Councils may be under pressure to contract out services and reduce costs, but they still expect to support the local economy and employment, says Simon Parker.

The conventional wisdom is that public spending cuts are good for the private sector. As local government is forced to explore more innovative and efficient ways of delivering services, it will inevitably turn to business for answers.

And if companies such as Capita are to be believed, the result will be a tendering beanfeast. The outsourcing giant says it has a record bid pipeline for 2011/12.

Will it pan out like that? Over the past few months, I have picked up anecdotal but remarkably consistent signals from both the public and private sectors that all might not be well in the outsourcing market.

This seems to be supported by the share prices of companies working in the public service industry, which have been lagging the rest of the market for some months.

Councils probably are preparing to go to market with a new wave of contracts in 2011, if only because they have held back so many decisions over the past 12 months.

However, these new deals will not be cheaper versions of the same old 10-year, back-office, outsourcing contracts.

Local government wants something quite different, but councils are struggling to articulate their new agenda to business. The result is an emerging disconnect between what is currently on offer, and the sector’s emerging demands. Something has to give.

On the business side, companies worry that some councils are outsourcing with reluctance, demanding huge savings at great speed, with tight penalty clauses and few redundancies allowed.

With bid costs on a big back-office tender running to something like £250,000, outsourcers are getting very picky. Some companies will simply retreat from the local government market, as Babcock has done since its acquisition of VT Group.

It is all starting to feel like a sellers market, except that the private sector does not always have services which councils want to buy. Some chief executives privately express a certain amount of frustration with the big incumbent companies, questioning their ability to deliver the levels of innovation necessary to cope with 28% budget cuts. If you always contract with the same old people, goes the logic, then you’ll always get the same old service.

Councils want economies of scale, but they are suspicious of inflexible, long-term contracts. If they do contract, they want more of their money to stay in the local area. And if they can’t save public sector jobs, they definitely want to see their buying power benefiting small local businesses.

Those local authorities which are most interested in the Big Society want to see their contracts supporting and developing social enterprises and mutuals. The most sophisticated are looking for new ways to personalise services and change public behaviour so that citizens themselves can shoulder more of the burden of delivering public service outcomes.

The skills required to do this are in short supply, and the people who are best at it are often community development workers with an innate suspicion of big institutions.

This represents a significant challenge for the local government supplier community. Back-office providers will have to use their call centres to support personalisation and manage each councils’ local service delivery market, signposting each member of the public to the voluntary group, social enterprise or business that can best meet their needs. Environmental services providers will need to find sophisticated new ways to reduce demand for waste and street-cleaning services.

To many companies, it looks like councils are simply being unrealistic, and they have at least a bit of a point. If the local government community wants innovation, it needs to manage the market effectively through better dialogue with business and a willingness to spend a little bit more to encourage new ideas.

But then the market, too, will have to adapt. New entrants are already trying to pick up their first few critical contracts. Established companies including Accenture and McKinsey are taking a serious interest in local government, while relative newcomers such as Wipro, Tata Consulting and CSC are starting to broaden what’s on offer.

New models of public-private partnerships might be part of the answer, moving away from monolithic single providers to something more like flexible federations, drawn from different sectors, most of them working on payment by results under a private sector prime contractor.

Joint ventures owned by local government, contractors and local mutual or social enterprise sub-contractors could become more popular – with the sub-contractors on the board, and profits shared with local charities.

Bringing the market back into balance is a classic chicken-and-egg problem, where the only way forward is for both sides to move together.

Local government needs to be clear and realistic about its demands, and business needs to invest in innovative new offerings. If we don’t find a way to take the long view, we risk a return to the cheap and nasty contracts of the 1990s.

Simon Parker is director of the New Local Government Network