'Murdering scumbags': How did outsourcing get into this mess?
Outsourcing firms seem to stagger from one scandal to the next, with even their Government paymasters putting the boot in at times. Can they turn their image around?
That was just one of the Facebook messages recently aimed at Atos, the French IT consultancy responsible for implementing the Government’s work capability assessments, after its controversial ‘Fit to work’ tests led to many long-term recipients of disability benefit having their payments stopped.
Another poster threatened to ‘hang you bastards’. The company said that last year there were on average 163 instances per month of staff being abused or assaulted, culminating in a week of organised protests in February, when Atos offices up and down the country were besieged by angry people, many of them in wheelchairs. Placards on display included one where the ‘s’ in Atos had been replaced by a Nazi-style SS insignia.
The level of vitriol, and associated reputational damage, is such that Atos has now provoked even more fury – this time at the Department for Work and Pensions itself – by seeking an early exit from the huge £500m contract, not due to expire until April 2015. Outsourcing – long a hot political issue in the UK – seems to have gone nuclear.
The Atos saga is far from exceptional. It’s simply the latest in a string of outsourcing cock-ups, most famously the fiasco of G4S’s failure to provide security staff at the Olympics, which led to the army being called in. More recently, the same company was forced to grovel after it was found to have overcharged for an electronic tagging deal, and it was accused of covering up the scale of a riot at a prison it runs.
Fellow outsourcing behemoth Serco was stripped of a £37m Ministry of Justice contract to provide probation services, and was investigated by the Serious Fraud Office after it turned out it had fiddled figures for transferring prisoners. As punishment for their misdemeanours, both G4S and Serco were banned for a while from pitching for government work, although that ban has now ended. In the wake of all the scandal, the CEOs of both firms resigned last year.
Serco now has a new boss – Rupert Soames, Winston Churchill’s grandson – and will be hoping for a new start to match. But G4S’s woes continue. A whistleblower has alleged accounting skulduggery and insider trading at the firm, and the government has appointed a ‘minder’, former Balfour Beatty chief executive Ian Tyler, to oversee its relationship with G4S, as the outsourcer tries to convince government it is fit to take on more work.
The odd thing about these foul-ups is that it’s not only union officials and those who feel their jobs are threatened who delight in taking the moral high ground and bashing them, but also Tory ministers. Take this classic of the genre, from justice minister Chris Grayling: ‘There has been a culture within parts of Serco that has been totally unacceptable, and actions which need to be investigated by the police.’
Pretty strong stuff. And the outsourcers are peeved. More than that, they feel betrayed about the way that government talks about them, on the one hand coming to them cap in hand to help make their ever faster, ever deeper cuts, on the other slagging them off when things go wrong.
‘I don’t think it helps their cause to be so antagonistic,’ muses a senior person at one outsourcing company. Another described the government as being ‘hostile’ towards the industry.
One of the outsourcers sees the government’s attitude towards them as part of ‘a climate of being anti-big business’.
He added: ‘The rhetoric is against big business, against the big outsourcers, banks and utilities. I find it curious that there is so much of this rhetoric, rather than a balanced commentary.’
Another adds, wistfully, that ‘maybe we all expected an easy ride from a Conservative government’. They feel that the Government is asking them to do complex, difficult things in a rush, and that ministers’ glee in slapping them down when they go wrong is cheap and nasty.
In one sense, it’s hard to feel too sorry for the outsourcers, which make handsome revenues from the state. UK government contracts with them account for £700m of France-based Atos’s global revenues of £7.2bn, £1.6bn of Capita’s £3.4bn, £1.3bn of G4S’s £8bn and £3bn of Serco’s £4.9bn. Local government spent £506bn with Capita in 2012/13, while Serco’s contracts with the NHS were worth £201m, and its central government deals £1.2bn.
The high-profile problems rightly raise questions over whether they deserve to be paid so handsomely. But, on the other hand, they have a good point. Most of what they do goes smoothly. And if, as this government continually tells us, we have to outsource public services to save money, then it follows that we all need the outsourcers, so ministers ought to be best buddies with them.
And it’s not only the big outsourcers that feel alienated. Electronic tag maker Buddi recently dropped out of a contract with the Ministry of Justice, after a procurement process that lasted two years, involved a top team producing hundreds of thousands of pages of documentation, often at very short notice, and cost the firm over £2m.
‘We were still at the stage of defining the final specs for this tag, which is on the market already and is working,’ says the firm’s founder and CEO, Sara Murray. ‘To me, it seems a bit of a fiasco.’ She contrasts the MoJ deal with a process Buddi went through with a large US electronics firm last year, for two and half times as many units, which took less than eight weeks.
