More outsourcing is not always the right answer to public spending pressures, says John Tizard
As public bodies, and local authorities in particular, wake up to the reality of operating on severely-reduced budgets, there is inevitably a loud chorus for more traditional outsourcing to the business sector.
Much of this noise implies that it is an unquestionable fact that procured services can and should always be cheaper.
Many of those shouting loudest also imply that the public sector will be unlikely to find the required savings without outsourcing or ‘salami slicing’ all their programmes. This is simplistic and wrong. There needs to be proper, evidenced-based debate leading to strategic decisions. There are many reasons why it is a false analysis.
First, the evidence on the application of outsourcing and strategic partnering by local authorities would suggest that, in the right conditions, this business model can indeed lead to both expenditure reductions and improved outputs alongside greater resilience. However, there is also evidence which suggests that, given the wrong conditions, the result can be lower service standards and – even where there are short-term financial savings – higher costs for the client authority in the longer term.
Second, the procurement process itself can be expensive in absolute terms. For example, the costs of advisers and client time – and in opportunity costs, given the time commitment required from senior executives. Public procurement tends to be a lengthy process, whereas the need to identify savings is immediate.
Third, long-term contracts, unless well negotiated, can reduce flexibility and, in effect, lock up a tranche of the local authority’s finances which will not be available for future years’ budget considerations.
The flexibility issue has other implications for a local authority, which may be uncertain about future demand and need for a service, may be seeking to partner with other local public sector agencies, and may be expecting significant political and policy changes.
Fourth, there are examples of local authorities themselves implementing radical service redesign and transformation, leading to greater value for money without any outsourcing. Fifth, the move towards greater personalisation and individual budgets mean the public sector will no longer be the purchaser for many services. Traditional, wholesale providers will either have to change their business models or give way to retailers.
And finally, the experience of CCT should remind us that short-term, price-driven procurement, which always buys at the lowest price, can often lead to lower quality and unacceptable employment practices. It is essential that local authority procurement learns from experience in both the public and business sectors, and that it is well resourced with competent and creative people.
Local authorities faced with major public expenditure reductions, increasing demands for core services, and improved outcomes are adopting a range of strategic options.
One of these – but by no means the only or, indeed, the prevalent, one – is the procurement of outsourced services from the business sector.
The most critical strategic approach should be to pursue strategic commissioning – often jointly with other local agencies – to focus on the needs and aspirations of place. Strategic commissioning should never be confused with procurement, which is just one means of implementing commissioning decisions. It is about identifying the needs and aspirations of the local community and then, given the resources available, identifying the most appropriate means of addressing these needs.
This requires a mindset and practice of neutrality about who provides, but a resolute focus on securing the best outcomes – for service-users, and wider local public interests – at the optimal price... not the same as buying at the lowest price irrespective of the impact on quality and wider public interests.
In these circumstances, outsourcing or long-term strategic delivery partnerships with a business or any other provider should only be pursued when it is the natural means of securing a strategic commissioning decision. Local authority commissioners and procurement executives have to take a political lead. They have to up their procurement and commercial skills. They must be able to encourage and foster a diverse range of suppliers from all sectors. And they need to know when and how best to use procurement as the means of securing delivery in ways that ensure whole-life value for money and wider public value.
Increasingly, local authorities are recognising Total Place and similar initiatives may offer the opportunity to work with partners from across the public sector to address budget shortfalls through partnership.
There are many opportunities, as the Total Place pilots are beginning to show, for reducing overall public expenditure in a locality by eliminating duplication; sharing staff, services and resources; merging and rationalising the local public estate; joint commissioning; and in some cases, establishing local public service boards to undertake commissioning. A key element of strategic commissioning should be to develop and foster a diverse range of suppliers in order to encourage innovation and creativity, and to offer choice.
Public procurement has to be able to underpin these strategic approaches. Business, social enterprise and third sector providers, too, have to be responsive to the new environment.
When the strategic decision is to outsource, most quality business providers will not wish to be drawn into a lowest-price competition, if this means they cannot deliver high-quality goods or services, build a long-term partnership arrangement with their public sector clients, and obtain a reasonable return for their shareholders.
The change programmes which local government has to address against the financial backdrop of severe resource constraint and cuts will mean that some local authorities will seek support and advice at both strategic and operational levels. This support could come from the private sector, or from within the public sector itself, or from partnerships between the two.
