The local authority outsourcing market: real gain or real pain? And what’s the practical alternative?

By Allan Watton on

outsourcingThe outsourcing market is one of the fastest growing sectors in the UK today. Local government contracts alone, were worth an estimated £30.5bn last year. Understanding the size and shape of such a rapidly growing marketplace is, therefore, crucial if you wish (or are forced) to play a part in it. In this article we have pooled data and put our heads together to outline an approach to help you visualise this complex sector and the likely effects of the government’s focus on encouraging more SMEs to enter the bidding process.

The definition of ‘outsourced’ varies dramatically across different areas of the public sector. Subject to both economic and political change, the outsourcing market is inherently prone to controversy. And, while putting contracts out to tender in sectors such as adult social care is now seen as standard practice, opening some others up to the private sector, like children’s services for instance, has already attracted much debate.

In order to try to avoid the recent relationship breakdowns, and associated negative press, that has often followed the usual large private sector contractors, and in an effort to reduce costs, the current government is increasingly exploring the idea of breaking up larger contracts between numerous SMEs. While cost cutting is high on the agenda here, such a move is also likely to have a positive effect on competition in the sector as it will help to open up more local contracts to more local businesses. And by boosting the local economy, the government believes that they may well help to calm any resistance to public services being delivered by private organisations.

Your own experience will likely highlight that there are some material risks associated with giving large(r) and often potentially mission critical contracts/projects to SMEs. On the plus side, smaller companies are usually much more lean and agile, often leading to much lower costs, flexibility and innovative solutions. A win-win?

Well, not quite. I am going to sound like a broken record on this, but the key issue we see time and time again when commissioning/outsourcing of major IT project/service relationships breakdown, is that the client-side intelligent client function is not just thin, but positively emaciated. When being ‘sold’ the benefits of outsourcing from private sector providers, we often see that senior executives on the client side don’t realise that unless you have the right mix of ‘intelligence’ (technical, management, contract management and project management expertise) in-house, you can’t have certainty that you are achieving best value.

And often, the consequence of not having certainty is a lack of visibility over input charging, but worse, no clear measurement of quantified benefits being achieved, the direct cash savings, or even other softer benefits that are unable to be financially quantified.

Some private sector providers treat this lack of being able to quantify results, as a bit of a catch-22. On the one hand, if they aren’t achieving your expectations, but you are unable to quantify what your expectations were in the first place, then it’s difficult (though not impossible) to hold them to account both morally and contractually.

On the other hand, when your audit and scrutiny committee ask for evidence of the benefits you are achieving from the relationship, other than to provide a general direction of travel as to the benefits, but no real evidence, then this often leads to discontent and requests for further clarity and better certainty. From the provider’s perspective, the catch-22 on the downside is that they are often unable to provide quantified evidence of the value they have created, although they ‘know’ (perceive) they have created value.

What the outsourcing market currently looks like

The direction the outsourcing market is likely to take over the next few years depends on a wide range of factors, but we can learn a lot from what it looks like right now.

While many councils, such as Barnet and Suffolk, have had outsourcing at the centre of their strategy for years now, others are much newer to the practice. Spending cannot be divided neatly along party political lines, as both Labour and Conservative controlled councils outsource to the private sector. However, as an example, in recent years the Labour-controlled Borough of Islington has started to move against the current by bringing some of its services back in-house after having put them out to tender in the past.

The key growth sectors for outsourcing last year are also interesting to study if you wish to get a clearer picture of the marketplace. The top positions by total expenditure, according to public sector and bespoke researchers, Porge, go to:

  • Housing and social care with 30.54% of total expenditure
  • Property, construction and facilities management with 25.6%
  • Highways, transport and waste accounting for a further 19.42%
  • IT outsourcing is often one of the most talked about sectors due to the pain often associated with it. It accounts for a mere 6.58%
  • Corporate, accounting for 6.47%
  • Legal and financial at 6.28%.

The ‘value’ that different public sector bodies get for their spend in outsourcing also seems to vary hugely. This is why having a strong, intelligent client function is so critical to closely monitor your outsourced/commissioned relationships to ensure that not only are you getting what you expect from them, but you are also driving the right behaviours between both yourselves and the providers to achieve the best possible outcomes.

The shift from large national providers to local SMEs

As you know, the government is keen to see a move away from large provider monopolies, towards awarding more outsourcing contracts to SMEs. After the negative press that the problematic relationships between the public sector and a few national providers has attracted, local councils are keen to allocate more contracts to local businesses with closer connections to the communities that they serve. Of course, the main reason for the drive towards SME vendors is an attempt to cut costs, as small companies are perceived to be able to provide a more detailed focus on specific project areas than larger providers can, offering greater value at lower rates.