She adds that the US federal government has an effective and quick piloting scheme, and that the UK’s current procurement system is just not up to the job. ‘I’d say that if we procured smartphones like that, a two-year process to determine what was the best and then a three-year contract, people would say that was ridiculous,’ she says. ‘They are trying to procure innovation but have no appetite for risk.’
So what on earth is going on? To get to the bottom of that, it’s worth taking a snapshot of the UK’s outsourcing landscape. To start with, outsourcing is not privatisation, although the two are often conflated by some newspapers (whether deliberately or not).
Privatisation is when government absents itself from the supply of a service, leaving it to a private company to deal directly with customers. Outsourcing is where the public sector is still responsible for the service, but hires a private company to provide it. And it makes sense. We don’t expect local councils to design and build their own street-sweeping machines. They buy them from Volvo. So why shouldn’t they buy services from experts too?
Opponents of outsourcing perhaps don’t realise how embedded outsourcing is in the British state. While big contractors Capita, Atos, G4S and Serco are the best known, the National Audit Office says that over 200,000 companies and charities provide services to the state. These include everything from managing buildings for government and answering phones for police forces, to maintaining the Royal Air Force early-warning base at Fylingdales and running the Atomic Weapons Establishment at Aldermaston.
According to the NAO, total government spending on outsourcing in 2012/13 was £187bn, of which £84bn was spent by local government, £50bn by the NHS, £13bn by devolved and independent bodies, and £40bn by central government.
About a quarter of all government expenditure is spent on outsourced services. So outsourcing is not going away, instead it is evolving into what Richard Harries, deputy director of the think-tank Reform, calls ‘outsourcing 2.0’.
And this is what is causing the problems. The theoretical point of outsourcing is to harness the power of markets to encourage innovation and savings. But the theory doesn’t always work in practice, so the Cabinet Office, the body that oversees procurement, is working on ways to make those markets function better.
‘We are on a journey,’ says the Government’s chief procurement officer, Bill Crothers, but ‘government is getting better as a buyer’. That isn’t good news for the big outsourcers. For a start, Crothers says, ‘on average the duration of the procurement cycle was about 200 days, and we have reduced that to 100 days. It’s quicker and cheaper to bid for business with the government.’
That helps smaller companies, which might not be able to afford the risk of investing in a long process with no guarantee of return at the end of it. The goal is for 25% of all outsourcing revenue to go to SMEs.
The government has also created new procurement vehicles and methods for bidding for work. One flagship project is G-Cloud, a cloud-based system that lets public sector bodies buy services through a marketplace called the CloudStore. Eighty per cent of its contracts have gone to SMEs.
Then there’s the Digital Services Framework, ‘a new procurement framework for building digital public services’, which has also been a boon for smaller firms. As of late 2013, 84% of the 183 suppliers that won central government contracts were SME s, and of the 70 that were new to government work, 94% were SME s. You can see why the giant outsourcers might not like this.
‘Some people have resisted the agenda and are defending their commercial position and not improving in the way we’d like to see,’ says Crothers.
More of the same is on the way. The Cabinet Office’s new Commissioning Academy will teach 1,500 public servants to be better at procurement by 2015. Traditionally, government buyers have concentrated on negotiating contracts, but they’ve realised that if you want the market to do certain things, then ‘market design’ is also important. In future, they will spend more of their time on the early stages of the procurement process, before the tender is even sent out.
As Crothers puts it, you need to ‘understand how you are going to package up what you are going shopping for’. If you go to market with a $1bn contract, you will get the usual suspects pitching. If you break it down into 10 £100m contracts then you open up the deal to new, smaller players.
In future, the government could ‘spend months engaging with the market, holding roadshows, having conversations, listening to why they may or may not bid, adjusting contract terms and how you go to market. That way you maximise the degree of competition,’ Crothers says.
They also want to get tougher on contractors that try to change terms after the deal is signed, causing value to leak away. This is all specifically designed to bring more entrants into the market, and reduce contractors’ profit margins.
‘We all pay a lot of tax, and if I can help us get to the point of paying less tax, then great. It’s for the public good,’ Crothers says.
There may be trouble ahead, all the same, because as well as making procurement more competitive and complex, the government is also asking outsourcers to do much, much harder jobs. The disability assessments, for example, try to reduce people’s unique sets of difficult, individual circumstances to a box-ticking exercise. Evidently, this tool is not up to the job.
