Contractual vs Democratic Accountability

Summary

Musings on the issues around outsourcing in the public sector – why is the political establishment obsessed with it?

This post stems from the Guardian’s headline about outsourcing some key functions of the police – such as detaining suspects – to the private sector. This is in part a “knee-jerk” reaction but also a “I need to look into this in more detail” sort of post. This is because the history and the detail around it is a little murky. Although the issues around privatisation, outsourcing and buying in goods and services are related, they are not the same. But they can be confused with one another.

Some personal definitions

Buying stuff: Monarchs and government’s buying stuff is not new. Whether it’s the hiring of mercenaries and the procurement of weapons, it’s been going on for hundreds of years. It led to some interesting historical spats too. One that comes to mind is that of Queen Victoria’s eldest grandson Kaiser Wilhelm II castigating the arms manufacturer Krupp for selling weapons to the then Chinese Empire which were then turned in Imperial German troops in the aftermath of the Boxer rebellion. Think of it like Argentina going into the Falklands today using weapons made by BAE systems that were manufactured in the UK. Exactly.

Privatisation – the like of which we started experiencing in a big way in the early 1980s was (amongst other things) a change in mindset of the role of the state – and the transferring out to the private sector things previously done by state-owned organisations. Rather than the state buying something, this is about what type of organisation should carry out a given function – public sector or otherwise.

Outsourcing is primarily about the delivery of services to persons or organisations that supposedly can deliver a function otherwise delivered by the state, but at a cheaper price (and/or more ‘efficiently’). I tend to think of these outsourcing firms as those that provide corporate services – such as running a staff canteen or delivering cleaning services.

So, where are the problems?

Whitehall has been having fun and games with all of these. The Ministry of Defence has a… ‘colourful’ record when it comes to achieving value for money in its purchases. Things are also not so good on sequencing of purchases – the idea of having very expensive aircraft carriers with no aircraft to fly off them striking me as particularly farcical.

On privatisation, there were some privatisations that, with hindsight seem to have made commercial sense in the longer term. British Airways and British Telecom being two examples when we consider the rise of short-haul budget airlines and the growth of cable and mobile phone/TV/internet providers. There were others that (in my view) clearly did not – the railways being the classic case. This is whether you consider the performance of Railtrack’s system of maintenance, the price increases since privatisation and the subsidies to the railways at the same time. (See more on my thoughts about all things railways here).

Outsourcing – the two key issues

On outsourcing, there are two issues for me here. The first is principles of accountability – moving from democratic accountability of service delivery to contractual accountability between public sector organisation and separate delivery organisation. The second is the issue of evidence – evidence that service delivery and broader “outcomes” are better value for money for the state than an “in house” team.

Prior to the boom in outsourcing, the principle was that as citizens, we could go to our local councillors or MPs and get them to deal with issues of service delivery. Councillors would hold the council to account and MPs the government for services delivered by the public sector. This in part is underpinned by the principle that MPs and Councillors once elected represent everyone who lives in their constituencies and wards – irrespective of who constituents voted for. If I have an issue about (for example) the opening hours of my local council-funded swimming pool and am getting nothing back from the pool managers, I go to my councillor. If I have an issue about my local hospital, I go to my MP. Councillors & MPs then hold to account ultimately the executive office holders (whether executive councillors or Ministers of the Crown) who then take action to get the problem resolved. (Ideally).

With outsourcing, the line of democratic accountability is broken. The principle of outsourcing is that in return for cash payments, non-state organisations (private firms through to charities) deliver a given set of services as set out in the contract negotiated. On paper the hard numbers might look promising: Compare how much is spent on the existing in-house provision and compare it to how much the outsourcing company might charge. If the latter is cheaper, go with the latter and you’ve saved money…nominally.

But it’s not as smooth sailing as that. There are a number of assumptions that, if tested are found to have been wanting in a number of areas. The first is that the state has the skills and competencies to negotiate and not get screwed over by a commercially-savvy private sector. (Think of all of the PFI deals of firms that were contracted to build & run schools and hospitals). At an operational level (for example with IT contracts) the ability to ask your in-house IT experts for help on the “soft” stuff that no contract could ever cover (such as how to do something on a desktop application) goes out of the window. As it turned out, in many teams that I worked in it was me that people came to for all of their “How do you do that on…?” needs. (No, I didn’t get paid extra for it).

