2 Outsourced and Business Services - Delivering More for Less
Foreword
3
Introduction
5
Executive summary
6
1. Benefits of outsourcing
9
2. Opportunities to extend competition
18
3. Removing the barriers
20
References
23
Outsourced and Business Services - Delivering More for Less is being published at an important time for the industry and the country. This is the third in a series of reports published by the BSA which charts the scope and development of the industry.
Outsourcing has a long history in both the private and public sectors. Its market has evolved and matured, making the UK a world leader. Yet the outsourced services industry remains an untapped resource in the battle to bring down the fiscal deficit.
The experience of the private sector is that year-on-year cuts of 5% cannot be achieved without radical structural change. Given the scale of the cuts set out in the government’s recent spending review, it is clear that public services require more than just greater efficiency. They need continuous improvement, and this necessitates some element of re-engineering.
Outsourcing should be part of the answer. Outsourced service providers have a proven track record in helping successful companies and government organisations achieve transformative change. They do this by investing in training and technology, utilising buildings more effectively, joining up the delivery of services and modernising management techniques. Innovation often comes by seeing the problem through new eyes, and outsourced service providers are not subject to the same hierarchical and organisational structures which can prevent the public sector from doing things differently. The new coalition government agrees that fresh approaches are needed. Recent announcements on spending cuts have been accompanied by a greater willingness to see public services delivered by a mixed market of providers. But if new providers are expected to fill gaps, the government needs to be much clearer about what it can and cannot provide
itself, and distinguish between essential and discretionary services. Like a private company facing an outsourcing decision, the state should examine what its core functions are and what it needs to provide.
New providers then need open and honest commitment from the government, and for there to be a sense of partnership. Outsourcing does not work as well as it can when public sector contract mangers fall back on the legalistic intricacies of the contract rather than acting like long-term partners. But if we can get this right, and bring together the commitment and expertise of public services with the customer accountability of the private sector, then we can achieve great things.
Kevin Craven Chairman BSA - The Business Services Association
FOREWORD
INTRODUCTION
The outsourced and business services industry is one of the largest sectors in the UK. The BSA is the only body dedicated to representing the industry as it operates across the private and public sectors. We promote the industry and the positive contribution it makes to the economy and society as a whole. Three quarters of the industry’s work is business to business, with the remaining quarter providing services to the public sector, although the latter is the area which receives the most attention from politicians and the media.
The BSA’s full members are active in providing business and outsourced services in the UK, across Europe and around the world. They have a combined worldwide turnover of over £70 billion and employ over two million people. In the UK the turnover is £17 billion with around 375,000 people employed. Our associate members are professional firms including lawyers, accountants and consultants who advise the sector.
The aim of this report is to set out the benefits the industry brings to its private and public clients in terms of improving standards, cutting costs, investing in training, commitment to social responsibility and energy efficiency. With these benefits in mind, the report then highlights areas of public sector activity which could benefit from the management and operational techniques described. The final section looks at what the barriers are to operating in the public sector and recommends action to overcome them.
In this prevailing austerity, failure to optimise the benefits of outsourcing is a mistake. So too is discussion of public sector reform which fails to recognise the potential of this dynamic and mature service industry. The entire rationale of outsourcing is to perform a function in a better and more efficient way than a client organisation could do itself. A competitive market to provide these functions means investment in innovation and training is fundamental. This investment drives growth through the rest of the economy. As an industry, we are beyond the simple dichotomy of public versus private provision. The goal should be to inject the best of the commercial world into the provision of public services - and vice versa.
We are also not naive to think that all outsourcing is a success. Careful consideration needs to go in to writing a contract, selecting the best provider, and managing performance. It is in our interests as well as those of the end-user and the taxpayer that the client - the commissioning body - is as effective as possible. The risk in the current economic climate is that clients forget the lessons of the past and instead of contracting with long-term value in mind, they contract on the basis of lowest cost. Lowest cost does not always mean best value and instead of ‘more for less’, we risk ending up with ‘less for less’.
