21/10/2019

Government outsourcing as a means to deliver public services is often a hotly debated topic. While governments have always purchased some goods and services externally, the level of outsourcing by governments of developed nations has grown rapidly over recent decades. From front-line services to back-office functions and IT systems to financing infrastructure projects, outsourcing is now core to how government operates. These reforms have been driven both by budgetary pressures and ideological views of economic theory.

It is unlikely that the reliance on outsourcing is going to decrease any time soon. Given the volume and importance of outsourcing and the fact that we now have several decades of experience to look back to, it is possible to make some informed decisions in relation to where the greatest efficiencies and benefits can be achieved, and also to consider where outsourcing may not work as well. A Report recently released by the Institute for Government (IfG) examines the experiences of government outsourcing in the UK to identify what has and has not worked, and why.

Has outsourcing worked?

Assessing government outsourcing across 11 areas, the Report concludes that the best outcomes have been seen in the outsourcing of support services that are relatively simple to contract for and deliver. Examples include waste collection, cleaning, catering and maintenance.

In IT and business process outsourcings, where the UK is seen as a leader, there is some limited evidence of cost savings, although the impact on quality is less clear. Whilst some case studies support the view that if done well IT outsourcing can deliver benefits, other case studies show if done poorly IT outsourcing can incur significant cost over-runs.

In front-line public services (which include services such as welfare, prisons, the NHS and social care) there have been mixed outcomes. In some areas, such as probation services, outsourcing has failed on every measure with those services ultimately being brought back in house by the Ministry of Justice.

What are the indicators of success?

The IfG previously identified certain common characteristics of successful outsourcings:

  • outsourcing works best where there is a competitive market of high-quality suppliers;
  • outsourcing is more successful where government can easily measure the value added by the provider; and
  • government should not outsource services that are so integral to the nature of government as to make outsourcing inappropriate.

The new Report highlights four characteristics that are associated with unsuccessful outcomes in outsourcing:

  • government not engaging with the market early in running procurements or not being clear about what it is buying;
  • excessive focus on the lowest price and an insufficient assessment of quality in bid selection;
  • the transfer of risks to suppliers over which the supplier has no control and which they are unable to price or manage well; and
  • even when government negotiates and enters into a good contract, not securing the outcomes it should as a result of weak ongoing contract management due to contract managers lacking the capabilities and information they need to ensure good performance.

Recommendations

The Report concludes that used well, outsourcing has delivered benefits. A wholesale program of taking services back into government hands would risk losing the substantial gains – cost savings, efficiencies, innovations and high-quality services, that in some areas, outsourcing and competition have delivered.

Instead, the Report recommends that government improve the way it decides whether to outsource services and what services to outsource; the way it engages with the market; and its processes of bid selection, risk transfer and contract management. It should also improve the evidence it uses to make contracting decisions.

The Report makes several recommendations for practical improvements required, including:

  • ensuring that the Cabinet Office and other government departments have sufficient resources to implement the recommendations of the UK government’s ‘Outsourcing Playbook’ (which outlines policies for making decisions around contracting with outside suppliers for the delivery of public services).
  • developing the commercial skills and capabilities of officials. This includes through the development and use of ‘commercial blueprints’ by public bodies to improve decision-making.
  • improving the scrutiny of, and accountability for, outsourcing decisions. The Report indicates that this should involve: mandating clear standards for the collection of data on the performance and value of outsourced contracts; and the establishment of a team with the capacity to analyse data on the outcomes of, and insights gained from, outsourcing projects.
  • improving the evidence that underpins contracting decisions through, in part, centrally collated information that can be accessed and used by departments to inform decision-making on future projects.

If such reforms are implemented, the Report argues that outsourcing programs can avoid costly failures, improve competition, deliver genuine value for money and get more out of suppliers.

Relevance to Australia

The experience of government outsourcing in Australia bears many similarities to the UK experience. The amount spent by the Australian government in 2017-18 on purchasing goods and services from private and not-for-profit providers was in the order of $90-$100 billion – around three times the amount spent on direct employment.

In Australia, a 2014 National Commission of Audit Report expressed similar findings to the IfG report, including that government should re-establish competitive tendering and outsourcing guidelines, make greater use of standardised contracts for procurement, improve public service contract management expertise, and more strategically balance risk management with the efficiency of procurement. 

Negative procurement experiences in Australia have similarly highlighted the potential for failure in poorly managed outsourcing projects. For example, the critical Senate report into the government’s ‘Jobactive’ fully outsourced employment service concluded that the service was failing those unemployed people that it was intended to serve. The Senate report argued that the outsourcing of ‘Jobactive’ lacked the necessary government oversight and institutional support, for example to ensure adequate staff training and appropriate integration between service providers. This correlates with findings in the IfG Report that it is often the most disadvantaged members of society that suffer under poorly run privatised models. Similar large-scale failures in the UK have negatively impacted public sentiment and led to calls for services to be brought back within public control.

According to the IfG, this would be the wrong lesson to take from the past 40 years of outsourcing projects. The IfG’s view is that the focus of government decision-making in the future should not be on ideology, but rather on whether privately-delivered services will provide benefits to the public, such as realistic cost savings and performance improvements.

Sarah Nickson, one of the authors of the IfG report, previously worked for the Department of Prime Minister and Cabinet in Australia. She says the IfG Report comes as a timely warning for Australia, providing numerous lessons for agencies hoping to achieve better outcomes, efficiency, quality and costs savings through outsourcing.

The sustainability of future procurement projects requires government to focus on outsourcing for the right reasons. This requires government to take the time to understand what it is buying, choose bids that deliver quality and value for money, allocate risks intelligently and ensure proper due diligence before, during and after outsourcing contracts are put in place.

Authors: Lesley Sutton, Clare Beardall and Asha Keaney  

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