Opinion: Can Local Government really cope with outsourcing?

 

Council Officers have a strong public service ethos and some are excellent managers. But does their experience give them enough insight to negotiate outsourcing contracts? They have, after all, chosen a career pathway other than that of private sector business. They inevitably lack a deep understanding of the very different attitudes, styles and pressures of work and management in the private sector.

During the procurement process, these rather sheltered public servants are faced with slick teams of well-resourced professionals adept at putting on a good show and armed with as much carefully selected evidence as they need to demonstrate their company’s capability and good standing.

These teams research their prospective clients and their key managers. They identify the local authority’s objectives and past track record. They prepare carefully – and they are well aware of the strengths and weaknesses of their competitors. They rehearse and hone the sharpness of their techniques and present the case for their company persuasively and with confidence.

Local authority officers might well feel a little over-awed, but whether or not that is so, it is unlikely they would ever have the background knowledge or self-confidence to successfully challenge any assertions, references, appeals to industry detail or figures that they might be presented with. They are unlikely to be able to mount a sufficiently robust critical appraisal of the material upon which they are expected to base their decisions.

Some councillors have relevant industrial or commercial experience, but councillors are now being excluded more and more from the procurement process.

So decisions are taken, the bidding teams move on to the next prospective client and the authority repents in leisure.

If I am right, all this is bad enough, but there is an even darker thought in my mind. It may not even matter which of the short-list bidders is chosen. The outcome may not be significantly different whichever bidder is chosen.

It seems to me that hedge funds and private equity firms have established pyramids of subsidiary companies ostensibly to deliver goods and services (but mostly services, of course) but which are merely vehicles to create an adequate financial return (say 20%, shall we?) on whatever slice of the megamoney cake has been assigned to them. So exploiting a contract loophole, or milking the contract by cutting back on the outputs, is the order of the day. Doing whatever it takes to maximise income and minimise costs is routine – always, of course, just short of a potentially reputation damaging contract termination.

Will new competitive entrants into the marketplace save us? I hope so, but it looks to me as though the financial dinosaurs have this time stamped to death any little evolving mammals that might threaten them. The middle ground is sparse, with little between the few big boys at the top and a swarm of small localised sub-contractors at the bottom seeking to live off the carrion.

Call Thomas Piketty to the witness stand! Thomas Piketty to the witness stand, please!

* Nick Hollinghurst is a Hertfordshire County Councillor and a member of Tring Town Council

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23 Comments

  • So the gist of this article is “council officers can’t cope – therefore we should give up.”

    The more constructive approach would be to send procurement officers on suitable training courses; negotiation skills, contract skills etc. Recruit people from the private sector with the requisite experience as seed-corn to improve the departments in which they work. And, ultimately, if higher degrees of responsibility and decision making are offered, you are likely to attract people to perform these sorts of jobs.

    The real problem with all contracting out is knowing what it is you want the third party to deliver – really understanding what is important, and ensuring there are appropriate contract markers to ensure this is delivered. It’s not difficult – company X offers service Y so tries to sell service Y, whereas really the council wants service Z. The key thing is to stick to tendering for service Z.

  • James Barber 15th Jun '15 - 1:07pm

    but including break clauses related to change of ownership can avoid the private equity issue. Balanced scorecards can insulate from the SLA problem feared in the artticle. Reverse scorecarding can improve the authorities performance.

  • jedibeeftrix 15th Jun '15 - 1:17pm

    Hmmm, I speak from experience as I am a local authority officer involved in the management and procurement of major business management software.

    The incumbent mega-corp does not always win.

    Then again I come from a technology startup background in the private sector. Does that explain the difference in perception…?