The BSA believes there is a significantly larger role for the outsourced service sector to play in creating a more efficient public sector. But
to do this public sector commissioners must take a more commercial outlook. Too often however overly complicated and poorly managed procurement processes hamper suppliers ability to bid for contracts. The lack of a level playing field between private sector and public sector bidders creates a completely unfair commercial environment and unrealistic and unsustainable pension requirements are a significant deterrent to suppliers.
As businesses BSA members are a significant part of ‘corporate Britain’. As such we would be concerned by any move that would make us less domestically or internationally competitive. Maintaining as stable and competitive a rate of corporation tax as possible must remain a priority for the government.
In summary, the outsourced services industry is a UK success story. Outsourcing is not a magic bullet to the UK’s fiscal challenge, but the industry is part of the solution.
Mark Fox Chief Executive BSA – The Business Services Association
EXECUTIVE SUMMARY
6 Outsourced and Business Services - Delivering More for Less “Suppose the amount expended in the purchase
of a given service to be a certain sum, and that an individual equally capable of rendering this service should offer to render it at less expense. Is there any good reason for refusing such an offer?” - British philosopher Jeremy Bentham (1748 - 1832)1
The outsourced and business services industry operates across the private and public sectors. Services include back office functions, customer contact centres, catering, cleaning, security and pest control. The sector also provides public sector specific services like social housing maintenance and management, offender management, building and maintaining schools, and managing defence estates.
The industry has grown significantly over the last few decades as organisations - both private and public - look to focus on their core functions and let expert outsourced service providers deliver non-core functions. Of course, what is considered core and non-core is shifting over time. Services that were once considered absolutely core to
an organisation’s success, such as customer care, are now successfully outsourced. The following key facts demonstrate the size and success of the industry:
l The UK is a world-leader in outsourcing, second only to the US and home to almost a fifth of all outsourcing contracts l Business services make the largest
contribution to the economy of any sector, contributing nearly 10% of total UK Gross Value Added
l The sector employs 1 in 7 workers l The part of the industry which operates
in the public sector is large, representing about 6% of GDP and employing 1.2 million people.
The case studies contained in this report illustrate some of the reasons why the industry has become so successful. They show how BSA members offer their clients’ measurable improvements in service quality and a guarantee that savings can be made
year on year. This is backed up by evidence from a government-commissioned report which found that, on average, competition to provide public services generates cost savings of between 10 - 30% without reducing quality.
These achievements cannot be made if investment in the workforce is not the number one priority. This is a service industry and so depends on the quality of its people. It is often asserted that employees suffer when they are transferred from the public to the private sector - but the evidence just does not back this up. For instance, a National Audit Office study of staff moving from the public to private sectors found that total employment increased by 20% and the turnover of staff who transferred to the private sector was 7% a year compared to 12.4% average for the public sector as a whole. Staff also generally benefited in terms of pay from the shift to private employment. In addition, business services and outsourcing companies always abide by employment law and have honoured key government agreements to
ensure that current public sector employees are not disadvantaged when they transfer to the private sector, such as the TUPE, the Fair Deal and the Two-Tier Workforce Code. In today’s business environment it takes more than just meeting the terms of a contract to become successful. Businesses have to demonstrate how they are responsible corporate citizens. The case studies in this report show how BSA members go above and beyond the contract - contributing to community goods and improving their own and their clients’ carbon footprints. Despite the benefits illustrated, two thirds of public services are still delivered by the public sector. We believe the government is missing out on huge opportunities to reduce its spending at the same time as improving standards.
For example, in the health sector only 30% of ancillary services are outsourced. The majority of the NHS insists on delivering its own cleaning, catering and building management services when
surely its managers would be better off concentrating on the core task at hand. The BSA has estimated that an easy way to knock £1 billion off the NHS budget - without compromising front-line service delivery - would be to subject the 70% of in-house support services to competitive pressure.