There is also the issue of where the efficiency savings come from. In terms responding to changing needs, things inevitably involved negotiations with contract managers – an extra layer of bureaucracy rather than a simple chat with someone locally. The most ridiculous concept I found was the idea of phoning a call centre on the other side of the country in order to get a building fault next to me sorted. These outsourcing companies have become so big that they have centralised these operations because for them it’s cheaper on paper. When giving a particularly bad piece of feedback in one case, their response was “Well our response time was within our SLA [Service Level Agreement]” – i.e. as far as they were concerned me being delayed/annoyed at their slowness was not a problem for them because they had met their contractual obligations. As the monopoly supplier, why should they care? It’s not as if I could have done anything about it.

One of the sights that continued to depress me throughout my time in the civil service – in particular in London – was the clear dependence on low-paid migrant workers in a number of areas knowing that the heads of the companies that they were working for were making small fortunes. The old hands in the civil service told me of the days when people such as the security staff, the cleaners and the canteen staff were all civil service, afforded the same dignities and protections that being a civil servant afforded. Being a public transport user both commuting and during my time living in London, I would regularly see what The Evening Standard described as “London’s underpaid army of the night”. It is this that is a huge issue for me – but one that is unlikely to be built into future contracts. Let me explain.

As far as the contract managers and negotiators are concerned, all they need to look at is the bottom line – looking nervously over at their shrinking budgets. What might suit their budget may conflict with other things the government wishes to achieve. For example a “value-for-money” contract may often mean the contractor paying a low hourly rate to its staff. That low hourly rate may mean workers have to work long hours and/or more than one job just to make ends meet – especially in a city as expensive as London. What does that mean for their health? What does that mean for their families? (Especially if they have children.) Wouldn’t it be better if these contractors paid their low paid staff more in order that they didn’t have to work such long hours and/or take on more than one job? What would the impact be on their health? Would it allow such people to have more time for their friends and families – and for their communities?

What we don’t have in all of this is a comprehensive set of data and empirical evidence comparing in-house vs outsourcing. Whether we ever will have one remains to be seen. I imagine that there will be intense debates as to where to draw the ‘value for money’ line. Should it be purely on narrow lines of A vs B, or should the net be cast wider? The Government has already incorporated sustainability into its contracting framework, and there’s now greater pressure for other things – such as the hiring of apprentices to wider UK economic benefits to be incorporated in some procurement exercises.

Are there lines in the sand which should not be crossed?

I think there are. I’m against the use of the private sector in our criminal justice system where it involves the involuntary incarceration of individuals. I remember as a teenager being horrified that a private company (Group 4) had won a contract to transport prisoners. I became aware of it because of high profile prisoner escapes and could not understand why a private firm was transporting prisoners. Hence the prospect of private contractors having the powers to detain people is something that horrifies me. The police have enough problems to deal with as it is (whether dealing with crime to the fall-out from the Leveson revelations) without needing to deal with this.

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10 Responses to Contractual vs Democratic Accountability

  1. Excellent article but there are few observations that I would add. In my recent blog [http://paulgriffithsuk.blogspot.com/2012_02_01_archive.html]. I discussed the potential impact of outsourcing on the NHS and much of what I’m about to write is an extension of what I said there.
    Outsourcing is not always a bad idea, however it needs to be used judiciously balancing the risks and benefits. It can work relatively for the procuring organisation when there is either an an ad-hoc requirement for a particular skill or when he service is very non-core.

    Ad-hoc requirements might include software developers. By outsourcing the procuring organisation avoids the risks and costs associated with an in-house development teams, that might be difficult to manage – particularly if this isn’t the focus of the organisation – and expensive – given the intermittent nature of the requirements. Non-core services might include office cleaning where an outsource can make the process more efficient. Tragically this efficiency is usually through stricter management and lower salaries rather than through “innovation” (as is sometimes implied by proponents of outsourcing) – with potentially significant social costs.

    However, most companies avoid outsourcing core functions (e.g sales, R&D, certain types of adminstration). The risks include: –
    – Loss of control – where outsourcing to a third party who could results in poor or disrupted service which would be unacceptable (e.g. for the organisation).
    – Loss of skills – meaning that the organisation would struggle to build the skills again in house at a future date and may forever be dependent on outsources
    – Lock in – where the supply of the outsourcing service effectively becomes indispensable to the procuring organisation effectively meaning that if requirement chance over the life type of the arrangement the supplier of the service can ask their price.

