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Public sector outsourcing failing in its objectives

Jane Lethbridge, director of the Public Services International Research Unit  at the University of Greenwich, discusses public sector outsourcing and its effects.

In the last two years, the UK public sector has spent almost twice as much on outsourcing as the commercial sector, according to a new study by Information Services Group (ISG).

Within that timeframe, 585 public sector contracts were awarded, with a total value of £51bn. This represents a near-threefold increase in public sector outsourcing since 2006-07, before the recession.

Jane Lethbridge, director of the Public Services International Research Unit (PSIRU) at the University of Greenwich, told PSE that she was not surprised by the figures, but that outsourcing public sector services can be problematic.

A common alternative to pure outsourcing is a shared services approach, and in a recent report, Lethbridge and Yuliya Yurchenko analysed examples of shared services in central government implemented to save money over the last decade. Under the remit of the ‘Government Shared Services: A Strategic Vision’ document, many departments set up their own shared services centres and by 2011, eight had been set up.

In March 2012, the National Audit Office (NAO) conducted a review of five out the eight centres. Their cost, up to 2012, was £1.4bn instead of the expected £0.9bn.  Additionally, the savings of £159m that had been expected by the end of 2010-11 instead were losses.

The NAO said: “The software systems used in the centres have added complexity and cost; and…as the use of the centres has been voluntary, departments have struggled to roll out shared services fully across all their business units and arm’s length bodies.”

Skills shrinkage

Lethbridge told us: “One of the reasons why government outsources is to save money, because it is thought that the private sector is more efficient and can do it better.

“But actually that’s not been the case on many occasions.

“Over the last couple of years, the policy of the Conservative-led coalition government has been to reduce the size of government. One way of doing that is to outsource, so there are fewer and fewer functions done by government.

“As more services are outsourced, though, the critical mass of staff in both central and local government will get smaller, and the skills and expertise they have will get less and less.

This has some “very serious implications”, she added.

Informed commissioning

It has been found repeatedly over the last 20 years that poor outcomes from outsourcing contracts often arise because of poor contract negotiation or oversight – showing how important it is that public sector commissioners of services have a detailed understanding of the services they are outsourcing, and commercial skills at least equal to the providers.

Lethbridge said when the scales tip too far in favour of outsourcing instead of in-house delivery, public bodies will end up with small groups of commissioners who lack expertise about the services they are actually commissioning for.

She explained: “One of the problems in the last 10 years has been that central government, for instance, has outsourced most of its IT projects. The result has been fairly disastrous, partly because civil servants were commissioning services that they didn’t really understand.”

Universal Credit

Lethbridge stated that the process of commissioning is a very specialised one and requires people with knowledge and understanding. “The more you outsource the less expertise there is,” she said. “Look at the Universal Credit project, which has been widely recognised as being fairly disastrous. Whether that goes ahead – we won’t know until the results of the next election – but I suspect it will be dropped and something else will be developed, which will be less extreme.”

Labour has recently pledged to ‘pause’ the roll-out of Universal Credit if it wins the election in May 2015.

It will halt progress for three months for a NAO appraisal, and, even if it chooses to carry on with the implementation, it will reverse the decision to not give payments to the main carer of children in a household.

“While we support the principle of Universal Credit, we will not accept the waste and delays which have left the project in crisis,” said shadow work and pensions secretary Rachel Reeves.

The ISG research shows that the proportion of small outsourcing contracts in the public sector fell from 46% in 2010-11 to 40% in 2012-13. The number of larger contracts stayed steady, with the growth in ‘mid-market’ contract, valued at £15m-£30m.

G-Cloud

Luke Mansell, partner at ISG, suggested the drive to procure services from SMEs via the G-Cloud online marketplace could cause a shift to smaller contracts.

Lethbridge said: “G-Cloud has a lot of potential, but government departments have to understand the potential of it and work through how they use it.”

But she concluded: “I do think you could well ask whether or not outsourcing is necessary.”

Highlighting some well-publicised failures by the likes of Serco and G4S, she added: “There should always be an option of an in-house bid putting in for the tender of public sector service contracts.”

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