The second section of this report sets further areas where we believe there is great potential and much more the market can achieve. However, if we want this force for transformation we need to change how contracts are awarded so that more companies bid for them, and to create new opportunities for companies to provide public services. Too often overly complicated and poorly managed procurement processes hamper the ability of suppliers to bid for contracts. We would like to see greater co-ordination of procurement through central frameworks. This would still allow for local commissioners to innovate but would reduce the inconsistencies which add cost to the procurement process. In addition, the lack of a level playing field between public and
private providers results in commercially unviable contracts and the strain of taking on huge pension liabilities acts as a significant deterrent to bid.
The reforms we recommend in the third section of the report will not only assist BSA members but will allow the government’s vision of a mixed economy of providers to become a reality. Small companies, mutuals and co-operatives which are expected to enter the market will also benefit. Greater competition does not necessarily lead to adversity and we believe that as trusted partners, BSA members can provide the expertise and capacity in this new landscape to the ultimate benefit of the service user and the taxpayer.
Power
Distribution Telecoms
Performance Improvement Consultancy
Maintaining the infrastructure of the UK
Social Housing Maintenance and/or Government Housing
Maintenanace Street Lighting GraffitiRemoval Property Maintenance Electricity Sub-stationEngineering & Design Arboriculture Grounds and Parks Maintenance Emergency Response and Contact Centre Highways Maintenance Power Drainage Gas Underground M&E Station Maintenance HVAC Water Communications Refuse Collection Streetscene & Environmental Management
Chart1:
Enterprise - maintaining the infrastructure of the UK
Outsourcing is not a new management fad. It has a long history going back to ancient times.2 The first outsourcing in the UK
we know of was 1,900 years ago when Britain was part of the Roman Empire. The Roman army initially had to make or import its pottery. However, around AD100, the army in Dorset switched to using a local manufacturer which had become capable of producing pottery in the quantities and to the standards required.
Equally, the use of private sector companies delivering public services is not new. In 1834, when a fire ravaged the Houses of Parliament, it was the men of a private company, the London Fire Engine Establishment, who heroically risked their lives and saved Westminster Hall.3 And
internationally, the UK is not unique. For instance, Falck provides around 60% of Denmark's fire services and 80% of its ambulance services, and has done since the 1920s.
What we now think of as modern day outsourcing of public sector services began its life under the banner of Compulsive Competitive Tendering in the 1980s. However, the landscape has evolved
considerably since then - in terms of the types of services provided, the relationship between contractor and client, and importantly, the quality of services provided.
A third of all public services are now delivered by the private sector. Most people come into contact with the private sector providers of these services everyday without realising it. Roads are maintained, rubbish bags are disposed of, prisoners are transported to new facilities, IT services operate in schools, hospitals are cleaned and social housing is managed. See Chart 1 for an example of the range of services provided by just one BSA member.
10 Outsourced and Business Services - Delivering More for Less
1
Benefits of outsourcing
l The UK is a world leader in outsourcing, second only to the USA and home to almost a fifth of all outsourcing contracts.4
l 82% of large firms in Europe, Asia and North America have outsourced contracts.5
l Shares of British-quoted firms, after announcing outsourced deals, outperformed comparable firms without such a deal by an average of 1.7% in the month after the announcement.6
l The overall professional and business services sector, a vast amount of which is outsourced, now accounts for almost 20% in terms of both national output (GVA) and employment.7
l Professional and business services account for almost 14% of UK exports,8 and the UK is the second-largest
exporter of business services after the USA.9
l The support services sector - which is a subsector of the business services industry and includes services like cleaning, catering and building management - was estimated to be worth more than £303 billion in 2007, with growth of 8% from 2002 - 2006.10
l The part of the industry which operates in the public sector is large, representing about 6% of GDP and employing 1.2m people.11
l From 2007/8 to 2010/11 the industry delivering public services was estimated to have grown 6.3% compared to the economy as a whole with growth slowing to 0.5% in 2009.12
l In 2007, local government spent £42 billion on external contracts - over 40% of all its expenditure.13
l Public procurement costs £3,560 per person in Britain per year.14
l The industry is truly international. For example, one BSA member alone employs over 380,000 staff to serve over 50 million people every day in 80 countries. l BSA members range from operating entirely in public sector markets to 50-50% public and private to 100% private sector. Private sector clients include banks, FTSE 100 companies, blue chips and hotels. Public sector clients include No 10, the Cabinet Office, the Ministry of Defence, hospitals and schools, local authorities and the Highways Agency. The types of services provided in the public sector include administration of welfare-to-work programmes; school building and maintenance; hospital cleaning, catering and portering; management of defence estates; installation of new IT systems; construction of transport infrastructure; and the running of prisons and probation services.
