DISCUSSION Delivering value in government outsourcing

by Philip Sadler _______7th December 2015
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Government is under constant pressure to get better value out of public sector contracts. Its means of doing so are primarily through pressure on costs. It is much more difficult to specify the quality of a service. Tomorrow’s Company is hearing from a number of providers that it is becoming counterproductive to compete on quality, as this is not properly valued in the procurement process.

One provider for vulnerable people has described losing an existing contract in which a very high level of skill and sensitivity was required, and receiving a phone call on the first week after the start of the new contract from the successful bidder who had no idea how to deal with the first emergency with which they were faced.

In 2013/14, the UK public sector spent a total of £242 billion on procurement of goods and services; this accounted for 33% of public sector spending.

It is often suggested that the Government could use its considerable spending power to pursue a variety of public policy aims, such as promoting small and medium-sized enterprises (SMEs), local growth or environmental sustainability.

For example, the coalition government set itself an aim that by 2015, 25% of central government procurement expenditure would be with SMEs (directly or indirectly).

In recent years contracts carried out by the private sector have been the subject of increased scrutiny as reports of poor performance and value for money have led to interest from the media and organisations such as the National Audit Office (NAO).

In its report Contracting out public services to the private sector, 2013-2014 the Public Accounts Committee noted failings in the government’s contract management and the performance of some contractors:

‘Government is clearly failing to manage performance across the board, and to achieve the best for citizens out of the contracts into which they have entered. Government needs a far more professional and skilled approach to managing contracts and contractors, and contractors need to demonstrate the high standards of ethics expected in the conduct of public business, and be more transparent about their performance and costs.’

‘The public’s trust in outsourcing has been undermined recently by the poor performance of G4S in supplying security guards for the Olympics, Capita’s failure to deliver court translation services, issues with Atos’s work capability assessments, misreporting of out of hours GP services by Serco, and most recently, the astonishing news that G4S and Serco had overcharged for years on electronic tagging contracts: these high profile failures illustrate contractors’ failure to live up to standards expected and have exposed serious weaknesses in Government’s capability in negotiating and managing private contracts on behalf of the taxpayer.’

So far, the contracting out of services has led to the evolution of large monopolies delivering public services, who largely, or in some cases wholly, rely on taxpayers’ money for their income. The state is then constrained in finding alternatives where a big private company fails.

John Tizard, a former senior executive at Capita, says that, with the exception of IT, most government procurement is driven by price:

“Given that the services most likely to be outsourced tend to be people-intensive where 80 per cent of costs are labour, downward pressure on terms and conditions is one way outsourcing companies can achieve cost savings.”

Redefining Purpose?

The government aims to achieve value for money in its contracting activity. But how is value defined, and for which groups is value to be delivered?

Certainly the tax payers’ interests need to be considered, and here there is a clear need to examine more closely than in the past the credentials of those companies awarded contracts. There need to be better ways of assessing factors beyond their financial strength and technical competence, factors such as the quality and transparency of their governance and the extent to which they have embedded a culture of integrity and public service.

Value needs to be delivered also to the contractors; the terms of the contracts must be such that they enable them to earn reasonable profits and while doing so to pay the ‘living wage’ to their employees. Some companies do not tender for government contracts because they believe that margins will be unduly squeezed and that it would be difficult to achieve a normal level of profitability.

When it comes to a whole range of personal services such as care for the elderly or those with a wide range of disabilities it is the recipients of those services who stand most to lose if contracts do not provide value at the point of delivery. Local authority contracts with care homes may make it difficult to provide adequate standards of care while agencies providing home visits for the elderly are often too brief to be effective.

Some 37,000 beds will be lost due to care homes closing because of a growing shortfall in funding set to exceed £1 billion by 2020, claims the report by the ResPublica think tank. The problem is exacerbated by rising demand, with the number of people aged over 85 set to rise by around two million in the next 20 years.

Residential care “faces a potentially fatal crisis,” warns the report. Local authority spending on social care for older people has fallen by 17 per cent since 2009. “If nothing in the funding regime changes within five years, there will be a projected loss of 37,000 care beds as funding fails to meet demand.

The introduction of the National Living Wage will increase the burden on care homes, and at £382 million will be around a third of the £1.1bn funding gap in 2020. “The National Living Wage is a great step forward. It is estimated it could help more than 6 million low paid workers. But for the care sector, which is heavily reliant on its labour force, it could be catastrophic,” commented Emily Crawford, co-author of the report.

ResPublica’s new analysis of residential care in England, which draws on Government data, warns: “Given the perilous state of the industry, we believe the most likely outcome is the vast majority of care home residents flowing through to hospitals.” It adds: “This would require the NHS to find £3 billion per year by 2020/21 to support frail and aged people who no longer have a home in the residential care sector, and who do not belong – nor wish to be – in a hospital.”

Conclusion

The government’s outsourcing policy and practices clearly stands in need of reform. There are three aspects which in particular need attention:

As result of earlier work on Tomorrow’s Business Forms, Tomorrow’s Company has developed the idea of a Trust Test. The idea is that alongside the normal details of price and performance, an organisation would as part of the procurement process be screened for aspects of its culture and character. The BSI is now taking this idea forward with Tomorrow’s Company and for more detail contact Pat Cleverly, pat@tomorrowscompany.com

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