Public sector outsourcing: What have we learnt and what is still unclear?

From the early 1980s onwards public sector outsourcing – the delivery of public services by private sector organisations – has become increasingly common place in the UK and internationally. While the language may have changed along the way, with Compulsory Competitive Tendering giving way to Public Private Partnerships, the underlying intention has remained consistent: to harness the power of competition in order to improve the efficiency, responsiveness and quality of public services. These aims have been reinforced by successive governments.

Since outsourcing is now so well-established, what can be learnt from this long-standing experience?

First, the impact of outsourced arrangements in terms of efficiency, quality and value for money seems to be mixed, but is also quite hard to assess. As the Institute for Government notes, one reason for this difficulty is the lack of transparency about both the terms on which contracts are let and how they perform. While there have been several high-profile failures, such as those involving Serco and G4S, it is hard to gauge how representative these are of outsourcing experience in general. It is certainly interesting to note though, that in some quarters there seems to have been a turning of the tide, with some recent examples of previously outsourced services being brought back in-house. In 2011, for example, the Conservative-led council in Cumbria decided to bring its contracted-out highways and road-works services in-house, citing rising prices and lack of flexibility, with similar decisions since being made in some other local authorities. These shifts indicate that, at the very least, the evidence about impact doesn’t all point one way.

Secondly, there is no shortage of incisive analysis pointing out the lessons that have been learnt within the public sector about the conditions for success. Reports by the National Audit Office (NAO) in 2012 and by the Institute for Government and the Public Accounts Committee in 2013 and 2014 respectively, all looked in depth at the problems and challenges of public sector outsourcing. The recommendations by these reports can be grouped, broadly, into a three-part agenda, dealing with:

• Oversight arrangements. This includes having clear rules in place to govern market-based arrangements, having a clear understanding of each particular market and, crucially, knowing whose job it is to perform these oversight functions – a point made in the Institute for Government’s report on ‘Making Public Service Markets Work’. The need for transparency also fits in here.
• Making markets work effectively. This heading sub-divides further into demand- and supply-side measures, aimed respectively at empowering users and at enabling entry to and exit from the market.
• Contract management and delivery. Here the emphasis is on contractors having the skills to design, manage and monitor contracts. As the Public Accounts Committee commented: “government needs a far more professional and skilled approach to managing contracts”, warning that “there are serious weaknesses in the Government’s ability to negotiate and manage contracts with private companies on our behalf.” Continuing concerns about weaknesses in this area are signalled by the recent announcement of a Cabinet Office review of £500m worth of outsourcing contracts held by Atos, following a major failure in their work on an IT contract for GPs.

There seems to be, then, a clear consensus about current problems in public sector outsourcing and how they need to be addressed.

The third point to note concerning the current state of play, though, concerns the criteria that are being used to assess the outcomes of public sector outsourcing. Almost across the board, the start and end point is that of ‘value for money’. This emphasis is echoed in, for example, the title of the NAO’s report on ‘Delivering public services through markets: principles for achieving value for money’. This is not surprising, given that value for money has been at the heart of the rhetoric that drives these arrangements.

It does lead, though, to some questions and dilemmas. Value for money has to be interpreted, and this involves deciding on the appropriate trade-offs between efficiency, economy and quality. In this complex process of decision-making, it is all too easy for the interpretation to focus solely on costs at the expense of a clear-headed view about how those costs relate to the outcomes achieved. An emphasis on value for money can also lead to a market-centric perspective in which the analysis of both the process and outcomes of outsourcing tends to focus on the workings of a particular sector or market rather than on the wider implications. This emphasis can be seen in the three-part agenda set out above.

These wider implications are important for the users of public services. As the Institute for Government points out, service users may have multiple needs and yet each commissioner will tend to focus on just one narrow part of these needs. There are also wider implications for providers. What happens to the strategic capacity of a local authority when it has outsourced its services to such a degree that it no longer has the capacity to take a strategic view about the future shape and pattern of services? What happens to organisational learning – both about the process of contracting-out and the outcomes achieved – when that strategic capacity degrades? What impact does this then have on public sector managers’ capacity to take the professional and skilled approach that the Public Accounts Committee has called for?

These questions about the impact of outsourcing on strategic capacity and organisational learning urgently need adding to the agenda identified above.

Ellen Roberts – follow me on Twitter