The UK government BPO market: opportunities and challenges
- On January 24, 2013
This column is written by Sarah Burnett, Research VP, NelsonHall.
Although government represents a major BPO market in the UK, supplying it requires staying power to last the long course of procurement and a good deal of insulation against reviews and U-turns. The government is looking to ensure that it gets the most value for money from all its contracts and so its reviews can lead to changes in direction. Consequently, although there are a number of compelling factors driving the market, for some suppliers the twists and turns in direction have proven too much and so they are quietly reducing their focus on the public sector. Others are eager to increase their share of the market and will stay the course to potentially win large and national-scale contracts that offer revenue certainty over long periods of time.
Market Drivers and Opportunities
Government BPO is a substantial market in the U.K., worth over £6bn a year. In the last three years alone contracts of TCV of £22bn have been signed and more is on its way. Examples of current opportunities include outsourcing of central government shared service centres (currently run by the Department for Transport and the Department for Works and Pensions) and Ministry of Justice probation services.
Since 2010 the UK public sector BPO market has been driven primarily by the need to cut public spending. In central government this is particularly focussed on the costs of the country’s benefit and justice systems. The DWP’s Work Program falls into this category as does the recently announced plan to outsource the majority of probation services by the MoJ.
Another key driver for outsourcing has been the need for departments to comply with new or changing regulation, e.g. Continuous Insurance Enforcement that came into force in 2011, which led to the DVLA outsourcing the work to Capita. Often legislative changes lead to restructuring of government bodies and quangos which in turn provides new contract opportunities. Examples of this include the new Disclosures & Barring Service (DBS) which implements some of the requirements of the Protection of Freedoms Bill which received Royal Assent in December 2010. DBS combines the services of the Criminal Records Bureau (CRB) and Independent Safeguarding Authority (ISA). The consolidation of the two bodies led to a change in outsourcing arrangements which in 2012 saw Tata Consultancy Services selected by the Home Office to run the combined (DBS) processes.
The third major driver for outsourcing has been the government’s reform of the public sector leading to measures such as My Civil Service Pension (MyCSP) being spun out of the public sector into a mutual organization, owned partly by the government, partly by its staff and partly by Xafinity Paymaster. As well as new structures for service delivery, reform of public services includes new ways of funding services. Examples include the government’s move towards community and personal care budgets which encourages closer collaboration between all the agencies involved in one service line, such as social care. This is also likely to drive the market for outsourcing as closer collaboration can incorporate shared services, a model which is well suited to outsourcing.
The opportunities are not limited to central government: the UK local government BPO market has just had one of its best years in a while, largely boosted in 2012 by Capita winning Staffordshire Council’s 20-year educational services partnership contract worth £1.7bn. This partnership could potentially generate £2bn of revenue over 10 years.
Other examples of recent local government outsourcing include:
- North Tyneside Council awarding Balfour Beatty a 10-year, £133m multi-process BPO contract in 2012
- Peterborough City Council awarding Serco a £100m, 10-year, multi-process BPO partnership contract in 2011.
Both outsources were driven by the councils’ need to meet the 2010 Spending Review budget cuts.
These types of contracts can be very attractive to suppliers as they offer revenue over long periods as well as upselling opportunities: the trend allowing services to be shared with other public bodies, and possibly even with the private sector can increase the potential size of the opportunity. Examples include the Staffordshire educational services partnership which aims to sell its service to schools and colleges outside the Staffordshire area. This has been enabled by the government opening up the educational services market by giving the funding to schools rather than local authorities, to choose a supplier of their choice. MyCSP, mentioned above, provides another example: Xafinity Paymaster, the commercial partner in the mutual, is not just responsible for the ICT, but also for the organisation’s business development through sales of services to other government agencies, and potentially eventually to the private sector.
The number and possible size of opportunities are increasing but so are the challenges that suppliers face.
Firstly, in terms of pricing, the more rigorous focus on value for money in contracts has increased the pressure on pricing. NelsonHall understands that some vendors have had to withdraw from tenders due to increasing price pressures. There is also the emerging trend for outcome-based pricing e.g. the Work Programme contracts that are wholly outcome-based. These contracts require the supplier to take on the up-front costs and risks of setting up the service delivery framework and implementation. The costs are recouped and fees earned only when the service is up and running and the required outcomes are being achieved.
Secondly, planned procurements can take a long time to complete. For example, the planned privatisation of the DfT’s SSC was first announced in April 2011. Almost two years later, and with bidding suppliers already short-listed, this is still to complete. The government has shown that it can speed up procurement; in February 2012, it completed the Civil Service Training tender in a matter of weeks rather than years. However, this is still an exception rather than the norm.
Thirdly, political decisions or other reviews can lead to a change of direction halfway through a procurement and so leave suppliers who have bid for the cancelled tender out of pocket. For example, the planned outsourcing of services by West Midlands Police that had got as far as having six consortia of suppliers shortlisted for the tender, was scrapped in November 2012 by Bob Jones, its newly elected Police and Crime Commissioner (PCC). Jones, reportedly, did not favour outsourcing as the force’s principal approach to budget cuts. Instead, he favours increasing use of technology to increase productivity. A few months before this, Surrey Police, which had partnered West Midland Police in the extensive outsourcing tender, pulled out of the procurement (which had already reached the supplier shortlist stage), following the G4S Olympics security debacle. Another example is Cornwall Council’s multi-process outsourcing tender which was halted after councillors who opposed the plan ousted the leader who was driving the outsourcing move. And in central government, in November 2012, the MoJ changed its plans to outsource the running of up to nine prisons, halving the number of prisons that were originally due to be contracted out. The department now intends to outsource only the management of the prisons’ facilities and not their operation.
This is not to say that rolling reviews of procurement plans are a bad thing. Far from it: as a buyer, the government is exercising its right to change course if interim findings do not support the case for the original plan.
Despite the challenges, many suppliers still want a bigger share of the government BPO market but others think that it has become too changeable. This is leading to some experienced BPO vendors quietly toning down their interest in UK government contracts given the time, cost and lack of certainty in the procurement process.
Those suppliers that can stay the course are incorporating some other government sector trends into their propositions. These include:
- The increased government focus on adopting cloud: This encourages BPO services using platforms that are included on the G-Cloud framework
- Consolidation of locally/regionally delivered services under one agency to standardise service across the country e.g. the national Blue Badge Improvement Service operated by Northgate Public Services on behalf of the DfT and for Local Authorities. This type of service consolidation lends itself well to shared services and ability to deal with scale
- Increasing SMEs’ share of the government market: lead suppliers partner with SMEs and charities to help the government achieve this objective.
The formula that the government looks for in tenders is one that combines value for money with achieving multiple policy outcomes in one go e.g. reducing unemployment costs without having to increase staff headcount and while engaging with more SMEs and charities.
Suppliers look to help the government achieve its multiple objectives. They offer services which often incorporate shared services with proposals to improve service standards uniformly across interfaces and regions where relevant. The route to achieving cost savings is indicated by the government’s approach to service delivery, which as well as shared services, particularly in the back office, has other components including self-service and “digital by default” in the front office supported by cloud computing.
In the age of austerity, it is not surprising that the government is taking a range of measures to maximise contract value for money. More reviews and changes are likely but for those suppliers that stay the course there are more opportunities to come.