In the last four decades, the UK government has pioneered outsourcing – delivering services through the private or voluntary sector after a process of competitive tendering. Outsourcing has been controversial from the start, but it has proved a durable model, expanding under both Conservative and Labour governments.
However, recent high-profile market failures (in particular the spectacular collapse of one of the UK government’s most important suppliers, Carillion, in 2018) have raised serious questions about the continued viability of outsourcing. Calls for more services to be delivered “in-house” have grown.
Recent research from the Institute for Government has argued that moving away from outsourcing wholescale would be a mistake. Outsourcing has been a qualified success in the UK, delivering real benefits and value for money in some areas, but failing in others. Private providers of maintenance, cleaning, catering, and waste collection have been able to deliver savings without harming service quality. Some more complex services, like prisons, have also benefited from outsourcing. There is also some evidence that competitive tendering has created efficiencies across the public sector as a whole, even when services are delivered in-house. But the potential advantages of outsourcing are too often overstated.
Advocates for outsourcing regularly claim that it can produce savings of up to 20-30% versus public sector provision. This may have occasionally been true when contracts were first let in the 1980s, but the Institute for Government found no evidence that it is true today. At most, newly outsourced services may be able to deliver savings of 5-10%.
Outsourcing can also sometimes be actively harmful, particularly when services deal with vulnerable people. In 2013 the UK government decided to outsource its probation service, which proved disastrous – performance declined by every metric, service users struggling to rebuild their lives suffered, and six years later the decision was made to bring much of the service back in-house. This sobering experience should remind governments that a strong, evidence-based case is needed before any decision is made. Institute for Government analysis found that there are a number of conditions and actions that make outsourcing more likely to succeed.
The conditions for outsoucing success
The underlying conditions for success are as follows:
- The existence of a competitive marketplace of high-quality suppliers – either entirely independent of the government, or proactively encouraged and developed where none exists.
- The outsourced service lends itself to the easy measurement of value added by the provider – preferably measuring outcomes.
- The service is not so integral to the nature of government as to make outsourcing inappropriate.
Improving outsoucing success
With these conditions met, governments can take a number of actions to improve their chances of success:
- Engage with the market early – to co-design the tendering process and service requirements with potential suppliers wherever appropriate and encourage as many realistic bids as possible.
- Take factors other than price into consideration – a race to the bottom on price is in no one’s long term interests, harms service quality, and often leads to expensive contract variations down the line.
- Manage risk realistically – public services are the responsibility of government, so service providers cannot bear all the risk of failure.
- Base your decision and expectations on rigorous evidence – unrealistic ideas about likely savings often drive unsuccessful projects.
- Invest in good contract management– otherwise savings and performance targets negotiated in the tendering process will not materialise.
- Consider smaller, shorter term contracts – large, long-term contracts can reduce a government’s flexibility, and discourage small and medium sized enterprises (who are often the most innovative and high-performance providers) from bidding.
- Be aware of the risks carried by some contractual mechanisms – some services do not lend themselves to strict contractual arrangements, and perverse incentives can unintentionally materialise. For example, payment-by-result in the UK government work programme discouraged the service provider from spending time with the most disadvantaged unemployed people, because focusing time and attention on relatively easy cases was more valuable.
- Consider all options – even where outsourcing is working well, it may be that further improvements can be made by bringing the service in-house: by increasing flexibility, integrating different services, or improving staff conditions and performance.
Outsourcing will not always be the best or most appropriate option, but with a good body of suppliers, clearly deliverable goals, and strong contract management, governments can deliver highly successful services by partnering with the private and voluntary sectors.
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