| SPOTLIGHT |
The word "outsourcing" appears only once in the Comprehensive Spending Review 2010 – in relation to the Foreign and Commonwealth Office's intention to continue to simplify, standardise and streamline back office functions. Yet outsourcing is seen by many public bodies as an effective way of cutting costs and achieving efficiencies. Janet Lewis considers Suffolk County Council's plans to outsource the majority of its functions and whether the Suffolk model is likely to be adopted by others going forward.
Aside from spending cuts, Suffolk's "New Strategic Direction" programme is the talk of the local government world at the moment. The programme will see the future role of the Council as an enabling one, focussing on becoming a strategic body with much less service delivery and transforming public services through collaboration and strengthening communities. The intended and principal outcome is a financial one – reducing costs by 30%.
The key characteristics of the "new" Council will be:
The plan is to first cut internal processing and bureaucracy, and then explore new sources of income independent of central government. The Council will withdraw from its role as a service provider and keep only those functions that are central to its strategic role.
So what's different?
Suffolk's plans are not dissimilar to previous outsourcings – and ideologically not that different from discussions more than 20 years ago. Yet it is the scale and speed of the programme that is different – even sensitive services like child protection could be privatised and divestment is expected to be completed within four years.
Others started the move towards more extensive outsourcing before the coalition government came to power. Essex County Council signed a £5.4bn partnering contract with IBM in December 2009 – that pioneering deal is intended to transform the way in which public services are delivered within the County and to reduce costs by up to 20%. IBM's first task was to review existing contracted out services to see if efficiencies can be made (similar to the Government's current initiative to review contracts with its top 20 suppliers to achieve efficiencies) and only then to start looking at how to streamline and merge services where appropriate.
It is worth reflecting on the degree to which compulsory competitive tendering and the rules on accounting for DSOs and DLOs caused many local authorities to outsource (usually styled "externalisation") through the early 1990s. This has been followed by other outsourcing trends, in social housing (ALMOs) and in service areas such as leisure. In that sense, outsourcing is not new. The difference is that local authorities, including Suffolk, do not regard the need to outsource as merely a reaction to isolated commercial or statutory pressures. Instead, outsourcing is the route by which the local authority is entirely re-focussed. Of course. Suffolk does not seem to be proposing to outsource everything from day one – but it is the goal of outsourcing everything within four years which resonates.
Will it work?
The Suffolk proposals are seen by many as controversial. The unions are up in arms – Unison have commented that the programme "amounts to a blank cheque given to the administration of Suffolk CC to dismantle local public services as we know it".
The key concern is that it is dangerous to offer the vital services most likely to be outsourced (including for example child protection, home care and support for young people) to the open market. Bear in mind that policing, schools, fire and other functions simply cannot be outsourced at all.
There is a fear that these services will be sold to the lowest bidder, rather than the most economically advantageous offering. "Most economically advantageous" is likely to take account of much wider issues than just cost – including quality, standards, continuous improvement, and partnership working. Suffolk have yet to announce the basis on which bids will be sought, but presumably the focus will almost certainly be on ability to achieve cost savings combined with maintaining and improving service standards.
After all, the Council will still owe statutory and fiduciary duties to its Council tax payers. Many are worried how these responsibilities will be discharged with only a small core strategic function retained within the Council. The client role will be critical – to ensure statutory compliance, to maintain public accountability and confidence, and to step in as provider of last resort if things go wrong. The way in which the client function will operate may be more interesting and complex than the outsourcing itself. This may in fact determine whether the model is a success.
And how will all this sit with the governance paraphernalia of local government – Cabinets, scrutiny committees, Section 151 officer, Monitoring Officer, etc? Will they be able to sufficiently discharge their duties through various contracts with external providers?
The challenges
Suffolk's procurement strategy will be awaited with interest by many, not least the potential bidders. The Council has a long way to go from announcing a radical programme to turning it into something that can be taken to market. The market will no doubt respond, but there are questions.
Could one organisation deliver all the services of a county council? This is unlikely and the private sector partner would therefore need to partner with others in some way. This in itself gives rise to potential procurement and competition law issues – would the appointment of a sub-contractor without a competition be contrary to procurement and/or competition law?
The other challenge is what happens if things start to go wrong? In a traditional outsourcing, deductions would be made from payments to the service provider for service failures. However, outsourcing a service which has an inherent failure rate (such as social services) raises a host of problems. The service provider will not take risks they cannot manage – and for certain levels of risk will charge a huge premium. The public are inclined to be more forgiving of "failure" where a service is provided by the public sector than when outsourced to a private sector provider (the difference being "profit").
Termination is the ultimate sanction but if all services are outsourced via a single partner, will partial termination be required? Segmenting an outsourcing could undermine its success, yet not allowing this flexibility could tie the Council to a long term failing arrangement. However the outsourcing programme is structured, a pre-agreed exit strategy will be key, not least to protect continuity of services, staff who have transferred to the private sector, and assets needed to deliver essential services.
The delivery vehicle or vehicles itself will also give rise to challenges. Suffolk seems to prefer a social enterprise, but what does this mean and how will it be constituted? The link with other initiatives and bodies, such as Local Enterprise Partnerships (Suffolk missed out on the first round of LEPs announced on 28 October 2010) and asset backed or property vehicles will also need to be fully considered.
Will others follow suit?
The Suffolk model sets outcomes in terms of percentage savings and passes delivery to the private sector. Outsourcing has traditionally been undertaken in this way on a much smaller scale, with contracts ring fenced to specific services. The new and emerging models of large scale "big bang" outsourcing work on the same principles but give the private sector greater scope to innovate, find savings and continuously improve services. But with this comes a greater risk that the private sector partner may fail – and failure, where vital public services are concerned, is not something any local authority can easily live with. It is the inherent "cost" of managing this risk that is in most danger of being over-looked.
Local authorities across the country will no doubt continue to consider outsourcing as one of the ways in which spending cuts can be achieved. Others may well follow Suffolk, but most likely we shall see a diversity of approach – from quasi-mergers (Westminster, Hammersmith & Fulham and Kensington & Chelsea), other types of shared services, or collaborative procurement models, through to more ad hoc outsourcing. Suffolk is bold to take the quantum leap to wholesale outsourcing and its efforts will be watched with interest.
Janet Lewis is a senior associate at Nabarro (www.nabarro.com).