  • You also have to set this, alongside how a great deal of Local Government is funded?
    By around February each year, many Local Governments, Departmental budgets are decided and declared to the relevant Departments for the following financial year. So if (say), the towns in-house, Housing Regeneration Unit is allocated a budget of (say) £5 million, they *must* spend it, by financial year end, or they lose that portion of allocation which is not *spent*. Worse than that, that same Housing Regeneration Unit will likely be penalised by a downward funding provision in the following years money allocation.
    Thus a perverse logic becomes embedded in Local Government thinking. In the normal private world a cost saving of money is *good*,… whereas in Local Government, a cost saving of money is perversely skewed by the urgent need to ensure your Departments financial allocation is *out of the door*, and spent by year end. There is no overriding urgency to cut costs ‘to the bone’ in a L.A., because a saving on your Departments budget allocation by year end, is often perceived by the towns Finance Department as a ‘failure’.
    Many of these large and small contractors understand this skewed funding model, and they also know that their government ‘financial overseers’, have a primary goal of making sure that their years allocation of funding is fully spent,..rather than how well it is spent
    You can’t blame government workers if the proverbial ‘pat on the head’, comes from spending money *fully*,.. with spending money *wisely*, being a secondary concern?

  • Simon McGrath 15th Jun '15 - 1:47pm

    Goodness where to start on this fact free article. Hedge funds don’t own outsourcing firms, some of which are owned by private equity but many of the big firms like Capita , G4S and Serco are publicly listed.

    The margins of outsourcing firms are far below 20% and the way to reduce them is to increase competition. If local authorities don’t have the skills to manage these contracts then they should hire staff who possess them.

  • Hugh Warner 15th Jun '15 - 2:10pm

    Can Local Government really cope with outsourcing? No. I agree with the drift of this article.

    Most Local Councils no longer have the skills to get value for money out of simple building contracts let alone contracted out services. My local council “outsourced” architectural services then had an officer who knows nothing about construction in charge of the projects. The private professionals are working on a percentage fee so have no incentive to reduce costs. When things go wrong they just shrug and walk away. (Based on personal experience .)

    The cost of writing a good contract to manage my local Leisure Centre, and time taken, was crazy. Result no bids!
    Contracting out refuse collection? We were one of the first. Chaos for 3 years while the private contractor operated it, with very low resident satisfaction. Now back in house. The benefit was changes to modernise working practices. Should services be privatised because a Council is unwilling to put managers capable of doing the job in place? That’s an expensive way of solving a problem.

  • John Dunn

    And that funding structure (used in so many areas of the public sector) is detrimental to all areas not just outsourcing. No one ever cares about these issues but they set the incentives that drive behaviour and when they have driven behaviour in the wrong direction people blame the staff for responding rationally to incentives.

    Hugh Warner

    “Most Local Councils no longer have the skills to get value for money out of simple building contracts let alone contracted out services.”

    If the issue is the staff not having the skills to contract out they are unlikely to have the skills to deliver efficiently in house either. There are many issues that cause skills shortages but certain councils could certainly work better with their neighbours to ensure the availability of the technical skills. I am often surprised how some councils are happy to worth with others and some are not.

  • Peter Bancroft 15th Jun '15 - 4:55pm

    In this case, pretty much what Simon said.

    As an outsider, it does seem that many govt contracts are very poorly negotiated. It’s sometimes a pricing issue, but I often see the opposite where procurement types are trying to act tough and put in terms which the outsourcing firm is obviously not going to adequately meet. Clearly there is a competence gap which needs to be addressed in some way.

    I also worry that risk adverseness and the slightly cosy relationship-based nature of the public sector means that it’s much more difficult for disruptive firms to enter into the govt sector than others. That isn’t fair to enterpreneurs and also means we end up outsourcing to increasingly sub par firms.

    We all seem to broadly agree that the situation isn’t ideal at the moment, but it looks like one of those where we all want to have our own sets of facts to justify our already made conclusions on. That’s never a good way to take decisions.

  • Councils employ plenty of people but not enough with the skills and chief execs appear to be able to earn up to 250K.
    Basically all tax payer funded organisations need to produce an organisation chart with the skills and remuneration package ( including pay, pension, training , holidays and sick days taken) of all employees and only then can one assess if it has the right people.
    TCO , PSI and John Dunne -well said .
    In many organisations those with technical skills and responsibilities can shown to have made mistakes but there are also people who float around management who appear to have few technical skills and responsibilities and are never sacked because they have never done anything wrong. Also councils can end up owning buildings and other assets which are no fully utilised.

