Labour Threaten to Cancel Outsourcing Contracts: 4 steps to a successful alternative

By Allan Watton on November 5, 2019

The ‘will-they-won’t-they’ of political discourse these days, whether on the subject of Brexit or an election, has kept the media busy. You’ll often see reporting in one paper something that’s the polar opposite of what’s reported in another, as rumours circulate and hearsay is mistaken for fact.

Labour’s Pledge. To Cancel Outsourcing Contracts

Outsourcing can be a legitimate option for the public sector if it is approached in the right way and for the right services. As part of the outsourcing process, you can also benefit from access to pools of excellent strategic talent across multiple organisations, on-demand, at a fraction of the cost of employing individual specialists.

However, Labour’s Shadow Chancellor John McDonnell has reiterated the party’s pledge to bring public sector outsourced services in-house, at the earliest possible juncture, should they be elected.

In an article in The Guardian recently, he said “People have had enough of being ripped off – full stop” as he discussed Labour’s promise to bring back all outsourced waste collection, school meals and cleaning services once their contracts expire, for the public sector to once again run those services. This is on top of the rail and water companies, the power networks and the Royal Mail, which are all also in Labour’s sights.

But is this pledge a legitimate case of economic and practical viability or is it, as perceived by some, simply party ideology?

Why Did Outsourcing Become so Popular?

In the heady days of the 1980s, the Conservative government introduced a new practice on a few public sector projects to drive up competition and, therefore, drive down costs. At that time, it was also perceived by some observers that the practice of private sector outsourcing was also designed to wrestle back some control from striking unions and to reduce the bureaucracy that had started to congest the system. But, throughout that time, outsourcing remained more ‘fringe’ than mainstream.

New Labour, under Tony Blair, ramped things up in the world of outsourcing. To this government it seemed that it was the quality of public services that mattered more than who was delivering them. So, throughout the late 1990s and early noughties, outsourcing became more commonplace.

But something happened a few years into the 2000s. A change of attitude, which started post the banking crisis when austerity started to bite. The ‘idea’ of outsourcing fell out of favour and over the next decade, fell further to become a symbol of everything that’s wrong with a Conservative government in the eyes of the Labour party.

Today, many Labour politicians see private sector outsourcing as the proverbial whipping-boy. Ending the ‘tyranny’ of outsourcing has become a central pledge of the party that is aiming for power.

Are there Challenges Proving that In-house Delivery will Offer Better Value for Money?

Whether services are delivered in-house, services shared between organisations or outsourced to the private sector, it’s crucial they not only offer value for money, but that value can be independently evidenced.

There are many examples where outsourcing has gone very wrong. But historically, it is perceived there are more examples where in-house services were delivered much worse – hence why outsourcing found favour. While there are examples of in-house services that have been the subject of poor delivery, there are success stories too.

This is also true for public services being outsourced to the private sector. Profiteering and poor value for money have been the main objections from the public sector. And in a number of cases, the evidence bears this out. But there still remain many cases where in-house service delivery offers worse value.

So, is the answer to take the lesser of all evils and select the ‘least worst’ option between outsourcing and insourcing for all services?

Of course not. So, the ‘outsourcing is always bad’ argument falls down at this point, as does the ‘insourcing is always good’. If you can’t clearly identify that outsourcing is always bad, you have to evidence that bringing those contracts back in-house would offer better value for money. Despite the importance of this exercise, I recognise this is a big ask.

The major issue with this is that to bring an early end to private sector contracts would cost the taxpayer many billions of pounds. The financial challenge also doesn’t completely go away if you just wait until these contracts expire. To bring these major contracts back into the fold of the public sector would always require a significant amount of manpower, retraining, investment and recruitment. What often isn’t seen either, is that once individuals leave public life as a result of a TUPE arrangement when they move into the private sector, many of them (albeit not all), value much reduced bureaucracy and prefer not to return to the public sector environment when services are insourced.

The other challenge that insourcing brings with it is that, in many cases, outsourcing was chosen as a way forward for major projects because many public sector clients didn’t have the capacity/resources to run the project themselves. They perceived that it would probably be run more expertly and at a lower cost by those in the private sector. Simply bringing these contracts back in-house does not change those perceptions.

Insourcing or Outsourcing? What is the Best Approach?

In reality, the question isn’t whether services should be insourced or outsourced. The questions are more fundamental. We should be asking:

  1. What social and environmental responsibilities do we need to address as central and local government organisations?
  2. How do we address them?
  3. How do we have to reshape our thinking to address service delivery in a very different way, given the austerity measures that continue to bite?

Only then can we draw up our business case for each service to determine whether each should be insourced, outsourced, shared, volunteered – or discontinued.