    It would seem that all of the above have already happened with government contracts. Many contract seem to suffer from Lock-in and the loss of skills in government effectively stops them being able to take these functions back (without significant upfront expenditure). Worse “loss of control” has a special significance for government, as the government cannot let certain outsourced services stop functioning. This means that the outsources companies take all the upside without any of the downside risk.

    My fear is that a lot of this is being driven by a combination of free market ideology and short term savings. I fear that longer term the true costs associated with this outsourcing will become all too apparent.

  2. Jen says:

    I did a research project on the shift from democratic accountability to contractual accountability a few years ago (using Education Bradford as a case study) and 3 issues stick in my mind:
    1. The way Education Bradford were able to re-negotiate their targets down midway through the contract as it became apparent that what they promised (& presumably helped win them their contract) was unobtainable; this was in the context of the failed contract in Southwark (I think) which cost the public purse money to escape.
    2. The comments from interviewees that contracting out education further undermined democracy as education was the biggest driver in getting people to vote in local elections.
    3. The fact that the supposedly ‘failing’ local authority was charged with overseeing the success of Education Bradford; they were considered too rubbish to run education themselves but were perfectly able to judge the competence of a private company.

    I came to conclusion that accountability was undermined for no measurable benefit – bonkers & slightly tragic.

  3. Natasha Jolob says:

    A timely and welcomed piece. There’s a lot of talk about outsourcing traditional government services to private sector contractors, but little on the benefits and opportunities of outsourcing social care to social enterprises which are uniquely placed to help the public sector achieve value for money, particularly in the context of the Social Value Bill.

    There appears to be a lack of understanding amongst councillors, commissioners, officers and the general public about the benefits of a social enterprise funding and delivery model particularly in the social care sector. Better marketing of the benefits of delivery by the social enterprise sector is called for.

    Furthermore, it strikes me that the challenge relates to strategic commissioning capability of local government, as it moves from service delivery to management and governance. Good performance management, good governance, relationship management, transition and change management, contract administration, and financial management are needed.

    The other challenge relates to the capacity of social enterprises to put forward a strong, coordinated and proactive business case that will address local needs. But this sector is currently super-busy with reacting to funding cuts, scappling around for small pots of funding to survive, trying to delivery local services, and inter-organisational competition.

    Yet this is prime time for social enterprises- at a strategic level we can see the development and organisation of social finance/ investment e.g. The Social Investment Business and Big Society Capital investment readiness fund for social enterprises that seek to deliver public services – finance is there ready and waiting!

    There a strong case to be made for outsourcing to social enterprises – specialist knowledge of users needs, a strong track record of designing innovative services that meet needs, trusted by the community, affordable services that attract low cost or free capital resources and a social purpose.

    I make a strong call for local public sector organisations to open up and pave the way for a new way of working with social enterprises.. better market engagement and management so that the Localism Bill and Big Society become reality.

    • Whenever I hear about social enterprise, instantly worry that it is basically a fig leaf used to disguise the fact that a lot of contracts are going to private companies. I would be genuinely interested in finding out what proportion of government/local government contracts go to such social enterprises versus the number that go to private sector profit seeking companies. Again I must stress I have nothing against either in principle, however, however, if social enterprises are only picking up a small proportion of contracts then obviously the debate needs to be framed appropriately.

      I agree with your point about the need to develop skills in managing contracts. Indeed such skills are essential if this push towards outsourcing is going to provide ANY long term savings. However, my fear is that; –
      1. Such skills are unlikely to come cheap, both building up such skills internally will take time and money as will acquiring experienced people from the private sector
      2, The government in its desire to cut budget and push outsourcing will not get the right people in and will hurry the process resulting in badly drawn up contracts.

      The net effect could well be further costs heaped on the public sector at a time when we can least afford it (whilst some companies in the private sector walk away with very favourable contracts from the ensuing mess).

  4. Natasha Jolob says:

    Outsourcing to social enterprises comes under the banner of ‘invest to save’. Invest in the development of a new funding/ delivery vehicle and the development of a business case, with cost savings and efficiencies built in over time. Yes there’s a need to bring in specialist expertise but it doesn’t need to be expensive. Local authorities also have in-house skills, and it needs a champion, one senior officer that is willing to develop a new way of working, to change and improve things and who supports social enteprise development locally.

    Examples of outsourcing to social enterprises are few and far between across the country. There is not a level playing field – competing against nationals and private sector prime contractors and providers is challenging for this sector, particularly as procurement is complex and time-consuming..hence the need to develop a new way of working, to be strategic, to enhance good market engagement and management by local authorities.

