Skip navigation.

Outsourcing and privatisation: time for a more thoughtful debate

Robin Stafford, 15 April 2014

There are those who see privatization, outsourcing or PFI as the right solution in all circumstances, in the belief that someone else, preferably in the private sector, can always do it better.

Others, perhaps concerned more with labour relations and rights, tend to be ideologically hostile to any form of outsourcing or private sector involvement in public sector activities.

Both schools of thought tend to ignore practical, operational advice from those who've actually done it, just choosing selective examples that support their ideological positions. 

We have an ideological divide along the lines of private/good and public/bad, or vice versa.  Both sides tend to ignore the very real lessons that have been learnt from what are now decades of experience. There are much more thoughtful and powerful arguments both against and for, once you move away from purely ideological perspectives.  Try talking to a bunch of scarred practitioners in the pub…

Unfortunately, all too often it seems that those promoting the arguments have little experience of actually doing it in practice, and fall back on anecdotal and self-serving evidence – or equally self-serving consultants.  As a result, the genuine strengths and weaknesses of outsourcing, and the associated arguments, are reduced to simplistic and often misplaced ideological critiques.

A view from out on the battlefield

A first step is to recognise that people are often conflating Privatisation, Outsourcing, PFI and ‘Off-shoring’, and then to recognise that the same or very similar developments are happening, in both the public and private sectors.  

What they all have in common is that an organisation takes something that it currently does for itself, and pays someone else to do it for them.  Privatisation is in many ways just a public sector term for what the private sector calls outsourcing.  In the case of off-shoring that extends to having the work done in another country, usually because of perceived low labour costs and very often, more limited labour rights, euphemistically referred to as ‘flexibility’. 

PFI is a slightly different case in that the primary objective is to get a third party to fund something that the government would otherwise have funded itself, typically infrastructure such as bridges and hospitals -- a little odd when government has by far the lowest cost of borrowing.  However it also tends to mean that the management of the construction is sub-contracted, and possibly the operational management as well.  We have seen this for example with NHS hospitals, where the staff may be NHS, but a third party runs the buildings and services.

Covering every plus and minus would need a long article.  A search on the web will turn up plenty of good papers on outsourcing, drawing on many years of experience and examples. These provide thorough analyses of why it may succeed or very often fail, though one wonders whether those doing the outsourcing have read them.  A number of consistent themes come through.

Why and where does it make sense – the positive reasons

There are many things that organisations of all kinds get others to do that they might once have done for themselves. Examples include transport and logistics, IT infrastructure and maintenance, cleaning, and canteens. To claim that there are never advantages to employing an external organisation would be disingenuous.

There are situations where organisations insist on doing work themselves that costs them far more to do, with no advantages in service quality. An example was where a major government department that received high volumes of cheques insisted on having their own cheque-processing operation.  Everyone else, including the biggest banks, outsourced the task to specialist organisations as it involves complex, expensive technology with huge economies of scale. This was a waste of taxpayers' money that could have been used to provide or improve services. 

Some sensible questions to ask about activities that might be outsourced are:

- Is this really at the core of what we do? 
- How good are we at it, or and might it worth making the effort to get better?
- Are there others out there who are already much better at it and who could really provide us a better service for the same or less as we do it now?
- Is this a new service or activity to us that someone else is already geared up to provide more effectively and efficiently?
- If someone else did it, could we integrate what they do into how we work without slowing things down, adding costs, overheads, or bureaucracy?
- Do we have the ability to buy and then manage a service provided by someone else, and would we end up ‘locked in’ and potentially losing control?

There are always hidden agendas…?

There are other political or commercial drivers that all too often may be the real reasons for outsourcing - but are almost never declared as such.

When you outsource, a lot of people and assets are transferred off the books of the organisation.  As a result, the turnover per head in the organization outsourcing the activities increases, ‘productivity’ is seen to have improved, and the return on assets increases as the value of the assets on the books has decreased. 

At the same time you often get a payment from the organisation that is going to provide the service, for the assets that they are receiving.  So if you are a business, that makes the financial results look really good for a year or two, the stock-market approves, and directors get bigger bonuses.  It is uncanny how often this happens just before a financial year or half-year end, contributing to profits and keeping the stock market happy.  However, by the time any increased costs or reductions in service quality come through, those directors are long gone to another job. 

Similarly, the Treasury likes the reduction in Government borrowing that this produces, combined with reduced departmental headcounts, but again by the time the increased costs or poor service have come through, ministers will have moved on! Many a recent ministerial embarrassment has been linked to failed outsources, from the Criminal Records Bureau or Passport Office to more recent Olympics or prison scandals. 

