As outsourcing is becoming more widespread in local service delivery, councils are focusing not just on cutting costs but also their partners’ fit with the organisation and the maintenance of service standards.
This article formed part of LGC’s latest Partnership Supplement. To read the supplement, click here.
Outsourcing remains a hot topic for councils facing further budget reductions and increasing scrutiny on service delivery. In a survey of 180 local authorities,
supported by Civica, LGC found that as councils make firm plans to outsource more services, they are also getting tougher on partners, demanding more stringent protection of service standards and better guarantees of control.
Of these respondents, 43.9% worked for district councils; 17.2% for unitaries; 14.4% for London boroughs, 11.1% for counties, and 10% for metropolitan councils. Around half of participants describedthemselves as either a director, a member of the senior management team or a head of service, while 12.3% were chief executives or deputies and 9.4% were finance or resources directors. Around a fifth were elected representatives. Top outsourced services The services most commonly outsourced already are waste management (59.9%), highways (36.5%), social care (35.8%) and revenues and benefits (30.7%).
Civica group business development director Paul Bradbury said these four were popular choices for outsourcing and had been for some years. However, he
added that waste management contracts represent the traditional outsourcing relationship that councils are increasingly eschewing in contracts for other services.
Mr Bradbury said: “Waste management is a great example of the transactional sort of service delivery outsourcing.”
He drew attention to the proportion of councils - just under a third - which listed housing as an outsourced service. “Housing is an interesting one,” Mr Bradbury said.
“Repairs and so on are most commonly outsourced, but now housing management is also being externalised. For example, Cheshire West and Chester Council has set up an externalised housing management organisation which now provides all housing administration services; it’s an interesting model.”
Mr Bradbury said he was surprised that only a quarter (24.8%) of respondents said they outsourced theircustomer services, as this
service did not necessarily require “specific local government knowledge” and would likely be fairly straightforward to outsource, giving councils the opportunity to benefit from partner organisations’ established best practice.
Outsourcing by 2020
The survey found that most participants expect an increase in outsourcing by 2020. Currently, many councils (38.4%) outsource up to 10% (as a proportion of overall budget) of their services, while 18% outsource 21-30% of services and around a quarter outsource more than 31% of their services. However, by 2020, just under half of respondents (48.8%) believe more than 31% of services will be outsourced.
Mr Bradbury said the sector can expect to see far greater proportions of services outsourced than at present.
“We have seen a lot of organisations turning to outsourcing as a means to achieve both savings and improved service quality. In particular, we expect to see
councils following examples such as Worcestershire CC’s commissioning model.”
Mr Bradbury explained: “Six months ago, Worcestershire CC started a series of market engagements with the private sector to look at how they can deliver things differently.
“So it is looking at delivery models for schools’ IT, schools’ support services, and council finance and administration. Over the next three to five years it
expects the bulk of its staff will be working for different organisations to deliver those services.”
He added: “This presents a challenge for the marketplace; does it have the capacity to pick up the services that are coming out? That’s an awful lot of
thinking and work to be for those projects to be externalised.”
Motivations and barriers
The survey asked respondents to rank their top motivations to outsource in order of importance, and the biggest barriers to outsourcing in a similar fashion. These were then weighted and ranked.
The top motivation for outsourcing was, perhaps unsurprisingly, reducing cost. However, following closely behind this was a desire to maintain or improve service quality, and then to enact cultural change within an organisation.
Mr Bradbury said: “Cost, risk and time are the things people outsource for. Customers like the clarity of having a contract that says ‘this will cost you £1 today and 90p the following day’.”
However, he agreed that councils were deeply motivated by a need to boost service quality while maintaining the public service ethos, and stressed the need to scrutinise key performance indicators in outsourced services to ensure standards did not drop.
He said: “For example, a classic revenues and benefits outsourcing contract would say the service needs to cost £X less than currently, but there are key performance indicators such as how long new claims take to process, or how overpayment risk is managed when claimants change their circumstances. There’s a basket of measures. Civica has committed to improve current performance as well as reducing cost.”
