The Post-Election Landscape
It’s the greatest British political story of our age – but what does the advent of coalition politics mean for the sourcing space in the UK? With a government set on cutting, whatever the cost, this should be a magic moment for suppliers – but is it?
The contrast could not be sharper between the confusion of the first hours and days following May’s general election, and the certainty with which the coalition has seized the savings agenda. On May 7 the UK’s population awoke with no idea as to the composition of its government, let alone its ideological leanings; three months on, and the marriage between Cameron’s Tories and Clegg’s Lib-Dems seems, if not blissful in all aspects, then sufficiently robust to allow the pursuit of policies – most notably, and most explicitly, economic – which overtly call for tougher times for much of the electorate.
That the electorate seems, thus far, begrudgingly acceptant of both the need for relatively strict economic measures and the form of the measures themselves as proposed by the government does not, of course, mean it will continue to do so indefinitely – but it demonstrates the scale of the opportunity presented to Cameron and his team. For a new government – an historically new form of government – to be able to grasp so fervently the nettle of widespread public sector cuts, takes a special set of circumstances. Fortunately, for the prime minister, the combination of a financial crisis, an unpopular incumbent, the near-disintegration of the governing party and the existence of a suitable and willing partner provides just those circumstances. Disappointed to be denied outright victory, the Conservatives have nevertheless secured themselves a dominant role in parliament at a time when an ideological aversion to Big Government coincides with the need to pare back billions from the budget.
Exactly how – and by whom – those billions are to be pared is of course a question of great interest to the sourcing community both within and outside the UK. Government spending on outsourcing prior to the election stood at around £80 billion (of a total budget of approximately £680 billion); analysts were keen to emphasise the extent to which this sum would grow regardless of who took (or remained in) office, based on a general assumption that much of the effort in reducing the budget deficit would be directed towards finding efficiencies and savings through process transformation, waste reduction and headcount rationalisation – in other words, precisely the kind of drivers which propel outsourcing.
With a deficit of £155 billion and a national debt of over £0.9 trillion, this is certainly a burning platform. However, initial jubilation at the prospect of countless potentially lucrative new government contracts spilling out from Whitehall – and renewed enthusiasm following George Osborne’s signal announcement that the government is going to hand over £80 billion of NHS spend to GPs, signposting a vast expansion in the country’s healthcare outsourcing market over the next few years – has been tempered by increasing unease, particularly over the possible ramifications for existing deals which the government might have in its sights as it prepares to pull the trigger.
“We are entering a period of uncertainty and difficulty for the supplier community,” predicts Jessica Hawkins of Ovum, “as the government gets to work cancelling various programmes. Incumbency will no longer be enough and with the £100 million contract ceiling [on IT deals, announced the week after the election] the large players will have to rethink their approach and make their offering more flexible and agile to fit agency requirements, which is likely to see more partnering taking place with suppliers working towards a common outcome.”
Hawkins points out that “I don’t think the UK government has actually stipulated that it will commit to increasing outsourcing, more that it will necessarily have to in order to achieve efficiencies”. And it’s worth remembering that, while the first raft of cuts have been announced the public sector has not yet felt the full weight of the hammer. Osborne’s budget in October will paint a much clearer picture of where exactly savings will be generated, but long-term plans to deal with the UK’s structural deficit remained to a degree cloaked in mystery.
In the short-term, however, thus far many of the policies made public have accorded with Conservative statements made before the election and which clearly signal an intention to engage with outsourcing, as John Sheridan of Alsbridge notes. “The Conservatives’ original Technology Manifesto appears to have pretty much made it through intact into the new coalition government,” says Sheridan. “Key promises around full transparency in procurement/tendering, opening the market up to SMEs, improving in-house procurement expertise to reduce the reliance on external ‘expert’ consultancy, standardisation/reuse of resources, developed solutions… and making it more difficult for IT contracts over £100 million to be let will have a huge impact in both the long- and the short-term.”
With the Conservatives’ actions hitherto living up to their words, therefore, while the specific nature of all the opportunities presenting themselves might not at this stage be crystal-clear, the feeling in some corners of the outsourcing community seems to be a cautious anticipation that they at least there to be taken if certain challenges can be met with fortitude.
