Interserve raises big questions for public service outsourcing again

The public sector must be prepared for the risks or not entertain outsourcing at all, says consultant John Tizard.



The recent events at Interserve have highlighted many concerns about the efficacy of of public service outsourcing.

Many of these have been well rehearsed and frequently repeated, especially since the collapse of Carillion last year.

However, Interserve raises two very significant issues, which should be of concern to every public sector body and leader considering outsourcing and, indeed, of concern to the public too.

These issues relate to ownership (and potential ownership) of  an outsourcing company and the principle companies in its supply chain, and to their operating and funding model.

Interserve was forced into administration by the refusal of two significant shareholders (both US-based hedge funds), to back the Board’s proposed solution to the company’s financial challenges. In effect, this meant that critical UK public services and public expenditure were put at risk and subject to the whim of overseas hedge funds.  

Interserve, like a number of other outsourcing companies, was seriously in debt.  In no small part, this was a result of the company’s operating and financial model, and its range of activities ranging from major construction to probation services.

The public sector may yet have to pay the price for the Interserve crisis as it did when Carillion collapsed, leaving services still requiring to be delivered and buildings still needing to be built.

Although most of Carillion’s contracts were either taken back into public ownership and management or transferred to other contractors, the public sector still faced a bill of at least £148m according the NAO.  

‘Whilst the experiences of Interserve, Carillion and other outsourcing failures raise some major questions about the efficacy and appropriateness of public service outsourcing, it is also critical that attention is given to minimising risk should any new outsourcing contracts be let.’

Whilst the experiences of Interserve, Carillion and other outsourcing failures raise some major questions about the efficacy and appropriateness of public service outsourcing, it is also critical that attention is given to minimising risk should any new outsourcing contracts be let.

Public sector bodies considering outsourcing must henceforth include in their risk assessment and bid evaluations consideration of each bidder’s ownership, operating and financing models, as well as their commercial and financial health (particularly, their levels of current debt).

Companies and shareholders expecting speedy and high levels of return on their investment will often be less well placed to deliver public services to specified standards than those taking a longer-term view.  This is even more the case if there are higher risks and more challenges with service delivery, and if the contract bids have been based on low margins. 

The pressures to make a return to investors versus those to meet needs and to secure high quality services delivered by well remunerated staff can explode with resultant commercial consequences for the outsourcer and a decline in or even termination of the service itself.  

These pressures and potential outcomes will be greater when the outsourcing company is relying on a range of contracts, including some not with the public sector, which, if they go wrong, add to the pressure to sustain the business and returns to investors.

This happened in the case of Carillion and possibly with Interserve. So the public sector has to understand and be able to assess the benefits and risks of such business models.

The public sector needs to have the capability to undertake such commercial risk assessments for major contracts.

It should also set conditions into contracts, which require agreement from the public sector client before there is any significant change in company ownership or control and/or significant shift in the shareholding balance – too often a public sector client contracts with a company, which in turn is taken over by another company or control of the company changes.  

Such change can lead to a change in ethos, employment practices, key personnel, investment decisions and expectations on returns to investors.

Contracts must require outsourcing companies to be transparent about financial as well as operational performance, not just in the contract but also in any part of the business that could impact on the performance and execution of the public contract. And the information and data that they supply must be open to external audit.

Critically, the public sector needs to understand the financing and operating models of companies bidding and delivering contracts in order to assess potential risks, and how these might impact on the sustainable delivery of quality services.  

To do this, the public sector therefore requires the capability and capacity to assess all these issues, as well as the commercial nous to know what to look for.  Inevitably, of course, this work may have to be undertaken on a shared, central basis, as not every public body will have the capacity to undertake such commercial analysis.

The measures that are proposed here are very much in the public interest. Public services matter. Ultimately, there are limits to the risk that the public sector can offload.

Recent events at Carillion, Interserve and elsewhere have demonstrated that unless the public sector can properly assess, monitor and manage risks, the case for public service outsourcing is even more diminished than it is already is.