The Bizzle

"Saving your ass since 1999"

The limits of outsourcing

There’s lots of stories around at the moment about how public sector cuts will be achieved (in part) through outsourcing. One that caught my eye was Suffolk County Council’s proposal for a “virtual council”, which would see the Council reduced to a procurement and management function with actual services being provided by private or third sector organisations.

I don’t wish to make a political point about this. But it’s interesting to look at the council’s aims for this proposal:

The council says it wants to withdraw from directly providing public services in order to reduce the local authority’s “size, cost and bureaucracy and build community capacity to enable Suffolk citizens to take greater control of their lives.”

The council is obviously going to be smaller following the implementation of these proposals, at least in terms of the headcount that it directly employs, although there must be doubts about whether the outsourced headcount in some areas would be lower given the lack of established providers in e.g. social services who can leverage economies of scale. And I guess you could argue that bureaucracy is reduced through arms length relationships with providers, although as I’ve written elsewhere you need more management than you think to make outsourcing work for the service user.

What looks like a real problem, however, is the tension between trying to reduce costs and “enable … citizens to take greater control of their lives”. Here’s why.

In any buyer-seller relationship it’s essential that both parties know what’s being delivered for the specified price. The buyer wants to that there’s no hidden or unexpected costs, and the seller wants to minimise the risk to his profit.

Because of their complexity, this principle is even more important to outsourcing transactions. Outsourcing contracts usually set out at some length (or at least refer to an agreed list of) the activities to be undertaken for the agreed price, and a mechanism for adding to that list or varying the nature of the activities together with principles for ascertaining how that affects the price.

The more complex the outsourced service, the more scope there is for errors and omissions in the list of activities. This is often to the benefit of the supplier, in the sense that it can name its price for the rectification of the contract to include an omitted activity.

Even where the contract is right when it’s signed, there will always be a need to add new activities or vary existing ones as time goes by. Again, the supplier will charge for this.

My own employer is mindful of its reputation, and tries to be fair in pricing up these variations. But I’ve seen some arrangements (IT outsourcing is particularly bad for this) where the supplier charges £100 per person per hour for attendance at meetings to discuss the possibility of making a variation. God only knows what the rate is for actual productive work.

And these issues apply to services with fairly standard activities. The needs of users of a lot of council services (like child protection, for example) aren’t standard, so how could you ever create a definitive list of what your supplier will do?

And how what’s your mechanism for determining the price for non-standard activities when the challenges that users face are by their nature unpredictable? Answer: a premium hourly rate for all additional time spent over and above what’s included in the standard unit price.

I imagine that clever and commercially astute lawyers and accountants could find contractual and commercial solutions that address these issues, at least partially. I don’t imagine that Suffolk County Council employs many lawyers and accountants with the experience of negotiating and (crucially) operating major outsourcing transactions that would be required to do that.

So the problem is like this. You could cut costs by outsourcing council services, but only by focusing on standard activities and ignoring difficult problems. Or you could be responsive to the actual needs of citizens, but only by paying the extra that your supplier will charge for non-standard services.

So, Suffolk County Council, which will it be?

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