Factoring in supply chains, there are 5.4 million people employed in the public services sector in the UK, generating an estimated £113.5bn in revenue in 2012/13 (or 7.2% of UK GDP). It is, therefore, surprising that for a sector in which successes and challenges are magnified by the impact these have on taxpayers, their wallets and their trust, that public sector outsourcing continues to be perceived by some as unable to learn from its own experiences.
Compounding the pressure of the resulting strategic partnerships taking place in the public eye is the need for the social impact of a contract to be taken into account, in addition to its economic benefits and risks as well as for the contract to be able to outlive its signatories – transcending administrations and elections.
However, the lifetime of such relationships is often much shorter than anticipated as a lack of contractual clarity and poor quantification of expectations and outcomes sees a contract’s efficacy for both parties degrade over time delivering questionable value for the client and limited growth opportunities for the providers.
For public sector outsourcing to be at its most effective, it must learn from current obstacles and not repeat them with predictable, but increasingly avoidable, frequency. Here are a few of the most commonly repeated challenges we find that all involved in outsourcing agreements should have on their radar:
1. The importance of appropriate vendor due diligence during the procurement process
Failing to implement adequate performance metrics and conduct suitable due diligence can damage prospects even before a contract has been agreed upon, but spending cuts are pushing the public sector to find ever more innovative ways of attempting to reduce costs. Unfortunately, where innovation cannot be found, it usually results in vital corners being cut so that whilst procurement timescales have been achieved, fitness-for-purpose of the procured service often is not.
The hazards of short-term cost savings during the procurement process often results in inadequate risk assessment. Such an example is exemplified by Transport for London’s (TfL) attempt to reverse historic under-investment in its underground network, which comprised the modernisation of Tube stations and maintenance or renewal of assets such as trains, signals, lifts, and escalators. London Underground entered into Public Private Partnerships (PPP) contracts with two organisations called Tube Lines and Metronet; the latter responsible for overhauling two-thirds of the rail network over a period of 30 years. Just four years later, however, Metronet admitted that the cost of the project was outstripping the company’s budget, with an expected overspend of £1bn. Later that year, it went into administration, before having its debts and administration costs (a total of £2bn) settled by the Department for Transport and the organisation being incorporated into TfL.
In 2014, the Crown Commercial Service was established with the goal of mitigating such procurement shortcomings. The importance of which can be further punctuated by the contrast between Metronet’s failure and the success of its counterpart, Tube Lines, which the London Assembly Transport Committee praised for delivering “substantial improvements to the Underground to time and budget”. The Committee concluded that “Tube Lines has demonstrated that the PPP can work. Metronet has demonstrated that the PPP can fail.”
2. Basing the perceived value of strategic relationships on cost instead of value and fair fees
The human resources aspect of a strategic service relationship often comprises around 80% of the cost of a contract. As a result, an organisation’s human resources are usually the first to be affected by any disruptive internal mechanism or external pressure to reduce costs (whether in order to win a contract or meet delivery expectations). Therefore, assessing a potential strategic partnership based on cost rather than value for money most often winds back to you in the form of decreased service quality, as your provider’s staff take the brunt of ensuring cost efficiency.
Saving on costs now without addressing a strategic reshaping of the service also doesn’t guarantee future savings for you or taxpayers. In fact, a report by Social Enterprise UK, a national body for not-for-profit businesses, found the opposite to be true: savings made now without strategic service realignment are paid for by future taxpayers.
For example, when private sector providers in the adult social care sector make tempting financial offers to councils, this often means carers end up working at (or in extreme circumstances, below) minimum wage. Where the consequences of these reductions are less than transparent, local authorities are not necessarily aware that their own residents may well be on the receiving end of those low wages.
In such an event, the local authority’s own housing benefit department will be tasked with making up the carer’s rent shortfall, while their health and children’s services will be strained even further.
So, prioritising cost over mutual value not only has the potential to fan the flames of an unproductive work environment, reducing morale and stifling innovation, but a saving made “in one part of the public purse creates an equal or greater loss in another”.
3. Avoiding transparency
Lack of transparency and accountability has marred numerous high-profile controversies in the public services sector, prompting the perception that some service providers pay lip service to the importance of being ‘open’. However, while some public sector organisations may only view transparency as a way of ‘ticking the value box’ and some private sector providers seeing this as ostensibly an easy way of getting the public on their side, there are very real benefits to ‘real’ transparency. Three areas worth highlighting are the visibility of contracts, open-book accounting, and independent auditing.
- Higher visibility of contracts
Holding the government accountable for how services are delivered or determining how well a contract has performed is highly difficult without contract visibility. And it is this lack of visibility that often diminishes the outsourcing relationship’s ability to maintain long-term viability through independent assessment, perspective, and input.
Fortunately, in addition to the Public Accounts Committee’s (PAC) call in 2014 for published contracts, tentative steps have been taken to increase their visibility. In March, Cabinet Office Minister Francis Maude announced the trial of a practical transparency clause in public sector contracts aiming to align the government and its suppliers “and improve their commercial behaviours in order to sharpen transparency and accountability, while ensuring suppliers have the space to innovate”. Based on recommendations from the Institute for Government, strategic suppliers will provide performance data, details of fees and aggregated financial data, and details of major subcontracting arrangements. This information will in turn be published in an accessible format for easy public access.
It’s worth noting, though, that high contract visibility isn’t without its drawbacks because if it is constructed inappropriately, it will affect a supplier’s competitive advantage. Depending on a supplier’s viewpoint, the result would either be restricting service providers from being able to compete or creating greater competition with smaller suppliers entering the fray.
- Open-book accounting
Already widely adopted within the British construction industry, open-book accounting means cost information that is:
-Open and transparent
Open-book accounting enables both parties within an outsourced relationship – as well as any third party with access – to understand key aspects of a supplier’s costs, helping to highlight potentially wasteful practices and inefficiencies, and enter into a constructive discussion to determine how practices may be realigned to provide the financial space for better forms of innovation.
As a result, ‘real’ open-book accounting has the potential to help clients and providers create financial surplus for innovation, cost efficiency and to save money, assuming the right client-side expertise is available to review and assimilate such data.
According to the PAC’s 2014 report on public service outsourcing, only a third of contracts are on an open-book basis and, even then, departments rarely take advantage of their increased access or, it appears, lack the capability to do so.
In the same vein as a transparency clause, the wider use of open-book accounting has only been trialled, but CIPFA (The Chartered Institute of Public Finance & Accounting) proposes a slightly more radical solution to cost transparency: open-book contract management, in which external auditors would confirm that all charges have been costed in accordance with the specified open-book accounting procedure.
- Independent auditing
Independent auditing affords an extra layer of transparency and security within the outsourcing partnership, whether it is the aforementioned proposal for audits of charged costs or independent audits of contract bids.
Independent auditing of contract bids allows parties to enter a strategic relationship that is properly costed and will benefit both sides, along with the opportunity to prevent the negative social and economic impacts of improbably low bids (and/or exaggerated perceived benefits) whose ultimate costs are paid down the road.
In 2011, David Cameron heralded a new age of collaboration between the public and private sectors with his proclamation that the “old narrow, closed state monopoly is dead”. But while the outsourcing revolution has been a boon to the public service industry, the research undertaken on the present success rate of strategic partnerships between the state and private businesses seems to indicate that complacency isn’t warranted.
Understanding where previous projects have succeeded and where challenges remain, helps to avoid repeating past mistakes, while knowing which facets of your supplier relationship can be improved, ensures that both you and your strategic partner come out ahead.