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Bringing outsourcing out of the shadows

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Public sector outsourcing is described as the UK’s ‘hidden industry’, but the government hopes to make it the country’s next great export.

It is one of the best-kept secrets in British business the public services industry that is. Addressing the CBI last December, business secretary of state John Hutton surprised the industry by acknowledging that it even existed. Out of the Blair/Brown governments’ record and sustained investment in the UK’s public services, he said a ‘public service industry’ had emerged.

Mr Hutton has commissioned economist Dr DeAnne Julius, a founder member of the Bank of England’s monetary policy committee, to head a review of this new industry. In essence, these are the companies that provide national and local government services that are historically provided by the private sector. These range from building and operating hospitals, to collecting rubbish.

Valid contribution

The significance of the review is when it reports in July there should at last be a value placed on the contribution public service outsourcing makes to the economy.

In 2005-06 the state directly procured£115bn of goods and services. Local government’s contribution was one-tenth of this total, according to a recent debt report. Insiders say that Dr Julius’s conclusion will be that this silent industry challenges tourism and aerospace for dominance in the economy.

Paul Lester is chief executive of the VT Group, a£1bn-turnover contractor that provides a swathe of outsourcing skills, including IT and training on Building Schools for the Future contracts. “Certainly this is one of the biggest sectors that nobody knew about,” he says.

In her call for evidence from parties involved in public service outsourcing, Dr Julius asked for answers to 10 questions, four of which are geared at making the marketmore effective helping the likes of VT produce performance and cost benefits.

Private sector responses to the review reflect widespread business criticisms of the government for delaying contract negotiations and changing briefs, for example design specifications on PFI projects. This creates the uncertainty that the private sector so despises and the cost increases that local and national government had sought to avoid.

Mark Fox, chief executive of industry trade body the Business Services Association (BSA), says: “Our priority is to campaign for fairness, transparency and consistency in the public sector procurement process.”

A member of the BSA elaborates by referring to an example from the health sector. He says it is common for clients to, without explanation, suddenly take cleaning back in-house having spent weeks or months running a competition for the private sector to take the job. This wastes the private sector’s resources, time and money.

Another of the review submissions says that the government must help the private sector reduce bid costs for outsourcing projects if it is to encourage new entrants.

This will resonate with the government and is likely to be reflected in the review’s final recommendations, as ministers are determined to make public sector outsourcing the country’s next great export.

One of Dr Julius’s questions asks: “What can the government do to improve access to overseas markets for companies operating in the public services industry?”

Eric Bohl is head of government consulting at EightyTwentyInsight, which is providing the Society of Local Authority Chief Executives & Senior Managers with its own report on public services outsourcing next month. Mr Bohl says: “The public services market is hugely exportable you’ve got overseas companies looking and working in the market over here so that they can take those skills back overseas.”

Mr Bohl is a keen advocate of private sector involvement in local government work, highlighting work carried out by Lambeth LBC as a good example. He applauds the council and local primary care trust’s decision to set up a shared facility: “Often a GP is dealing with medical problems stemming from, say, anxiety caused by debt,” Mr Bohl explains. “Now that GP should have someone in the same building who can help them treat the patient for that.”

The maintenance and operation of this shared facility is run by LiftCo, Lambeth’s private sector partner on small health schemes. By allowing the private sector to concentrate on the types of administrative and practical work with which the public sector has so notoriously struggled, the likes of GPs and care staff can use their time solely on the patient. This, argues the industry, is an efficient distribution of resources.

There is plenty of ideological opposition to this thesis, with many viewing outsourcing as privatisation by stealth. But an industry source one of a number who refused to speak on the record to LGC argues that this is no longer relevant, as both the Labour government and Conservative opposition have reached a “political consensus” that outsourcing is the future. Opponents should instead make the best of a situation they cannot change.

Another industry source adds that even opposition to his company is disappearing. Over the past five years, a new breed of council chief executives is increasingly showing “professionalism and commercial aptitude” towards outsourcing. There are, he adds, only “a few old dinosaurs” who seek to make life difficult for these companies.

“The quality of these chief executives is now comparable with the chief executive officers of industry,” the source adds. “They have the ability to reach fair conclusions on getting the right balance between when [it is more efficient] to outsource and when it is not.”

An example of this new breed is Jon Rouse, who was appointed chief executive at Croydon LBC last year. In his view, outsourcing is no longer a political issue, providing the result is right: “Outsourcing and joint ventures is mainstream business. You have to have a pragmatic approach to delivery what works, works. Sometimes that means taking stuff in-house, other times it could be a public private partnership.”

And VT’s Mr Lester argues outsourcing generally delivers savings for councils. “Our rule is if something gets outsourced, then we hope to reduce costs by 25-30% and improve performance,” he says.

The greatest problem with Dr Julius’s review, according to a member of its advisory panel, is that the terms of reference are “bland”. It is not clear what will be within her remit to recommend and the source complains that meetings to discuss the likely content are infrequent.

The result could be some very general points about the industry and the need to help it develop, without actually coming up with ways to do this. Indeed, on the review website, Dr Julius seems to suggest her report will provide a mere basis for future discussion: “The review will develop an analytical baseline for the public service industry and provide a factual analysis of the key issues to be addressed if it is to achieve its full potential.”

Yet there is little doubt that the industry is pleased to be recognised, and the BSA’s Mr Fox speaks for the industry when he concludes: “This is an industry whose scope has not been fully and properly appreciated by policy makers. I hope the review will go a long way to clarifying all of that.”

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