According to the DWP, in 2011 10,600 people died within six months of being told that they were fit to go back to work, and people with untreatable degenerative illnesses have been told that they should get jobs. Clearly something is not working, but Atos ends up shouldering the blame for a mess that is far from entirely of its own making.
There are broadly four problems with the way the government is changing its outsourcing regime. Firstly, as mentioned above, in its haste to get things off the balance sheet, The government risks trying to outsource things that it shouldn’t, or can’t. It’s pretty easy to work out if the bins have been emptied, or if someone is collecting fines or answering phones within four rings, but when it comes to things like probation, or getting people back into work, measuring performance is much murkier.
In probation, for example, there are ‘lots of interfaces between probation and other services so there’s interaction to manage’, says Tom Gash, who has written several reports for think-tank the Institute for Government. ‘It’s also hard to say who or what has helped to stop an individual from reoffending, so it’s hard to measure the value the contractors add.’
This is an especially big problem, as another government mantra is ‘payment by results’. The big outsourcers say that some of the problems with things like electronic tagging arose because they were being asked to do difficult tasks on a scale never before undertaken – problems were inevitable.
Secondly, and relatedly, there is the problem of risk transfer. Politicians are keen to shift the risk for some services into the private sector. It’s nice to be able to blame an outsourcer when there’s a prison riot. But outsourcers need to be paid a fair price for taking on that risk, and that is not an easy calculation.
Take, for example, the case of employment services, where they are taking on the risk of the labour market. As Harries says of the mooted deal to outsource probation services: ‘Of course, the principle of introducing competition into probation is absolutely right but anyone who says they understand all the risks involved is taking quite a big punt.’
Then there is the specific question of reputational risk, as these deals come under more scrutiny. ‘We are in an era when things like transparency will be built into contracts, and the industry needs to get used to that,’ says Harries.
He says that government too often puts confidentiality clauses into contracts, but this has to change. ‘We need to move to a more mature relationship, and a recognition that these deals will be scrutinised. That might push the price of contracts up but it is the price of doing business with the taxpayer.’
Thirdly, if government goes too fast, it risks having no bidders for some contracts. Gash says that ‘in some cases, there is a limited capacity to respond to opportunities. So in the south-west and other rural areas there isn’t much competition, and if you let lots of contracts out at the same time, providers might not want to bid for all of them. The market may not be ready to respond to opportunities, it takes a while for providers to get up to speed.’
This is especially likely if, as per the government’s new strategy, you want SME s to do the work. A tender with no bidders is no use.
And, fourthly, there is a drive to make outsourcing more varied, encouraging more joint-ventures and mutuals. There is a sound reason for this. Gary Sturgess, an academic expert in outsourcing who used to work for Serco, says: ‘One of the flaws in the contractual system of competition and contracting is that it is such a powerful tool for driving down price that that often trumps the need to be concerned about quality.’
Government is notorious for choosing the cheapest tender. Contracts can also get too big. ‘I’ve seen contracts that are too complex, that are over 1,000 pages long,’ says Iain Gravestock, a partner at KPMG. ‘When you are trying to understand the performance measures and metrics it gets to a point where contracting can introduce too much complexity.’
Other arrangements are simpler and can do the same job of pushing down price and improving performance, thinks government. For example, a number of local councils have set up joint-ventures with BT to provide its phonelines and broadband. The idea is that the any ‘excess profits’ are partly fed back to the council, and that it has more control over what goes on. The civil service pension scheme is now run as a mutual, co-owned by the civil servants and a private company.
The downside? These could be trickier to run, and offer too little profit for contractors to be interested in them. All of these problems can be overcome, but something needs to change. The drive to get more SME s on board is being undermined by the government’s own shoddy procurement processes.
As Buddi’s Sara Murray says: ‘It’s a real tragedy with the effort that we have put in to deliver the same bid as a much larger company, with the best product in the world, that is manufactured in the UK, that we couldn’t make it.’
That said, she is also dismayed to see the large outsourcers getting slagged off. ‘These are big employers, and to have a pop at our own big companies which then destroys their chances on the world stage is as bad as having a pop at SMEs.’
What should be done? On one hand, the politicians need to slow down. If they want to outsource something like probation, they need to use pilots and roll it out gradually. Civil servants say it would take 15 or 20 years to do it properly, so if ministers want to go faster they have to take the blame for mistakes. On the other hand, outsourcers should get real.
They like to quote the figure that contractors can cut the cost of public services by 20%. Maybe once, but the days of such easy wins are over. Future contracts will be smaller and smarter and government will drive harder bargains.
Politicians have to be more honest, yes, but big outsourcers also have to realise that their world is tougher now. For the taxpayer’s sake, they need to kiss and make up.