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Research: Back office market shrinks 30% in three years

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Local government spend on back office outsourcing has fallen by 29% over the past three years as austerity and new technology combine to shake up the market, analysis by LGC has found.

Data shared exclusively with LGC by Porge Research shows that councils spent £611m with external suppliers on back office outsourcing in the last financial year, down from £862m in 2013-14.

Lgc following the money final

Lgc following the money final

This article is the last in our Following the Money series using data from Porge Research’s Illuminator tool, which compiles data published by councils on invoices paid to external suppliers of over £500. 

Spending by councils on outsourced back office services fell across all regions of the country except Yorkshire and Humber, and the south west, suggesting many councils are either taking services back in house or driving efficiencies out of suppliers.

Spending on outsourced back office services was proportionate to the regions’ total net current expenditure in 2015-16, with the exception of the south west which spent proportionately more and the West Midlands which spend proportionately less.

The data also showed unitary councils spent a disproportionate amount on back office outsourcing, accounting for 36% of the spend on this when they are responsible for 22% of total expenditure across local government.

Counties accounted for just 10% of the outsourding spend compared with 25% of total expenditure. 

Alice Watson, managing director of Porge, said the ending of a number of high profile big ticket contracts had driven the “cooling down in the market”. These included Liverpool City Council and Lancashire CC ending contracts with BT in 2014-15 and 2013-14 respectively.

Richard Hanrahan, director at Agilisys, told LGC it was “undeniable” that there were “fewer opportunities” coming into the market for back office outsourcing. He said the combination of austerity and the availability of new technologies had combined to bring about changes in the market over a relatively short space of time.

Although Capita has maintained its position as the biggest player in the market, some other big firms, including BT, have fallen out of the top five to be replaced by more recent entrants.

Table

Table

Capita executive director Chris Sellers said that in today’s market contracts tended to have much lower “day one ticket value” but that did not always mean less value over the whole contract.

“You can still have a 10-year relationship or a seven-year relationship, but exactly what you’ll do [over that time] may not be as clear as it would have been five years ago,” he said.

Capita recently issued a profit warning. However, Mr Sellers said that was not at all related to the firm’s local government business.

Council-owned companies are also starting to make an appearance in the list of providers, although in the main they only provide for their host organisations. The most notable exception to this was Hoople Ltd, owned by Herefordshire Council and Wye Valley NHS Trust, which provides some services for eight other public sector organisations in the West Midlands, including Worcestershire CC. The data does not include any council companies’ work for private sector firms, universities or housing associations.

Kerry Hallard, chief executive of GSA UK, formerly the National Outsourcing Association, said: “We’ve predicted for some time that we’re going to see some really big names disappear and some new names come to the fore and that’s what you’re seeing in your data.”

She said the move away from long-term high value contracts to shorter and much more flexible arrangements was also happening in the private sector.

Ms Hallard said her advice to GSA members “stuck” in these big contracts was they were “better off” changing their model mid-contract to keep the customer happy in the long run than “burying your head in the sand and saying we’ll take what cash we can get for now”.

Between 2013-14 and 2015-16 Agilisys improved its position in the market while Liberata and Arvato made it in the top five for the first time.

Liberata chief executive Charlie Bruin told LGC new deals tended to be more “platform based” and linked to a particular technology.

He said his business had also seen growth in on-demand services which allowed councils to purchase extra capacity as and when they needed it, such as in revenues and benefits administration, or one-off bespoke services, such as reviewing empty homes in an area.

 

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