Is there a crisis in local government outsourcing?

Worrying times for local public sector outsourcing contracts.

Has the third bus arrived with the latest big outsourcing company to report troubles? Following the collapse of Carillion and the losses reported by Capita along comes the announcement of a massive drop in Interserves’ share price and the inevitable ongoing discussions about the viability of the outsourcing model – especially within the public sector.

These three companies share many similarities they are – (or were, in the case of Carillion) – companies spanning the continents and offering services in an array of diverse sectors. Capita for example a multinational business operating in Europe, Africa and Asia, with  a split in its services about fifty-fiftyhalf between the public and private sectors.

Business logic suggests the wide range of skills and experience offered by this kind of international, inter-sectoral organisation, can be a big plus to local government and other parts of the public sector. And most certainly the NHS could benefit from the know-how of senior personnel in business.

Should care be outsourced?

But such size and diversity can also be a weakness when an organisation becomes too big and geographically spread, it can become difficult to coordinate its service delivery potentially leading to confusion, duplication and waste.

Nevertheless, we should not overstate the problems of giant outsourcing companies. They have become part of the local government landscape and many councils depend on them. And most, close to 90%, of all local government contracts work and deliver positive benfites in cost and the delivery of services.

But taken together the recent spate of crisis stories suggests to local authorities and other parts of the public sector that to become too dependent on huge multinationals and to become at risk to uncontrollable market forces is something to be avoided. Public perception of outsourcing is poor and any short term crisis that impacts the delivey of public services receives due attention from the public and politicians alike.

The important lessons coming from the recent crisis are well known and researched. Large scale companies often will under-bid to gain the business, and there is evidence that these organisations continually grow by acquisition, or the under-bidding of contracts to gain turnover share rather than a more organic growth approach. They have to keep running to avoid the collapse. The way it was put to me on one of the bids I was involved with was ‘we bid low to get the contract then when we are in we can get the contract changed to our advantage.’ But sometimes it does not work out like that!

For the public sector contract and procurement managers the pressure to get costs down over-rides sensible decision making and evaluation of bids. They are too tactical in their decision making and think they are doing a good job by squeezing down the price and pushing all the risk onto the suppliers. Well that gets them no-where when the contract collapses! So there are two sides to these problems: aggressive selling by suppliers to get the business and force out competition, and poor procurement and contract management prectices within the public sector.


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