To Outsource or Not to Outsource?
Blog posted by: Stephanie Elsy, Managing Director, Stephanie Elsy Associates, 23 April 2019.
Reform’s excellent recent report ‘Please Procure Responsibly’ looks closely at the current state of public sector procurement. The most important question that officials should ask themselves before embarking on outsourcing an in house activity is: why they are considering doing it? What is the business case for it?
Often people think that outsourcing an in-house activity will save money and that is their main motivation. It is certainly true that research has shown that outsourcing saves on average 20 per cent the first time it is done, although the savings can sometimes be very much higher. These savings will come usually from two main sources: manpower reductions and/or new infrastructure and technology. It is unlikely, however, that such savings are repeated at that scale when the service is re-competed a second or third time. In addition, when calculating cost savings, it is important to include the costs of the procurement process itself. The government body and the successful bidder’s costs will need to be recovered over the life of the contract. Given this, cost savings alone might not be sufficient reason to outsource.
Sometimes government agencies decide to outsource non-core activities, such as back office and hard and soft Facilities Management (FM) services, because it enables the organisation to focus more on their core business activity. This makes sense and is commonplace in business. It also gives the organisation access to economies of scale (sharing call centres for example) as well as expertise that they may not be able to attract or afford on their own. Back office and FM service markets are very well established now and there are usually plenty of suppliers for government to choose from.
Access to private sector finance to fund either new estate or technology has also driven outsourcing. This has often, but not always, been conducted via Private Finance Initiatives (PFI) or the newer variations of it. It is a shame that PFI has fallen out of favour: it has worked in many situations but has been brought into disrepute by too many bad deals and the model being extended away from its initial purpose. It was always a bad idea to use PFI to keep debt off the government balance sheet and government was perhaps too slow to learn the lessons from the early deals where investors fleeced the Treasury. It also stretched the model too far to use it for IT projects and hospitals. PFI works well with infrastructure that does not change for 30 years - but not with anything where flexibility is required. So now what works and what does not have been established, it seems unhelpful to stop using PFI altogether. Especially as without PFI government bodies can only use government funds to invest in major capital projects.
Having considered the reasons for outsourcing, it is then vital for the government body to make sure it has the resources, capacity and capability to manage both the procurement process and the contract once it is awarded. Although government has invested significantly in recent years in developing the commercial skills of its officials, it is still the case that procurements are still too often conducted by officials with little previous relevant experience and inadequate training. This is in no one’s interests. Procurement is a complex legal and financial process, and if it is to be done well officials need to have the right knowledge, skills and experience to manage it. If those skills are not available, it is probably better for everyone not to do it at all.
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