Realising benefits while managing risk – the key to delivering successful outsourcing
Proxima details the three critical success factors which must be in place for an effective outsourcing strategy
The collapse of Carillion and most recently Interserve entering administration has thrown the spotlight on Government’s ability to manage key strategic suppliers. Such events also raise questions around the construct of many of the public’s largest outsourcing arrangements.
What do these seismic shifts in the supply market mean to the future of Departments’ commercial dealings with behemoth ‘partners’ who have become a fixed part of the front line landscape to deliver public services? It’s easy to default to lazy answers in these challenging times. But the key question is – what is the role of outsourcing in the future delivery of public services?
Outsourcing is defined as ‘an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally, and sometimes involves transferring employees and assets from one firm to another’.
In this context, it represents the concept of practice of handing over control of public services to private enterprises. In practical terms? It means the public sector is significantly dependent on external suppliers.
Today, Government spends £268bn or 32% of general Government expenditure on buying goods and services from external suppliers, which by international standards isn’t particularly high. The Netherlands and Japan both spend more than 40% of their expenditure on external suppliers. Under the right market conditions and by targeting the right services, the tax payer can get better value for money by outsourcing through improved services, enhanced social value and environmental performance, and lower costs. Evidence shows this is difficult to do in reality; can this be achieved in the UK in 2019 and beyond?
It’s not a one size fits all.
In some cases in-house delivery or in-housing of currently outsourced services will prevail. One recent high profile review has been completed by Dame Glenys Stacey on probation services, which concluded “we now find probation supervision provided under contract to be substandard, and much of it demonstrably poor”. The future of this commercial arrangement is not clear but big questions are being asked about the long term sustainability of outsourcing in this area.
In response to the challenges being experienced, the Government Commercial Function launched in February 2019, the new Outsourcing Playbook to help teams make better outsourcing decisions and manage contracts more effectively. The documents contain sound advice but will need to be incorporated in to day-to-day activity to deliver the desired effect. The programme to develop commercial capability across Government is progressing well – but it’s too soon to see real results.
Proxima’s experience in leading major 'make vs buy' reviews to assess the pros and cons of outsourcing shows that sometimes it works and sometimes, it just doesn’t. Our observations show outsourcing is successful when three critical success factors are in place - but these are easy to overlook and can have crippling effects on long term service delivery and value for money if they are not considered effectively:
- The supply market brings you added value
First and foremost, outsourcing presents an opportunity to tap in to specialised organisations, which can bring continuous innovation and improved performance. In the digital age, organisations are increasingly looking outwardly for sources of innovation, whether it’s from incubators, academic partnerships or external suppliers. For example, consider security services, by outsourcing security services it isn’t purely moving labour from one payroll to another, it’s about meeting the objectives of safety for your people, building assets and reputation in the best way possible. The outsourcing market is able to implement risk based solutions using a combination of human labour and technology not readily available to many Government departments.
Commercially, if Departments are considering outsourcing services, the key question has to be how will the external market offer more value than today? If the aim is to outsource non-complex services and the arrangement only moves labour from one payroll to the other it won’t give those benefits, no matter how well it is executed.
- The supply market is competitive
Outsourcing isn’t about focusing on price. This in itself can be a struggle for Government to countenance. It is important for Government to access markets, which have good levels of competition and as a result Government does not become over dependent on particular suppliers – it will achieve a spread of risk over a politically sensitive portfolio. Government’s strategic suppliers with spend greater than £100m per year has grown over the last 5 years, which does ring some alarm bells considering some of these suppliers have had financial difficulties and include both Carillion and Interserve.
Opening up more competition starts with the tender process. Whilst the EU regulations are designed to support this, research from the FT and OpenOpps shows that 23% of all public sector contracts were awarded to sole bidders. The statistics speak for themselves - the tender approach needs a rethink. It needs to be more open and accessible to a broad church of suppliers. This means going beyond issuing a PIN and, instead, designing the full end to end tender process in a way that is attractive to bidders and encourages high levels of participation. A post Brexit exercise, undoubtedly.
- Risk is actively managed and objectives are aligned
Some great steps forward have been made with the continued investment in the Government Commercial Function, taking the best from a mixture of public sector and private sector professionals to help manage complex relationships that span Government departments.
The first steps are often the hardest, these roles now need to take a broad view across Government and to not just focus on beating down costs but consider driving innovation with the right incentives and managing risks. After a string of profit warnings, both Carillion and Interserve were awarded in excess of £2bn in new contracts. This does not signify effective management of commercial risk. A new, fresh, bolder, approach that will manage risks and make tough decisions is needed. Arguably this starts with technology and data. Both are critical to creating better visibility across Government departments along with proactive risk management. When the technology fundamentals are in place, new solutions such as using AI platforms to leverage the power of news and social media platforms as part of a broader risk management strategy will then also play their part.
In conclusion, Proxima observes that outsourcing offers great potential to Government to deliver more innovation and more quickly. As time moves on, and technology plays an even greater role, this this will only accelerate. Government should not be scared to innovate. Don’t stop searching for partners who can do things better than you can. Do have your eyes open to the risks and do keep them open to develop a commercial strategy which delivers real value through effective management of the supply base – whatever its shape.