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John Tizard: When outsourcing it’s vital to assess the full costs – not simply contract price

Monday October 15th, 2018

All too often public sector leaders and managers consider outsourcing public services because they believe it will save money. This can be tempting given the horrendous impact of austerity-driven cuts and budget constraints.

John Tizard

John Tizard

With outsourcing as with many other temptations, it is always wise to consider the full implications of the offer before taking a bite. The bonus of cost savings may not always be what it appears to be, or certainly what those marketing outsourcing may be claiming.

I and others have written extensively about the lack of comprehensive evidence of the impact of outsourcing, even though it has been widely practised across the public sector for many decades. Yet the policy and practice has continued – though there is evidence, especially in local government, that the growth in outsourcing has been arrested.

The immediate or even long-term financial savings that are claimed for the service budget line too often fail to materialise; and when there are such savings there is often a wider cost to the outsourcing public body, service users, staff, the wider community and the local economy.

It is vital that any public body which is contemplating the possibility of outsourcing any public service should ask some serious questions about these wider costs. They should be factored into the strategic ‘make or buy’ decision and into consequent business case assessment.

These costs include

  • the transactional costs of every aspect of the procurement process – both internal resources and external support
  • the costs of effective contract management
  • the opportunity costs of senior and other staff being engaged in procurement and contract management
  • the trade-off between service quality and lower immediate expenditure

However, there are wider costs for an outsourcing body to consider, including

  • the impact on staff morale and productivity more widely within the outsourcing body
  • the costs of contingency arrangements in case of provider failure
  • the costs associated with risk, brand and reputational management
  • the potential diminution of democratic accountability
  • the costs of loss of agility to change services without expensive contract renegotiation
  • the potential impact of loss of ability to collaborate across and between services and public agencies
  • the hollowing out of the outsourcing body’s capacity which may be required in unforeseen circumstances
  • the loss of budget flexibility given that contracts tie in levels of expenditure
  • the reduced ability to drive wider policy objectives through services

There are a further set of costs relating to the holistic impact of outsourcing, including

  • the negative economic impact of fewer people in employment and/or reduced spending power if those employed are on poorer wages/salaries and terms and conditions
  • the consequences of a move to precarious forms of employment if that is what the outsourcing contractor chooses to introduce
  • the impact on local suppliers and supply chains if the outsourcing contractor procures its supplies from outside the outsourcing body’s economic area

All of these costs should be estimated and evaluated for the lifetime of the proposed contract: this is about long-term stewardship in the public interest.

There could and often will be many other costs that responsible public bodies will evaluate if they consider potentially outsourcing.

Public bodies should also consider the comparative costs of outsourcing to large corporate businesses as opposed to local SMEs or local voluntary and community organisations or social enterprises and partnerships, compared with other public bodies and, most importantly, compared with ‘in-house’ publicly managed services. The business case for any outsourcing proposal should include such comparisons in ways that address the potential costs listed above.

I know that some public bodies do undertake analysis based on some if not all of the above. I believe that any public body that seeks to demonstrate that it practises exemplary stewardship in the public interest should always do so, and do so transparently. They should publish their approach to evaluating all the costs and invite stakeholders to contribute and comment.

Public service outsourcing can have significant long-lasting costs for the public purse and wider public well-being. No public body or public leader should take a bite at the sugary sweet of outsourcing, tempting as that may be, without undertaking a full cost appraisal and cost benefit analysis. For just as we know that too much sugar can be extremely harmful to personal well-being, so ill-considered public service outsourcing can be extremely harmful to the public finances and public well-being.

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