News focus: A case of conflicting objectives

11 October 2010

12 October 2010 | Lindsay Clark

Can contracting out services enable the public sector to cut costs and demand for services at the same time? Lindsay Clark asks whether the equation adds up

“Putting you first” reads the slogan on vans belonging to Connaught, the social housing services firm that entered administration last month.

Finances aside, what it has in common with many government suppliers is its marketing message that the customer’s needs are paramount.

That will certainly be a message Suffolk County Council wants to hear. Last month, the authority voted to outsource most of its services in an effort to cut 30 per cent from its annual budget. The move is in response to a massive reduction in the funds that local government receives from Whitehall, which is expected to be set out in the spending review next week.  

If Suffolk’s lead is followed, council procurement staff will have their work cut out, as they strive to find suppliers, design contracts and negotiate prices in a massive wave of outsourcing. 

But if procurement teams believe suppliers will put public services first, then such an expectation could disrupt the key relationships when they are most critical, warns Peter Howarth, chief executive of the Society of Procurement Officers in Local Government. The public sector is outsourcing while trying to cut calls on services, says Howarth, but he doubts this will happen unless the process is being managed “quite rigorously” by the procurement manager.

His argument is that reducing demand is at odds with the private sector companies’ chief purpose: to maximise profits and market share. “There is nothing wrong with that,” Howarth says. “But don’t let us run away with the myth that they’re going to reduce demand for their product because it ain’t going to happen.”

Instead, councils could understand suppliers’ financial needs, but also help them in other aspirations by enhancing their reputation in the sector. This could, in turn, benefit market share, Howarth says, which can create a strong incentive for better performance. In return, suppliers could contribute to a council’s community or environmental goals.

Partnerships that do not get the relationship right can end up with an “us and them” situation. “That’s why many fall flat on their face,” he says. 

Although he is not opposed to outsourcing, Howarth emphasises that using private companies was no panacea for the public sector.  There is evidence to support his caution. Southwest One is a partnership between technology giant IBM and Somerset County Council , police and other public bodies, to collaborate on finance, procurement and HR.

The £400 million contract was expected to produce £200 million in efficiency savings over 10 years. Yet the partnership lost £16.6 million this year. Meanwhile, the Audit Commission ordered the participating authorities (Somerset, and Taunton Deane Borough Council) to pay the extra cost of producing their accounts after problems with a new accounting system meant they took longer to compile. 

Although Southwest One says losses are expected at this stage in the contract, there are other reasons suppliers may be wary of becoming part of the revolution in public services. Rules governing the transfer of public sector staff, which are enshrined in the Transfer of Undertakings (Protection of Employment) Regulations, could be used by unions bent on challenging outsourcing deals. 

Debbie Venn, associate with ASB Law and an expert in outsourcing contracts, says: “Suppliers will be careful to look at whether they’re getting an indemnity from the council in respect of their obligations as an employer that have already arisen. And the councils will probably not want to give that indemnity because they are tied because of cost.” 

Yet private sector involvement in the public sector is bound to increase, says Jessica Hawkins, an analyst with research firm Ovum. “The changing dynamic between the public and private sectors is likely to be met with some resistance, not least from the unions, but the reality is that many [public sector] simply don’t have a great deal of choice but to take a more radical approach.”

In that case, it would be better to work with the idea that the outsourcing firm’s raison d’être is to make profit, despite any slogans declaring otherwise.

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