Have outsourcing public service providers become too big to care?

In the previous post, we started to consider whether outsourcing public services is incompatible with open policymaking. In this post, we look at the size of the public services industry and ask whether ‘economies of scale’ also means ‘too big to influence’.

If you’re a critic of outsourcing, G4S has made it easy for you recently. The company’s Olympic security fiasco underlines everything you believe: that superlarge private outsourcing companies like G4S are largely unaccountable, sometimes unreliable, and – given that they profit from providing public services – fundamentally unethical. To its proponents (and sometime apologists), the public services outsourcing industry promotes greater efficiency, effectiveness and innovation, and as the public scrutiny now on G4S illustrates, they are doubly accountable – to society as well as shareholders.

Our focus here is slightly different. Guerilla Policy is a proposal for a radical openness in how public policy is created, in particular that the people who use and provide public services should have a much greater role in proposing, researching, developing, implementing and reviewing the policy that impacts directly on their services and their lives. In an age of social networks and social media, we think this is entirely possible – if the will exists to make it a reality. We’re encouraged that the Government now seems to be thinking the same way. As part of its recent civil service reform plan, it has committed itself to ‘open policymaking’. Government says it believes that policymaking is often drawn from a too narrow range of views and is not designed for implementation. Instead, it wants to improve policy advice by creating opportunities for a wider range of views and expertise to inform its development.

But as we started to suggest in the previous post, in reality the open policy agenda might be marginalised as a result of the Government’s (perhaps stronger) attachment to so-called ‘open public services’ – the challenge to the ‘presumption’ that the state should deliver public services rather than the voluntary or private sector (promoted through various policies such as mutually-owned providers, the expansion of personal budgets beyond social care, the use of payment by results to reduce re-offending, and the Community Right to Challenge enacted through the Localism Act 2011).

Outsourcing has increased significantly in scale since the 1980s, but the bulk of public services are still provided ‘in-house’. The expansion of outsourcing has been uneven, with a much greater amount of external commissioning having taken place in waste services, transport, prisons, welfare to work and ‘back office’ services such as IT, HR and facilities management. In contrast, the penetration of private sector providers into policing, education and probation services has – up until now – been limited. The historical trend however is clear and seemingly unceasing, whichever party is in power.

When it presents its vision for open public services, the Government tends to highlight the smaller charitable providers that have developed progressive, innovative, ‘people-centred’ services and approaches. It doesn’t tend to showcase the likes of Serco, Capita or Ingeus Deloitte. And yet these, more than any other providers, represent the reality of public service outsourcing today. In recent years, charities and voluntary sector organisations have seen a growth in income from contracts and fees from the public sector (to £12.8 billion per year, according to the NCVO), at the same time as grants have stagnated. However, this is still a relatively small proportion of the £82 billion in total spent on outsourcing by the public sector (according to Oxford Economics), and a smaller proportion still of total public sector procurement (of goods and services of all kinds) of £196 billion (all figures 2009/10).  The Economist estimates that this £82 billion figure will increase to £140 billion by 2015.

What has been more dramatic is the growth of a small group of very large providers who have the scale to absorb the costs and risks associated with delivery of many contracts. Welfare to work is a case in point; the Work Programme is a £5 billion programme which is wholly outsourced to a group of large private sector ‘prime contractors’, with only one voluntary sector provider, CDG, delivering as a prime. A4e is a good example of a company that has emerged from nowhere in the 1990s to have an annual turnover of £215 million. The vast majority of its income comes from contracts to deliver welfare to work, skills, advice and probation services.

The increased reliance of government on this small group of increasingly powerful providers is well-illustrated by the G4S fiasco. And if such providers are ‘too big to fail’ – as the need for what is effectively another public sector bailout suggests (this time by police forces and the army) – then what does this suggest for the ability of ordinary people to influence such providers under open policy? If government struggles to hold such providers to account during the delivery (and indeed non-delivery) of contracts, how likely is it that we will be able to influence the way they deliver services, let alone the policies under which they provide them? The critics and proponents of outsourcing might be right to contest issues of transparency, accountability, efficiency and effectiveness when it comes to outsourcing. But as policy insiders themselves, these commentators also ignore the question that the scale of these providers poses for open policy: why should companies the size of G4S – the largest private security company and third largest private sector employer in the world – care what we think?

