Government needs to get better at outsourcing - and the time is now, according to the Institute for Government

Profile picture for user slauchlan By Stuart Lauchlan September 17, 2019
Summary:
Public sector outsourcing policy and practice comes under the spotlight in a major new report.

Outsourcing on Red Keyboard Button. tashatuvango - Fotolia

Anyone who’s tracked public sector computing will know that outsourcing is always with us - and seemingly never far from a negative headline or a drubbing from the Public Accounts Committee or the National Audit Office.

But a major new report from the Institute for Government (IfG) - Government Outsourcing - what has worked and what needs reform? takes a commendably balanced view of the industry, arguing that while there are evident faults and errors that have been made, outsourcing has enjoyed  its own successes. In large part, it’s not so much outsourcing itself as a model that is at fault when failures occur as the political and administrative decision-makers behind it.

There’s a cliche in private sector outsourcing circles that you don’t outsource your way out of a business problem, you just abdicate the responsibility for it to a third party. The public sector version of this needs to be borne in mind:

Governments should base decisions on whether a service is delivered publicly or privately not on ideology but on what most benefits the public…They must outsource for the right reasons – where private providers benefit from expertise, economies of scale or new technologies that enable them to deliver services better or more cheaply, or where competition can improve performance. They should not outsource where there is no reason to think it will work, as with probation, or in pursuit of unrealistic cost savings. They must develop better evidence to inform these decisions.

Attitudes towards outsourcing have varied according to political administration. As expected, the Thatcher free-market economy mantra was all for it, but rather more surprising to some might be the revelation that the Blair years under New Labour saw a sizeable increase in private sector service delivery to the public sector.

For the Coalition Tory/Liberal Democrat government, outsourcing was a tool to cut costs in an austerity regime, while the Cabinet Office of the day under Francis Maude railed against the Oligopoly of the ‘usual suspects’. Those days of big ticket consultancies and service providers being called in for a ticking-off and a demand to cut prices are long gone as the empire struck back in the wake of Maude’s (long time coming) departure.

Today the re-grouped Oligopoly is back inside the tent, with Brexit crisis preparations providing a handy pick-up for business. Government now spends £292 billion on services - across all sectors, not just IT - from external providers, more than a third of all public spending.

With a General Election now presumed looming, outsourcing in government is  at a crossroads. A Tory win would see no change in current practice, other perhaps than more gains for the ‘big ticket’ providers. On the other hand, Labour has declared that there is “not a shred of evidence” that outsourcing has improved the cost or quality of services and pledged to pull everything back in-house.

Continuity 

The IfG cautions that such a move would end what it calls “40 years of continuity’ and that while outsourcing has suffered high-profile failures, the evidence is that “on balance IT companies appear to be able to deliver savings and quality improvements”.

In fact, it argues, government has played a role in creating markets that have become increasingly low-margin and high-risk and have encouraged risky behaviour from suppliers which in turn has led to failures. The report identifies three factors that make outsourcing any service more likely to succeed:

  • The existence of a competitive market of high-quality suppliers
  • The ease of measuring the value added by the provider
  • The service not being so integral to the nature of government as to make outsourcing inappropriate.

On the flip side, there are conditions and practices that encourage failure:

  • Government did not always engage with the market early in running procurements or establish a sufficient understanding on both sides about the service that were being outsourced.
  • An excessive focus on the lowest price and an insufficient assessment of quality in selecting bids undermined many contracts.
  • Government transfers risks that suppliers have no control over and cannot manage, rather than those which suppliers can price and manage better than government.
  • Government does not secure the outcomes it should as a result of weak contract management.

An example of a well-managed outsourcing initiative is the National Savings & Investments (NS&I) managing to reduced operational costs while improving service delivery by outsourcing all of its IT, transactional and customer-facing functions to Siemens Business Services through a competitive tender in 1999.

Examples of poorly managed programmes include HMRC’s Aspire contract, which helped reduce operating costs but its budget over-ran. And then there’s the National Programme for IT in the NHS, abandoned after costs topped £11.4 billion with precious little to show for the money.

The IfG argues  that a big issue is lack of demonstrable evidence to support decision-making around outsourcing, with ministers and officials simply hand-waving about aspirational cost savings and quality improvements. Bear in mind that the NHS National Programme was commissioned by Tony Blair after a one hour meeting with officials and representatives of IT vendors. There was no proper business case or strategic plan. £11.7 billion later…

To do

The report picks out a number of key principles that need to be addressed:

  • Government needs to get better at deciding when to outsource.
  • Departments should ensure that officials engage early with suppliers.
  • Government should improve the way it assesses price and quality in selecting bids.
  • Government should get better at allocating risk.
  • Government should strengthen contract management.
  • Government must ensure that its own Outsourcing Playbook is fully implemented in practice.
  • The Treasury should ensure that the commercial team in the Cabinet Office has the budget to support implementation.
  • Permanent secretaries should ensure departments adopt best practices.
  • Government should continue to strengthen internal commercial skills.
  • Government should improve scrutiny of outsourcing and accountability for success or failure.
  • The Cabinet Office should mandate clear standards for the collection of data on the performance of outsourced contracts in line with the Open Contracting Data Standard.
  • The Cabinet Office should establish a team with the capacity to analyse data on the outcomes of complex outsourcing projects and produce insights to inform best practice.
  • Ministers and senior civil servants should be accurate when describing the benefits of outsourcing.
  • Contracting authorities should work with suppliers and external experts to develop rigorous case studies of contracts, including in areas where outsourcing has worked.

My take

This is a very extensive and in-depth report and one that deserves attention at the highest levels of government.

Outsourcing agnosticism is a sensible mindset to cultivate. To assume that all outsourcing is bad is wrong. I tracked the NHS debacle from earliest days through to the legislative post-mortems and lawsuits from IT services vendors essentially suing for compensation from the taxpayer. The problems with that programme were legendary, from the ego trips of some of those in charge of delivery right back to the madness of a Prime Minister commissioning the scheme in pursuit of his place in 'modernity' and blinded by vendor blandishments.

I never want to see such a folly repeated, but as ministers and permanent secretaries start to put the ‘usual suspects’ back on speed-dial, there’s a real danger that I will. As the IoG notes, public sector outsourcing is at a crossroads. It’s time to take a long look at where it goes next.