UK government must rethink outsourcing of public services
LONDON — With the collapse of Carillion, a succession of scandals involving large British companies like G4S, Serco and others, and the zig-zagging share price of outsourcing giant Capita, now is the right time to rethink the U.K. governments approach to the private provision of public services.
Is it really right that government is so reliant on a few players in markets like security services and facilities management? How did we reach such a level of market consolidation that has stifled innovation in public services, and created a climate of complacency among larger providers? Why have we not been able to diversify the market until now? What needs to change?
Far from an academic exercise, the answers to these questions impact not only the cost of the state but the provision of many public services.
Much government work, especially at local levels, is outsourced. The British government is quick to point out that the U.K. spends less on outsourcing than other European countries such as Germany, Sweden and the Netherlands, but many services are today in the hands of private providers. Private companies maintain housing for soldiers, monitor offenders and help get the long-term unemployed into work. Failure to fix the problems of the market will directly impact the lives of huge numbers of citizens.
It is easy to default to lazy stereotypes. Some on the left decry any form of outsourcing and would happily take everything — from prison guards to coffeemakers — back under direct public management. The right, on the other hand, implicitly trusts the private sector to be more efficient and is loathe to change any arrangements, not least for fear of recreating the sprawl of a state that Margaret Thatcher dismantled in the 1980s. Both solutions lead nowhere.
Government needs to be much more proactive in getting new players into the market.
Long-term investment aside, there is no evidence that the state can deliver the continuous efficiencies and ongoing innovation offered by private companies — indeed private outsourcing can be an extremely effective mechanism for delivering high-quality and affordable public services.
But at the same time, problems from poorly conceived contracts can create cost increases that surpass the costs of in-house services, and if the oversight of the contracts is poor, government is vulnerable to corruption and profiteering. The scandal of G4S and Serco charging the U.K. Ministry of Justice for tagging offenders who were dead shows how bad things can get.
The first step is to manage risk more smartly. Government cannot stop any firm — no matter how large — from being mismanaged and going bust. But they can limit their own exposure.
Departments can stop giving long-term contracts to single suppliers via one-off competitions, which means that if and when companies fall over, the whole system falls over with it, and there is no alternative supplier ready to step in. Government could instead tend toward multicomponent, diverse “lots” for services, with multiple suppliers across the country, ongoing competitive pressures and dynamic contracts and pricing that changes to reflect new technologies and reductions in the costs of providing the service. Government can impose restrictions on the kind of financial gearing a public company that has large public contracts should be allowed if they want to keep the work.
The government commercial function and systems needs to be re-thought.
Second, government needs to be much more proactive in getting new players into the market, especially when it comes to technology-enabled services, such as offender management, for example. This has been tried in the past. Departments regularly contacted foreign suppliers and promised their bids would be looked at seriously. It has happened with transport, prisons and health care at various points over the last few decades. But the government inevitably defaulted to the existing suppliers, like Capita, Serco, Atos and G4S. This wont do.
Government should set a target for ensuring contracts in key sub-markets; for example electronic monitoring, facilities management and so on see at least a proportion of business going to a new entrant in the market. They should also make a rule never to allow an entire market to be outsourced to a handful of firms. For when those firms fail or struggle, government has no alternatives. Indeed, the Ministry of Justice is still spending millions on tagging offenders with G4S and Capita despite the tagging scandal because it has not actively welcomed in or competently procured new entrants in the market.
It might even be worthwhile creating a kind of new measurement of public sector market concentration — a version of the Herfindahl-Hirschman Index, the formula used to measure competitiveness of markets — but specifically tailored to government markets. Like the Bank of Englands inflation target, the government would make a commitment not to go above a certain threshold on this index and report to parliament if it does.
Then the government should look within itself, as Cabinet Minister David Lidington said he would at a recent speech. It may not be smart to take over the range of outsourced services, but the reality is that many suppliers win contracts and deliver services by integrating different kinds of smaller suppliers and by hiring staff. Often the likes of KPMG and Capita bid for work before they actually have the capabilities to deliver the contracts. They then go and buy services and products from smaller firms.
That kind of integration could be done by government-owned entities or a government-backed mutual, which could integrate the services of smaller firms at a lower cost to the taxpayer and greater benefit to the smaller companies actually delivering the products and services. Why not try that in one market?
Then the government commercial function and systems needs to be re-thought. Though Conservative-led governments have undertaken a number of important reforms, bringing in private sector expertise, there is more work to be done. Today, the way that contracts are awarded and risks assessed militates against innovation and experimentation, locking out new entrants and startups.
Any government that says it wants to take on vested interests wherever they may be must look first at how it itself has created a select number of vested, incumbent suppliers.
Government needs to be able to fund more pilots and crucially find an easier way to move from a pilot to a fuller contract. Like in Australia, we need to consider a system where innovators who propose a new solution that government then wants to adopt get a no-bid chance to at least pilot their solution. Nothing kills innovation as when a new player proposes a new solution and government takes the new idea and hands the delivery to a large incumbent.
Finally, government purchasing needs to be more dynamic, more tailored — more, to be blunt, like it feels to buy on Amazon, eBay, Asos and Spock.
Any government that says it wants to take on vested interests wherever they may be must look first at how it itself has created — and become reliant on — a select number of vested, incumbent suppliers. Choosing a large incumbent still currently feels safer than choosing a new player. As the saying goes, “nobody got fired for hiring IBM.”
But that should not be the case. Outsourcing is necessary but urgent reform is needed for outsourcing to meet the needs of modern government.
Daniel Korski was deputy head of the policy unit at No. 10 Downing Street and is the founder and CEO of Public, a venture that helps technology startups transform public services.
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