Outsourcing is a well-established means of delivery. There are clear benefits in terms of cost savings and improving service quality. There are obviously risks too. Care needs to be taken by the client over selecting the best provider and managing the contract. The BSA does not believe that outsourcing is a magic bullet to the country’s problems. However, we do believe the industry is part of the solution.
This is because outsourced service providers aim for three things when working with clients - whether they are public or private sector clients. First, they offer measureable improvements in the quality of service provided. Writing performance targets into a contract is a powerful incentive for raising standards. This is especially true for public sector clients who have not previously measured what they do. Second, savings are guaranteed. The client is promised a reduction in their operating costs of 20, 30, sometimes even 50%. The third benefit goes deeper and involves making the client’s operations more effective in the long term as outdated working practices are reformed. If any of these promised benefits are not achieved, the contractor can be sacked. The following sections look at how BSA members have:
l Improved service standards and reduced costs l Improved employee conditions
l Gone above and beyond the terms of the contract.
Value for money - improving standards
and reducing costs
The most comprehensive review of private and voluntary sector providers delivering public services was the 2008 government-commissioned Julius Review. It found that shifting public services into a competitive environment creates cost savings for the taxpayer of around 10 to 30% with service quality staying the same or improving.15
The Serco Institute reviewed 198 government and academic studies spanning 30 years, 12 countries and five sectors - defence support, hospital services, prisons management, municipal services and refuse collection. The evidence showed that opening-up public service monopolies to competition can cut costs by up to 30% - and with no sustained evidence that efficiencies are achieved at the expense of quality. Perhaps most significantly, experience shows that substantial savings are available to public and private sector providers alike: it is competition, or the threat of competition, which drives value-for-money improvements.16
In local government, the use of competition accounted for a third of all savings made in corporate services (an estimated £80 million) over the two-year period 2004/5 to 2005/6.17
Case studies - improving standards
Capitatook on the NHS Choices website in 2008. The aim of the website is to empower and inform people to make the right health decisions. This in turn reduces the burden on the NHS. The first task for Capita was to increase visitors to the site. The target of 7 million visits per month by 2011 looked challenging but Capita achieved its target two years early, doubling visits within 12 months. The target for 2011 is 11.7 million per month. To do this the website needs continuous improvement. In addition, the Department of Health is saving money as Capita eliminates duplication of effort elsewhere by providing syndicated content for NHS trusts’ local websites. NHS Choices is helping to make healthcare more accessible and patient-centred. The flow is two-way as patients can rate their experiences on the website. As well as giving patients more choice, the service gives them a voice.
OCS plays an essential role at the Port of Dover in ensuring passenger and freight vehicles quickly and safely board and disembark ferries at the port. It was selected as a provider after the Port decided to stop providing landside services itself. OCS has worked in the transport sector for over 40 years and has used this experience to build on the trust and reputation the company has in the market. Port of Dover chief executive, Bob Goldfield explained the change; “The withdrawal of the port from directly providing these services and the introduction of competition within this market now provides choice and flexibility to our customers and enables them to more directly control the cost of their landside provision in these difficult times”.
Amey provides and maintains a worldwide fleet of Engineer Construction Plant and Rough Terrain Mechanical handling equipment for the British Armed Forces. This equipment is essential to
maintaining capability during operations. Better fleet management has reduced costs by cutting the number of that fleet by 1,800 vehicles. However, through an innovative process known as ‘Whole Fleet Management’, Amey has significantly increased equipment availability to over 90%.
