Procuring a cure for procurement

Outsourcing is nothing new for the civil service. Since the strategy first gained traction in the 1980s, private firms have become firmly established within our public services – steadily moving on from their beach-heads in back office services such as office cleaning, facilities management and IT systems to provide key frontline activities such as care for the elderly, benefits appraisals and prison management.

The coalition’s Open Public Services agenda envisages a big further expansion of outsourcing. But there’s a problem: regular, high-profile contracting and delivery failures, which have created a long series of media furores and undermined trust in the government’s ability to buy services effectively from private suppliers. G4S at the Olympics; Capita’s courts interpreters contract; the collapse of Southern Cross; suspect accounting at A4E, Serco and G4S; the West Coast Mainline franchise – the list goes on.

Commentators have reacted by blaming their favourite targets: civil service incompetence for the right, and rapacious companies for the left. But such finger-pointing does little to help civil servants address the challenge facing them: how to develop an ‘outsourcing 2.0’ approach that enables the public sector to realise the many potential benefits of contracting out, whilst minimising the multitude of risks.

Shortly before Christmas, senior civil servants gathered at a Civil Service World round table – organised with the support of IT provider HP Enterprise Services – to discuss how departments can make a success of the next wave of outsourcing.

Kicking off the discussion, the panel agreed that political pressures often squeeze the timescales for signing contracts down to dangerous levels. Claire Stretch, a programme director at the Office for National Statistics, said: “I think this is one of the biggest reasons that so much of this fails. There is not enough time to do it properly.” And Keith Lambert, a Home Office deputy director, cited one outsourcing scheme given little over a year to move from launch to selection of the provider:

“Both commercially and operationally, that is incredibly tight,” he said. “Talking to some commercial colleagues, they suggested it should have been started six to nine months ago.”

Stretch argued that long lead-in times, which allow early discussions between departments and the private sector, are vital to ensure that all parties understood the true picture of what will be required under a contract. “There are often a heap of complex legacy systems and data: it is really complex,” she pointed out. “Underestimating this complexity adds pounds to the bill – and the shorter the timescale to do this work, the greater the budget over-run will be.”

Nicola Lowit, a deputy director at NOMS, agreed that pre-procurement discussions and early engagement are always helpful. However, she added that the electoral cycle often makes it difficult to find the time for such advance scouting work. “There is a real pressure on us to deliver stuff really quickly,” she commented. “Inevitably, that means that you often don’t have the time to think things through fully.” HP’s Paul Liptrot noted that rushed timescales can scare off some providers, saying: “We took a look at one big project, but were terrified by the amount of risk the government was asking us to take without [the time to do] proper due diligence.”

Contracts let, then let slide

Another source of problems identified during the debate was a lack of attention paid to ongoing management of contracts once they have entered the operational phase. Lowit said: “I think the standard requirement would be that around five per cent of the cost of a contract should be [spent on] ongoing management, and we have sometimes only put in about one per cent. We have a tendency to see it as a transactional process and it is much more than that.”

However, Stretch said that contract management can’t be a panacea for problems caused by a short lead-in period. “Good contract management can only be a sticking plaster in some places,” she commented. “You can deliver it as well as possible, but if the underlying contract or procurement is wrong, and is for something you don’t want anyway, then you will still have issues.”

HP director Shaun Collings agreed: contract management is of little use if it only serves to “spot a problem when it is too late”, he said. A more collaborative approach is required from the moment discussions begin between the buyer and potential providers, calling for “more forward-looking, and both parties jointly predicting the potential problems which might arise on some of these contracts”. Dianne Rogers, who manages contractor compliance for HMRC’s estates and support services, concurred: “Partnership [working] can change everything,” she said; what’s needed is “having a clear steer and objective about what you want to achieve.”

NOMS’ Lowit also agreed, but pointed out that existing contractual and procurement frameworks often make it tricky to foster the right behaviours. Often, she said, the relationship created by standard approaches to procurement is “quite adversarial, and about penalties”: a more nuanced approach to setting up payment mechanisms and incentive structures can foster better joint working.

Collings suggested that use of blunt instruments such as contractual obligations and penalty clauses points to problems in the relationship between commissioner and supplier: “If a problem arises, then you don’t want to be going to the contract as a first port of call to sort things out,” he said. “It will find you redress, but not sort the problem”.

Sometimes, said HP’s Liptrot, contracts have such long durations that tensions are bound to build up over time as the world outside changes. “Sometimes we sign contracts for 10 or 15 years, but things move on almost immediately,” he said. “We might sign agreements where we will supply something for £50 on day one, and five years later the market can supply it for £2.” Departments understandably resent paying such outdated prices – but Liptrot emphasised that these problems can be overcome if both parties understand the over-arching aims of the contract and work towards achieving them.

Collings added that with the right mechanisms in place to manage such changes of circumstance, long contracts can still be successful. The direction of government policy, though, is away from long-running contracts and towards breaking services into smaller elements with shorter contract terms – something supported by HMRC’s Rogers, who’s seen plenty of contract amendment charges based on calculations that aren’t always as transparent as they could be.

People power

The most successful partnerships, Lowit said, are often characterised by a degree of continuity in the personnel working on them. However, she added, “you often get quite senior teams on both sides in the pre-contract and pre-procurement phase, and then more junior teams once it has been let. If this happens, then you have lost the relationship and the understanding disappears.”

Collings pointed out that the competitive dialogue process can help such a culture of collaboration to develop from an early stage, by allowing a department and potential bidders to get a feel for each other before signing on the dotted line. “You can’t remove all of that human emotion and that ability for people to work together,” he said. “It is so important.”

