The Whitehall Effect: how Whitehall became the enemy of great public services and what we can do about it
The following is an edited extract from Chapter 5 of The Whitehall Effect: how Whitehall became the enemy of great public services and what we can do about it by John Seddon, recently published by Triarchy Press.
It was Gordon Brown, when he was Chancellor of the Exchequer, who invented the phrase “invest to save”. What it meant was that local authorities could use cash from Whitehall to create call centres and back offices. Jim Murphy, minister at the Cabinet Office, claimed that sharing services would realise efficiency savings of up to 20%. And so the wave of sharing services in central and local government began.
Among the initiatives funded by Gordon Brown’s ‘invest to save’ scheme was one conjured up by the Department of Work and Pensions’ (DWP) and described earlier in The Whitehall Effect. The DWP made available £200m to encourage local authorities to reconfigure their housing-benefits offices as separate front and back offices, tied together with IT systems to pass work to and fro. Unfortunately, such a design for housing benefits or, for that matter, any other service, can only lead to worse service, increased failure demand (requests from the public to sort out or put right things that have been done wrong or not at all) and – as a direct result – higher costs.
The increase in failure demand that housing-benefits services experienced as a result of the DWP scheme meant a sharp growth in the overall volume of work. This led to backlogs building up. DWP ‘help teams’ then advised the same housing-benefits services to hire a private-sector ‘backlog-busting’ firm to help reduce the backlog.
Private sector partners have a vested interest in keeping demand high
Payment for volume of activity is a common and fundamental error in outsourcing contracts. It incentivises increased activity, the last thing that is wanted in any service, least of all one that consumes public funds. It doesn’t take a genius to work out that under a volume-based contract, the more failure demand the system generates, the better it is for the outsource provider. The worse the service from the customer’s point of view, the greater the benefit to the provider’s revenues.
Example 1: At the time of Gordon Brown’s inadvertent creation of a market for private-sector backlog-busters in housing benefits, we were engaged by a local authority to help it improve its housing-benefits service. It transpired that the benefits staff actually belonged to a private-sector ‘partner’; not immediately obvious as agents worked in the council offices and to all intents and purposes behaved as if they were part of the council. The results impressed council leaders. It was, they said, the kind of innovation they’d hoped for by outsourcing their services to the private-sector partner.
This led to a meeting with the chief executive of the outsource company. He too was impressed by what the housing benefits people had achieved, and excited at the revenue potential from doing the same for other councils. We were in one of the company’s offices in the North East. Outside our meeting room there were groups of people working as backlog-busters for a number of local authorities. I suggested those authorities would be a good place to start as the firm already had a relationship with them. I maintained that if we could make improvements, the local councils would no longer need the backlog-busting service – in my view, this was a great value-creating pitch. His reply was, “That’s not very commercial, John”.
Example 2: In 2013 I was at a lunch in the City with the leaders of a number of private-sector providers of public services. One, the chief executive of a firm supplying custody management for the police, thought, as I was to him an ‘improvement’ man, that I’d appreciate his tale of what his firm had been doing to improve custody management. To cut a long story short, he told me his firm had cut the time police officers are tied up with the custody-management process, releasing police officers to spend time on their “proper” job.
I pointed out that when you study offenders going through custody suites you learn that a significant proportion of them shouldn’t be going into custody at all. They will indeed have committed an offence, but for many reasons (the next step in the criminal justice system isn’t ready, or they will be spared custody because of their circumstances) locking them up serves no purpose, since they will soon be released. Genuine improvement would focus on reducing the volume of work in the custody suite, a much more powerful improvement lever. The chief executive changed the subject. His firm’s contract was based on volume, so the more people that go through custody suites, the more it earns.
Example 3: We can see this same pattern in many local-authority outsourcing arrangements. Take, for example, Service Birmingham, essentially an outsourced call-centre and IT-support arrangement. The good news at least is that local councillors woke up to the fact that they were paying their private-sector ‘partner’ for servicing failure demand. But an internal inquiry blamed council departments for ‘letting down’ citizens (Ref. 1). The council had failed to understand that the causes of failure are systemic – including, for example, the separation of front- and back-offices. Birmingham council has taken its call centre back in-house which of itself won’t solve the problem and councillors are reported to be saying that exiting the deal would be too costly, though the costs remain “shrouded in secrecy” (Ref 2).
Abandoning outsourcing deals is always costly
Bedford council paid £7.7m to get out of an outsourcing contract (Ref. 3). Somerset paid £5.9m (Ref. 4). Many are kept secret for reasons of ‘commercial confidentiality’. Because the truth of way out-of-whack costs is too embarrassing for them to admit, local politicians tend to put a gloss on the reasons for termination, citing for instance ‘benefits from the partnership’ that the council is ‘now taking forward’ – which is partly why such lapsed deals fail to make the national press. Nevertheless, for those who care to look, the high level of terminations is clearly telling us something important.
Francis Maude, minister for the Cabinet Office, continues to maintain that outsourcing is essential for improving public services. It is, he asserts, “in our interests”. Maude believes outsourcing public-sector work to overseas facilities (‘offshoring’) is essential if the UK is to remain competitive, otherwise jobs will be lost in the UK (Ref. 5).
Offshoring is still outsourcing – trying to do the wrong thing cheaper
Offshoring takes the idea of moving work to low-wage areas and internationalises it, still in the vain expectation that lower-cost transactions will lead to lower-cost services. Wherever they are located, they don’t. Maude, like others before him, is repeating what he found in the Gershon report. (In 2004 Gershon’s eponymous report put at £20bn the savings that could be made by improving procurement, standardising policies and procedures and simplifying, standardising and sharing support services such as HR, IT and finance in ‘back offices’).