    Outsourcing to social enteprises will require the development of a business case and a competitive dialogue process, as well as the development of an appropriate delivery/ funding vehicle. It is easy to do, and not expensive!

    • I would agree that the procurement process ends up favouring national providers over social enterprises. I would suggest that this is not down to any specific failures of government procurement people but some simple factors: –
      – Corporations represent a lower risk option. The corporation will have experience of delivering services elsewhere and offer financial stability meaning risk of requiring a bail out.
      – Corporations are likely to have in house skills to cope with specific regulations and fulfil the legal requirements
      – Good social entrepreneurs to drive social enterprises are few and far between. Many well intentioned people may wish to run contracts for local government but in reality few will have the necessary management acumen
      – Social entrepreneurs are likely to be most available where they are least needed. For example there is likely to be an abundance of educated housewifes with spare time in the leafy conservative voting surrey suburbs, However you are less likely to encounter such people in inner city neighbourhoods.
      – As you correctly state social enterprises will have less experience and capabilities with the procurement process. However I suspect this might be the least of their problems.

      Potentially some of these issues could be overcome by reducing the requirements on social enterprises (e.g. helping them removing regulations, insuring against financial risks associated with small enterprises and even encouraging more social entrepreneurs). However I remain very doubtful about even with appropriate measures enough on a large scale particularly in the areas of greatest need.

      I suspect that a couple of social enterprises will pick up a few contracts and the government PR machine will use this to validate its policies. However on a macro level such social enterprises (despite the good intentions of people in that sector) will achieve not end up achieving a lot other than making the outsourcing of government functions to corporations more palatable to the public.

  5. Natasha Jolob says:

    The implementation of the Social Value bill will hopefully have some effect. What is needed, I think, is a collaboration/ partnership of local social enterprises, (re)designing new and innovative services.. a well organised, coordinated partnership and supply chain of large and small enterprises, working together as one sector in a locality. Consortia are being formed across the country, enabling social enterprises to bid for large public sector contracts.

    It is a pity that the national Third Sector Consortium was not a preferred supplier for the DWP Work Programme – it should have been and was uniquely placed to deliver the outcomes needed (vs e.g. A4E).

    A ripe policy context (localism, big society, social value bill etc), and the right (social enterprise) funding and delivery model surely provides opportunities to develop new ways of working and outsource to this sector.

    I agree with you – it is much easier to outsource to big private sector companies, with a track record, who can carry the risk and that have the capital to deliver large contracts. I am keenly watching The Social Investment Business and Big Society Capital who are paving the way for the capitalisation of this sector – this is a fantastic opportunity.

    There are millions of cases of successful social enterprises across the country, many are small and local.

    I keep on harping on about the need for 1. The development of a business case for outsourcing of specific services 2. Development of a local, context specific social enterprise delivery and funding model, backed up with social investment finance 3. Awareness raising amongst stakeholders about the benefits of social enterprise/ community group delivery

    Is it this simple?

    • I cannot claim any specific knowledge of this sector…. therefore I will defer to your knowledge and experience. Assuming corporations and social enterprises can offer the same level of service then obviously policies helping social enterprises with credibility issues has merits.

      That said I still have my doubts. My first concern is how effective such organisations are at delivering services in the deprived parts of the UK. This point about the big society was highlighted much more eloquently by Phillip Pullman (http://falseeconomy.org.uk/blog/save-oxfordshire-libraries-speech-philip-pullman) (in particular around the 11th paragraph on the two communities)

      Also whilst I’m sure there are many social enterprises already doing lots of work, I would love to know what proportion of outsourcing contracts by value are they winning (or going forward stand a reasonable chance of winning). My fear is that despite the good intentions of many in the sector (and even ministers in the government) ultimately it will be little more than a fig leaf to make a policy of outsourcing to corporations seem more acceptable.

      …. However I am open to being convinced on both these issues as I am not dogmatically anti-outsourcing to either corporations or social enterprises.

  6. Thanks for the original article- very useful to remind people of the distinction between privatisation and outsourcing. Those who argue against outsourcing don’t do themselves any favours by confusing the two.

    1. Social enterprise and outsourced markets
    Natasha raises points commonly raised by the social enterprise movement themselves and necessarily so. You can’t have social purpose businesses competing in a market if there is no market. (Of course we should remember social enterprises operate in other markets, not just those for public service /back office services to the public sector). So social enterprises have an interest in developing a market. There’s a tension in here for some who consider themselves part of the social enterprise movement- it doesn’t always sit comfortably to advocate for more outsourcing. Particularly in the face of outsourcing practice being so bad.