While this is good news in theory, in practice the process of switching from one or two larger vendors to numerous SMEs could cause some problems if local government fails to implement effective ICF (Intelligent Client Functions) provisions. As stated earlier, it is our own experience of dealing with many hundreds of these relationships, that often senior executives do not place enough importance on having a well-resourced ICF team on board. So if this is the case when dealing with larger providers, are client-side teams likely to be prepared for the added complexity of managing many smaller providers at once throughout the lifecycle of a contract?

So why is a well-rounded ICF team so important when dealing with SMEs and what are the potential consequences if you do not have one?

Why SME outsourcing needs a strong ICF team

With the average value of local government contracts rising by 67% last year, outsourcing is very big business. In order to get the best value out of your providers though, particularly SME providers, it is crucial that you have a well-resourced ICF team in place. Without this, if things go wrong, it may be hard to determine where the cause of any problems may be coming from.

The more vendors involved, the more complicated the process of managing and maintaining pace and schedule. With contracts being split between numerous small providers, it is our experience that if things take a turn for the worst there will be a lot of finger pointing and unclear technical evidence as to where the cause of the problems arose from. Because of this it will be far more difficult to get to the root of the problem so it can be resolved and the relationship and business outcomes can get back on track, quickly.

A well-resourced ICF team overseeing the project can independently monitor all parties and anticipate potential problems, providing practical solutions before a project is shifted off course. After all, as you know, while you can outsource many things, you cannot outsource strategy, and without a strong ICF team in place you will not be able to appropriately challenge key vendor decisions or drive maximum value from the relationship.

In order to cope with the ever-changing landscape, it is, therefore, vital that you have a skilled ICF team with the manpower, the funding, the authority and the relevant expertise to drive the correct behaviours and outcomes on a project.

Each client situation is different, according to the service being outsourced, but our own experience is that a strong ICF team (consciously developed to ‘expert’ or ‘diversified’ standard), will generate between two and eight times return on its costs annually.

Your place in the outsourcing landscape

Although there are many adverse press reports regarding public sector outsourcing, there is little doubt that the current evidence suggests the outsourcing market will continue to grow throughout the coming years, whatever the political environment. It seems government does not have any credible answers for a sensible alternative. It is, therefore, crucial, whether you work in the public or private sector, that you keep on top of the latest changes in the market and take the time to invest in a solid and emotionally mature ICF team that will be able to deliver maximum value for you, particularly if you are dealing with an increasing number of SMEs.

A word of warning for the larger providers

A comment for the larger outsourcing/commissioned providers: £30.5bn is a very attractive opportunity for those providers looking to continue the bidding process for public sector contracts. So, if you are one of these providers, just be mindful of the changes coming with the new EU procurement regulations, expected for implementation in the UK in 2015. These will assist public sector organisations to weight much more heavily and select their preferred providers based on:

  • Social values.
  • Subcontracting large elements of work to the local economy (whether SMEs, mutuals and/or other socially based enterprises).
  • Your past service delivery performance – very specifically, whether you have achieved ‘reasonable’ business outcomes for your other clients, not just whether you have achieved what was detailed in the KPIs or specification.
  • Flexibility of increasing or decreasing the scope of outsourced services – without significant financial penalties to your client for doing so. For example, if a client wants to terminate or reduce an element of service early (prior to the natural end of the contract), it is unlikely that you as the provider will be able to legitimately claim for loss of profits to the end of the contract. However, you are likely to be able to offset reasonable costs (independently validated – not just what you say the costs are) of reshaping the service and changing the delivery resources accordingly.

A further point is that during the bidding process, when representing to your potential clients that you are prepared to offer the flexibility as outlined above, you need to bear in mind that your statements must be supported by quantifiable evidence. In other words, you need to provide performance measurements and reporting from other clients showing how you have implemented social values, SME subcontracting, performance reporting and flexibility of increasing or reducing the scope of service delivery without penalty, and quantifiable evidence of the business outcomes as a result.

Your prospective client will be entitled to ask you, as the provider, for reasonable evidence to support your claims. If your evidence does not align to your claims, then the prospective client may well be entitled to deselect your organisation from the bidding process as a result. Alternatively, if you win the contract, but it transpires post-contract, that the evidence you provided in support of your claims was not accurate, the client may well be entitled to cancel your contract and select a replacement provider, with you being responsible for the resultant costs of the client having to re-engage with a different provider.

And if your legal advisors suggest they can contract you out of this obligation by cleverly worded ‘Entire Agreement’ or other contractual clauses, then you need to find yourself alternative legal advisors, because it will be very unlikely you will be able to rely on those exclusions in view of your ‘expert’ provider status.

For providers, large or small, that can demonstrate this tangible evidence of achieved business outcomes and flexibility, the future looks very good indeed for winning mutually beneficial work in the public sector and improving community outcomes by excellent and value driven service delivery.

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