An Example of One Approach – Insourcing

Once the business case has been agreed, you can implement the most effective approach for each service. As an example, if you determine it should be insourced because your business case and value for money evidence clearly demonstrates this, there are several benefits to this approach if insourcing is implemented well.

Control

The first benefit is control. When you outsource it’s important to recognise that you move into a ‘delegation’ process where direct control over the service is undertaken by a third party, and for good reason. While you must provide clarity on the outcomes you’re looking to achieve, it’s important to leave the ‘how’ to your chosen outsourcing partner. Interfering in the ‘how’ may well negatively impact on the relationship, its trajectory and, therefore, the chances of the success of your project. Bringing a project/service delivery back in-house gives you direct operational control once again.

Expertise

The second benefit of insourcing can be expertise. Sometimes outsourcing is a decision that’s rushed into. It can be chosen for reasons other than cost-effectiveness – political for example – where urgency pressures were significant. If you decide to bring the project back in-house and can secure the right (and willing) individuals back from the outsourcing company, then you have scored a great coup. Well done. As we stated earlier, many individuals, once given a taste of life outside the public sector, are very reluctant to venture back in.

Cost reduction

The third key benefit of insourcing, implemented correctly, is cost reduction. Private sector organisations are responsible to their shareholders and they’re tasked with making as much profit as is reasonably possible. Public sector organisations are responsible for much wider ‘balanced scorecard’ considerations, including economic regeneration, social values and the environment. Any monies that can be saved from the direct costs of service delivery can go towards funding wider social causes if the project is brought back in-house.

This said, the reality is that if value for money is genuinely achieved from private sector outsourcing, their profits can be a good thing – as can performance bonuses for individuals. The taxes on profits and bonuses feed the taxation system – which in turn contributes towards how much money the public sector has to invest in the economy and support of the country’s social and economic systems.

What is important, however, is that profits and bonuses need to be achieved in the context of a wider social balanced scorecard basis. The pursuit of profits and bonuses for their own sake often drives really poor behaviours from the individuals who are in receipt of them. In these cases, you’ll usually find that the wrong measurements are in place within the organisation responsible.

4 Steps to Smarter Insourcing

If your business case determines that you can evidence that one or more services should be brought back in-house, there are four key considerations it will help to have on your radar:

Step 1: Smart analysis

It’s often not economically feasible to follow political ideology alone. There needs to be a financial and social values viable reason for bringing outsourced activities back in-house. So, analyse the life cycle of your project – why did you (or those who made the decision) feel outsourcing was the way to go initially, what’s changed since then, have outsourced partners proven their worth (or lack of), and have they been given the time to turn things around (as making too swift a decision could cost you more than you hope to save). Essentially, can you show a clear and undeniable business case for insourcing this particular service?

Step 2: Lessons learned

It’s order to assess whether your organisation is ready to insource, ask yourself whether you have successfully navigated previous projects in-house where you utilised similar skills and expertise that would be needed on this one? And, have you recognised the challenges in your outsourced partner that you can evidence you would have handled better internally? It’s important to learn lessons and employ this knowledge to avoid pitfalls, but it’s just as important to be able to evidence that this is what you can and will do before considering insourcing services.

Step 3: Resource ready

It’s a simple question with a very complicated calculation to determine a sensible answer, but do you have, or are the ‘right’ individuals available, to make insourcing a reality in practical terms? Some clients who outsourced services/projects did not see the need to retain teams of individuals with the expertise to run a project that has been handed over to an outside team. Do you feel you are, or can be, resource-ready to handle the project now? What skills and manpower will be needed? Where will they come from (new recruitment or other departments)? How long will the resource reshuffle take for you to be ready and do you really know how resource heavy the project will be at every stage in its evolution?

Step 4: Business case

Just as you would have developed a business case for the project at the outset, you should produce one with the same depth and clarity for insourcing the services/projects. The business case must be able to identify quantifiable benefits for such a move. The creation of this document should help you to identify all three steps mentioned above which, in the right combination, will provide you with the justification and the evidence for insourcing.   

Conclusion

According to The Times article, Mr McDonnell unveiled plans to “to force councils to take back control” [Note: just councils?] of certain services should they win power at the election. That they will “take contracts back in-house when they expire”. But the article went on to warn that those who advocate such things have “very short memories” for both the innovation and cost savings that many outsourced relationships have created. It also noted “the chaos of the 1970s” in the time before outsourcing, when costs ran rampant and public institutions were bogged down in red tape and industrial action.

Insourcing is just one of the viable options in the right circumstances. There are certainly cases where it has succeeded when implemented well. However, the cost of doing this wholesale, as Labour say they intend to do, would be significant and would be a difficult thing to justify unless evidence can be brought forward to show the medium to long-term benefits of such an action.

Photo credit: iStock

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