“In the short-term there are necessary cost savings to be made, not all of which will be welcomed. In an ideal world this would result, one hopes, in a degree of net growth in the outsourcing space,” says Darian Sims of Océ. “However, I suspect that we may well witness a degree of consolidation, contractually with incumbent outsourcing partners, which will limit genuine growth in public sector outsourcing. This shouldn’t be overly alarming, or even disappointing, as I believe that public sector organisations are drafting their battle plans as we speak.”
“Government is going to have to get used to doing more with less; there is no hiding place from the cold hard facts of massive budget cuts,” believes Stortext’s Mark Iveson. “As government employees are laid off the effort required to maintain service levels will become harder and harder, so much so that outsourcing must be considered in areas that were previously deemed peripheral. By implication, that must mean larger departmental processes are outsourced in the first phase in order to give a smaller, more focused government the ability to manage as opposed to doing.”
Of course that ability to “do” doesn’t just come from streamlined processes but from the security of an entrenched position in government – and to a certain extent that relies upon not alienating the electorate. Announcing cuts is one thing, managing them quite another; Cameron is asking for a good deal of sacrifice from voters and his team must not be seen to act excessively – let alone exhibit any sign of ideological satisfaction – when wielding the scalpel. “I expect the government to strike a very fine line this year between increasing outsourcing but minimising impact on jobs. I think much of their focus on outsourcing to BPO and IT outsourcers in the short-term will be to strive for greater efficiency; help streamline IT infrastructure and business processes for greater rationalisation. They will need to avoid cutting too deeply anything that will be seen to affect onshore jobs so as not to foment additional voter dissatisfaction around the government cutting jobs in a bad economy and avoid increasing the burden on the already strained welfare state,” says Ian Southward of Symphony Services.
To a certain extent, though, some strong disapproval is inevitable. The scale of the cuts mooted by the new administration makes it so – and in terms of the public’s perception of events, transformation through outsourcing may just be one part of a much bigger picture. “There may well be problems for the new government with industrial relations in the face of increased outsourcing,” says Alistair Maughan at Morrison & Foerster. “However, these are likely to be dwarfed by the impending threats of industrial action in relation to cuts in the size of the civil service generally. The jobs impact of extra outsourcing is likely to be minimal by comparison to the general headcount reduction required across the civil service. At least outsourcing is about transferring a job function with only the risk of future rationalisation. The big fight will be about what the public and the Daily Mail can most easily understand: immediate job losses.”
“You only need to look at what has been happening with BA, Royal Mail and others to realise that unions will seek to challenge the spending cuts as they impact their members. The possibility of around 300,000 job losses in the public sector is going to be harsh enough without the added threat of offshoring and wider ’rationalisation’ from the creation of shared services,” adds Alsbridge’s John Sheridan.
Offshoring, of course, is the unacceptable face of outsourcing as far as much of the British electorate is concerned, and Cameron might very quickly find himself in the mire if transformation is seen to be resulting in a torrent of work overseas. “To allay fears in the electorate that outsourcing is not going to be a cover for exporting jobs, the government will need to define and enforce clear guidelines on what activities could be potential candidates for off shoring,” warns Steven Barker of Siemens IT Solutions & Services. “These guidelines would need to ensure that only low-value, relatively unskilled roles could be considered for offshoring.” The mission-critical problem here is that a good proportion of public sector workers are engaged in those “relatively unskilled roles”. Getting the correct balance between efficient practice and a manageable degree of voter antipathy is going to be one of the defining challenges for the Cameron-Clegg alliance.
For larger providers looking to leverage further their offshore capabilities it may be tempting to assign this issue into the ‘it’s their problem’ box. But this would be to underestimate the scale of the difficulty facing both Cameron and Clegg if their respective – and already partially fragmented in their responses to the terms of the coalition agreement – party bases take umbrage at overt offshoring. Suppliers need to be intensely conscious of the political background against which each sourcing decision must be assessed: intelligent, sensitive delivery strategies must be developed that provide the greatest efficiency savings within new, restrictive political and financial parameters.