5 Comments on “Have outsourcing public service providers become too big to care?”

  1. Some random thoughts… (I nearly didn’t but seeing as you said no comment is too stupid…)
    1) At their size, it takes a failure of massive proportions to dent their public image, so legitimate worries over transparency, accountability etc will remain the scope of enthusiastic bloggers and hardly make a dent in their business model
    2) The crucial aspect for these providers is continually winning new contracts (even as they lose one). My experience of the procurement processes for these contracts is that they are getting bigger and more unmanageable with every round, effectively eliminating competition, as only a Too Big to Fail organisation can win. This means that once a certain corporate size is attained, these organisations effectively have a monopoly on outsourced contracts.
    3) In terms of policy – HOW services are delivered, there is no incentive for the few competing providers to share best practice, and so the likelihood is that gaps develop between the best and the worst – however the worst performers are unlikely to lose too many contracts due to issues outlined above.
    4) These few providers will then realistically only compete on price, which will eventually lead to poorer quality provision.
    5) A body procuring these services will likely be judged on the COSTS first – a cheap contract that is performed fairly poorly might generate penalty payments from the provider – only making the service look cheaper and the procurer look even more efficient. The procurer will never be brought to account for selecting the provider, providing the 250 page procurement pack is completed satisfactorily.
    6) Regulation is a possibility, but fraught with dangers (see the financial services industry – after a while the same bodies rotate from regulator to director of regulated body and vice-versa). Similarly effective regulation imposes additional costs, reducing any financial savings.

    In summary, the only influence you can have on how services are delivered under this system, is to specify the amount that the providers can spend on them.

  2. Thanks for the comments Chris.

    I completely agree on your point about how the market maturing point. A small group of private sector providers is emerging who can absorb the complexity and risk of increasingly large contracts that are being outsourced. This same group of providers keeps popping up in different markets – A4E and Serco for instance are on the frameworks for both Ministry of Justice and DWP. I am struck that only one third sector provider was selected as a prime contractor for the Work Programme for instance. This sends a really clear signal to the market that to be a big player in the outsourced public services market, you need to be a private sector provider.

    I also agree that price is king at the moment. I lead business development for a national charity and we are seeing significant downward pressure on price in areas such as domicillary care. Quality does seem to have fallen by the way side.

    What do you think about financial incentives such as those in the Work Programme? They were designed to incentivise providers to work with those who face more complex barriers to securing a job. I am not convinced that these incentives are enough and I am interested in your idea about specifying the amount that providers can spend.



    • Hi Chris, thanks for taking time to read my comments.
      One thing I forgot to mention is that the nature of contracts will inevitably reduce he likelihood of innovative solutions, particularly in the areas of care [IT may be different], as the Contract will specify how a service will be provided for the duration – this will leave no room for innovation on the ground.

      Re – incentives – these seem to be of limited value, they will more often lead to a free-ride for the prospective employer, who will temporarily suspend the normal criteria for applicants, only to revert after the incentive ceases. NI holidays based on long-term placements would be better.

      My comment on establishing how much providers can spend was simply aimed at the commercials – contract is worth £xm over 3 yrs – max you spend on it would be, say x-10%.

      It’s interesting also to consider the effect TUPE regs have on these big contracts – essentially, most of the same people will end up working on them, but over a 10 yr period they may have several employers. I’d be willing to bet that over that period their engagement, commitment will reduce, no doubt in conjunction with their pay & benefits package.

      I reckon I could keep going all day – I really like the idea of your project, and it’s interesting to me that in the time it’s taken typing this, I’ve been changing my mind a good deal. I think that means it’s a bit complicated, but most definitely worth doing, and I’m hopeful that we can succeed with generating workable (evidence & experience based) policies.

  3. An interesting point on the ConHome blog on the same issue – with the provision of social services (employment, benefits etc), the incentive for the public sector ought to be to reduce the requirement (ie – remove the need for unemployment beneifts by providing jobs).
    However, for a private contractor, this is not the desired outcome, in fact the reverse is true – a big contractor wants to keep the contracts and hopefully make them bigger (and retaining them by demonstrating success in confined/specifically contracted measures.
    If the Goals of the state / contractor are so apposite, then the outcome is likely sub-optimal on all counts.

  4. There is also an interesting blog on ConHome on a similar topic asking the question about whether bigger is always better. Are large outsourcing providers such as Serco, G4S and A4e simply too big to fail? What happens if one fails? Shouldn’t we be taking lessons from the banking collapse that pure market economics are not always enough. The state may be called upon to act as a guarantor. And if we become reliant on these large companies – then what happens if one does collapse – who will step into fill their shoes?

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