    All tax payer funded bodes needs a Doomesday Book and plan show all employees , buildings and assets . Organisations need to be able to save money and not be punished by reduction in allocation the next year if they save it.

  • Well, I am quite interested on this whole outsourcing agenda, which seems to be ideologically driven. As a new member I would be interested to know if the Liberal Democrats have a coherent policy on this. For sure, the old council-run services were often beset by lazy bureaucracy and the sort of perverse incentives that John Dunn refers to. But instinctively I feel there has to be a better way of doing it than putting 20 or 10% of taxpayer’s money straight into the profits of private enterprise. And quite a lot of money into council departments that simply write and negotiate contracts, rather than deliver any service. In this country we now have the State subsidising private enterprise on an absolutely massive scale. Is that really what capitalism is about??

    This article highlights what for me is wrong: http://www.theguardian.com/commentisfree/2014/dec/15/local-services-barnet-council-town-hall

    However it does not suggest many solutions… One obvious thing for me is that contracts to provide local services should NEVER be for longer than an electoral cycle. One suggestion would be for groups of local authorities to create companies to deliver these services, rather like the Manchester airports group. These would then return profits to the public purse. In government I would actively foster such companies by taking on some of the risk of start-up… The key thing about these companies is that they would have to be genuinely competitive with the private sector, but would not have to answer to shareholders wanting ever increasing profits. Stability and a zero margin offering value for money would be sufficient for success. Is that too socialist for Liberal Democrats?

    Well, this might be a pipe dream I am having, and I would be interested to see discussion from those more knowledgeable than I. But local council services are very obvious and tend to be a source of great dissatisfaction when they break down. If we could articulate a better way of doing things, we could win a lot of votes.

  • Nick,
    Yes, of course, Lib Dem councils have to make the best of what the Tories insist on for the next 5 years… But if we could project a “better way” perhaps we could put the blame for failure where it deserves to be!

  • Phil Wainewright 15th Jun '15 - 7:30pm

    Outsourcing entire functions on long-term contracts is a very old-fashioned way of cutting costs and one that inevitably fails because if you have no one left in-house with skills and knowledge of that function then how on earth are you supposed to manage the contract to ensure it continues to deliver value for money?
    Under the coalition, a lot of progress has been made in government IT purchasing to start moving away from big, custom outsourcing contracts towards smaller, off-the-shelf services and software that’s more likely to keep up with the faster pace of technology innovation. Maybe this principle could also be applied in other areas too?

  • @Andrew “One obvious thing for me is that contracts to provide local services should NEVER be for longer than an electoral cycle.”

    Having worked in private sector firms that delivered outsourced services to local government, I can tell you that this is a bad idea.

    On a transformational deal, there will often need to be considerable upfront investment, the risk of which is taken by the contracted entity. It requires a long period in order to make a return, and the smaller the margin, the longer the return period required. There is a reason that the rail franchises were pushed out to 10 or 15 year deals.

    Short term contracts for anything requiring genuine transformation and investment won’t work.

  • TCO has it right. The devil is in the detail – a clear understanding of what you want from the contract. Unlike some socialists we don’t assume outsourcing is wrong, but the Thatcher government outsourced for reasons of ideology and party advantage and did some very bad deals.

    I’m not sure local government procurement officers do the job worse than national ministers and civil servants.

    One key issue often overlooked is that whereas in-house provision implies quality control by line management, if you outsource you need to employ suitable people to check what’s happening and identify and deal with failings. Sometimes local authorities outsource to a company but have no-one to check on the ground that it’s doing what it should, even statutory requirements.

  • @Simon Banks thanks.

    There are three dimensions to a contract: cost, quality and service. Too often only cost is focussed on and not the other two.

    At the very least there should be regular contract performance meetings and independent verification of contract deliverables against explicit KPIs.

