Following in the footsteps of local government, Whitehall is set to accelerate the outsourcing of services and functions. Stuart Watson monitors progress – and looks for lessons in some major recent outsourcing programmes.
With the dust barely settled following the election, the new administration’s cost-cutting drive is under way. On 24 May the chancellor outlined the first £6.2bn of savings and the establishment of a new joint Treasury/Cabinet Office body to co-ordinate the push. That will constitute only the first wave of the efficiency drive, however – and the signs are that outsourcing will soon be high on the agenda.
In March, a paper released by the Conservatives’ Public Services Productivity Advisory Board outlined many of the efficiency measures that the Treasury/Cabinet Office Efficiency and Reform Group will now implement. It also pledged that immediate action would be taken to release additional savings in 2011-12 by accelerating the outsourcing of back office and processing functions.
Sir Peter Gershon, who led the 2004 efficiency review conducted by the previous government – and has since joined the Tories’ productivity board – was quoted in the paper. “The pace of improvement in the public sector back office has been too slow in the last six years and there has been too much resistance to involving the private sector,” he said.
Gershon went on to recommend that all government back office transactional functions should be outsourced within 18 months, unless they can already demonstrate best private sector practice. Last week, a statement from the Efficiency and Reform Group said that it was “considering a wide range of measures for achieving [the] goal of efficiency savings, including working with departments to enable greater outsourcing”; it seems clear that Gershon’s outsourcing agenda has momentum behind it.
Certainly, there is the potential to realise big cost savings if government handles it well. In March, a report compiled for the Institute of Directors suggested that, at a conservative estimate, £10bn could be saved through further public sector outsourcing. Towards Tesco: Improving Public Sector Procurement was compiled by Colin Cram, a former civil servant who was director of the North West Centre for Excellence (now the North West Improvement and Efficiency Partnership) and who is now managing director of independent consultancy Marc1. “I reckon £100bn-£150bn of government spending could be outsourced. More, if you want to be radical,” he says.
Cram argues that apart from a few sensitive areas such as security, all government activity could be outsourced. He says that local government has gradually become more ambitious in its aspirations over recent years, and he expects to see the first almost complete outsourcing of business by a local authority within five years – even including the first outsourced chief executive. He contends that this principle could also be applied to central government, with even policy making functions hived off to a central unit run by third-sector think-tanks.
The government is unlikely to be so radical – but outsourcing has been advancing within parts of the public sector for many years, and the private and voluntary sectors have a solid base from which to expand. Ever since the introduction of compulsory competitive tendering in the 1980s, external providers have offered councils a growing range of services; in December, outsourcer Connaught signed a £250m agreement with Norwich City Council to provide multiple services within its social housing, compliance and environmental divisions over 10 years. “The market will mature more quickly because of the financial pressure that local government will be under,” predicts Chris Sellers, business development director at Connaught.
While central government has traditionally tended to confine outsourcing to back office functions – with some obvious exceptions, such as the NHS’s network of GPs and the Department of Work & Pensions’ New Deal providers – recent years have seen Whitehall commission out a growing range of frontline services. The Business Link website is run by outsourcer Serco, for example; and this trend is likely to accelerate if services are to be maintained in the face of a tighter spending environment.
Most outsourcers certainly expect a boost to the business they receive from central government in the next couple of years. “We will see an increase in outsourcing, not just in IT but in business processes and administration,” predicts Martyn Hart, chairman of the National Outsourcing Association. “The next wave will be HR, finance and accounting. They are relatively easy and fast to do.”
Chris Bingham, vice president for government at technology services company Atos Origin – which provides IT functions for several government departments, including the Home Office (see box, p21) – argues that in the past, bureaucratic empire-building has retarded the progress of outsourcing, but he speculates that this is set to change: “The civil service high-flyers in the future will be those who can demonstrate that they are able to respond to the cost pressures,” he says.
Bingham claims that cost savings of 20-30 per cent are often found in the IT sector if an outsourcing contract is operating efficiently. Cram puts the typical figure closer to 15 per cent – but even at that level, the cumulative effect across government spending would be considerable.
Outsourcing is not a quick fix for reducing spending, however; there are big potential risks to both costs and service quality. Contracts must be both strong and flexible, and good relationships with suppliers are essential if services are to be maintained or improved while cutting costs (see case studies). Under current procurement processes, says Cram, setting up an outsourcing arrangement takes a minimum of six to nine months. “It is a medium-term strategy,” he says. “And if the whole public sector was outsourcing at the same time, then the private sector wouldn’t be able to cope.”
Case study: Home Office/Atos Origin/Fujitsu
In September last year, the Home Office signed a new £430m deal with the two contractors providing IT services to around 70 per cent of its users. Pressure had been building for several years to renegotiate agreements with Atos Origin and Fujitsu, which Home Office group commercial director John Collington says had produced an “inconsistent” record of delivery.
He explains: “We called in both chief executives to see us in January 2009. We had to move them from a position of [mutual] mistrust to one of trust and respect. We wanted to take a strategic approach, blending the best parts of those contracts and saving a significant amount of cash in the process.”
Instead of competing to provide end-to-end services to individual sections of the organisation, it was decided that the two suppliers should each deliver parts of the service across the Home Office and UK Border Agency as a whole, with Atos Origin handling applications while Fujitsu would look after desktops and IT infrastructure.
Collington claims that the new contracts will be around 25 per cent cheaper than the previous arrangement, saving £112m between 2010 and 2016. He also expects ongoing efficiency savings. It was essential to fix the “broken” relationships with and between the two suppliers before renegotiating the contract, he argues; this required an honest exchange of views, a focus on delivery and some changes in personnel.
Another lesson Collington learned from the negotiation was the importance of being clear about what the Home Office wanted from the new deal – both in terms of price and service standards – and how quickly it wanted to achieve its aspirations. Research was undertaken to establish that the proposed price was realistic, and the suppliers were told that if an agreement was not concluded within nine months there would have to be a fresh procurement process.
Wayne Gibson, general manager for the Home Office account at Atos Origin, says that the contractors had to open their minds to doing things differently: “We have raised the performance standards and the penalties for not meeting those are also higher, at the same time as taking 25 per cent off the price,” he comments. “That couldn’t be done without fundamentally re-engineering how we deliver services.”
This involved a clearer focus on results, rather than individual processes, so that a single group of technicians could provide services across the whole organisation. Meanwhile Atos Origin staff, working closely with Home Office officials, were carefully schooled in the outcomes that the client wanted to produce.