by outsourcing providers - the claims that then form the basis of the business case for more activity.

Again, I should emphasise I’m not predicting these things will happen. As we said earlier, these are just possible drivers that could lead us to look back in a few years and think, yes, 2013 was the peak for these firms.

And in part 2 we’ll put the opposing case – why outsourced services provision may continue to thrive in the UK public sector.

Voices (4)

  1. Dave Orr:

    FOLLOW THE MONEY!

    I confidently predict that outsourcing & privatisation in Health, Police and Local Government (including social care) will accelerate.

    This Conservative-led coalition government and most Conservative-led Councils (Barnet, Somerset etc) are using the post-banking crisis austerity and £1 trillion of resulting debt to drive privatisation programmes re-branded as “commissioning” – hence Clinical Commissioning Groups in Health.

    Police are accelerating privatisation of things like Custody Suites (Lincs with G4S).

    PFI is known to be have more expensive lifetime costs than conventional public funding (through cheaper state borrowing) with “fiddle factors” (like Corporation tax receipts often offshored & never seen) made to slew business cases (alongside gold-plated RPI annual uplifts).

    PFI has been re-branded to PF2, but remains an expensive form of hire purchase and still pops up regularly in Private Eye, as Hospital Trusts pay so much PFI rent that they struggle to afford Doctors, nurses and treat patients – whilst companies trade the PFI contracts post-build and bank excessive profits from lower interest rates and add-on costs with no or little gain share for the poor taxpayer!

    There will be continuing reputational scandals (Olympics, Winterbourne View, G4S & Serco tagging over-charging, South West One in Somerset etc); however looking at mid-Staffs, in fairness, these scandals have occurred in the public sector too and where the public service ethos should have been an added protection.

    Barnet Borough Council with Capita will surely follows Beds, Suffolk, Birmingham, Liverpool and Somerset etc falling well short, costing more and/or failing.

    Yet Councils blithely carry on letting massive one-size-fits-all contracts that they cannot manage effectively and with councillors (of all parties) with no or small business experience matching up against the likes of Capita, IBM, Serco, G4S, Circle, Virgin Health, BT etc.

    It is a gravy train dressed up as “public/private partnership” and sadly this train left the station many years ago…..

  2. JohnLandseer:

    To help get you started on Part 2….

    Outsourcing and it’s early incarnation of market testing came about because of both political and economic imperatives of the time. I posit that it has a lng way to go yet.

    Irrespective of whether LabLib or Labour get in next time, there is still going to be a big hole in the public finances to deliver (and pay for) the huge (and costly) number of services currently being paid for by the tax payer.

    Bringing services in-house requires capacity, capability to deliver oh, and money. So, even with my fairly opaque crystal ball,can’t really see much more being delivered or brought in-house in the next 5 years.

    Certainly, new contracting vehicles appear (MyCSP) to bring value and cost efficiencies as well as giving employees a say and share in their respective companies. Truth is, the Big Question facing the next government is not what we should outsource/deliver via mutuals but…..what services a) need to be provided and b) at what cost.

    In my humble view, politics will always tend to trump economics (viz the on-going Eurozone debacle) – a grown up debate on what we spend our taxes on is well over-due – trouble is, we have ‘outsourced’ (pun intended) all our decision making to the politico’s who, as we saw at last week’s PAC, really don’t have a clue on what is going on or, at what cost.

    On the basis that we stay with a capitalist based system of market forces, I do believe that ‘intelligent suppliers’ will always tend to out-gun intelligent client’s in the long run – makes the world go round. Let’s see what side of the fence those running the CCS/GPS/OGC/CCTA are on in 5 years time…..

  3. Ian R:

    The reform of EU regulations, going through its reading in EC Parliament in early 2014 may start to affect this debate significantly. The UK government has been vocal proponents of the draft text that has been negotiated, which will see a real shift to dividing contract into smaller chunks, allowing contracts to be awarded directly to mutuals on a time limited basis without full competition and the ability to negotiate with the market before, and during competition.

    These aren’t necessarily all new proposals but the current administration are likely to be fully supportive of the new regulations and I would suspect, would want to lead by example when conducting future outsourcing exercises – which may significantly reduce the number of huge, complex, single supplier contracts, but give equally large headaches in terms of contract management of multiple suppliers..

    It’s going to be an interesting 2014…..

  4. Dan:

    8. They’ve generated headlines. Whereas previously MPs and Ministers may have gone easy on the companies, now that its got voter recognition, they’re more likely to be tougher on them.

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