In-house or Outsource?

In the last blog entry, I discussed some of the aspects of the collapse of Carillion, the UK-based civil engineering and outsourcing firm.  Carillion’s collapse has led to a wider conversation about when outsourcing is appropriate and whether outsourcing firms are more effective and efficient than public authorities providing services in-house.

Using outsourcing firms to provide public services began in the early 1990s.  Successive governments have increased the amount of public services delivered by private firms year on year.  In his 2016 budget, George Osborne introduced tax advantages for local authorities who transferred services to the private sector.

The growth of public service outsourcing has moved private sector provision from back office functions such as ITC provision to front-line service delivery.  If you need an assessment for disability benefits, it isn’t provided by DWP staff but by ATOS, a private sector firm.   My refuse is collected by a French firm Veolia, road maintenance is carried out by a private sector firm, my local sports centre is run by Serco, not the local council.  Carillion was running prisons and providing school catering.

The question isn’t whether the private sector should be involved in the provision of public services but at what level that involvement should be.  There are also serious questions as to where the power and control lies in an outsourcing arrangement.  Are elected councillors determining the decision-making and service standards of an outsourced service or are these decisions based on the commercial needs of the outsourcing firms shareholders?

My local council’s contract with Veolia for refuse collection is a case in point.  Somehow, the Council signed a 29 year contract with Veolia which basically allowed Veolia to annually increase the cost of service provision.  Worse, the contract included a clause in relation to the building of a waste incinerator.  Something no one in my town wanted.  The contract term stated that if the council refused planning permission for the incinerator, it would become liable for all of Veolia’s legal costs in a potential planning appeal.  The council refused permission for the incinerator and was left liable for a multi-million pound bill.

The big argument for outsourcing is that the private sector is more efficient than the public sector.  By outsourcing, that private sector efficiency can be infused into the public sector.

As someone who spent over twenty years working in the public sector in a job which inspected the private sector, that argument looks weak.  A recent report about ATOS’s performance in delivering PIP (Personal Independence Payments) shows a catalogue of errors, delays and poor decision-making.

Local authorities of all political persuasions have been bringing outsourced services back in-house citing poor service delivery and increasing costs.  For example, Liverpool Council brought street cleansing back in-house after the chosen outsourcing firm failed to meet required service standards.

In my twenty years in local government, I have seen the good and bad of outsourcing.  I worked at one council which outsourced its ITC provision in a highly successful manner which brought in better equipment and servicing.  I have also seen outsourced contracts which delivered poor quality services and unacceptable costs.  In my experience, the use of the private sector is no more efficient or cost-effective than providing in-house services.

Possibly the worst example of outsourcing I have come across was a small local authority who outsourced their trading standards provision.  To this day, I cannot work out how the councillors thought they would save money or improve service provision with the deal.  All the existing trading standards staff were seconded to the outsourcing firm as it had no experience of working in the profession.  They all had TUPE equivalent rights which meant their pay and conditions could not be altered.  The Chief Inspector then had to be transferred back to the council as, by law, that role has to be a direct employee of the local authority.  This was outsourcing delivered by dogma rather than common sense.

I have spoken to other local councillors who have expressed the wish of ‘commercialising’ trading standards.  I then ask them how?

Trading standards main income generation stream, metrological verification, was removed twenty years ago when the government allowed manufacturers and installation firms to self-verify metrological equipment as fit for use in trade.  Local authorities were left with the legal duty to inspect equipment to ensure it was properly installed and calibrated but with no ability to offset the inspection cost.

In some circumstances, under the Primary Authority scheme, local authorities can charge for the provision of business advice.  However, for charges to apply, the business seeking guidance must operate across local authority boundaries.  In any case, authorities can only charge to cover costs.  There can be no profit motive.

In his book, Marketing in the Public Sector, Philip Kotler asks, “What do citizens want from public services?”

He argues that they want two things:

  1.  Performance of services that are critical to the public interest (such as policing and the military); and,
  2. Performance of necessary services that cannot be appropriately handled by the private or non-profit sectors i.e. some form of welfare state.

He points to the views of many on the political right that public services are often inefficient and wasteful.

Kotler argues that public servants need to improve not only real performance issues but the perception of their services amongst the general public.  He argues that to do this public services need to learn from the processes prevalent in the public sector including those of the professional marketer.

Throughout my career, I have seen this process in action.  I have worked in local authority departments which have ISO9000 series quality assurance systems.  I have seen total quality management being applied.  Increasingly local authorities have flat management structures.  Some have tried non-hierarchical matrix structures.  Performance appraisal and metrics are now the norm and lean production is used.

I agree with Kotler that the differences between the public and private sector are often overstated and these differences are often a convenient excuse to avoid the application of private sector style management processes and procedures.

I am also aware that there are often statutory and moral reasons that certain private sector processes may be inappropriate for public service use.

It must be remembered that many public services are statutory.  They must be provided.  Unlike a business, a public sector body cannot move out of a sector simply because it is unprofitable.  For example, John Menzies, once Scotland’s biggest chain of newsagents saw that the sale of newspapers and stationery was increasingly unpopular.  Menzies sold their shops to WH Smith and instead concentrated on the distribution of computer peripherals.  A local authority cannot decide to stop the provision of social work services or its library service just because there is no money in it.  Social services must be delivered by law.

I suspect the reason why so many public service outsourcing contracts go wrong is the attempt by management to force a new culture on to staff.  This builds resentment and argument.

It is a good idea to remember that the culture of an organisation belongs to everyone in that organisation and to try to force cultural change without the agreement of all stakeholders can be a disaster.

Whereas culture belongs to all stakeholders, procedure belongs to management.  It is much better to adopt culture through the proper application of procedures that to force a sharp change in the organisational culture by diktat.

Perhaps the outsourcing of public services has taken a step too far.  Certainly, the debate on where outsourcing sits in the provision of public services has a new impetus in light of the Carillion collapse.

My personal view is that public services can learn from private sector management processes but that the private sector can also learn from the vocational pride of many public servants.