Latest trends in public sector outsourcing

21 May 2007

Martyn Hart, Chairman of the National Outsourcing Association, examines the latest trends in public sector outsourcing.

A recent report by Sir David Varney has been published outlining major opportunities to strengthen public sector delivery, to enable it to meet changing citizen and business expectations. Outsourcing is one way that the report highlights that public sector delivery will be improved. The UK public sector is set to outsource a further £20bn worth of services – representing a growth of 50% over three years, according to research from Kable.

Attempting to bring the public sector more in line with private sector operating costs has always been a challenge, for example, HR costs in the public sector are said to be two to three times the level of that in the private sector. So even though many found the job cuts to be objectionable, not many can doubt the rationale.

Although outsourcing was cited as a solution, and has been successful in many cases, it is not the panacea that it was promised to be. Many organisations, private and public, have fallen foul of poor outsourcing and off-shoring procedures, from either having rushed into it too quickly from the outset, having badly structured outsourcing deals or finding out that they had selected a supplier that was incompatible. Outsourcing and off-shoring can fail for a myriad of reasons.

Gradually, organisations are learning from mistakes made and moving on to prevent further problems. A case in point is Swansea City Council, which decided to outsource its IT department without first consulting its staff or the trade unions and then failed to implement correct communications procedures. Swansea has seemingly learned from its mistakes with the recent announcement that it will drop the second (e-government) stage of its outsourcing deal. Swansea's decision to split the contract into two has been cited as an example of good practice in outsourcing, as it enabled them to avoid being locked into a relationship that was not working. It seems that local government on the whole realises the importance of watertight communication procedures.

One example of these communications failing is in the case of the £179m outsourcing project between Westminster and Vertex. A row has recently broken out over the cost of outsourcing a call centre from London to Scotland. The GMB union claims that it will cost Westminster residents an estimated £179m and 400 job losses if proposals made by Vertex (the outsourcing partner of Westminster Council) were to go ahead. This is an example where the unions should have been fully informed from the very beginning, and the failure of these communications has left both sides red-faced.

The outsourcing market is maturing and the way organisations use outsourcing is becoming more sophisticated. This, plus developments in the offerings available, means that we are seeing many new ways of working emerge.

The trend to insource: there have been stories of insourcing deals in all sectors. End-user organisations, either not satisfied with the outsourcing service or undergoing a change of requirements, have deemed outsourcing or off-shoring unsuitable and brought the process back in-house. One such example in the private sector is that of the Newcastle Building Society. The Newcastle Building Society recently decided to shut down its back office processing unit in Mumbai, India, after finding that its staff in the UK were more efficient, accurate and actually cheaper. The fact remains that once an organisation outsources, it has to very carefully consider every factor and eventuality before deciding to bring the service back in-house. Customers and employees may have a poor view of what they may see as wasted time and resources, which could, in turn, affect the organisation's reputation and even its share price.

Barnsley Borough Council recently addressed this issue and decided to keep knowledge in-house by choosing to create a joint venture with a supplier. This means that the jobs were technically still with the local government but that economies of scale could be made as the venture was run more like a private sector company. They can also do work for other organisations, which means they have an additional revenue stream, making jobs more secure and making growth more plausible.

One trend the NOA has noticed is that even if an organisation takes a service back, it establishes the same service 'contract' conditions that it would with an external service provider, using the same Best Practice and models it would have used for outsourcing. Often this is called an internal service provider and is very popular with shared service centres that serve a number of public bodies.

Multi-shoring: many suppliers have come to realise that a completely outsourced off-shored solution rarely lives up to expectations. NOA research has proved that it is nigh on essential for all processes to have an element of on-shore, as well as off-shore. With public sector, in particular, off-shoring is contentious. As such, many suppliers, even traditional off-shore suppliers based in India, Philippines or elsewhere, have started to establish footprints in the UK and Europe in a bid to offer customers the option of a blended outsourcing service and to win more UK-based business. Suppliers can tailor the project so that elements are delivered on-, near- and off-shore, depending on the customer's requirements. This enables a solution to be delivered that combines the most cost-effective options and the best quality of service. When off-shoring a call centre it is imperative for firms to choose a location that has a strong linguistic empathy with the UK.

Multi-sourcing: rather than selecting just one supplier to work with, the so-called 'one-stop-shop' or 1SS as it is known, many end-users are now opting for a multi-sourcing option. The mega deals where organisations outsource everything to one supplier are starting to dwindle and end-users are taking more control over their sourcing decisions. They may have a centralised sourcing team, which decides which elements or processes should be outsourced, or off-shored to different suppliers, or which should be kept in-house. This method of outsourcing requires more time and resources on the client side, but also allows the client more flexibility in terms of negotiation on prices and contract terms, which reduces risk as well as being able to select the best supplier in the field, often referred to as the Best of Breed, to deal with specific areas. The problem with mass outsourcing deals is that no one supplier can be an expert in everything.

Outsourcing can bring many benefits but...
The actual outsourcing process can still be a difficult business and organisations should not enter into it lightly. Many organisations have fallen foul of poorly structured outsourcing deals and less than harmonious supplier relationships. This can be problematic when outsourcing call centres, as firms are allowing another company to talk directly to their customers and the supplier has to fully understand the needs of the end-user.

Many a project has not delivered because the supplier's working practices don't sit well with those of the end-user, or the end-user's expectations are at a complete tangent to what the supplier is focused on. This is why the cultural aspect of the relationship is key and especially in a partnership the legal structure is vital. If anything goes wrong, both end-users and suppliers need to be protected.

In order to avoid outsourcing or off-shoring failures, or to avoid having the expense and stress of insourcing three years into an outsourcing deal, organisations would do well to pay heed to a number of considerations.

Defining requirements: many organisations, suppliers and end-users, have discovered once a contract is underway that the initial requirements have changed. It is imperative that a thorough 'needs analysis' is conducted prior to project commencement so the project can be scoped accordingly. It is also important that the contract is structured in a flexible way, so if requirements do change, then the contract can accommodate that.

Supplier selection: from cultural compatibility to work ethics, it is imperative that a customer selects a supplier that it can work with easily, in the way that they feel comfortable with. Outsourcing is not simply handing your process over to a supplier for them to deal with – close collaboration and sound communication is important to the success of the relationship.

Judging performance: from SLAs and KPIs to benchmarks and regular performance assessment, it is imperative that the process is regularly reviewed to judge progress. It must also be assessed against the original, in-house process, in order to assess how the process has developed and if there have been improvements consistent with the investment in the outsourcing project. But it is important for end-users to bear in mind that they shouldn't be trying to nail suppliers to the wall with unrealistic SLAs. Over promising and sky-high expectations can be a recipe for disaster. It is important that objectives are agreed on both sides before embarking on the project.

Communications: I've mentioned this above already, but it is vital, to communicate, engage stakeholders and partners as early as possible. Communications may be the most important part of any outsourcing, in-house or off-shore programme!

Careful consideration on every level and the adherence to Best Practice throughout is the real key to outsourcing success. Whatever an organisation's objectives for undertaking outsourcing, every potential person affected needs to be considered and every possible outcome must be prepared for. The failure to take all these factors into account leaves an organisation vulnerable to an outsourcing disaster, which will be costly and, in the worst cases, can severely damage business and your reputation!