Outsourcing – here to stay but is a broader contractor market the only hurdle?
By Gemma Pearce, Browne Jacobson
Sir David Lidington, former minister for the Cabinet Office, and Rachel Reeves, chair of the Business, Energy and Industrial Strategy committee, both called for greater diversity in the outsourcing market, at the Institute for Government (IFG) on 17 September1 but warned of a lack of civil servants to deal with the breakup of big contracts into smaller ones.
The event held to launch the IFG’s report “Government Outsourcing – what has worked and what needs reform?” explores the highs and lows of the outsourcing market since its inception and puts forward a number of recommendations to tackle the persistent issues with government outsourcing.
The government purchases almost as much from external providers as it spends on its own staff, and there are increasingly few public services where the government does not rely on external contractual relationships. Currently the government spends 13.7% of GDP each year on outsourcing and contracting and claims this reduces costs between 10-30% improves efficiencies and delivers a greater quality of service compared to keeping services in house.
However, the market is not as attractive as it once was. The collapse of contracting giant Carillion last year rocked both the private and public sectors and has resulted in a nervousness and mistrust in outsourcing. Carillion’s liquidation cost the public purse £148m as it picked up 420 abandoned public service contracts2, and has led to many critics calling for an end to outsourcing altogether.
Additionally, many of the larger contractors have merged with smaller contractors leaving no real market competition in some areas. The impact of this is an undermining of the positives of outsourcing – e.g. reduced costs, opportunities for greater dynamism, innovation and experience by supplier opportunism and limited bargaining power for the government.
So is this the end of outsourcing and the beginning of “insourcing”?
Not likely! Government capacity limits what can be brought back in house and in any event “insourcing” across the board would risk losing the benefits (cost savings, efficiencies, innovations and higher quality services) where outsourcing is actually working.
What needs to change?
The IFG’s recent report puts forward several recommendations to tackle the persistent problems that currently undermine outsourcing.
Creating/exploiting competitive markets of high-quality suppliers is one recommendation with their research showing outsourcing has worked best where there is healthy competition. Their recommendation being where there is no competitive market the government needs to take steps to create one, for example, through early engagement and piloting, and properly assessing how contracting out will work in practice.
However, the report further recommends that the government strengthens its commercial skill and capabilities and make ministers and officials more accountable to the public and improve the evidence base that informs outsourcing decisions3.
Ensuring that in future outsourcing services is for the right reasons and when doing so it does it better – understanding what it is buying, choosing bids that deliver sufficient quality and value for money, allocating risks intelligently and managing contracts effectively.
If outsourcing is here to stay, purpose and rigour will be key to government rectifying the problems undermining outsourcing… not just a broader contractor market.
Read the full report here