Monday, 13 June 2011

The perils of blind outsourcing

The news that Suffolk County Council has halted its controversial plans to outsource all its services after public opposition to spending cuts and a collapse in staff morale should come as no surprise. However, one might also question whether there was always something wrong about a policy that appears to see outsourcing as an ideological aim to be pursued in its own right rather than something that evolves from a market testing exercise concerned to establish the optimal approach to service provision.

Market testing should fundamentally be seen as a managerial issue not a political one. There should be nothing politically wrong with a Labour council exposing in-house services to market competition (and possibly outsourcing some of those services as a consequence) and nothing politically wrong with a Conservative council accepting that a market testing exercise has confirmed the retention of in-house service is a better option to alternative private sector provision.

It is not a case of whether private provision is better than public provision (or vice-versa) but what gives better value for money to council tax payers. However, as usual, a good argument often gets in the way of the facts.

Market testing is a managerial process that involves exposing existing (in-house or external) service provision to external competition (from public, private or third sector providers) in the belief that competitive forces will improve service provision. However, care is needed here and it is important to think carefully about the longer-term implications of outsourcing as well as potential short-term gains.

Outsourcing all aspects of service provision and closing down, completely, the in-house operation could mean a council burning its boats and in certain circumstances being left at the mercy of a private sector monopolist with no alternative in-house provider to fall back on. This could be because the existing provider market is immature and has a limited number of suppliers or because existing providers operate illegal cartels to reduce competition (for those who doubt this, I refer them to Office of Fair Trading investigations of collusion in the building industry in relation to public sector contracts).

I am a supporter of the principle that in-house service provision should be exposed, periodically, to external competition and, if appropriate, services might be outsourced. However in considering outsourcing, let us not delude ourselves as to the nature of private business.

Fundamentally private business does not like competition and will take actions, where it can, to reduce the level of competition. Witness the cool response from businesses to David Cameron’s speech, last year, to the CBI conference that proposed a tougher competition regime. Eliminating all in-house service provision can leave a council at the mercy of a rapacious and virtually monopolistic private contractor and leave them up the proverbial creek without a paddle.

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