This may sound cynical but talk to business and outsourcing experts informally, and they will tell you that it is exactly what goes on, usually under the cover of improved service or reduced cost.  Whether at the same time, the private sector is deliberately being given the opportunity to profit from government activities is another debate.

PFI is a particular case, driven by the Treasury wanting to reduce borrowing for capital projects, even though as we know, the Government can borrow money at lower cost than everyone else and over longer timeframes.  The history of PFI is of massively increased running costs and not necessarily improved service, with numerous examples in the health sector alone.  Arguably this is partially as a result of weak negotiating and commercial skills in the Treasury and spending departments, but it also reflects the huge complexity and scale of many government services (health, taxation, social security, etc.) compared to the private sector.

One major factor in why public sector projects go wrong is that they tend to be particularly large, complex and unique. Outsourcing the accounts department of a company, when all companies do much the same thing in their accounts departments is one thing. Outsourcing activities that are unique to a government department, complex, subject to political driven change, and poorly understood is another matter.

So HMRC might outsource the processing of their cheques, as this is capital-intensive and essentially a generic, discrete, commodity activity.  The activity of assessing and processing tax returns would be a very different matter, and HMRC have more ‘customers’ than even the largest UK bank or insurance company.  On the evidence of recent years they also make a much better job of it.

Surprisingly enough, buying services such as health is not like buying cornflakes in Tescos, and running a major hospital is not like running Ryanair, whatever prominent politicians and media commentators might say.

How much is this about making change happen?

It is inevitably the case that there will be some areas of the public sector where costs are greater and service levels poorer than they could or need to be, just as in any large private sector organization. What should not be inevitable is that perhaps through a combination of poor management and resistance to change, they continue to waste money that could be spent elsewhere and provide better services. 

A reason for outsourcing in any sector may be the hope that a third party will be able to drive through changes that the internal organisation has not been capable of. However, there is an iron rule known to practitioners, that 'outsourcing a problem merely leads to a bigger problem'!  Greater willingness and management capacity to change and improve within organisations, would remove some of the justifications claimed for outsourcing

In the early days of outsourcing, the assumption was that the supplier would bring deep expertise and experience, derived from being a specialist in the field. This is still claimed by promoters of outsourcing, both customers and providers. But what ‘deep expertise’ do the likes of G4S, Serco, Capita et al bring these days? 

On a recent trip to the Orkneys I found that one of the main ferries was out of action for a month – and that it was being run by Serco!  That well known shipping business… 

It is little wonder that these organisations so frequently struggle to cope with the operations that they take on, when in reality they have little or no previous experience of them.  It tends also to support the argument that the drivers are more about financial engineering than improving operational efficiency or service.

What is unquestionably true, again from talking to practitioners, is that when major, complex activities are transferred to third parties, it is extraordinarily difficult to bring them back in-house again, even assuming that those responsible will ever admit their mistake.  This dramatically reduces the commercial negotiating power of the buyer of those services, as the supplier knows that in practice they have little choice but to continue. This myth of there being ‘open markets’ needs to be challenged.

There is further issue as to whether a service is really a 'public good', with potential examples being health, power, transport, or security.  This presents a different philosophical challenge, which Michael Sandel has eloquently addressed.  As is starting to be recognized, it is also highly questionable as to whether there can ever be a genuinely 'competitive market' for these services, with both railways and energy providing glaring examples.

In conclusion

Undoubtedly, the public sector has scored some own goals by making a poor job of procuring and then managing outsources. Equally their providers have too often failed to deliver the promised cost reductions service improvements -- not entirely surprising when the original drivers were really political and financial.

That said, it is acknowledged to be a very difficult task, which many private sector organisations also struggle with, even though their operations are usually smaller, much less complex, and without the political overtones. The examples are out there in many companies together with examples of operations being brought back in house, but the media tend to ignore them and there is in practice much less transparency.  Shareholders ought to be much more challenging.

Overall, the arguments put forward, both for and against, are too often ideological and emotional, and miss many important points.  Few if any of the politicians seem to understand the subject very well either, though Margaret Hodge has made some very perceptive observations and challenges in parliamentary committees.

The opportunity is there for a much more informed, thoughtful and honest debate, with tougher challenges both to proposed and existing outsourced operations.  Far greater transparency on contracts and performance would be a very good start.

  • Robin Stafford is an associate consultant with Public World, former Head of Programmes at Standard Chartered Bank, and former Head of Sustainable Consumption at the World Wildlife Fund.
Bookmark and Share