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How outsourcing fell out of fashion in the UK

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How outsourcing fell out of fashion in the UK

UK outsourcing

How outsourcing fell out of fashion in the UK

Decade of austerity and a change in political mood has seen the private sector’s role diminish

Graham Smith has moved from the private to the public sector while collecting rubbish in Liverpool © Jon Super/FT

In his 20 years as a binman Graham Smith has worked on both sides of Liverpool’s experiment with privatised services.

When Mr Smith began collecting rubbish, he was employed by a private company. Three years ago he joined the public sector after the council decided it could provide the service more cheaply and took over the contract.

The move was welcomed by Mr Smith, a union representative, who said his relationship with the council was less antagonistic.

“[The private sector] always tried to reduce our pay and holidays and sickness entitlements but we always fought them off. Now we [and the council] are working together to make efficiencies,” he said.

Thousands of workers like Mr Smith are being transferred into the public sector as dissatisfaction with privatised services grows. Nearly a decade of cuts in funding for local governments, which pay for many outsourced services, along with poor standards of service and a lack of flexibility in contracts have prompted councils to reduce spending on external providers.

The spectacular collapse of the government’s biggest contractor, Carillion, last month may further accelerate the trend.

Around a third of Conservative local authorities, and 42 per cent of Labour councils, took services back in-house in 2017, according to research by the not-for-profit Association for Public Sector Excellence.

“It’s an across-the-board change we’re seeing,” said Jessica Figueras, chief analyst at GlobalData, a business intelligence consultancy. “It’s a slow process but when contracts come up for renewal they often won’t be retendered or if they are, they will be broken up into smaller lots.”

The trend is clearest in IT and technology intensive jobs such as human resources and payroll functions, where local government outsourcing hit a peak of £708m in 2012/13 but fell sharply to £535m in 2015/16, according to GlobalData research.

Last year, for example, another troubled outsourcer, Capita, agreed to shrink its IT contract with Birmingham council, the country’s largest local authority, by £10m a year to £70m — in a deal that only lasts until 2021.

“During the first wave of outsourcing, organisations decided that their internal departments weren’t fit for purpose so handed them to the private sector,” Ms Figueras said. “Now organisations are looking at their outsourced IT capability and concluding they won’t be able to get the step-change and the improvements they need with the current outsourced set up so they are going the other way.”

Central government departments are also rethinking how they outsource services. Troubled contracts, such as the multibillion pound Aspire contract to run HMRC’s IT services— which was criticised by MPs as “unacceptably poor ”— led the government to shift away from “monolithic outsourcing contracts” in 2013.

Three years ago the DVLA, which maintains and registers drivers and vehicles in the UK, ended a contract with IBM and Fujitsu for IT services, bringing 20 years of outsourcing to a close. Rather than hand management of a project that would enable users to pay their vehicle tax online to an IT consultancy, the DVLA trained its own staff, who built the online application themselves in just seven weeks.

More recently, in the wake of Carillion’s collapse, the Ministry of Justice created a new company to take over nearly 1,000 prison cleaning and maintenance workers to deliver the services in-house rather than striking deals with the collapsed contractor’s private sector rivals.

“When it comes to project managers like Carillion, which handled thousands of school meals and cleans hospitals and courts, local authorities are starting to think, “why can’t we do it ourselves?” said Ian Makgill, director of openopps.com, a public procurement adviser.

Mr Makgill said some public sector purchasers are also trying to end suppliers’ so-called “land and expand” tactics, where companies bid low, then try to raise the price by either expanding the work once they get the contract or by arguing over contract specification, he said.

“Councils used to think it was cheaper and easier to amend the contract and provide another £100,000 in revenue than it was to re-tender but now they are alive to the possibilities and considering outcome-based contracts.”

This leaves outsourcers in a bind, he adds. “If they want to continue to win business they need to provide better services and outcomes, but they cannot do this without becoming more expensive.”

Transferring employees back to the public sector can also cause problems. After Manchester’s North West Ambulance Service was transferred to Arriva in 2013, and then brought back under NHS control three years later, staff members found their £7.80 hourly salaries were nearly £2.40 an hour lower than those of colleagues doing the same job who were already employed by the NHS. When the former Arriva workers asked for pay parity, their employer refused and they are now balloting for strike action.

Edward Goodwyn, partner at the law firm Pinsent Masons, said issues such as this are common in insourcing deals. He points out that three pay differentials between former private sector staff and their public sector counterparts could lead to equal pay disputes; in cases where private sector operators are taking over from Carillion, there may also be issues with the pension liabilities.

For white collar outsourcers to survive, they may need technology-led transformation such as robotics and artificial intelligence for administrative work if they are going to retain their worth.

But in lower-skilled, more labour-intensive jobs such as school meals, housing maintenance and street cleaning, there is no easy way to reduce costs except by baring down on the pay, conditions and size of the workforce.

Back on the streets of Liverpool, Mr Smith said he does not see how it would be possible to reduce salaries or cut costs any further but that savings come from integration with the rest of council services. He points to how the city’s binmen have agreed to earlier shifts to beat queues at the tip, and can use any council site to have lunch rather than trekking back to a company depot. “The improvements come from the bottom of the yard now,” he said.

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