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.




Are you thinking strategically

A few years ago, I carried out a metrological inspection of a local factory.  I was escorted around the factory whilst carrying out my various duties by the company’s production manager. The production manager was in high spirits. After many years, he had finally got his board to employ an American efficiency consultant.  The consultant was to look at their production processes and suggest productivity improvements.  I jokingly quipped that the best such measure would be for the company to move premises. The production manager smiled wryly. I suspect this was also his view but he would never get such a measure through the firm’s family dominated board.

The factory had been built by the family firm in the 19th century.  It had been located on its current site; on the edge of the town centre and next to the railway station; for over one hundred years.  The factory was on one side of the main thoroughfare into town.  The company offices sat on the other side of this busy road.  It was a rabbit warren of buildings and often the easiest to move from one production department to another was to walk out of one door onto the main road and walk along the pavement to another entrance.  The factory site sloped meaning that many of the production processes happened on different ground levels.  Despite being next to the railway station, the company’s products were predominantly delivered by road.  This meant that lorries and tankers had to traverse narrow streets many of which were now residential.  Beside the factory were railway arches which were too low for many commercial vehicles.  Many parts of the factory were dark, dingy and dirty.  There was a real problem with rodents and major electrical re-wiring was urgently needed.

Another division of the same company was as a house builder and many of the estates around the factory had been built by that company.

The production manager wanted to improve productivity and to grow production but he had little available space to store raw materials and finished products.  As much of the equipment used in the factory was bulky, the factory had effectively been built around it.  This meant that the business was stuck with aging infrastructure which was difficulty and costly to maintain.  It was also virtually impossible to reconfigure production lines for more efficient processes.

The production manager could also see that tactically it was a good time to carry out a move.  The area of town where the factory was located was a target for regeneration.  The local council had plans to carry out significant improvements to the area.  Many of the light industrial buildings which used to be located around the railway station had either been demolished or converted to make way for housing.  A big project was underway to attract new residents to the town.  At the same time, a new business park, partly funded by the local development agency was expanding on the town’s northern edge.  Not only did the business park open up the possibility of a modern factory on a single level, it had direct road links to the local motorway network.  Transport logistics would be much easier.  A modern factory, on a single level would also allow for easier production line ergonomics and the implementation of just-in-time stock control.  A new factory would allow room for production to expand to supply more customers and new markets.  A new factory would allow for increased product development and entry into different market segments.

I could also see marketing advantages.  The company manufactured high quality specialist lubricants for the automotive and aeronautical sectors.  Many of their high-profile customers premises looked more like scientific laboratories than production facilities.  For example, the company supplied many of the leading sports car manufacturers operating in Formula One and other leading race series.  It supplied companies such as British Aerospace and Airbus.  Surely it would be advantageous for two major elements of its marketing mix, its process and place, to attempt to mirror that of its major customers?

A few months later, I returned to the factory to carry out some follow-up work.  I asked the production manager about the consultants report.  I was told it had been rejected out of hand by the controlling family.  They had voted to stay put in the factory their antecedents had built.  The consultants carefully presented arguments about efficiency and modern production processes were dismissed out of hand.  The board baulked at the initial capital costs of a move and ignored the long-term efficiency savings of a more modern facility.  It seemed history and tradition was more important than future viability.

Strategic business management has changed over the last forty years.  Aaker (1995) described these changes:

  1. Budgeting – This was the traditional method of allocating resources in a strategic manner.  Budgets were allocated to various functions and monitoring of these budgets was used as a method of controlling complex processes.
  2. Long-Range Planning – This was a move away from annual budget settlements.  Greater emphasis was placed on forecasting future market events.  The extrapolation of trends was used to plan future sales, profits and costs. Long-range plans were used as a basis for decision-making.
  3. Strategic Planning – A specific overall direction of travel for a firm would be determined and control of planning activities centralised.  Trends are used to examine the overall business environment.
  4. Strategic Management – This is the situation today.  Strategies are formulated and their implementation managed.  The focus of planning and forecasting is putting agreed strategies into practice.  The focus of strategy is managing change and transforming the business to meet current market conditions.

Marketing too has seen change.  Initially industry focused on making products.  The more you made the more successful you would become.  This focus on production ignored important things such as the quality and consistency of products or the needs of consumers.

Company’s then developed a product focus where the aim was to reduce wastage, reworking and increase product consistency.

The trend then moved to a sales focus.  Marketing activity was focused solely on increasing sales.  Many firms still have a structure where marketing activity is predominantly focused on sales figures and promotional activity.

Today many organisations are applying marketing practices across all of their functionality.  The focus is to meet the individual needs of customers.  For example firms such as Brompton Bicycles, Mini and Reebok allow customers to effectively design their own products from a seemingly endless range of product options.

The lubricant manufacturer is still located in my local town centre.  They are now storing finished products in an additional building (which involves transferring barrels of product by fork lift across a street which is a bus route).  This building had preciously been leased to a gym chain and the rental income used to offset some costs.  This rental income has now been lost and what was once a dance studio and function room is now filled with barrels of oil.

It seems that the company has been set in aspic.  I suspect that its ability to be fleet of foot and to explore new markets has been seriously hampered.  I also suspect that its ability to adapt to new customer demands and to defend against attacks by competitors has also been hampered.  I suspect the firm is surviving and defending its market position rather than being at the forefront of changes in its market.  It had the chance to change and modernise.  It didn’t take it and I hope that decision doesn’t harm its viability in the long-term.