    2. Can we avoid outsourcing?
    I tend to think that there is such a momentum behind outsourcing that there is probably little point in trying to reverse that trend. Maybe I’m wrong, but even if you could convince central government it is a bad policy (good luck with that) there is so much outsourced already in local government that you’d be left with the question of whether you were going to bring things back in house.

    So if you assume the current of outsourcing is too strong to halt (or even just that what has been outsourced still needs needs managing), the question I’d have is how to make it work as well as possible.

    There also opportunities to improve results of services when outsourcing or from better commissioning of those things for which a “buy” decision (rather than a “make” decision) has already been made. More on this later.

    3. Does organisational form matter in delivery?
    Of course there is absolutely no reason that public sector employees in in-house teams delivering public service could operate in a seamless, user centred, dynamic, entrepreneurial, learning, focussed and brilliant way. Many on the front line want to work that way. It annoys me that little attention has been paid to overcoming the barriers to them acting like that whilst remaining employees of the public sector. However it also annoys me that the assumption of some that just by spinning out to a mutual or social enterprise these professionals, and the management systems behind them, will somehow automatically revolutionise their practice.

    Many social enterprises are wonderful organisations who really make a difference to peoples lives, who have pioneered approaches to service delivery that the public sector has struggled with (being joined up and person centred e.g.). But I agree with Paul that there is a real risk of social enterprise being used and abused by politicians.

    4. Pros and cons of outsourcing
    There are definitely cons to outsourcing and they all happen without any effort needing to be made. Massive challenges with the role of the public sector teams that then commission services, issues of practice and skills, costs of management of a commissioning processes that are overlooked by drawing the boundary of VFM assessment too narrowly, accountability issues as raised already, erosion of terms and conditions for employees, likelihood of corporates winning work and playing the game and extracting profits for shareholders, lack of practice around re-design of services for and with people etc etc etc.

    The pros on the other hand need work to realise; they are opportunities. Greater autonomy and flexibility for employees, greater user focus, co-design and co-production, faster responses to need, being able to test new approaches to delivery out, increased trust between service users and service deliverers, more evidence based approaches, community ownership and therefore willingness to make effort, joining up with other agencies, bringing in new resources, perhaps even needing to spend less to achieve better results (even when taking into account transaction and management costs). I do not think that social enterprises and mutuals have a monopoly on this sort or stuff- I have seen some great family owned businesses (in home care) who will go the extra mile. Nor, as already stated, does just being a social enterprise mean you will automatically achieve any of this. The third sector (social enterprises included unfortunately) is not immune to entering survival mode and forgetting about serving people.

    The problem is none of these pros seem very likely to occur when the provider base consists largely of big private sector providers competing for huge contracts. Perhaps this makes sense for infrastructure, for office supplies, for utilities but even for such things the public sector would still do really well to remember to offer opportunities for smaller suppliers in these contracts, through use of small lots and supply chain initiatives. Smaller suppliers and social enterprise do not just pop up overnight- you need to allow time for their development.

    5. Making the best of outsourcing and the already outsourced work
    So what to do for public services that are already outsourced and those that will be regardless of the rights and wrongs of it? Well at some point the relationship between the new provider and the commissioner will be (re)negotiated. At this point the PROCESS- to determine what is needed, which is the best option, and what the scope and specification of any contract best is- matters. Yes the Public Services (Social Value) Act is good but there is still a massive task to make people comply with it. There are real dangers that it will be ignored, or that all that will happen is people will justify existing practice in the language of the act or just write a policy.

    The Best Value Statutory Guidance published last year http://www.communities.gov.uk/publications/localgovernment/bestvaluestatguidance gives some better clues as to what practice should be sufficient to meet the Public Services (Social Value) Act than the Act does itself, and unless and until any change in policy around outsourcing then those worried about outsourcing should really hold Best Value Authorities to account on their compliance with such guidance.

    As a further level of explanation of practice of how value can be achieved, stakeholders involved etc, have a look at this LGA publication. http://www.local.gov.uk/c/document_library/get_file?uuid=ad803542-e680-430f-8090-8af903b8dd3a&groupId=10161

  7. Pingback: Are there some moral lines that outsourcing of public services should not cross?

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