John Tizard: The Outsourcing Debate: strategic ‘make or buy’ decisions can protect the public interest

The efficacy and even the ethics of public service outsourcing are being seriously questioned across the political divide but especially by the left. Similar deliberations are going on amongst public sector executives. And it would be no surprise to learn that investors, staff and executives in major outsourcing companies are wondering if this business model may be outliving its shelf life and certainly its rich revenue earning life.

David Walker and I, in our recently published report for The Smith Institute – Out of Contract: time to move on from the ‘love-in’ with outsourcing and PFI – – – argue that the current questioning of the efficacy of public service outsourcing is long overdue. There is a need for a pause before new contracts are let and for reflection based on evidence as to the real long-term impact of the policy and administrative practice. Our view is that the default option should always be public sector ownership and management. However, there will always be a role for charities, social enterprises and both staff and user cooperatives; and, in some circumstances, there will be a role for the private sector – large corporates and SMEs – though with a greater emphasis on the latter. Major corporates should have an historic role rather than a significant delivery role in the future. Our report sets out many of the reasons for this view, one which has also been expressed by many other commentators and activists.

There are two fundamental issues that must be considered in order for both the policy debate and the development of practice to be based on reality.

The public sector has usually always bought rather than produced commodities such as equipment and food. In calling for far less outsourcing to the private sector we are not arguing for the state to move into manufacturing nor agricultural and other economic sectors – this is a very different policy debate. Of course, the public sector can and should seek social value when it procures goods – and the Social Value Act should be extended to goods as well as services. It can and should consider procuring goods from local suppliers, co-operatives, social enterprises and SMEs and, especially at local authority level, to integrate procurement of goods with wider policies such as economic regeneration and social inclusion.

The state has not built most major infrastructure itself. Some local authorities have had, and some continue to have, direct labour organisations but they have usually only had the capacity to undertake small-scale building and maintenance projects. The public sector has always contracted with the private sector to build roads, schools and other large infrastructure. It can and should do this through borrowing capital itself (it can borrow much more cheaply than the private sector) and procuring contractors in ways other than through PFI and similar PPP arrangements. It should also only contract with companies with the right ethical standards, employment practices, business and ownership models and financial robustness. No sensible or responsible government should have contracted with Carillion for HS2 projects given the company’s declared financial state at the time.

There will be other activities and services which the public sector is likely to wish to contract for rather than manage itself. In these circumstances it must have strong and effective commercial and procurement capacity. It must have access to information about potential bidders, their market share, their financial health, business and ownership models, tax and remuneration practices, employment standards and performance in other contracts.

However, as is argued in Out of Contract, public sector organisations should at a political level adopt strategic ‘make or buy’ criteria for deciding if and when to procure services rather than to adopt the default option of in-house provision. These criteria could vary between organisations. They are likely to include factors such as:

how best to secure social value and value for money
the need to ensure public accountability
public sector competency and capacity to both deliver and to procure / contract manage service provision
current performance and quality issues
views of stakeholders including service users, the wider public and staff
the condition of the supply market and what role social enterprises and charities could play
Prior to any decision to outsource and contract, the public body should be statutorily required to consult on and open to political scrutiny the following:

the application of its ‘make and buy’ decision
the business case for outsourcing
how the outsourcing will contribute to or undermine wider policy objectives; and its holistic economic and social impact
its procurement and contract management capacity and arrangements including how stakeholders will be involved
All of the above should be subject to external independent regulation.

It would not normally be sensible for there to be an automatic ‘in-house’ bid, if a decision has been made to contract services from external suppliers This creates artificial expectations and/or wasted expenditure, as well as depleting the client-side capacity and expertise to design specifications, procure and evaluate bids.

The current state of major companies in the outsourcing industry has simply amplified the debate on the future of outsourcing, which makes strategic ‘make or buy’ decisions fundamentally important if we are to stop more and more inappropriate outsourcing.