Mr Bradbury said councils were often motivated strongly by an outsourcing partner’s ability to enact cultural change effectively.
He said: “At Gloucester City Council we externalised the revenues and benefits and IT services but we are still in the same building, so individuals in the council can see the organisational change.
“They can see the behaviours such as team meetings, which encourages innovation.”
The biggest barrier to outsourcing, respondents said, was finding a partner organisation with the right fit for a council. This was followed by a fear of losing
control over a service, and obtaining approval from elected members.
Mr Bradbury said councils were usually keen to see evidence from partners that they have completed work with similar organisations before.
He said: “When we’ve spoken to senior officers, the first thing they say is: ‘Where have you done this before? How has it worked? Have you done this recently in an organisation like ours?’”
Mr Bradbury said elected members must be involved at the earliest possible opportunity to reassure them of the value of outsourced services.
He said: “The earlier you engage members in the ‘art of the possible’ conversations, the easier it is to get buy-in. Officers must share with them what other
organisations have done.”
Cost and quality
Most participants (70.6%) who plan to outsource within the next year said they have projected savings as a result. Of these, around a fifth said outsourcing will save them 22.4% compared to the in-house cost, 19.8% said it would save 10-14.99%, and 17.2% said it would shave more than a fifth from costs
However, 10.3% said outsourcing would be cost-neutral, and a further 10.3% said outsourcing would actually add cost. Mr Bradbury said there were often upfront costs during the transition to outsourced services which could skew the figures.
“If you take a service on and make some staff redundant, you could count that cost in year one or over the life of project; so it depends on how councils record it,” he said.
He added: “If you’ve driven a service through cost savings down to a point where it’s not reliable or stable you find you need to invest in it again.”
On the flipside, a third (33.8%) of participants said service quality had improved thanks to their outsourcing activity, while a third (34.5%) said service wuality remained consistent although service efficiency improved and 11.5% said service quality and efficiency remained the same.
However, a fifth (20.3%) found that service quality worsened when delivered by an outsourcing partner. So, how can councils hold their outsourcing partners to account on the balance of service quality against efficiency?
Mr Bradbury said the answer lies in a council and its partner’s approach to changing a service. He highlighted an example of where service quality could have been maintained with a gentler implementation.
“Say, as part of a council strategy to better manage demand, the authority tried to move contact to new channels, either from face-to-face contact to phone contact, or from phone contact to online, and then restricted access to the old form of contact.
“Here, you may say the service quality has declined. Actually, that council needs to make it easier for those who can self-serve to do so to avoid teething troubles.
“Our experience has been that services do improve.”
Medium, micro or macro?
The figures showed a fair variety in the size of firms councils chose to work with. Around a quarter had outsourced to micro businesses (of up to nine employees)and a third to small businesses (10-49 employees). Most business resided with firms of 50-249 and 250-999 employees.
Mr Bradbury said the size of the partner organisation a council should choose depended on the service.
He said: “If you are outsourcing a 20-person operation, it would be a significant risk if you outsourced to a micro business. Councils need a rule of thumb as to how large an organisation they need to carry out the project.”
However, Mr Bradbury said the trend was now towards outsourcing individual services piecemeal, opening up the market to smaller partners.
He said: “Massive, Barnet-type procurements which involve 600-700 people have started to disappear and you’re looking at individual services now and a blended approach to whole service delivery.
“For a social fund delivery contract of ours, we engage a charity to deliver the work, so actually it is a smaller secondary contractor being used.”
In fact, Mr Bradbury said councils were increasingly interested to know from their outsourcing partners whether the main contractor had plans to engage smaller local organisations in delivering the service, potentially boosting the local economy.
Overall, the outlook for outsourcing looks positive, with councils looking to increase the proportion of services they outsource, demand more from their
partners, and with the outsourcing market developing accordingly.