Outsourcing companies have been one of the major beneficiaries of the drive for efficiency savings across local government.
Offering expertise and economies of scale but a poorer deal for workers, the unions claim the industry has grown dramatically as public sector belts have tightened.
But the current economic downturn has left several showpiece outsourcing projects in doubt. Concerns regarding Charnwood and Rushcliffe BCs’ service centre project with Liberata together with Wolverhampton City Council’s back-office tie up with Axon have led to wider questions about whether councils will be as eager to pursue such partnerships in the future (LGC - 06/11/08).
Moreover, senior outsourcing sector figures are predicting a period of consolidation in a market currently worth an estimated£79bn, of which Unisonestimates£5bn is local government work. Such consolidation could mean less choice for councils as they consider how to make efficiencies in any service from back-office support to waste disposal.
One major consideration for councils who have already agreed oursourcing contracts is whether they could be getting a better deal. The unequivocal answer from KPMG’s UK head of public sector Alan Downey is that those who do not ask, do not get.
“If your bottom line is suffering, you try and get a better deal from your suppliers. There are some in the public sector who are reluctant to do this or find it embarrassing, but that is what a private sector company would do,” Mr Downey said.
“It may be that you are not able to come to an arrangement but if you can, that saving could help you avoid having to raise council tax or cut front-line services.”
HM Revenue & Customs (HMRC) last November renegotiated its IT contract with outsourcer Capgemini . While the contract was extended by three years it is understood the government department managed to achieve significantly better terms. The move followed HMRC announcing it needed to slash operational costs by 5% each year over the period 2007-08 to 2010-11.
However, outsourcers may also be looking to shift the goalposts, especially if they are having trouble funding their projects. This scenario has grown increasingly common as the credit crunch has intensified.
Serco Consulting’s local government director Ian Persechino said he expected both sides to ask to renegotiate terms.
“Renegotiating contracts is not uncommon. I have not heard that anyone is in negotiations at present, but there are certainly some that are taking soundings about the possibility,” he said.
That the recession will trigger further consolidation in the sector comes of little surprise the bigger outsourcers have been always been acquisitive beasts. A notable example is Capita , which started life as a division of the Chartered Institute of Public Finance & Accountancy but has seen headcount swell from two to around 30,000.
“In the short term, we would expect to see some consolidation and therefore a reduced number of players in the sector,” said Serco’s Mr Persechino.
While he admitted that fewer players in the market equated to less choice for local government, he was adamant that any reduction in the number of companies involved would only be a short-term issue. He insisted there were more than enough firms to eliminate the risk of a cartel forming.
Moreover, the removal of weak players from the market would save councils from signing up with unstable companies, said Mr Persechino.
It is unclear exactly how many outsourcers will feel the pinch of the downturn, but one outsourcer facing challenges is Liberata.
Last week it emerged that a deal to take on a string of services for Charnwood and Rushcliffe BCs appeared doomed because the company had failed to meet conditions laid down by the councils. It was understood the company could not secure a bond to cover pension liabilities.
The shelved deal followed a report that in September the Learning & Skills Council (LSC) had deducted£3m from its payment to Liberata for the education maintenance allowances (EMA) contract.
Distribution of the allowances, which are issued to help teenagers stay in education, has been dogged by delays. The company said the delays were caused by “technical problems, specifically the helpline” and admitted that around 150,000 students were experiencing problems with the system.
While it is uncertain how those events might impinge on the company’s bottom line, the company’s 2007 figures showed a decrease in turnover. In its financial statement dated year end 31 August 2007, it reported a turnover of£37.6m, down from£40.6m in 2006. Its 2008 figures have not yet been submitted to Companies House.
The company refused to discuss its financial health with LGC. It said in a statement: “It is Liberata’s policy not to comment on rumour and speculation regarding itself and any aspect of its financials.
“We can disclose that we continue to work closely with the LSC and other government bodies to resolve the situation with the LSC and its EMA student payments.”
But the Local Government Association , which signed a 10-year deal worth£29m with Liberata in May, has admitted it is monitoring the situation closely. Deputy chief executive John Ransford said the LGA was still talking about Liberata’s position with members.
Mr Ransford said: “There is quite a lot of discussion about outsourcing at the moment. There have been some concerns about Liberata this week, but our contract with them is fine in fact it is ahead of schedule.”
It is clear that local government figures are questioning whether outsourcing offers value for money and are increasingly calling for councils to re-evaluate their models.
LGA Liberal Democrat group leader Richard Kemp, a former chair of 4ps, the advisory body for councils on private sector partnerships, said: “This is a golden opportunity for local government to reassess what it out-sources and what the advantages actually are.
“Often leaders and chief executives take the easy option and outsource problem areas without evaluating if they could do a better job in-house. But the current climate has revealed that private sector management is not always better than public sector management.”
Cllr Kemp said that councils should look at which solutions keep cash in their local area rather than outsourcing the benefits to the private sector. Examples included going into partnership with housing associations or social enterprise schemes spending their profits locally.
Ken Cole, efficiency and procurement adviser to Capital Ambition , the London regional improvement and efficiency partnership, said: “I am not against outsourcing, far from it, but I do think that it’s often done badly and for the wrong reasons. A lot of the outsourcers build in huge margins for uncertainty and there are issues about whether or not it always offers value for money.”
The unions have historically taken a dim view of outsourcing. A Unison report on the sector published in September concluded that, “the increasing privatisation of public services delivery fails to produce value for money for the public sector or service users”.
But outsourcing is here to stay. All the political parties support it and while the economic downturn may cause some companies problems, others seem as buoyant as ever.
Amid the turmoil there could be new opportunities for councils to assess whether further efficiencies are possible.