Politics vs. Reason: busting the myths around UK public sector outsourcing
By the end of this newly elected parliament, £1 in every £3 spent by the UK government is likely to be outsourced, representing growth of at least £20bn over today’s market of £90bn. These findings, from recent state-of-the-industry research by OC&C Strategy Consultants, allow us to inject some facts into the often fractious and politically charged debate on the merits of public sector outsourcing.
In many ways, the controversy around public sector outsourcing is driven by a few high-profile cases dictating public perceptions. In reality, outsourcing of public sector services is neither fundamentally good nor fundamentally bad.
Well-managed outsourcing can have an immensely positive impact on the country’s ability to deliver world-leading public services. But, by the same token, when governments and organisations get outsourcing wrong, the outcomes can be abysmal. OC&C’s analysis of 45 million individual transactions of 176 local authorities and central government bodies over a four-year period has allowed us take a look at the realities of outsourcing in the UK public sector, challenge some of the widely-held beliefs and examine the best practices that both public sector organisations and private sector vendors can learn from.
Debunking the myths
Myth 1: “Outsourcing is for Tories.”
Many people in the UK believe that public sector outsourcing is a right-wing phenomenon. The figures do reveal that over the course of the last Parliament the share of departmental spending on outsourced services increased from 22% to 28%. However, this represents only a moderate acceleration. And in fact, outsourcing has been growing steadily over the past 25 years – under both Conservative and Labour governments. Had Labour swept to victory on 7th May, we would still have expected that £20bn projected growth figure to hold true. During the last Parliament, for example, both Conservative and Labour-controlled authorities increased outsourcing at a roughly similar rate.
Why? Growing demand for public services and the continued bite of austerity have made outsourcing the standout option for public sector bodies caught between raising taxes and reducing essential services, and which lack the funding to invest in making efficiency savings themselves. It’s time to take the politics out of the equation, and instead, let reason drive decision-making.
Myth 2: In the UK, most public sector outsourcing contracts go to the same handful of big corporations, which have become too big to fail.
This is one of the most commonly held beliefs and one that couldn’t be further from the truth. Careful analysis of the figures reveals that the public services market is extremely diverse, with tens of thousands of private and third sector organisations supplying goods and services to local authorities.
Capita is one of the biggest players in local government outsourcing, but it accounts for just over 1% of local authority spending on third parties. Even the top-15 suppliers, including well-known names like Veolia and Serco, account for a combined total of just 10%. What’s more, public service contracts are currently responsible for over a third of all charity funding in the UK. What this means is that across the UK thousands of small and medium-sized business – not to mention third sector organisations – are poised to enjoy a slice of that £20bn pie.
Myth 3: Outsourcing is a zero-sum game – vendors can only make money by bamboozling the public sector.
One of the most negative perceptions around public sector outsourcing – the belief that third parties are out to make extortionate profit at the expense of the tax-payer – has contributed to the politicisation of the debate. However, this is a relic of the old school of outsourcing where a few controversial cases have given the whole industry a bad name. Nowadays, none of the largest public services players make particularly large margins – 5-10% is the standard, which is in line with the lower end of comparable industries like engineering or construction.
While there is still scope for organisations to behave badly, it’s in everyone’s interest to stamp out the incentive to do so. Prioritising short-term profits over long-term success is a foolhardy approach in any sector and if allowed to continue, would prove toxic to the outsourcing industry. By moving to outcomes-focused arrangements and enacting fair risk-sharing mechanisms, governments and third parties can ensure that all interests are aligned – cutting the cost of bureaucracy to deliver well run public services without a compromise on quality.
OC&C’s research highlights a range of contracts across the country where outsourcing is driving efficiencies in the public sector. The Department for Transport’s HGV road user levy, for example, generated an impressive £25 million for the public purse last year. In that instance, Northgate Public Services was hired to ensure the 130,000 foreign HGVs taking 1.5million trips across the UK every year were contributing to the maintenance of British roads. The Foreign Operator Payment System, introduced and managed by Northgate, resulted in 95% of HGV operators complying with the new levy. This service was developed through exactly the sort of innovation and collaboration outlined above. The private sector took on the cost risk of development and implementation to produce a cost-efficient, quality service for the public sector – everybody wins.
Avoiding the three basic errors of outsourcing
For too long, controversial cases of public sector outsourcing have overshadowed the huge number of examples where outsourcing is working well. In instances where arrangements have gone sour, it’s often because governments and organisations have committed one of three basic errors – focusing on inputs rather than outcomes, devolving too much or too little control to the contractor, or letting politics rather than reason drive decision-making.
There is no such thing as good or bad outsourcing – only well or poorly designed contracts. With innovation in technology and a new wave of research, there are more opportunities than ever to reduce costs while still securing the delivery of world-leading public services. Governments and third parties need to collaborate to improve services and reduce administrative costs; define and invest in operational best practices; adopt payment mechanisms that fairly apportion risks and rewards; and most importantly, move to outcomes-based contracts so that incentives are aligned for all parties.
About the Author
Vivek Madan is a Partner and the Global Head of the B2B Services practice at OC&C Strategy Consultants. He works with clients to address fundamental strategy and change questions, leading the firm’s largest global projects in this space.