Another way to better align buyers and suppliers is to tie their interests and aims together more closely. And one technique for achieving this is the use of outcome-based contracts, in which companies are charged with finding their own ways to achieve set policy objectives, rather than – as in most historical outsourcing contracts – providing a specified basket of services to an agreed standard. “If we are truly looking for help to enable improved public services and policy, there ought to be more stipulations about defining outcomes and making those clear in the contract,” said Collings. “Then we are delivering to outcomes rather than just simply to some service levels.”

The ONS’s Stretch agreed, saying: “A contract shouldn’t be about defining how you achieve the goals, but just what the end goal will look like. Then you go out to market and it will tell you how it will achieve the aim.” However, others warned that outcome-based contracts can create incentives for staff to fiddle the figures, with one participant citing the behaviour of Work Programme contractor A4E. The contractual and monitoring arrangements are crucial here: “There is clearly room for interpretation in the way that the outcome is achieved and how it is therefore paid for,” said Liptrot. “If you don’t crack the code correctly in the contract, it drives inappropriate behaviours.”

Rogers also questioned whether the civil service has the capability and capacity to adequately measure and understand outputs, to which Stretch responded: “If we can’t do it, then nobody can!” A bigger difficulty, she argued, is the problem of creating contracts that differentiate between results achieved by the provider, and the changes created by evolving environments and circumstances (many Work Programme contractors, for example, have struggled to achieve employment targets due to the dramatic slowdown in the jobs market). “We don’t necessarily know what the outcome needs to be in sufficient detail at an early stage,” said Stretch. “By the time we are into the contract, things have moved on.”

The panel also identified a focus on price – to the detriment of quality – as one reason why some outsourcing projects have struggled. Collings said that value is best judged by balancing cost, risks and benefits. However, he said, often the process becomes dominated by cost considerations, particularly as deadlines loom: “The problem that inevitably brings is that you are always going to go for the cheapest option, and that can bring issues in terms of risk and the ability to deliver the planned benefits,” he concluded.

Poor pay = poor results

The false economy of going for a cheap option also came up in relation to skill levels in the civil service. Blaming salary caps and the diminution of other benefits such as pension arrangements, Liptrot argued that departmental procurement units are struggling to retain key staff. Civil servants are approaching him seeking jobs, he said, adding that “these are very competent people who have just had enough.”

On salary caps, he warned that wage bill savings are often outweighed by the huge costs of poor procurement or contract management: “I just think it is illogical: the short-term perceived gain often results in huge amounts of pain downstream,” he said. Stretch backed him up, recalling that when the ONS recently tried to recruit contract managers “the rate we were offering was so low that we didn’t even get applications for some of the roles. We ended up paying four times as much to get consultants in to run them.”

Better training for those in post would also help ease the progress of outsourcing projects, it was agreed. Collings said that sometimes even senior staff are unsure of their roles: “You are told you are a senior responsible officer [SRO]. You have got the title now. Do you actually know what that entails? Are you going to investment your time in engaging with suppliers?” He complained that in one recent case, the SRO had been invisible – not just to the client, but to his own staff.

Geoff Endersby, an HP account director, said more effort should be put into securing private sector secondments for civil servants. Far more private sector staff are currently working in departments than those making the opposite journey, he said: “There is plenty on the client side in departments – and it doesn’t always help to build the department’s capability – but very little that I have seen in the past four to five years of people coming into us and learning what we do.”

In addition to these suggestions, Collings said that emerging models of service delivery offer a set of more sophisticated options for those seeking private sector skills, investment, techniques and technologies. The choice is no longer between public sector delivery and outsourcing, he argued: new formats allow the public sector to bring in private sector staff and systems without contracting out responsibilities and workforces. The “co-sourcing” model being tried out by some councils, for example, involves building teams from both sectors: “First generation outsourcing was the lock, stock and barrel transfer of everything,” said Liptrot. “What is happening is that clients are building up their own internal capabilities now, and being a lot smarter about how they outsource in the second generation.”

From the discussion, it’s clear that civil servants have learnt much – often the hard way – about how to outsource services safely; but no matter how much effort is made to develop government’s models, capabilities and capacity for contracting out public work, the civil service will always have to deal with an imperfect world.

The political timetable will require huge and complex procurements to be conducted at breakneck speed; the austerity agenda will squeeze salaries despite the resultant damage to departmental capabilities; the public sector’s social and economic goals will remain awkward to encapsulate in a set of clear quantitative targets. Civil servants will, nonetheless, have to continue pushing outsourcing across new frontiers for the foreseeable future. And this, the participants agreed, will require buyers and suppliers to develop both new kinds of relationships, and new formats for partnership working. Then both sides will have the best possible chance of pursuing the Open Public Services agenda whilst minimising the risk of further failures, consequent media furores – and further bouts of unhelpful finger-pointing.

Around the table: the participants

Claire Stretch, programme director, Census & Web Data Access, Office for National Statistics
Geoff Endersby, account director (UK public sector) at HP Enterprise Services, with responsibility for benefits and tax
Dianne Rogers, head of contracting compliance, Estates and Support Services,
Shaun Collings, business director (UK public sector) at HP Enterprise Services, with responsibility for a number of central departments and agencies, local authorities, Scotland, education and policing
Joanna Marshall-Casson, senior lawyer, Children’s Services and Family Law Team,
Paul Liptrot, sub-regional sales director (UK Public Sector) at HP Enterprise Services, with responsibility for benefits and tax
Nicola Lowit, deputy director, Prison Unit Cost Programme, National Offender Management Service
Keith Lambert, deputy programme director for immigration enforcement at the Home Office

Legal Adviser’s Office, Department for Education

HM Revenue & Customs