Andrew Jepp 30 July 2015

The new risk landscape

Outsourcing has never before been a more topical issue for local government. First introduced over 30 years ago by Margaret Thatcher as part of the Conservatives’ privatisation programme, outsourcing has been a common management strategy for local authorities for decades.

However, this trend has become particularly pronounced in recent years. The scale of outsourcing is now greater than ever before, especially as legislative changes and financial pressures have seen a transition for councils to community leaders and service commissioners too.

Indeed a recent study by OC&C Strategy Consultants found that for every £3 spent by government and local authorities on delivering public services, £1 goes to outsourcing companies, whilst another study by the Information Services Group found that the number of outsourced contracts rose by 125% during the coalition government. With further funding cuts to be expected, the impetus towards outsourcing is only likely to grow.

Whilst local authorities should so far feel confident in how they have dealt with risks associated with outsourcing, there are a number of emerging risks and reputational threats that councils must take account of – hidden costs; loss of control over service delivery; potential supplier failure; and an inability to remain compliant with legislation. All make the new risk landscape increasingly complex.

Another key challenge for local government is understanding liability and responsibility. A common misconception is that responsibility and liability are transferred further down the supply chain with new contracts. In reality, their delegation is often less defined, with liability often remaining firmly with the local authority, whether a third party was responsible or not.

This combination of new risks and misconceptions about liability and responsibility could leave some local authorities vulnerable.

Several studies and polls have shown that some local government organisations are sleepwalking into third-party contracts. Lulled into a false sense of security by expected efficiencies and savings in service provision, many organisations have failed to put into place appropriate strategies addressing new risks.

The key challenge is to make sure that risks are better and more widely understood across local government. This is a fact well illustrated by a recent audit of central government public accounts. The report, Central Government’s Management of Service Contracts, found there were no documented plans for managing 28% of contracts, while a further 56% of contracts did not have a contingency plan in case of supplier failure.

Whilst we cannot assume that this is mirrored in local government contracts, it does act to highlight a common lack of understanding of the risks associated with third party partnerships.

This presents a serious challenge for local authorities to overcome, not only threatening the service users, but posing a risk to the very stability of the authority itself; its services, its outcomes and its reputation.

Fortunately, there are ways in which local government bodies can further act to mitigate risk.

In the first instance, councils should ensure they understand the full range of risks that they may face. A full risk audit can help public sector bodies to understand which risks are most likely and most damaging. It can also help local authorities establish key risks that could stop the partnerships from achieving their objectives.

Council chiefs should also ensure that clear lines of responsibility and accountability are drawn as soon as possible in the contracting process. Clear exit strategies and business continuity plans should also be put in place to ensure that a local authority’s operations remain unaffected. Without imposing this level of control, both the risk and cost of partnerships could spiral.

They should also work with third parties to make them aware of the sensitivities in place, especially as they may not be familiar with the wider cultural, political, reputational, regulatory, funding constraints and statutory responsibilities involved.

Equally, some third parties may be considerably smaller, and so council chiefs should be willing to provide support where appropriate. As the local authority often remains responsible for failure, even if further down the supply chain, it is in their interest to make sure that their contractual and legal responsibilities, alongside the crucial statutory and political responsibilities are made clear to, and embraced by, the chosen partner organisation.

Finally, local government organisations should invest in communicating to the public how potential risks associated with outsourcing are managed. A key problem facing local councils is the lack of public understanding and awareness about the situation amongst their communities.

Indeed, research carried out by Zurich Municipal earlier this year found that data security issues relating to the outsourcing of council services is a key concern amongst local communities. Almost three quarters (72%) of those polled felt that outsourcing put their personal data at risk, whilst less than a fifth (18%) of those polled would trust third-party organisations to handle their data securely.

Local authorities need to do more to communicate with their local communities about who is responsible for each public service and why. Whilst this may not eliminate the threat to their public reputation, it will certainly help to mitigate it.

A clear risk management strategy has several benefits. It will help local authorities reduce unplanned costs, increase their understanding of risks, increase resilience of strategy and objectives, provide greater control and governance, protect against third party failings, and, most importantly, prepare them for an effective response and recovery if required.

So far, councils should feel encouraged by the way they have managed the new risk landscape thrust upon them, brought upon by transformations in local government and a tightening of the purse strings right across the public sector. They should therefore feel confident in their abilities to minimise the threats posed by partnership working.

Whilst it may never be possible for local government to outsource risk as they outsource their services, it is possible to mitigate it. Good planning and risk management is therefore key as the move towards outsourcing gains pace.

Andrew Jepp is public sector director at Zurich Municipal.

This article first appeared in Local Government News magazine. Click here to register for your free copy.

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