Regardless of where work will be carried out, one battleground that is certain to see some terrifying action will be the scramble for position among providers as the efficiency-drive rhetoric starts manifesting itself in cold, hard contracts. Opinion is split as to whether smaller providers will benefit from the government’s £100 million IT-deal cap, and whether the BPO market will see the major players already in the market further tightening their grip on the big bucks. “While the scope may be engineered to limit the size of outsourcing transactions, the larger outsourcing organisations will still be in a dominant position. The commercial risks that the government will expect the vendors to accept are only possible for organisations of a certain scale. We may see coordinated supply chains emerge where a large organisation essentially provides a service integration role – the CSC agreement for the IPS provides a good example where many of the underlying services are from Tier 2 organisations,” says AOMI’s Jon Clark.
Danny Jones, a partner at TPI, agrees that there are certain challenges facing smaller or less-established firms – but that these should not prove insurmountable. “This should be good news for new suppliers seeking to enter the market; however the cost of entry is high and in the past has taken some years to achieve,” Jones believes. “The cost of bidding is also high, even for relatively small-scale work like consultancy. The sector would benefit from an injection of new talent and consideration needs to be given to the ways that this can be made possible.”
Alsbridge’s John Sheridan believes that close cooperation between multiple providers will be vital – and thinks that it will result in both innovative practices and a revitalising of the market.
“The ‘presumption against government IT contracts worth over £100 million’ is there to open up the market and not to limit the scale of future projects (necessarily). It means that suppliers will have to collaborate a lot more – and in a manner in which they may have previously have felt very uncomfortable – creating consortia that deliver best-in-class services (or good-in-class… there is always a commercial balance to be made… fit-for-purpose without paying a premium for a service you don’t actually need) – where the delivered value of the whole is greater than the delivered value of the individual parts. That’s going to require some real out-of-the-box thinking and new governance models to manage decisions, risks, issues, rewards… Is this a move away from ‘one throat to choke’? “Small businesses,” Sheridan continues, “will benefit as procurement processes and general access are improved making it possible for SMEs to win projects that previously were closed to them. The move to open standards across all government departments opens additional doors as larger contracts can be broken down into smaller ‘lots’ and the monopoly of the big supplier is finally curtailed: under the previous government just nine IT companies accounted for 60 per cent of public sector IT spending.”
If, however, smaller providers are going to take advantage of such opportunities, they’ll have to survive in what is, regardless of the coalition’s proposals, a rather harsh operating environment. Shortly before Outsource went to press it was reported in the UK national press that 168 public sector suppliers went into insolvency in the first half of this year – an increase of 47 per cent from the same period in 2009. It is, of course, a harsh environment indeed for many of those on the other side of the buyer-vendor divide. The cuts demanded by Cameron, Osborne et al will mean huge swathes of employees being removed from the public-sector payroll. The widespread figure of 300,000 projected job losses – which Osborne said in May he “did not recognise” – quoted by John Sheridan lies at the lower end of predictions, with the chief economic advisor to the Chartered Institute of Personnel & Development, John Philpot, estimating some 580,000 redundancies over the next five years.
Some of those losing their jobs will look for related work within the private sector. Thus, another consequence of the cuts for the outsourcing space is likely to be growth in the available talent pool and, therefore, downward pressure on wages. However, as much of the talent will either be transferred as part of outsourcing deals or retained within organisations desperately trying to attain efficiencies without being forced along the outsourcing path, the impact may be lessened considerably. What is certain is that outsource providers will not be prepared, nor required, to pick up anywhere near the entirety of the state’s wage burden: many jobs will simply be gone for good. For those within public sector sourcing who are fortunate enough to escape the axe, the next few years will involve learning how to operate in a very different competitive environment, using – or acquiring with great haste – the skills which have so driven sourcing within the private sector. Lean government will require lean skills, and those employees – indeed, those departments – without a robust grounding in, for example, process efficiency methodologies may struggle to keep above water as the private sector proposition becomes increasingly overpowering.