Offshoring – the need to think before you jump!

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By John Tizard, Director, Centre for Public Service Partnerships (CPSP@LGiU)

As public expenditure pressures bite and cuts are made across the public sector, it is perhaps understandable why some leaders and senior managers are asking the question: “Could we save lots of money if we offshored services?”

The Cabinet Office has in the last two weeks issued its guidance on the subject – ‘Government ICT Offshoring (International Sourcing)’.  While the document states that it does not introduce any new policy one is bound to ask: “Is the Government advocating more offshoring of UK public services?” Interestingly, the guidance indicates that it is concerned with those services which are already outsourced to the private sector in the UK rather than the relocation of in-house services.

Many of the current major ICT and business process outsourcing suppliers operating in the UK have some nearshore and/or offshore capacity. Many are already providing offshored services to their private sector customers.  Some are, of course, providing some public service delivery from offshore locations.

The newly updated Cabinet Office guidance raises many issues that need to be considered before services are offshored. These include data protection and data security issues – no data relating to national security should be offshored; and the overall quality of the service should be maintained at the same time as significant savings are realised. The guidance recognises that there may sometimes be industrial and public relations issues associated with proposals to offshore public services. Only recently Birmingham City Council decided against an earlier agreed plan to offshore some of the services provided by Service Birmingham, its joint venture service company with Capita.

Offshoring public services is not new but it remains a small-scale activity. There are examples such as NHS shared administration services (over 30% of targets have been agreed), core elements of the National Savings business activity and smaller elements of other administrative activities.

Experience in the private sector and the limited experience so far in the public sector would suggest that offshore outsourcing typically provides real savings over a five-year period of 40% to 60% against similar UK-based in-house processes and often with service improvements too.

Proponents of offshoring argue that there are other operational benefits too, including: greater flexibility of supply capacity; economies of scale based on shared services that can better accommodate seasonal peaks and troughs; secure resilience; access to a more highly skilled labour force – for example more graduates (over 75% in most Indian business process outsourcing (BPO) centres); data security is as robust as it would be for a UK-based operation; and the services are likely to be based in modern, purpose-built premises of the highest international standards.  Indeed, the Indian BPO offices that I have visited offered working environments as good as if not better than the UK public sector sometimes offers.

So if offshoring is so financially and perhaps operationally attractive, why has it not been embraced as a standard option by the UK public sector?

There are many answers to this question.

There remain concerns about data security, whether founded or not; there may be some reluctance to explore anything new, though current financial pressures may change this; there are genuine issues relating to voice-based services – we have seen some private sector firms reverse decisions to move their call centres offshore; and cost inflation in many offshore economies is greater than in the UK, though labour costs in countries such as India remain considerably lower than in western economies.

However, the public sector is also understandably very wary of the political consequences of exporting jobs and most likely creating greater domestic unemployment, especially given the current economic conditions.

There are macro-economic implications too which should be taken into account. A net increase in unemployment would have financial and economic repercussions for the wider public sector and local economies. Tax revenues would fall and benefit expenditure would increase. There would also be less spending in local shops and in the local service sector.

Therefore, when considering the option of offshoring, a public agency must evaluate the full social, economic and financial cost benefits. Of course, there is real risk that no one agency other than central government would have the incentive to consider these macro-matters. The Cabinet Office’s guidance is aimed at individual agencies and their suppliers though it does recognise that there could be wider economic and political issues to be taken into account; it suggests that in some cases ministerial approval should be sought (of course this would not apply to local government where the decision would solely be one for the individual local authority.)

I believe that the Cabinet Office guidance is a useful starting point but it is in danger of implying that selecting an offshore solution is a managerial or technical matter when it has to be a political one. This cannot be left solely to suppliers or to client managers.

Therefore, my advice to public commissioners, procurers and politicians is:

• be open about any decision to offshore and avoid offshoring by stealth
• decide what services must be locally based for one-to-one contact, and how elements of a service may be potentially split between those which need to be locally based and those which can be delivered remotely
• fully understand the options and evaluate them – consider all options including local and UK based ones, and avoid jumping for any one solution without considering the full range
• ensure that this evaluation takes into account the short and longer term wider social, financial and economic implications for the nation and the locality of the existing activity as well as the agency
• fully consult and involve service users and the wider public
• fully engage and consult staff and their trade unions
• seek agreements with staff and trade unions
• identify the services/activities that might be in scope and their interface and balance with the indigenous service
• if services are transferred, what would be the residual resilience and capacity of the exporting organisation?
• ensure that any offshore provider has excellent workforce practices and pay and conditions (perhaps recognising local trade unions), good working environments and effective management
• understand the full scope of the potential supply market – not just UK-based companies with offshore capacity but also international and offshore-based businesses – and potential suppliers’ track record
• ensure that control over location and the consequential handling of workforce and service issues remains with the public sector and not the provider
• consider independent advisors to broker the views of the stakeholders, and to identify and evaluate the options

Offshoring is a highly charged public policy issue. It has been in manufacturing and financial services and will be even more so in respect of public services.  Government is right to offer guidance but it has to go further and work with all stakeholders to ensure that in the pursuit of cost-cutting the public sector does not neglect wider long-term social and economic considerations.

It is very important to think very carefully before jumping offshore.