Gershon’s analysis was based on ‘evidence’ provided by the big consultancies, some of which have their own overseas call centres and back offices and all of which chant the mantra that service costs are identical to transaction costs. They claim that sharing services yields efficiency gains of 20-30%, outsourcing yields a further 10-30%, and offshoring yields the same again. In other words, by sharing services and outsourcing them to lower-cost operations overseas, companies can reduce costs by up to 50% (Ref. 6). This – pardon the expression – is pure horse shit. If the volume of calls remained the same and the unit cost of handling each call fell, then there would be a real saving. But, as I explain elsewhere in The Whitehall Effect, taking the calls and placing them in a call centre where they are handled by people who don’t understand the problem means that callers get a worse service. They have to call back (often many times) to get their problems resolved and, as a result, the volume of calls increases sharply. Costs rise.
The truth is that while large and sustainable gains are achievable by improving the design of a service, sharing services without redesigning them can only release minimal less-of-a-common-resource gains. (These are one-off savings achieved by, for example, vacating a building or merging two HR departments. Elsewhere in the book I explain why even these savings are often not achieved and why they don’t amount to very much.) Outsourcing such unimproved services on the usual transaction-cost basis simply locks in the high costs and, from there, as call volumes grow, costs will only grow.
The rudder of profitability vs. the rudder of compliance
Since Gershon, many private-sector companies have discovered that offshoring raises costs rather than reducing them, and have consequently brought work back home (they call it, naturally, ‘onshoring’). Private-sector clients with outsourced operations – which are invariably on transaction-volume-based contracts – find that working with the ‘partner’ to improve service design inevitably involves new ‘works orders’ which attract large fees. In time, because they are steered by what I call ‘the rudder of profitability’, these private-sector firms learn that the only way of achieving a fundamental redesign of the service is to take it back in-house. Public services, which are steered instead by what I call ‘the rudder of compliance’ (the need to meet targets, directives and standards) continue to make the same old mistake with outsourcing.
Francis Maude clearly believes that private-sector partners are a good thing and that the private-sector is ‘better’. It makes you wonder why companies with terrible reputations for customer service – some of which are the butt of jokes in national media – even get a look in.
None of this is to argue against outsourcing in principle. Vanguard helps private-sector business-to-business services work as one system, where the books are open and gains to the provider follow gains to the whole system. And it is true that the private sector has taken the lead in developing more constructive outsourcing approaches – approaches that abandon strict contract rules and instead draw up agreements that treat the supplier as part of the same service system, working together for the same purpose.
With such an approach suppliers of custody services, for example, would, like their host police force, be focused on the end-to-end process. Only in that way can both parties improve the system. Similarly with outsourcing of customer services in local authorities, cutting failure demand has to involve both parties working together on the services end-to-end: as failure demand falls everyone wins.
- 1 Birmingham Mail, 12 June 2012, ‘Call centre not to blame for frustration with Birmingham City Council services, claims report’. Byline: Neil Elkes. http://www.birminghammail.co.uk/news/local-news/call-centre-not-to-blame-for-frustration-186673#ixzz1xZjnDlCG
- 2 Service Birmingham call centre was taken back in house: See thechamberlainfiles.com, 24 June 2014, ‘Service Birmingham costs to fall by £150m after Capita takes a ‘pragmatic view’ to council contract renegotiation’. Byline: Paul Dale. http://www.thechamberlainfiles.com/service-birmingham-costs-to-fall-by-150m-after-capita-takes-a-pragmatic-view-to-council-contract-renegotiation/
The cost of exiting the Service Birmingham contract remains “shrouded in secrecy”: See Birmingham Post, 31 July 2014, ‘Time for city to bite the bullet and save millions on its Capita contract’. Byline: David Bailey. http://www.birminghampost.co.uk/news/news-opinion/david-bailey-time-birmingham-bite-7543701
- 3 Computer Weekly, 13 September 2005, ‘Bedfordshire pays HBS £7.7m to terminate outsourcing contract’. http://www.computerweekly.com/news/2240075126/Bedfordshire-pays-HBS-77m-to-terminate-outsourcing-contract
- 4 BBC News, 17 July 2013 ‘Southwest One contract dispute cost council £5.9m’. http://www.bbc.co.uk/news/uk-england-somerset-23339493
- 5 Financial Times, 3 November 2013, ‘Whitehall outsourcing is “in our interests”’. Byline: Sarah Neville and Gill Plimmer. http://www.ft.com/cms/s/0/77039df2-4395-11e3-8279-00144feabdc0.html
- 6 HM Treasury, 2009, Operational Efficiency Programme: back office operations and IT. Author: Martin Read (p.30, Chart 2.K: Cost efficiency journey, Source: Bain, McKinsey and PWC research provided to the Operational Efficiency Programme
The Whitehall Effect: how Whitehall became the enemy of great public services and what we can do about it is available now from Triarchy Press. For more information, click here.
About the Author
John Seddon is an occupational psychologist, researcher, professor, management thinker and leading authority on change in the public sector. He is a visiting professor at Hull University Business School and author of several best sellers including Systems Thinking in the Public Sector, the Failure of the Reform Regime and a Manifesto for a Better Way. A long-term critic of the UK’s public sector reform, John was described by the Daily Telegraph as a “reluctant management guru”. He won the first global management Innovation Prize for ‘Reinventing Leadership’ in 2010. John is the managing director of Vanguard, a consultancy company he formed in 1985 and the inventor of ‘The Vanguard Method’.