Mark Whitehead 19 November 2018

The fragile state of outsourcing

Interserve faces an uncertain future, Allied Healthcare could fold at the end of the month, Capita faces new problems...it's been a jittery few days for anyone using some of the best-known outsourcing companies.

That includes, of course, many local authorities, still reeling from the collapse of construction outsourcing giant Carillion earlier this year which left them to pick up the pieces and landed taxpayers with a huge bill to pay.

The latest flurry of headlines warning of the fragile state of companies in the middle of multi-million pound building contracts, or providing care services for vulnerable people, or responsible for council administration, marks an ever more fragile relationship between town halls and the big outsourcers.

Where once they were seen as go-ahead, commercially-minded organisations offering the kind of flexible, entrepreneurial thinking needed in the public sector, now they are increasingly seen as a high-risk liability.

The fate of the Public Finance Initiative model, much loved by governments of all colours in the last three decades, illustrates the way attitudes are changing.

Announcing the end of the PFI in the budget last month chancellor Philip Hammond slammed them as 'inflexible and overly complex'.

He even tried to distance himself from the whole idea of the PFI by blaming Labour for what was once the epitome of Conservative market-friendly thinking (they were introduced by John Major's Tory government in the 1990s but given a big boost in the Blair and Brown eras).

Existing schemes will limp on but the PFI as an effective political and economic solution to funding the public sector is now as dead as a Norwegian Blue Parrot.

But with increasing volatility in the contracting market place the PFI's junior partners – common or garden outsourcing projects – are coming under increasing scrutiny.

Opinion is inevitably divided over the merits of outsourcing. Some see it as a valuable way of making the best use of resources – in the "buy or make?" question, buying can be a lot more efficient than to doing it yourself. Few councils would consider opening a factory to make their own stationery. Many services such as cafes and leisure facilities are now successfully run by outsourced organisations.

But in traditional procurement thinking these are low-risk-low-cost services. It can make a lot of sense to pay someone in the private sector to do it for you, saving management time and resources for more important strategic decision-making. By comparison goods and services which pose a greater risk if they were to fail, or which carry very big price tags, demand much closer management.

In the case of Carillion the price tag was particularly high for the public purse and for many local government commissioners, while if a company like Allied Healthcare were to go under, the cost would come mainly in the form of disruption and anxiety for a lot of frail elderly people and their relatives.

The future of one of the biggest construction companies and one of the biggest care services providers cannot be confidently predicted, but senior decision makers must be pondering the political consequences of another outsourcing disaster.

There is increasing realisation that smart sales people bringing good news from the go-ahead commercial sector should be treated with caution.

If Interserve or Allied Healthcare were to collapse – or, in the worst case scenario, both went under – stand by for further rethink from Mr Hammond and his colleagues on the wisdom of relying on big private sector organisations to provide public services.

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