Sodexo’swork maintaining Fife Council’s school estate resulted in a vast improvement in the quality of service provision. Rector of Queen Anne High School, David Meek, said: “The quality of work done by Sodexo in maintaining the facilities at the school has far exceeded my expectation. It is an absolute delight to enjoy the fruits of their labour: we can come to school knowing it will be fully accessible; clean and even, when the need arises, snow free. It is clear that as a company they want to provide a first class service and that is certainly what we receive.”
12 Outsourced and Business Services - Delivering More for Less
Babcock is responsible for building and maintaining the accommodation for the armed forces across the UK, with the construction of some 15,000 new bedspaces. Babcock’s joint venture partnership has seen a friendly and collegiate ‘campus style’ village built and modernised, improving the quality of life of military personnel. Through its Debut Joint Venture, Babcock has also constructed new houses in North Devon. Major Nick Underwood RM, Officer Commanding Base Squadron Rm Chivenor, says: “These houses have been built to a very high standard.”
Ecovert FM provides facilities management services to King’s College London. Over 5,000 students and staff benefit from Ecovert FM’s solid relationship with the college. Service standards are effectively guaranteed by 80 Key Performance Indicators. This enables King’s to focus on what it does best: world-class academic delivery.
Balfour Beatty WorkPlace working with its supply chain partners has introduced a mail scanning and indexing service for the Pensions, Disability and Carers Service: an agency of the Department of Work and Pensions. The innovative approach, using the latest technology and streamlining processes, has greatly improved the ‘post to desk’ time and the accuracy of document storage. This has meant the agency has increased its customer response time and dramatically reduced process costs.
ARAMARK was selected by NAAFI, HM Forces official trading partner, to operate its remaining UK retail business. This included the transfer to ARAMARK of the 3 NAAFI shops and the bar facilities at RAF Brize Norton. Brize Norton is the largest station in the Royal Airforce; home to 3,900 military personnel and 600 civilians. It is the UK hub for deployment of personnel on overseas operations. ARAMARK worked directly with the RAF to improve the terminal facilities. Combining commercial experience with a focus on standards has resulted in a revival of the service. As Flt Lt Olivia Steel, OC Passenger Plans, said at the time: “The café in the general lounge and the new addition of the kiosk in the departure lounge has made a dramatic difference to the comfort of our passengers and their families and friends.”
Case studies - saving money
Compassdelivers facilities management services in the NHS. Their ‘soft’ facilities management work (patient catering, cleaning, waste management, linen services and helpdesk management) delivers savings of £794 per bed. Cleaning 73 miles of hospital corridors each day, Compass has innovated to deliver a better service at lower cost. For example, introducing microfibre mops saves 270 hours per week.
Balfour Beatty WorkPlaceprovides facilities management and other services to Royal Mail. The joint venture has achieved £150 million savings for Royal Mail over the seven years of the contract.
Enterpriseworks in partnership with Liverpool City Council providing a range of services from waste and recycling collection to highways maintenance. The residents of Liverpool have seen huge improvements in service delivery - with a 16% improvement in street cleanliness - and the Council has achieved substantial cost savings - £7 million in one year.
Interserve’s partnership with the London Borough of Croydon to deliver the full range of facilities management services brings together 50 different single-service providers. By channelling local providers through Interserve, Croydon saved £4 million over two years (20%). Interserve also challenged the status quo - introducing new mailroom equipment and cutting the number of invoices processed each year from 28,000 to 12. Tony Middleton, Divisional Director, Asset and Facilities Manager at London Borough of Croydon said: “Transferring facilities management responsibilities to Interserve has allowed the Council to take a more effective and strategic overview of its services and consider how best to develop them in the next few years”.
Capita works in partnership with Birmingham City Council to provide their information and communications technology services. The improved communications infrastructure has saved the Council £350,000 each year and network management costs have fallen by 40% per year.
