The collapse of one of the largest suppliers to the UK public sector, services and construction firm Carillion, is leading to some soul-searching about the whole nature of the relationship between private sector service providers and their government clients.
At the extreme, we have some commentators saying that “nothing should be outsourced,” which is clearly ridiculous. Government is never going to develop its own ERP software solutions, run its own hotels or develop mobile phone networks.
In the first part of this short series, we therefore looked at the good and valid reasons for outsourcing – using specialist who may have expertise and cost advantages compared to in-house operations, for instance. But there are less good reasons too. Here are those we have seen in organisations (both public and private sector) in our past experience:
- A short-term financial benefit – guaranteed short-term savings, maybe even up-front payments from suppliers, but leading to a longer term negative (e.g. cost, loss of capability or competitive advantage). Suppliers are of course very good and skilled at presenting a financial case that looks good, and often that is done by disguising longer-term costs and emphasising an immediate saving. It is the same principle that construction firms have been accused of for years – “bid low and make your money on the changes.”
- This applies really in the public (government) sector – the ideological view, which believes that “the private sector will always be better than the public.” Some politicians, commentators and others have seemed to genuinely believe that, although there is no evidence that such an extreme view is true. Every case for outsourcing should be looked at on its own merits – as we said in Part 1, there are times when a third party is likely to bring benefits, but it is not always the case.
- Outsourcing in order to sort out a difficult management problem within the area being addressed is often the driver for outsourcing, and generally (but perhaps not always) it is not a good reason in itself. The issues could be staff issues, poor business processes or customer service, or technology and systems related. The issue is that “if you outsource a problem, you just get an outsourced problem.”
There is some truth in that, and there are cases where it soon became clear that the outsourcer couldn’t sort the problem out either! If the current situation is a mess, it is also very hard to baseline the situation (in order to measure improvement), or to know whether the potential providers are offering a fair price for the work. So often it is advisable to sort out as much as possible before committing to the full outsource, using external resource if necessary to help the improvement but without going the whole complete outsourcing hog.
- Finally, we have seen individuals prompting outsourcing for personal gain. They might see it as an opportunity to make their name internally by driving a strategic and significant project, or they might see the prospect of a juicy job for them in the service provider’s business, either immediately or in the future. It goes without saying that this is a terrible reason for outsourcing – but it has without a doubt happened.
So the key message is that outsourcing can have real benefits, can be the best route for a public sector organisation to take – but it is certainly not always the right option. Every case in which it is worth considering must be looked at on its own merits and analysed very carefully to ensure that any benefits are worth the cost. That is not just any financial costs but also in terms of effort and other strategic issues (such as a loss of internal capability).
Outsourcing is not a panacea for government – but neither should it be demonised or disregarded.