Public Sector Outsourcing - Time for the Tide to Ebb

29/07/2013 12:42 | Updated 27 September 2013

In my opinion, a contemporary public sector leader should think very hard and analytically before assuming outsourcing is the most effective and efficacious way of either improving the quality or reducing the cost of public services.

I fully appreciate that this stance goes against the contemporary grain, given that many political leaders (both within the current Coalition Government andsome in the last Labour Government), as well as some public sector executives, have asserted that the business sector can save the public sector large amounts of money whilst at the same time improving the quality of provision.

Whilst acknowledging that there are clear differences between and within Whitehall departments and between local authorities or NHS trusts, in truth the narrative and justification for involving the business sector in public service delivery has never been consistent. I recall arguments such as the need to: increase capacity; reduce costs; leverage investment; address underperformance; source scarce expertise; transfer risk (although actually, ultimate risk is hardly ever transferable); tackle poor industrial relations (and sometimes to take on the trade unions); and in some specific cases, extending choice to service users. Sometimes it has been for ideological reasons.

The reality, however, is that evidence that outsourcing to the business sector is better (or worse) than retaining services within the public sector is often hard to prove, for it's practically difficult to compare with an untested alternative. That said, what evidence does exist suggests at best a very mixed picture and nothing like as glowing a success as some marketing presentations or political promotions might suggest. Some early examples of success are not repeatable. Times and condtions have changed.

It is a fact that early outsourcing initiatives often led to significant savings (either through productivity improvements or deep cost cutting) with variable quality service provision - but increasingly and unsurprisingly, the public sector has become more efficient and able to itself improve and reform. It's also easier to measure benefits in services such as 'back office' support than it is in services with more complex services with complex outcomes. And whilst there are some examples of outsourcing of such complex services which have been to be successful many have not. The contemporary public sector leader would be well advised to also consider alternative models of service delivery and not simply to pursue outsourcing as the natural and inevitable model.

So why might a prudent public sector leader question the efficacy of traditional outsourcing to the business sector? The reasons differ for different services and different public agencies, but include such observations as that:

• there is no automatic guarantee of service improvement and/or cost reduction, especially if there is a desire to sustain decent pay, terms and conditions for staff - noting that poor terms and conditions commonly lead to poor quality of service
• the procurement process will take a long time (possibly 12-18 months) at a time when budget pressures are immediate; and it will cost money and senior officials' time when they could be doing something else; and the resultant contract management ends up being an additional cost for the public sector
• contracts tend to be inflexible and /or expensive to change
• recent high profile events and reports have raised questions about the honesty and ethics of providers (although even I must sadly accept that examples of poor ethics are not limited to the private sector), as well as public sector contract management skills and competency
• in a period of uncertainty, every long term contract represents another element of a public agency's budget that can't be changed, and thus forcing cuts into other areas and distorting strategic commissioning and political choices on budget allocations
• if all the expertise of a public body is outsourced, there is little professional capacity to both monitor contracts and, in the case of failure, step in; and actually, there is generally too little ability to build in service resilience into contracts
• there is a desire to encourage charities, social enterprises, SMEs and mutuals to deliver public services; and the experience of the business sector supporting them as genuine partners, whilst it does exist, is rare
• the public and politicians, post banking crisis, understandably continue to question the proposition that 'markets and business sector are naturally best', resulting in an increasing pressure for 'responsible capitalism'
• there is increasing demand for transparency and accountability where public money is being used to fund public services, and often, there is too little of both when services are contracted, with both providers and clients hiding behind the claim of 'commercial in confidence'
• there is now a statutory duty to pursue social value and public value, and not just 'value for money'
• some in the public sector wish to ensure that public services are delivered by well-paid staff, employed with decent terms and conditions and development opportunities - and have deep concern at the prospect of price-driven procurement leading to 'zero hours' contracts and sub-minimum wages
• far-sighted local authorities and their partners are increasingly seeking collaborative relationships and integration of public services to address 'cross cutting' services, noting that the wrong approach to outsourcing can too easily lead to a fragmentation of service provision
• all too often, public sector procurement processes result in only a few serious bidders and a lack of competition; the reality being that some markets are dominated by just a few providers despite government attempts to encourage new entrants
• in terms of capital, the fact is that the public sector can borrow more cheaply than businesses and rarely seeks to exploit this advantage
• there are severe questions and anxiety about the quality and effectiveness of public procurement, as exemplified by the recent IfG report

Whilst there is a serious and urgent need to enhance public procurement capacity and skills (and there most assuredly is), this is not the main challenge to public sector leaders as they consider how to tackle their budget and service conundrums. Yes, of course, they need to procure better; contract better; and manage contracts better in your organisations. They can and should also insist on much greater transparency and accountability. And there can and must be independent audits of all major contracts and financial and operational performance of contracted services and providers.

However, the really important questions that need to be asked are:

• can we secure the outcomes we need in other more effective and flexible ways?
• can we improve leadership and management for public services without resorting to business sector outsourcing and if we did would they better?
• can we find more appropriate and effective ways of working with the business sector, the third and social sectors and public sector partners or even supporting our staff to create a mutual?
• how can we work with staff, service users and communities to introduce co-design and co-production, and service improvement with cost reductions where needed?
• and if we do decide to outsource, will there be a competitive supply market; and how can we contract to meet our short and long term objectives?

I fully recognise that for a variety of reasons there will be further public sector outsourcing but surely the time has come to move on from any presumption that it is always the right answer? To recognise that are many alternatives which might be better for any given situation. And if is outsourcing is pursued to do it well and only when it is demonstratably in the public interest.

For the reasons listed above and as a result of recent high profile examples of failing or underperforming public service outsourced contracts lead public sector leaders surely should be more imaginative than hitherto. They should have more confidence in themselves, their staff and their services. They should challenge what seems to be a new contemporary market based orthodoxy - and should focus on doing what is right for service users, communities, and taxpayers. Above all, they must drive the pursuit of public value.

Actually, I do detect some signs that the tide could be turning. Where once there was a sense of a flood towards outsourcing, I now sense an ebb in that particular tide - and rightly so.