  • John Faulkner 16th Jun '15 - 12:47pm

    Being a qualified CIPFA accountant that started off life in a local authority but now works in higher education and has also been an elected councillor for eight years I am rather taken aback by the attitudes here towards the professional staff in the public sector. They may have been attracted by working in the public sector but their training is as rigorous as that of any of their private sector counterparts. They are NOT nervous poorly trained individuals that are intimidated by large contracts or dealing with large private sector organisations. They probably have more experience and knowledge of out sourcing than their private sector colleagues. The problem is the environment in which they have to operate. I found it quite laughable when public sector staff were compared unfavorably with the councillors. My experience of working with conservative councillor colleagues who had private sector financial experience was not positive.!

  • John Faulkner
    Compare CVs of people who run top construction organisations( ARUP, Mott MacDonald, WS Atkins, MACE, Rogers, AMEC, BALFOUR BEATTY, Laing O’Rourke , Carillion etc, etc ) and those working for government. Foreign countries often ask top british construction companies to design their infrastructure, an example would be ARUP and The Bird’s best stadium, Beijing.

    I would suggest that if a chief exec from a council earning £250K plus cannot draft an adequate specification and manage the contract, then they should not be in the job. Local government is another example of senior people wanting the rank and reward but not the responsibility when things go wrong.

  • John Faulkner 16th Jun '15 - 2:14pm

    Charlie
    Finance and procurement professionals in local government aren’t earning anything like £250k a year. Many public sector organistaion are large entities in their own right. They are complex organisations such a s large LAs, hospitals and universities, many of which are world ranking. Yes, lets compare the CVs of individuals in the private and public sector organisations. Have you done the research already?.

  • John Faulkner
    Experience of local government includes dealing with LAs. When I pointed out to a transport officer that the council should be using the NEC3 contract( as suggested by the Cabinet Office since 2005 and this 2-3 years ago ) , not the ICE 7th, as the latter gives far too much control to the contractors , he was unaware of the new contract . I then sourced a course on the NEC3 small works contract but the council officer said they could not afford to go on it. I then pointed out that the cost of the course was far less than the costs listed on the snagging list for one small contract , let alone all the other contracts undertaken by the contractor.

    When at meeting people were complaining about a PFI contract let by the council , I pointed out that if they wished to query it they would need FRICS Chartered Surveyors (Quantity and Structura)l and a Fellow CIOB. The council officials did not even know what the professions meant , nor did they ask me after the meeting. Part of the problem is that not only do council officials not know they do not want to ask people who may know and offer them free help.

    When asking consultants to tender for work CVs are requested. I think part of the information which councils should provide is not only salaries as I have mentioned before but also CVs of the heads and deputies of departments. Have listened to a LA engineer who did not understand the thermal expansion of metal , I am worried about the technical experience of LAs. How many LA personnel who let construction and maintenance contracts have experience of undertaking the work?

  • It might help to inject a few facts into this discussion to replace some of the wilder assertions about local authority salaries.

    The figure of salaries “around £250,000” in Local Authorities mentioned in one comment is very, very misleading.

    Even The Taxpayers’ Alliance, not known as a defender of public service employees, recognises that very few people have salaries anything like that figure.  The vast majority do not even get anything like six figure annual salaries. 

    According to a recent report by the Taxpayers’ Alliance, only 42 local authority employees are on more than £250,000. 

    The figure may have come down since that report was published.

    They helpfully compare what those in public service get compared to the private sector remuneration of Tony Blair since leaving office 8 years ago.  
    His net worth being apparently about £20 million.
    As the cost of the Chilcott report is only £10 Million thus far perhaps we could ask him to pay for it?
    Of course Blair might argue that bringing peace to the world through his  own religious foundation is more complicated than running Birmingham City Council.   

    Although to be fair to that City Council, Birmingham has never invaded anywhere and Blair has not yet brought peace to anyone.

    Source below —
    http://www.careerbuilder.co.uk/article/yah-106-job-search-the-uks-most-surprising-salaries/?lr=int_ukyahoo

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