Monday, 1 April 2013

How have public sector spending cuts affected Government outsourcing?

Serco sauce - putting the sauce into outsourcing

In the wake of the financial crisis of 2007-8, Britain found itself with one of the largest budget deficits in the developed world. In 2009/10 the deficit peaked at 11.3% of GDP, the highest since the levels of borrowing required to finance the Second World War. Inheriting such unsustainable levels of borrowing, the Coalition Government came to power in 2010 on a promise to undertake a significant program of retrenchment. But what is the effect of austerity measures on government outsourcing?

Despite the association of outsourcing with cutting costs, one might expect government spending cuts to result in less outsourcing, as fewer new contracts become available. Indeed, the surge in outsourcing predicted by many failed to materialise in the immediate aftermath of the 2010 election; the number of government contracts awarded actually fell by 13% between 2009 and 2011. However, the entire value proposition of firms like Serco, G4S and Capita is that they can provide the same level of service provided by the government for less money. Thus, outsourcing services and functions should be seen as key to mitigating the impact of public sector spending cuts on services. In fact, despite the initial dip in the number of contracts awarded, the total value of government contracts awarded has doubled since the financial crisis, rising from £9.6 billion in 2008 to £20.4 billion in 2012. Austerity, then, has quite sensibly resulted in more outsourcing.

The scale of the cuts is also seeing outsourcing make inroads into areas where it has not yet penetrated. Barnet Council, for example, is in the process of outsourcing around 75% of its functions, including core services such as planning and environmental health; the next logical step for the government’s education reforms would be allowing for-profit enterprises to run schools in the state sector; and in March 2012, the Cabinet Secretary, Sir Jeremy Haywood, even suggested that it was time to end the monopoly of Civil Service mandarins on providing policy advice to ministers, opening the function up to competition. Austerity is thus seeing a greater range of services and functions being outsourced than ever before.

However, with more outsourcing will also come greater scrutiny, and a pressure for ‘smarter’ outsourcing, especially as outsourcing firms profit while the public finances ail. In an early example, shortly after coming to power, the Cabinet Office Minister, Sir Francis Maude met with 19 outsourcing firms for discussions to press for better terms. Similarly, in 2010, Sir Phillip Green’s efficiency review criticised government procurement “for failing to leverage both its credit rating and its scale.” Multiple contracts for services have been signed with major government suppliers by different departments at different prices. Serco, for example, runs prisons for the Ministry of Justice, air bases for the Ministry of Defence and hospitals for the Department of Health on a large number of different contracts. Austerity has brought pressure for rationalisation. As a result, we should begin to see fewer, but larger government contracts, allowing the government to take advantage of economies of scale.

Smarter outsourcing also means introducing new models of outsourcing. The model currently looked upon most favourably in Coalition circles is Payment by Results, which links returns to outcomes. This is hoped to drive improvements in service quality, and represents better value for money for commissioning bodies, as they pay less if intended outcomes are not achieved; it can also ease pressure on budgets by staggering payments over longer time periods. Payment by Results schemes are quickly becoming entrenched, the most prominent example being the multi-billion-pound Welfare-to-Work scheme, which links payments to providers to service users staying in employment. Other examples include the Serco-run HMP Doncaster, where 10% of the contract price during the first four years is conditional on Serco reducing the reconviction rates of offenders within a year of release by 5%. Similarly, Social Impact Bonds, which promise returns funded by commissioning bodies to private investors if certain social outcomes are met, are currently being used to tackle homelessness in London and reoffending in Peterborough.

In conclusion, austerity has resulted in a greater number and variety of outsourced services, and a pressure towards a rationalisation of contracts and new models of outsourcing such as Payment by Results.