By CivilServiceWorld

14 Dec 2012

The government has repeatedly come a cropper when outsourcing work, but the number of outsourced projects is only going to grow. Mark Smulian attends a round table on how the civil service can become a shrewder customer

When a Tory-led government came to power in 2010, both the opponents and the champions of outsourcing expected to see it passing big chunks of public sector work to the private sector. In the event, with the Liberal Democrats acting as a brake, the anticipated wave of outsourcing schemes has so far been more Torquay than tsunami. Yet this still leaves the civil service managing thousands of outsourced workstreams – and a number of recent service failures have illustrated just how important it is that officials have the right skills, capabilities and structures to expertly commission and manage external providers.

We’ve seen the abuse of residents in care homes; the failure of G4S to fulfil its Olympics contract; complaints over the quality of Capita’s law court translators; the collapse of care home provider Southern Cross; fraud in the Work Programme; and, of course, the mismanagement of the West Coast Mainline contract. The civil service plainly has a lot to learn about how to handle outsourced work; so CSW, along with law firm Bird & Bird, convened a round table to discuss the issues.

Though outsourcing has not accelerated dramatically, Bird & Bird senior associate Barry Jennings pointed out that the nature of outsourcing schemes has been changing over the last decade from “back-end, simpler stuff, like IT, printing and facilities management, to much more of the discussion around front-end services and being more radical about what could be outsourced”. This mirrors trends in the private sector, he noted.

Meanwhile, Jennings explained, two contrary trends have emerged in outsourcing projects. One movement – particularly noticeable in the field of IT – is that “rather than going to one contractor and saying: ‘You are going to do everything for us’, people break it up into separate contracts” – leaving departments less vulnerable in the case of failure on the part of an individual supplier. Meanwhile, pressure to exploit economies of scale is increasing the size of other contracts. “Simpler outsourcings may get bigger, while more technically innovative or complex projects may get smaller,” predicted Bird & Bird partner Peter Elliott.

Alongside these changes, said Georgina Aplin, commercial delivery manager in the Cabinet Office’s Efficiency and Reform Group, civil servants are being encouraged to pose bigger questions about service delivery – moving from asking “whether government should be doing this back office service, to starting to look at: ‘Should this agency be in the commercial world?’.” Conventional outsourcing is “not always the answer,” she said, particularly when government wants to realise the potential commercial value of an activity: joint ventures and mutuals should also be considered.

The ingredients of good outsourcing
Asked to list the essential requirements to make outsourced projects work well, participants agreed that clarity on all sides about the project’s objectives and the players’ responsibilities is crucial. Differing expectations, poor specifications or lax contract management are often to blame for failures, they said.

A common thread found in successful schemes, said Elliott, is that “people understand what they are trying to set up in the first place, what they are trying to achieve, and how they will measure success – and have then kept that in their minds, not just in setting up the contract but throughout its operation.” When client and provider expect different things, said Jennings, it’s easy for things to “go horribly wrong”. And then “it really does not matter how good your relationship is, because a supplier is not going to bite the bullet and take on £10m more of work for no extra money”.

Good information on the public bodies’ current operations is equally important, pointed out Ministry of Justice finance business partner Emma Eckered. Traditionally, knowledge about markets and the strengths and weaknesses of individual suppliers has been scattered across government, with cultural and structural obstacles preventing its transfer – but Eckered noted that the MoJ has spent the last four years increasing its data on and control over all the contracts managed by its various arms and agencies, “so we have an understanding and can compare costs”. This enables the department to act as a single buyer, she said, finding efficiencies across its operations. “People asked for information on suppliers, and we could not give it as we did not have it all. Now we have a complete picture of what we are spending.”

As the MoJ’s Kay Wood, a senior estates finance business partner, pointed out, there is some way to go before that kind of oversight extends across Whitehall: “Information is not in one place, and until we have an overview it is very difficult to say: ‘We can do this’,” she said. Things are improving, said Elliott, but many parts of government still don’t find it easy to ask colleagues in other departments for information on, for example, suppliers’ competence. “At big department level they talk to each other about suppliers, but that does not always filter down to smaller organisations, even though they will be running contracts worth tens of millions of pounds and need to get up to speed as well,” he said.

As well as understanding their own operations, civil servants need expertise in the contractor market and intelligence on individual suppliers. “We should be experts in the market concerned, and if we are not we should make ourselves experts by talking to the market, funders, and colleagues to raise our game,” said Aplin. “Being more commercial is part of the day job.”

Rethinking risk
Such knowledge helps to squeeze risk out of outsourcing projects – an essential undertaking, as departments’ efforts to pass risk to suppliers have often led to prices spiralling without actually reducing the pain for government when things go wrong. As Tony Waldron, head of commercial and lead negotiator at the NHS Business Services Authority, pointed out, government always remains ultimately responsible for service delivery standards. “Risk can never be transferred to the private sector,” he said. “And if there is an assumption that risk has been transferred, that is where problems happen, because people get lazy and complacent”.

Kally Sheth, a large business services advisory accountant at HM Revenue & Customs, emphasised the importance of developing a Service Level Agreement (SLA). In one outsourced project, she recalled, civil servants required a small but essential change to the service provided, but in the absence of an SLA commissioners and suppliers had been unable to agree a solution. Having contacted senior managers within the supplier to short-circuit the blockage, she found that “once people understood the requirement, it became very easy. It was just a question of getting in direct contact with the right people and I think they were keen to demonstrate they could give a good service.” The lesson, she said, was that had an SLA been in place “we would not have had the first response we had”.

