As the various election campaigns splutter into life, and politicians of all colours try and explain how they will deal with the deficit, there is a sizeable groundswell of opinion forming that wholesale outsourcing of public services might just be the “silver bullet”.
My interest in this topic stems from my day-job helping organisations source IT services, and public sector ICT is seen as a candidate for producing massive cost savings. Whilst it can be argued that public sector IT sourcing strategies are inefficient, I also believe the “silver bullet” scenario is being somewhat oversold.
Providers’ PR and journalistic opinion based on theoretical understanding do not make for balanced debate, nonetheless the debate is well underway with supporters and detractors lining up arguments that seem to suggest the result will be a “score-draw”, mainly because measuring the benefits or pitfalls objectively is very difficult to do as no-one has agreed a consistent set of metrics.
Objective measures or not, we need answers to some basic questions:
- Given that most outsourcing deals signed with the sole objective of reducing costs fail to deliver the expected savings, why does everyone think this time will be different? Moreover, who will carry the risk if the savings are not delivered?
- Analysis of outsource contract failures suggests that organisations do not have the capability to specify, negotiate, and then manage the resulting contracts – is the public sector any different? If it is not, who or what will set up and govern these contracts, and at what cost?
- Outsourcing impacts people – how will this significant change be managed and implemented whilst balancing the needs of individuals and the state?
I think the answers will not arrive any time soon however I can probably make an informed guess regarding the level of cost savings. Consider that the UK, where roughly 20% of a £620bn public purse is outsourced, is not alone in wanting to reduce its public spending deficit. It is not known how much of the remaining £496bn is being targeted, however it is also well understood that around the world government outsourcing activity is on the increase.
The impact of that is easy to see. Here in the UK, Capita’s profits rose 17% in 2009 and analysts believe its order book will strengthen due to an increase in government outsourcing. Babcock’s bid for VT indicates that existing government suppliers are now attractive takeover targets for those looking to share in the opportunities. But note Christopher Hyman, Serco’s CEO – “There are more opportunities than we are able to bid for” – when commenting on his business’s 34% rise in profits and an order book standing at £17bn without the expected new spate of outsourcing activity.
This is good business for the providers, however a glut of opportunity is not conducive to maximising competition and therefore savings. Worse still, providers will be able to pick and choose which contracts to bid for, and unless they are “incentivised” by lower cost saving targets or less stringent service level agreements, their focus will not be the areas with marginal profit potential or difficult, non-standard services.
The DeAnne Julius report commissioned by the government estimates that services outsourced to the private sector cost 20% less, is this trend sustainable when demand is likely to outstrip supply by such a wide margin? I’m only a simple IT Consultant, however even I understand the first rule of market economics.….
Neville Brown – Head Intelligent IT Sourcing – Itica Consulting – March 2010