More nails in the coffin of public sector outsourcing

Yet another outsourcing company gets into trouble.

I don’t think that many people will be sad to see the back of Working Links as they lose their probation services contract.

It looks like they might not be the only ones to lose their contract in the weeks to come – of the 21 Community Rehabilitation Companies only 2 are achieving their contracted outcomes.

I’m not opposed to outsourcing of Government work like some people – using Government spending to boost the private sector and the overall economy is a sensible Keynesian idea, and there are plenty of bits of routine Government admin which could be done more cheaply using surplus capacity in the private sector.

But I do think that there are some parts of the Government which should never be outsourced. When considering whether something should be outsourced there are 4 key questions to ask:

  1. Can you transfer delivery risk to the private company – if something goes wrong can you hold them to account for their performance and make them fix it? The failure of Group 4 to deliver their contracts for the 2012 Olympics are a good example of this – the risk stayed with the Government no matter what the contract said, and Army ended up doing the job instead
  2. Can you commercialise the activity and turn it onto a contract with clear outcomes without creating perverse incentives?
  3. Is there an existing market for this service? Are their commercial companies out there with expertise in this business area?
  4. What are the commercial partners bringing to the deal? Capital? Investment? Expertise?
  5. it is impossible to transfer delivery risk to the private company
  6. It is impossible to commercialise the activity and create a contract for it without creating perverse incentives
  7. There isn’t an existing market for these services, and potential contractors don’t have experience in this business area

Criminal justice is a terrible business area for Government outsourcing because it has all of these problems – the risk stays with HMG no matter what the contract says, the contracts create perverse incentives, the private sector has no experience in criminal justice, and they don’t bring anything meaningful to the deal.

But it is also a terrible area for outsourcing companies to get into because their investors want predictable stable returns which are impossible to deliver with a volatile and unpredictable client group.

I worked alongside charities who were bidding for these contracts a long time ago and the commercial terms they were being offered were heavily weighted towards achieving specified outcomes for the ex-offenders.

Failure to achieve these outcomes was existential – it would drive the charity out of business. But getting predictable outcomes from an unpredictable client group was nigh on impossible.

This meant that only businesses of a certain size and structure could win these contracts, and even then, as the collapse of Working Links shows, a small variance from expected outcomes made the contract commercially unviable. This was the heart of the problem with Working Links who look to have been manipulating their contract performance to keep afloat.

At the time I was concerned enough about MOJs contracting systems that I considered speaking to their auditors, butI was concerned that if I did so the charities who I was connected with risked being disadvantaged in future bidding rounds.

HMG have produced a new “playbook” for people making outsourcing decisions, which tries to encourage more rigorous modelling of how much a service should cost and then run pilots, suggests ways to allocate risk between government and suppliers, and assess the merits of delivering a service in-house compared to outsourcing.

The problem is that the playbook doesn’t really address the central problems – some areas of Government business aren’t really suitable for outsourcing, and there is a massive lack of commercial expertise across the Senior Civil Service.

For MOJ there is no way of fixing this situation. No way of mending the problems, or sorting out the market failure.

Outsourcing criminal justice services doesn’t work, and the whole system should be brought back in house immediately.

The sad thing is that there are still some really good UK outscourcing companies who do better work for the clients and service users than their public sector equivalents. There is nothing special about being a civil servant that makes people good at dealing with people or managing complex business processed.

But too many parts of the state of been outsourced in a way that makes no sense for HMG and no sense for the outsourcer. As HMG has got stricter with outsourcers driving down profit it has forced outsourcing companies into riskier business areas to keep their margins healthy. This imbalance of risk and reward is infecting the whole industry and putting companies out of business.

Left wing critics have failed to come up with a workable critique of outsourcing beyond some rather tired stuff about evil capitalists. Internal civil service critiques of outsourcing are driven by the desire to build large personal “commands” and a suspicion of commercial management as not really being a gentlemanly pursuit.

But that doesn’t really matter when the advocates of outsourcing are headed by Chis Grayling who is doing a great job of trashing the UK outsourcing industry.

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