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Outsourcing is dead, long live outsourcing

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The debate about outsourcing public services has rarely been so charged and so confusing.

G4S’s shambolic Olympic performance has emboldened critics, who argue that public-private-partnerships are inevitably less flexible and accountable than in-house delivery. In local government, some key figures see an important new trend towards bringing services back in house. But at the same time, all the evidence continues to point in the direction of significantly more externalisation over the coming years.

Long-term contracts are likely to be the first casualty

So what’s really happening? The truth is that we probably should expect to see more contracts going to market. Local government is in a profoundly pragmatic mood when it comes the private sector, but councils increasingly want something different from the market. The result will be outsourcing, but not as we know it.

Long-term contracts are likely to be the first casualty of this shifting mood. With councils facing massive financial uncertainty, many chief executives are wary of being tied into what they fear will be inflexible 5-10 year deals. As one unitary chief put it to me recently “I don’t know what my budget is going to be in three years’ time, so how can I enter into a long term contract?” This is challenging for the private sector, where business models are often based on up-front investment with profits only realised towards the end of long contract terms.

The shared services market is also facing a shake-up. Councils increasingly recognise that they will have to share back offices and integrate front offices, but they also know that this represents a big saving on a small budget. The very best level of cost saving is about 3.6% of overall council spending, but something like 2% is probably more realistic.

That’s definitely worth having, but it is unlikely to make it to the top of the chief executive’s in-tray at a time when senior officers face major policy change in every aspect of their organisation. The private sector needs to make the process of sharing easier by providing flexible, plug and play solutions that deliver benefits quickly and minimise both disruption and the investment of scarce senior time in managing workforce reform and redundancies.

Infrastructure is seeing radical change as councils become increasingly sophisticated investors. The council-led revolving investment funds currently popping up across the country in the wake of the city deals will pool public money and invest it on a commercial basis. That means finding ways to make new transport and energy infrastructure deliver a financial pay-off for the public sector as well as social benefit for communities.

Can the private sector rise to the challenge of developing new service offerings? Probably. Many companies are already investing in the future, but change takes time and money and both are in short supply. In the imperfect, specification-driven local government market, the private sector needs a helping hand.

Councils need to find new ways to come together and manage the market, clearly explaining their changing demands so that business can respond. They also need to up the pace of change on the tricky business of outcome-based contracting, which would allow much more private sector-led innovation. Get this right and local government can build a renewed marketplace, with a much wider and more innovative range of players and business models. Outsourcing is dead. Long live outsourcing.

Simon Parker is director of the New Local Government Network thinktank

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