PracticePeople In PracticeBacklash grows against outsourcing

Backlash grows against outsourcing

In the late 1980s, accountant Rod Aldridge led a management buy-out of Capita, a professional support services company, from the Chartered Institute of Public Finance and Accountancy. He financed the deal with a £20,000 business loan. Today Capita is a FTSE-100 company.

In April, at the company’s annual general meeting, Aldridge published figures that showed that in 2000, turnover had increased by 39% to £453m. Pre-tax profits increased by 41% to a shade over £52m.

The company employs 7,500 people and Aldridge’s personal fortune is estimated to be somewhere around the £130m mark. A substantial part of Capita’s success has been to do with the increasing level of outsourcing within the public sector, particularly local government. It calculates that about 30% of its turnover is within local government and accounts for 20% of that outsourced market.

Although outsourcing is probably most associated with the private sector, Reuters predicts that one third of all companies in the UK will start or increase their level of outsourcing in 2001, with the practice widespread in the public sector.

Groups such as Aldridge’s Capita, CSL, ITNet and EDS have seen the way the commercial wind has blown. They have been able to exploit the belief among many in central government of every political hue, that public services can be better delivered by the private sector.

Pressure to outsource
This is coupled with increasing pressures on town hall budgets, which has meant councils cannot afford to run a number of services, which has resulted in widespread outsourcing.

‘The reasons for local authorities going down that [outsourcing] route is because it is cheaper,’ says Sandra Howell, a national officer with the public sector’s largest union, Unison.

Private companies can bring in the finance to deliver a service where that budget no longer exists at local level. Figures published by ITNet in April show the importance of the public sector to the outsourcing market.

In 2000, a total of £1.4bn public sector IT outsourcing accounts were let out. The total market, private sector outsourcing included, was worth £4.3bn, a 37% increase from 1999.

The spread of outsourcing
And it is not confined to IT, with services that would have once seemed untouchable by outsourcing now affected. Over half of all contact hours between English local authorities and people who receive home care are now carried by the private sector.

Education looks as if it is the next sector that could be affected. In recent months local education authority services have been privatised. Support services in health could follow soon after. E-commerce services, where the public sector does not have the funding or expertise to develop systems could also follow this trend.

‘We are confident there will be a growth in local and central government contracts, not just in volume but also in scope,’ says John Tizard, director of public service development with Capita.

The trend began under former prime minister Margaret Thatcher. In her first term in office, she introduced the concept of Compulsory Competitive Tendering which was widely disliked across the public sector, as it obliged that various services be put out to commercial competition.

It was about finding the cheapest service regardless of quality. The 1980 Local Government, Planning and Land Act compelled councils to put construction, maintenance and highways out to tender.

Further blue-collar services were added in 1988 and in 1994 legislation was extended to white-collar services, legal, property, finance and personnel, for the first time.

Although CCT no longer exists, the trend towards privatisation has continued.

The current government has introduced Best Value, which although it does not compel services to be pushed out to the business sector, certainly encourages councils to look towards the market.

The ever-widening use of the private finance initiative has also encouraged the public sector trend towards privatisation. It is a trend that looks set to continue.

One crucial difference with outsourcing nowadays is that the public sector is a more willing convert to taking the market route. Initially, it had to be dragged kicking and screaming to the table.

However, the high degree of outsourcing has exacted a price. Unions have complained about the conditions some staff have faced when they have transferred from the public to the private sector.

And recent cases have proved that not all contracts have a happy ending.

The London Borough of Hackney has just terminated a contract with ITNet to provide council tax and housing benefit revenue service. The dispute seems certain to end up in court. Taunton Deane Borough and Kingston upon Thames councils have terminated contracts with contractors CSL and EDS respectively.

And Capita has run into problems at the London Borough of Lambeth.

More headlines to come
These are not isolated cases. There are widespread whispers that other contracts are in trouble and could make headlines soon. This has led some to argue that the nature of outsourcing contracts has to change. Some in the public sector are arguing for more managerial control over the implementation of contracts, to ensure that they do not fail. And such a view has support within the private sector.

Although it will remain part of the business landscape for some time to come, the structure of contracts could change in the near future. Capita’s Tizard says change is in the air.

‘Outsourcing probably has a very short future,’ he says.

This seems somewhat surprising for someone who works for a company who has done so well out of the outsourcing trend. However there is logic behind what he is saying.

He believes future contracts will be based more on an equal partnership between the public and the private sectors, rather than the public sector reluctantly taking up the challenge. ‘I think it is about the relationship,’ says Tizard.

‘About both partners having shared objectives to grow and change. ‘

This could result in more joint ventures between the two sectors, though Tizard believes this approach can be too risky for councils. Instead he sees a new era of contracts emerging where a genuine partnership between all parties involved is a reality rather than just an often-talked about concept.

‘The partnership approach gives a great deal of influence and control to the council and benefits it without the risk of joint value companies.

‘In ten years’ time,’ he says, ‘the kind of relationships that emerge will be very different.’

Related Articles

Is inefficiency stealing your time and money?

Accounting Firms Is inefficiency stealing your time and money?

11m Emma Smith, Managing Editor
CIMA elects new president

Institutes CIMA elects new president

12m Emma Smith, Managing Editor
Transparent currency trade: How to achieve costs visibility

Governance Transparent currency trade: How to achieve costs visibility

12m Emma Smith, Managing Editor
Introduction to KPMG UK’s new leadership team

Accounting Firms Introduction to KPMG UK’s new leadership team

12m Emma Smith, Managing Editor
EY appoints head of UK Infrastructure Asset Intelligence practice

Accounting Firms EY appoints head of UK Infrastructure Asset Intelligence practice

1y Emma Smith, Managing Editor
FRP Advisory expands operation with new office, partner appointments

Accounting Firms FRP Advisory expands operation with new office, partner appointments

1y Emma Smith, Managing Editor
Magma Group announces merger, partner promotions

Accounting Firms Magma Group announces merger, partner promotions

1y Emma Smith, Managing Editor
MHA MacIntyre Hudson advises on management buy-out

Accounting Firms MHA MacIntyre Hudson advises on management buy-out

1y Emma Smith, Managing Editor