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The growth in public service outsourcing without evidence of its impact is perplexing

Tuesday May 5th, 2015

Public expenditure on public service outsourcing has almost doubled from £64bn to £120bn a year since 2010, according to a recent report from Information Services Group (ISG) as reported last week in the FT:

In fact, public service outsourcing has not only grown in terms of volume of expenditure but also in the scope of the services being contracted out. Specifically, there has been a significant increase in outsourcing of criminal justice, employment and defence services.  The Coalition Government has also continued and accelerated a trend established under the previous governments and even legislated to subject health services to competition.

John Tizard

John Tizard

The number of public services outsourced contracts rose 125 per cent during the last Parliament: from 526 under the last government to 1,185 by 2015.  The value of central government contracts has risen sharply from £37bn in the last five years to £67bn. In healthcare, they grew from £9bn to £16.5bn, in education from £1.8bn to £3.7bn, while in local government they doubled from £16bn to £32.5bn.

The ISG report claims that the UK outsourcing market is the second biggest in the world (with the US market being the largest). Inevitably, this gives the public service industry a powerful voice with governments. Of course governments must have dialogue with industry and other interests but there is the risk that enthusiasm for market growth can cloud factual, evidence-based policy.

Further, the report shows that in spite of government exhortations to open the market to more providers (including SMEs, social enterprises and charities), the provision is still markedly dominated by a relatively small number of very large companies. If competition has a positive role to play, there must be competitive supply markets. This does not seem to be the case in too many procurement projects.

All too often, specific procurements result in only a few bidders tendering because of: the supply side problem of few providers; overly rigid and bureaucratic procurement processes; inflexible and unrealistic contract terms; and the inherent risk aversion and conservatism of most procurement officials and politicians. This combination stifles innovation and wider public policy goals relating to SMEs, social enterprises and charities; and it is not in the public interest.

The public sector has allowed itself to become overly dependent on a few companies, which, like the banks, could become too large and too critical to be allowed to fail. It also means that innovation can all too often be stifled and wider public policy objectives in respect of social enterprise, SMEs and charities forgotten or abandoned.

The public services outsourcing industry claims that the trend to accelerate and expand public services outsourcing will continue over the next five years.

Now, whilst this may be true, I wonder if there is not also some wishful thinking on the part of those corporates keen to take advantage of and profit from an expanding number of public service contracts. Certainly, there is plenty of anecdotal evidence that an increasing number of public sector executives and politicians (especially in local government) are becoming less enamored with ‘traditional’ models of outsourcing. The latter seem to be coming to the view that: the results of outsourcing have been very mixed; the cost of procurement often outweighs any potential benefits; a leaner, more efficient public sector offers less opportunity for significant savings from outsourcing; and, in times of uncertainty, it is not prudent to lock ever-larger proportions of budgets into often inflexible, long-term contracts.  There have also been some high-profile failures, which have caused some to rethink their approach. In spite of these points, however, it is clear that others have continued to see outsourcing as an easy solution or as a panacea to their budget challenges – and often both.

Whether the outsourcing companies and the public sector zealots for outsourcing are being over-optimistic or not, what is abundantly clear to me is that there is far too little evidence to enable a ‘considered’ debate on the public value generated by public service outsourcing. Candidly, ‘enthusiasm heavy’ and ‘evidence lite’ is never a good way to develop or implement public policy, nor to deliver public services.

Outsourcing has taken place and may well continue under governments of all persuasions.  This reinforces the need for independent evidence for the benefits of this policy – and we need it urgently before more contracts are tendered.

In light of the above, the new government should commission an independent enquiry on public service outsourcing.

This enquiry’s remit would be to:

  • determine the monetary value of public service outsourcing from 1997 to 2015, both in absolute terms and as a percentage of total public spending
  • review the level of outsourcing over the same period, by sector – e.g. local government, police, criminal justice, NHS, etc. – and by types of service – e.g. clinical, IT, “back office support”, prisons, etc.
  • identify the drivers for the growth of outsourcing including the role of public expenditure cuts, ideology and other drivers
  • investigate the impact on service quality as a result of outsourcing
  • calibrate the wider economic and social impact of outsourcing on local economies, labour markets, and other public services such as social security payments
  • calculate the number of staff who have transferred from the public sector as a result of contracts and the impact on their terms and conditions (and on the terms and conditions of staff who have remained in direct public sector employment) and the extent of a growth in a “two tier” workforce
  • analyse the impact on pay and income differentials as a result of outsourcing
  • consider the conditions and circumstances when public service outsourcing is most effective and when it is least effective, including the quality of client management
  • consider potential conflicts between short-term profit objectives and the pursuit of long-term public service outcomes
  • test public attitudes to public service outsourcing and how much this varies between public services and between the nature of providers – e.g. large corporates, SMEs, social enterprises, and large and smaller charities
  • undertake some international comparisons for the UK public sector to learn lessons
  • recommend policy and practice changes in respect of:
    • criteria for deciding whether or not to out source best public procurement processes and practice
    • public and social value tests that are holistic, against which to evaluate possible outsourcing and individual bids
    • measures to ensure
      • public transparency and disclosure
      • accountability of providers and procuring bodies
      • compliance with public service ethos of providers
      • innovation and change where this adds public value
      • where markets are used, ensuring these are competitive and open to SMEs, social enterprises and charities
      • collaborative approaches in preference to competition where this meets a public value test

It is deeply perplexing that, over the last five years and previously, the public sector has been increasing its reliance on public service outsourcing without any credible independent evidence to verify the value of the policy.  At a time of continuing public expenditure constraint and cuts, public questioning of the ethos and practices of large corporations and rising demand both for a greater volume and an ever-higher quality of public services – the lack of any independent evidence for the benefits of this policy of outsourcing is stark.

A national enquiry should be a priority for ministers and, in particular, the Treasury and No 10.  And it would be of great public interest.


John Tizard
Twitter: @johntizard
Linked In: John Tizard

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