PPP: linking innovation and outsourcing

As the UK Government strives to raise both the quality and accessibility of services in key areas of health, education, transport and law and order the role of public-private partnerships, or outsourcing, has once again become a topic of intense debate. But for this discussion to be meaningful, and to relate to today’s social and political agenda, the way we think about outsourcing needs to change.

For more than a decade outsourcing has been widely considered a rather blunt instrument in the push to drive down public sector expenditure in this country. As many early adopters of outsourcing are now discovering, simply handing over one part of the business – typically the IT function – may have an instant impact on the bottom line but it rarely acts as the catalyst for transforming services, operations or management. With public sector budgets under more scrutiny than ever, with ‘anytime, anywhere’ service demands a reality and with the convergence of public, private and not-for-profit sector offerings, now is the time to explore the real potential of partnering. And there is no country in the world in a stronger position to create the partnering models of tomorrow than the UK.

The UK is arguably the most mature public sector outsourcing market in the world. A recently released research report Outsourcing in Government: The Path to Transformation implies that just as the UK has been a leader in first generation government outsourcing, so it now has the opportunity to take the lead in the second wave.

As contracts come up for renewal, as new services need to be created and managed, and as new skills and operating processes become critical to success, departments and agencies have the opportunity both to broaden the scope of their programs and to put the emphasis much more strongly on the creation of value and the achievement of outcomes, rather than focusing only on the reduction of cost, significant though that can be.

Already in the UK we have examples of outsourcing arrangements that are breaking new ground for governments anywhere in the world. For example, the Inland Revenue’s approach to partnering has evolved from conventional deals supporting what were perceived as non-core processes into strategic partnerships involving a high degree of risk sharing – leaving the public sector executives free to concentrate on the ongoing management of their commercial relationships and the generation of transformational programs.

At the MoD outsourcing has been seen as the means to ensure that a continually squeezed defence budget can be focussed primarily on the provision of front line assets. In essence, anything which isn’t directly required for fighting in the front line is seen as a candidate for outsourcing, thereby reducing investment in under utilised fixed assets and the need to tie up combat personnel in non-combat support functions. Faced with the challenge of updating an infrastructure which had hardly changed in 30 years, National Savings took the then radical move to outsource whole of its operations – customer service, finance, IT, procurement and HR – and 90% of its employees moved to a private sector partner. As a result the organisation has been able to build a competitive, low-cost operation with more flexibility.

While these examples point to an awakening of outsourcing as a tool to help drive change within an organisation, making it happen remains a major challenge across the public sector. Commonly cited barriers to the development of a transformation approach to outsourcing include time-consuming procurement processes, difficulty in demonstrating value-for-money, uncertain budgetary support and public accountability.

With the current administration encouraging departments to consider partnering as a valid option across a wider range of public services, it is important to minimize these barriers – whether perceived or real. At the same time, organizations must learn from earlier outsourcing exercises and ensure emerging best practices are applied not just to the renegotiation of existing contracts as they expire, but to each new initiative as it comes forward.

Some of these lessons depend on the adoption of a more open approach to contract negotiation, aimed at developing a cooperative rather than an adversarial relationship with providers. Fear of the private sector’s profit motive has too often led to contracts which inhibit the ability to respond to changing circumstance and actively discourage joint problem solving. Others require changes in long established, sometimes statutory procedures, often originally designed to ensure fairness and best value in government procurement but now sometimes having precisely the opposite effect.

Most challenging of all is the need to change the public sector culture, which too often inhibits public servants from innovation and risk taking by being quicker to punish failure than to recognise and reward success. It’s that culture which has, hitherto, led executives either to consider outsourcing only for services they consider ‘non-core’ or not ‘inherently governmental’, or to regard it as a last resort solution to the most intractable of crises.

Not only must public sector leaders rethink the relationship between services, risk and value, but they must redefine their own role from one of controlling functions to managing relationships, from crafting deals to developing an active deal-making environment, from controlling input costs to measuring outcomes and from selecting outsourcing vendors to looking for strategic allies. At the same time, it requires a new level of transparency, accountability and value creation from the private sector.

These points, key to making transformational partnering work in practice, were re-enforced by the National Audit Office last November: ‘To build successful relationships the public and private sectors need to adapt a flexible and co-operative approach where they understand each other’s objectives, concentrate on establishing common ground and see each other as partners with a single business focus.’

Last year’s report on Public Private Partnerships (PPPs) from the Institute for Public Policy Research (IPPR) – takes the argument even further. It suggests that the schemes which disappoint tend to be those which have been initiated primarily or exclusively as a means of cutting costs or of offloading management responsibility and risk on to private sector providers. In its conclusion it argues that, ‘If PPPs are to be a significant feature of the public service landscape in 2010 . . . the association between private or voluntary provision of public services and cost cutting will have ended… public managers will have the experience and confidence to allow more innovative partnership models to emerge.’

Our research shows those executives around the world who believe they have used outsourcing to achieve dramatic results – ranging from massively more effective organisations to stunning improvements in economic value – generally follow one of two paths. They either shift to buying services rather than the capacity, or they transform the value equation, by re-evaluating their organisational structure and operations to ensure they are as streamlined and efficient as possible. This often involves outsourcing critical processes, creating new sources of revenue and driving economic development. They apply flexibility and innovation to improve government operations, serve citizens better and foster healthy enterprise, by structuring deals that stimulate private-sector innovation and economic development. They align internal and external resources to turn historical roadblocks into new ways of doing business – sharing risks and gains with their business partners. Rather than simply crafting deals, they’re orchestrating an active environment of deal making that stimulates healthy competition and continuous improvement.

The government has already articulated its plans to deliver high quality, efficient services to its constituents at their point of need. The next step is to consider all of the management tools and resources available to help achieve this goal – of which outsourcing is one. However, rather than simply wringing costs out of non-core activities, those leaders truly aspiring to be at the forefront of transformational change will start with a bold strategic agenda, set aggressive targets, collaborate to create new ways of working and share risks and rewards with their business partners.

• Peter Holmes is Accenture’s managing partner for Government Services.