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John Tizard: More and more public services can be publicly owned and publicly managed in the public interest

Monday September 24th, 2018

As the Labour Party reaffirms its commitment to set in-house ownership and management as the default option for public services, public sector leaders and senior officials should consider how to respond.

John Tizard

John Tizard

Most public bodies (including most local authorities) will have long-term outsourcing contracts and many will be considering whether to outsource other services or whether to re-let contracts that are soon due to finish. Public bodies including local authorities of all political persuasions are bringing outsourced services back in-house. And even the Conservative government has brought the East Coast railway into public management but generally is more enthusiastic for outsourcing than local government.

Public bodies should start by adopting an overarching policy position on their approach to public service outsourcing and the consider individual services and contracts in a strategic way based on this policy. These are political choices.

Politicians may decide to set in-house provision as the default. They may determine politically driven ‘red lines’ about external service provision.  This may include a policy not to outsource specified services to any non-public sector organisation or perhaps only to consider charities and community groups for other specified services. These are legitimate political decisions.

Political leaders may acknowledge that the voluntary and community sector, along with employee and service user co-operatives, form an alternative form of social ownership and management, which can complement, rather than compete with, the public sector. In these cases, they may prefer to develop relationships through partnerships rather than competitive tendering-based procurement.

This is why a policy is necessary. Having adopted their policy, public sector leaders must know what is happening in their organisation in terms of outsourcing and what the options are.

Therefore, I recommend public bodies should review all existing outsourcing contracts to identify how well the services and contractor are performing and if they are not meeting expectations, why not. Even though many outsourced contracts will be operating well, such reviews should be standard practice even when there is no a priori desire to bring services back in-house.

When there is a desire to bring a service back into public management, the public body should extend the review to consider:

  • how performance matches contractual obligations (is there evidence to demonstrate that the contractor is in breach of contract?)
  • what the contract says about early termination and what the costs of so doing might be (for example, having to pay a contractor compensation for loss of future profits)
  • how long the contract has to run before it expires (there is little value in considering a contract that only has a year or so to run unless performance is very poor)
  • the cost-benefits of renegotiation, revision or early termination – this should include considering the internal capacity of the public body to take over the management of the service and the time that might be required to gain that capacity (noting that this may not be as long as some will argue given that many core staff and managers would transfer back to the public body under TUPE)
  • the potential operational and financial risks and additional costs of early termination

A key point to emphasise is that, simply because a contract has several years to run, it does not necessarily mean that a public body must wait until such a contract naturally expires before it seeks change. However, I expect that this will often be the easiest and cheapest route to bringing the services back in-house.

Termination may not always be best short-term option and the reviews could also be to identify those contracts which would benefit from renegotiation.  In these cases, the public body should:

  • identify the options for re-negotiating a contract to ensure better value for money, improve performance, and/or make a better public interest contribution
  • ensure that it has the capacity and expertise (contracting, legal and service professional) to manage the contract and hold the contractor to account for the remainder of the contract’s term

Even when ‘in-house’ services become the default position, this does not mean there will not be some outsourcing. In this case the public interest will need to be secured through effective procurement and contract management and be preceded by a strategic ‘make or buy’ decision based on a set of public interest criteria, using factors such as:

  • internal capacity and resources to

o    deliver the services effectively and efficiently to the required standard and where necessary to reform them

o   undertake a competitive procurement process, agree a contract and to manage this contract

  • holistic cost-benefit analysis of the economic and social impact of outsourcing on the local economy (if money and jobs haemorrhage, there will be a negative economic impact on local businesses) and the financial impact on other public sector budgets (for example redundancy and/or low pay has costs for DWP and other public sector bodies)
  • the consequences of outsourcing for democratic accountability
  • considering the experience of other public bodies that have outsourced similar services
  • the capacity, quality and competitiveness of the supply market
  • a comparative assessment of the outsourcing with in-house provision based on the above criteria

I would advocate that public bodies should:

  • involve staff, trade unions and the public including voluntary and community groups in the ‘make or buy’ decision and, if they move to outsource, in every aspect of procurement and contract management
  • publish and consult on the business case and the public interest test and then be held to account for the results of the outsourcing
  • specify contract terms and conditions that protect the public interest
  • use procurement to drive other policies, including supporting SMEs and start-ups
  • be transparent in respect of a contract and its operational and financial performance

Whilst public bodies require the right expert legal and procurement advice to undertake these reviews, what will matter most is the political will to proceed.  Political leadership is critical.

Political leaders should ensure that they are involving and gain the support of staff, trade unions, citizens and civil society groups. They should also ensure a robust communications strategy to underpin the strategy, not least because there is likely to be much media and political opposition even though ending contracts could be very popular with the public. Change is coming.

The ‘golden age’ of outsourcing has passed. More and more public services can and will be publicly owned and managed.

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