John Tizard is director of the Centre for Public Service Partnerships, University of Birmingham
Much of this noise implies that it is an unquestionable fact that procured services can and should always be cheaper.
Many of those shouting loudest also imply that the public sector will be unlikely to find the required savings without outsourcing or ‘salami slicing’ all their programmes. This is simplistic and wrong. There needs to be proper, evidenced-based debate leading to strategic decisions. There are many reasons why it is a false analysis.
First, the evidence on the application of outsourcing and strategic partnering by local authorities would suggest that, in the right conditions, this business model can indeed lead to both expenditure reductions and improved outputs alongside greater resilience. However, there is also evidence which suggests that, given the wrong conditions, the result can be lower service standards and – even where there are short-term financial savings – higher costs for the client authority in the longer term.
Second, the procurement process itself can be expensive in absolute terms. For example, the costs of advisers and client time – and in opportunity costs, given the time commitment required from senior executives. Public procurement tends to be a lengthy process, whereas the need to identify savings is immediate.
Third, long-term contracts, unless well negotiated, can reduce flexibility and, in effect, lock up a tranche of the local authority’s finances which will not be available for future years’ budget considerations.
The flexibility issue has other implications for a local authority, which may be uncertain about future demand and need for a service, may be seeking to partner with other local public sector agencies, and may be expecting significant political and policy changes.
Fourth, there are examples of local authorities themselves implementing radical service redesign and transformation, leading to greater value for money without any outsourcing. Fifth, the move towards greater personalisation and individual budgets mean the public sector will no longer be the purchaser for many services. Traditional, wholesale providers will either have to change their business models or give way to retailers.
And finally, the experience of CCT should remind us that short-term, price-driven procurement, which always buys at the lowest price, can often lead to lower quality and unacceptable employment practices. It is essential that local authority procurement learns from experience in both the public and business sectors, and that it is well resourced with competent and creative people.
Local authorities faced with major public expenditure reductions, increasing demands for core services, and improved outcomes are adopting a range of strategic options.
One of these – but by no means the only or, indeed, the prevalent, one – is the procurement of outsourced services from the business sector.
The most critical strategic approach should be to pursue strategic commissioning – often jointly with other local agencies – to focus on the needs and aspirations of place. Strategic commissioning should never be confused with procurement, which is just one means of implementing commissioning decisions. It is about identifying the needs and aspirations of the local community and then, given the resources available, identifying the most appropriate means of addressing these needs.
This requires a mindset and practice of neutrality about who provides, but a resolute focus on securing the best outcomes – for service-users, and wider local public interests – at the optimal price... not the same as buying at the lowest price irrespective of the impact on quality and wider public interests.
In these circumstances, outsourcing or long-term strategic delivery partnerships with a business or any other provider should only be pursued when it is the natural means of securing a strategic commissioning decision. Local authority commissioners and procurement executives have to take a political lead. They have to up their procurement and commercial skills. They must be able to encourage and foster a diverse range of suppliers from all sectors. And they need to know when and how best to use procurement as the means of securing delivery in ways that ensure whole-life value for money and wider public value.
Increasingly, local authorities are recognising Total Place and similar initiatives may offer the opportunity to work with partners from across the public sector to address budget shortfalls through partnership.
There are many opportunities, as the Total Place pilots are beginning to show, for reducing overall public expenditure in a locality by eliminating duplication; sharing staff, services and resources; merging and rationalising the local public estate; joint commissioning; and in some cases, establishing local public service boards to undertake commissioning. A key element of strategic commissioning should be to develop and foster a diverse range of suppliers in order to encourage innovation and creativity, and to offer choice.
Public procurement has to be able to underpin these strategic approaches. Business, social enterprise and third sector providers, too, have to be responsive to the new environment.
When the strategic decision is to outsource, most quality business providers will not wish to be drawn into a lowest-price competition, if this means they cannot deliver high-quality goods or services, build a long-term partnership arrangement with their public sector clients, and obtain a reasonable return for their shareholders.
The change programmes which local government has to address against the financial backdrop of severe resource constraint and cuts will mean that some local authorities will seek support and advice at both strategic and operational levels. This support could come from the private sector, or from within the public sector itself, or from partnerships between the two.
John Tizard is director of the Centre for Public Service Partnerships, University of Birmingham
