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People over Profit: five ways to improve outsourcing in local government

Outsourced public services are here to stay, argues Joe Penny of the new economics foundation (nef). So how can we ensure that providers prioritise people over profits locally? 

In August, a judicial review into Barnet’s controversial ‘One Barnet’ plan to outsource swathes of its services ruled in favour of the council and against local campaigners. 

Over the next ten years private company Capita will now earn £480m through two contracts that cover services ranging from planning and trading standards to human resources and benefits administration. Yet, as eye-watering as £480m over ten years is, ‘One Barnet’ is just the tip of a very large iceberg – one which, unlike actual icebergs, is growing all the time. 

Though in no way new, outsourcing is now very big business – £82bn is spent on outsourced public services every year. It covers a huge range of services, including a growing number of ‘human services’, such as social services for vulnerable young people, the probation service, and, of course, the NHS. What’s more, as year-on-year cuts to public spending continue, pressures to find cheaper ways of delivering public services mount. This is especially true for local government, where swingeing cuts are forcing a radical rethink of what services councils can provide.

For many this shift towards diverse ‘markets’ in public services is long overdue. MPs, civil servants and policy wonks from all political hues back the idea of more ‘open public services’. For others outsourcing represents nothing more than a betrayal of the very ethos of public services. At nef we have questioned approaches which uncritically embrace choice, competition and free market principles in public services, especially when it comes to providing human services, such as social care and youth services.

We have also challenged the bias towards large organisations and corporations, and an unquestioning faith in the efficacy of the private sector. However, we do not reject the idea that public services might sometimes be better delivered by alternative providers, such as community groups, voluntary organisations and social enterprises, if they are commissioned well.

So how can we make sure that when public services are ‘opened up’, they privilege co-operation over competition, shared responsibilities over individual choice and people over the financial bottom line or profit? Over the past three years we have been working closely with several local authorities on better ways of commissioning and procuring of human services. Drawing on this work, five principles have emerged.

1. Re-imagine what ‘open’ public services means

In the Open Public Services White Paper, it is fairly clear what ‘Open Public Services’ means. It means opening up public services to more market-based principles. But there is another way of interpreting open public services.

What if it was re-imagined to mean open to deliberative decision making with local citizens, and in particular people who use services? 

Shifting commissioning from a technical process, delivered by a few local authority officers, to a deliberative process, involving all of us, could help to ensure that decisions about public services better reflect our needs and aspirations. Of course, ‘our’ aspirations will not always be consensual. There will be differences of opinion and conflict. 

But then, as Bent Flyvbjerg and others have shown, that is always the case. It’s just that in an open and deliberative process these conflicts are recognised and engaged with.  Doing this can only make decisions more legitimate; this is all the more pertinent during a time of cuts.

2. Commission for full social, environmental and economic value at the local level 

Local authority commissioning shapes how vast sums of money are spent in local areas across the country. It influences the quality and availability of public services and their impact on the local economy.

However, traditional approaches to commissioning and procurement fail to adequately take into consideration the value that can be created by different approaches to delivery and their wider social, economic and environmental costs and benefits.

Too often value is conflated with price alone. The Public Services (social value) Act points towards a much more helpful understanding of value, placing a duty on public bodies to consider social, economic and environmental value before services are procured. 

Questions remain about quite how different local authorities will interpret the Public Services Act. However, ambitious councils can use it to promote living wages and good jobs, support sustainable local economic develop and protect the environment. 

For a great example of this in practice, read about the Evergreen Cooperative initiative.

3. Remember that small is beautiful 

Over the past 30 years, procurement rules governing how local services are purchased have come to favour large scale contracts and big organisations and businesses. Looking at the ‘One Barnet’ plan and other similar propositions, it looks like this will continue to be the case. 

But big is rarely best when it comes to public services – especially human services. Big services are usually inflexible, impersonal and unresponsive to people’s needs, and they fail to get the full social, environmental and economic value from public money. In fact, as a July 2013 report from The Centre for Welfare Reform argues, at their worst, large scale contracts can lead to a ‘hollowing out’ of local communities with regards to skills, employment opportunities and smaller community organisations. 

In response we need to move towards smaller scale services, with less hierarchy, fewer onerous targets and more emphasis placed on building people’s capabilities, relationships and mutual support networks. Our work with Camden Council shows how this can be done through commissioning in a mental health context.   

4. Collaboration over competition 

At the heart of the move towards outsourcing in local government, and other public agencies, is the belief that competition yields better services at a lower price. However, there are a number of potential problems with commissioning services competitively, especially during a time of austerity. One is that you create a ‘race to the bottom’ affecting service quality and producing false efficiencies in the long run. Another is that competition sets providers against one another and stops local organisations working together and sharing resources. This is wasteful. 

In addition, competitive commissioning can favour larger organisations (who are better at writing bids) over smaller providers, who might be more connected to the local area.

An alternative is to develop collaborative commissioning models. The Lambeth Collaborative is a good example. The Collaborative is made up of commissioners, providers of health and social care services, and service users and carers. Together they take an asset-based and co-produced approach to commissioning. One unique element of the collaborative is the alliance-contracting model they use. This brings together a set of providers who sign up to a values based agreement and framework to collaborate with one another, share ideas and coproduce their services.  

5. Set minimum cost to quality ratios 

In our research into the new austerity we heard from providers about mental health and homeless services that were being commissioned on the basis of a 90% cost to 10% quality ratio. This means that the cheapest bidder, regardless of how good they are or how well they treat and pay their staff, will always win the contract. This is as clear an example of a ‘race to the bottom’ as you will hear. 

To guard against this, minimum cost to quality ratios should be considered, ensuring that quality always takes precedent. We are currently working with two local authorities on commissioning their youth services. Despite both receiving significant reductions to their budgets, they are assessing providers’ bids on the basis of 80% quality to 20% cost.

These five principles have been drawn out of our experience of working with local authorities on commissioning human services – namely mental health and youth services – during a time of cuts. They are by no means exhaustive and their relevance to all public services will vary. However, taken together, they could help enormously in ensuring that public services keep people, rather than the financial bottom line, at their heart.