Jennings backed Sheth’s call for strong SLAs, noting that relying on contract terms alone can see suppliers “ticking all the boxes”, while still leaving clients unhappy with aspects of their work. In such cases, he added, “if it’s not in the contract, legally there’s not much they can do about it”.

Sheth’s point highlighted the importance of good client-supplier relationships; close partnership working cannot guarantee success, but weak relationships often mean failure. “If you do not have a strong relationship... that is where you get the friction and services not delivered in the way you want,” said Waldron.

Picking people on point
On the commissioner side, those relationships are generally handled by contract managers – and Aplin called for work to improve the skills of civil servants in this role. The low status of contract managers in Whitehall is “a bugbear of mine, as often the people appointed are not necessarily professional contract managers,” she said. They need either skills as professional contract managers, she said, or deep expertise in the field of work; too often they have neither.

Jennings too said contract management should be a senior role, occupied by people who can “talk right up to chief executive level” – but instead tends to be handed to junior staff. Civil service human resources procedures don’t allow managers to put senior officials into these jobs, “but they might be responsible for a £1bn contract. It’s an HR grading problem as much as anything,” he said. “For me, the contract manager should be the person who brings all the silos together in an organisation, and I found my role when I did it was to go round different bits of the organisation and try to get consensus.”

Indeed, Wood suggested that the civil service’s generalist tradition can undermine its operations across procurement and contract management. “The civil service is renowned for generalists... but if outsourcing is going to get wider, it must recognise that certain elements need specific skills and you cannot just slot in generalists to fill those gaps,” she said.

Public organisations must also ensure that, when services are outsourced, they retain sufficient expertise to oversee a successful supplier handover or take a service back in-house. “The degree of ‘replaceability’ of a contractor plays a part in the success of a contract,” said Metropolitan Police analyst Alan McDonnell. “Some suppliers, once in an IT system and doing the programming, are impossible to replace because nobody else understands it, so they can give you whatever service they want.”

Jennings pointed out that this can affect the way in which contracts are re-let, particularly when service delivery equipment is becoming outdated or worn. “If there is no life left in assets at the end of a contract, an incoming supplier will not want to take them on without a substantial risk premium and immediate transformation programme,” he noted. That makes new suppliers appear more expensive than incumbents, which are often happy to soldier on with the old assets and defer the costs of replacement – even when that builds up greater costs in the long term.

Dependence on existing suppliers can partly be avoided by setting contract lengths of three to five years rather than a decade – and Elliott pointed out that this allows commissioners to more easily make changes to services without renegotiating with an incumbent. Shorter contracts also allow for a relatively quick exit if performance is poor, he said, and longer ones can “go off track as people forget what they were about”.

Avoiding calamity
With the main ingredients for success listed, the chair asked how recent outsourcing failures could have been avoided. What about the abuse of care home residents, for example? In part, said Wood, such problems should be eliminated by good policy work: the care sector controversies illustrate the need to “get the policy right before you implement outsourcing. If you don’t, the rest of it doesn’t follow.” Even then, a strong inspection regime is required to ensure quality, she added: “Outsourcing does not absolve us of responsibility for a service, so we need inspection.”

Wood also pointed out that the collapse of care provider Southern Cross demonstrates the need for civil servants to put fall-back plans in place, and keep a careful eye on the provider’s financial health: “Have a contingency plan, so if a significant issue is imminent you have something you can put in place.”

Asked how departments can ensure suppliers cut costs through efficiencies rather than degrading service quality, Elliott recommended involving all those who’ll be dealing with the contractor – including junior staff – in designing SLAs so that, for example, standards are set for how quickly telephones should be answered. Relatively minor irritations can quickly turn public sector staff or service users against a provider, he said.

As civil service organisations ask care providers to drive down costs, said Elliott, “there are pressures in care to cut corners and pay staff low rates, and if you want to move away from that you need a procurement process that makes it easier to pick the right suppliers. That might be hard to justify as they are more expensive, but they will have the people who care about delivering a good service on their staff.” Patient groups could be involved in specifying services, suggested Waldron: “Ask them how they would want care done, and take time to get governance structure right,” he said. “You may not get the cheapest service, but you’ll get one that works.”

Turning to payment-by-results schemes such as the Work Programme and its predecessors, the chair asked how civil servants can minimise opportunities for fraud. Performance monitoring is always essential, replied Jennings: while it would be wrong to assume that “90 per cent of the supply side community is out to defraud customers”, organisations generally shouldn’t be allowed to scrutinise their own performance. “There is obviously a conflict of interest there,” he said. “You could procure a service and split that into a service delivery contract paid by results, and a service reporting line awarded to a separate entity which is paid on a fixed basis.”

Having covered both the ingredients of success and the protective measures that should avoid disaster, the round table participants returned to their departments with a set of thoughts about how to make outsourcing work, and a renewed understanding of how difficult it is to get it right. Both assets will be increasingly important to the civil service – for while the outsourcing tidal wave remains over the horizon, departments certainly face an inexorably rising tide of outsourced work and contracting jobs.

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