Our readers speak on outsourcing – an evil menace, or a force for good?

We started the New Year last week with some lively comments on our piece about outsourcing, so I thought we'd revisit some of our reader comments, which raised some great issues.

A couple of readers came at it from the "all outsourcing is rubbish" angle. Well, it is simply too much of a fact of business life to reject the entire process completely. No organisation can do everything itself - the days of Henry Ford buying his own steel mills are long gone, and whether it is cleaning, audit, IT support, web hosting - we all "outsource” in some way. When you buy a ready meal from Tesco you’re outsourcing something that our grandparents would have done themselves.  So I don't think we can simply say, “outsourcing is wrong” or "the public sector shouldn't outsource".  I do accept though, as Final Furlong pointed out, the success rate is way lower than it needs to be in both public and private sectors.

RJ put it very well:

...it is surely self-evident that high quality outsourcing can and will deliver benefits to any organisation whether public or private sector. The problem is that so many outsourcing exercises are undertaken with a poor understanding of objectives, the scope of requirements and the true internal costs (and value/benefits), are driven by short-term goals and with little consideration as to how they will be managed on a long-term basis.

The indefatigable Dave Orr then told us more about his personal crusade against the South-West One (SW1) shared services venture in Somerset and Devon. We have featured this before, and covered the role that the local Chief Constable was playing, sitting on what seemed to be both the supplier and client side of the fence. Actually, he resigned from the Board of South-West One not long after – perhaps he reads Spend Matters!

We will I suspect come back to this - but are two sides to every story, and ideally I'd like to hear from the SW1 side as well. Let's see if we can do that in the not too distant future. I also have a sneaky bit of sympathy, particularly for the procurement head at SW1 who came in after things had started (apparently) going wrong. Local authorities are, as I know personally, not the easiest environment in which to work – for instance, mandating SAP type processes is not easy, even if the Board AND Councillors are fully behind you.

So I'm a little hesitant about slagging off the venture, and IBM who are the private sector partner in it, without understanding more clearly what has gone on there. But I know, it doesn’t look very good in terms of the numbers Dave quoted.

And finally, the comment from Michael Poole about the public sector situation was very perceptive.

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?

If you have a look at the full article I wrote for Outsource magazine, you'll see that I did mention this issue of priorities. The cost cutting task is considerable, so the top-slicing that has gone on so far in Whitehall was perhaps the only feasible way of making reductions quickly enough.

However, I would argue that at some point soon there needs to be some genuine re-engineering and improvement rather than more random voluntary redundancy schemes – and that is, maybe, when good, well-thought out outsourcing will come into its own. Or... maybe not!

Voices (3)

  1. flog:

    The anticipated £192m ‘savings’ – where they quantified as being ‘real’ cash or was there a possibly that non-cash figures where included?

  2. David Orr:

    Now SW1 leave modestly sized & cash strapped Taunton Deane District Council with significant cash shortfalls & increased borrowing, when SW1 was supposedly build to deal with a downturn in Councils finances at a timer of increasing cost pressures due to ageing population i.e. NOW!

    Slowww link on £7m 1*/Poor web site built & hosted by SW1:

    http://www1.tauntondeane.gov.uk/tdbcsites/tdbcagendas/RtnPDF.aspx?ImgName=Item%

    £2.1m of capital borrowings, taken out to part fund the Southwest One Transformation Projects, will not be repaid from procurement savings when originally scheduled (during 2011/12). This is because procurement savings have not been realised as quickly as originally forecast.
    The repayment arrangements for this capital borrowing therefore need to be reviewed.

    The total cost of the Transformation Projects is £3.65m. The £3.65m total cost is comprised of capital costs totalling £2.1m and revenue costs totalling £1.55m.

    The funding requirements for the Transformation Projects were agreed by the Executive on 14 November 2007. This would have seen the revenue borrowings from reserves (£772k) repaid by 2010/11 and the capital borrowings (£2.1m) repaid by end of 2011/12.

    However, procurement savings have been delivered at a lower rate than originally anticipated in 2007. Back then it was estimated by IBM that £3.376m savings would have been generated by close of 2011/12. This would have been sufficient to have repaid reserves and to repay the capital borrowing within that time.

    It is estimated that during the early part of 2014/15 sufficient procurement savings will have accrued to settle this debt in full. This would be 24-30 months later than originally forecast, back in 2007.

    The delay in repayment would lead to additional interest costs being incurred. The calculation of interest costs are based on the CRI (consolidated interest rate – effectively the average of interest cost % and interest income %). On this basis it is estimated that a delay in repayment would cost £2m x 3.05% (current CRI) = £61k per year.

  3. David Orr:

    Hi Peter,

    Indefatigable? I am persistent certainly. A few factual corrections:

    a) Devon are not involved.

    b) The Chief Constable of the Police service involved was on the Board of SW1 for over 3 years, so “not long after” is a questionable comment. Just before he decided that being the Chief Operating Officer of the Police, whilst sitting on the Board of his major supplier was a conflict of interest after all, the Home Affairs Committee received complaints from a local MP about him making public savings claims based upon “pipeline savings” from IBM/SW1 that had not been assessed by his own Client Team!

    c) Coincidentally, I met with the Chair of the Police Authority yesterday (at his invitation). We discussed the differences in savings targets from two similar size & staffed organisations – where the Police were looking for a reasonably realistic £15m of savings, whilst Somerset County Council (SCC) were looking for 12x that at £192m. Before you blame the elected Councillors or the Officers for this clearly wrong number, you need to understand that IBM ran due diligence for 6 months before contract to come up with the SCC influenceable spend and savings target on their behalf (and paid for).

    d) The new Head of Procurement has been in post for getting on for two years now. Yet the cash savings of the £192m of “assured savings” was £5m at end of 2010 and at the end of 2011 (4 years into this controversail contract) is just £7.6m. If he is making a difference, it is painfully slow progress.

    e) I would welcome the contrversial joint venture SW1 (IBM 75% one) telling their own story on the costs of £62m and the massively overstated “assured” savings of £192m.

    f) Whilst I can inspect the accounts of the Council; lobby my elected Councils; inspect meeting papers and in the final resort ask questions under the Freedom of Information Act….I can TAKE NONE OF THESE DEMOCRATIC & ACCOUNTABLE actions with SW1 because they are a Limited Company and therefore largely unaccountable to local taxpayers. They don’t even publish Board minutes (with redaction of sales prospects; margins etc). They won’t hold a small initial part of their Board meetings in public session before moving to private session, as my local Police Service does. Yet I believe that with at least 90% of their funding coming from the public purse they fall within the definition of a “public body” as did the Duchy of Cornwall recently.

    Owning up to mistakes or errors of judgement, is where continuous improvement starts….on that note, can we have a spell checker for comments please?!

    Good of you to continue to air all views and act as a positive platform for informed debate and healthy challenge.

    Are those principled objections indefatigable enough Peter?

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