Babcock saved its client, Defence Equipment and Support, £5 million per year by integrating the soft services required under the Bristol and Bath Total Facilities Management contract in to the South West Regional Prime Contract.
Amey provides facilities management at Ministry of Defence’s headquarters - such as the management of correspondence, online records management, cleaning and grounds maintenance - which has resulted in annual cost savings of £10 million.
Ecovert FM provides facilities management services such as helpdesk management and cleaning for the Cabinet Office which has resulted in £6 million annual savings since 2002.
MITIE helped Lloyds Banking Group to save £42 million over five years by integrating their cleaning services with just one supplier across their entire UK portfolio.
Workforce - maintaining and improving
working conditions
It is often assumed that when employees are outsourced to a private sector employer their terms and conditions are reduced. However, private sector companies are obliged to meet TUPE (Transfer of Undertakings (Protection of Employment)) regulations and the standards of the government’s 1999 Fair Deal. TUPE means terms and conditions must be the same or better than they were under public sector employment. The Fair Deal goes further than TUPE and asserts that the pension scheme offered by the new private sector employer must be “broadly comparable” to that offered to the staff member by their public sector employer.
Outsourced service providers are also accused of making profit by cutting jobs. The evidence, however, does not back this up. For example, a 2008 National Audit Office study looked at the terms and conditions of staff who moved from the public to private sectors.18 It found that total
employment increased by 20% and the turnover of staff who transferred to the private sector was 7% a year compared to an average of 12.4% for the public sector as a whole. Staff also generally benefited in terms of pay from the shift to private employment.
In addition to the hard question of cash, evidence from our members, as illustrated in the following case studies, strongly suggests that employees benefit in terms of career progression and training when they are transferred. Experienced staff who have frequently been constrained by bureaucracy and inflexible working practices are often empowered by private sector management techniques. A Serco Institute survey found that 86% of former public sector managers now working for a private sector contractor agreed or strongly agreed with the statement that ‘I have more freedom to experiment and innovate than I would have as a public sector employee’.19
Case studies - investing in people
OCS provides soft facilities management services to Lymington New Forest Hospital, including cleaners, caterers, porters and housekeepers. Staff here were the first to gain from a new training programme aimed at raising skills in public services. All 53 employees working for OCS at the hospital were awarded their NVQ level 2 in customer service.
Capita took on the challenge of transforming Southampton City Council’s back office and customer services in 2007. 650 council employees were subsequently transferred to Capita’s workforce. In addition to significant cost savings - £16.5 million measured over a ten-year period - and a great improvement in services, workforce satisfaction is high. This is demonstrated by exceptionally low attrition and sickness rates at 3% and 1.7% respectively. In addition, total employment actually increased as new services were added into the contract.
Rentokil Initial has long had a focus on skills training as critical to delivering customer service, as well as to underpinning its role as a major employer. Under the Train to Gain initiative, 419 Rentokil Initial employees achieved an NVQ, an increase of 25% on the previous year. In 2009, the Initial Facilities Services Learning and Development team delivered 4,661 days of training across the businesses, an increase of 55% on the previous year.
ARAMARK provides services at Marchwood military port, including catering services for 480 military personnel. Eighteen military chefs are employed within the contract, working alongside four civilian
caterers. The chefs have benefited from a targeted schedule delivering appropriate technical and food safety training. Participating in training together, throughout the life of a contract, not only ensures that any misconceptions about each other are erased and a true ‘team spirit’ develops, but delivers a new range of commercial skills and knowledge to the military. This helps them to understand the retail environment and develop technical skills that will enhance their future employability when they leave the Service.
Babcock recently trained 200 staff as part of their NVQ programme. In addition, Babcock’s in-house training team has received external accreditation for delivery of health and safety training.
Kier has a partnership with Stoke-on-Trent City Council to deliver a repairs and maintenance service to the city’s 20,000 social homes and 500 municipal buildings. A month in advance of the TUPE transfer, Kier held a day-long session where staff could meet the Kier team. The day included sessions with shop stewards from other Kier contracts so staff could ask questions without Kier management present. Face-to-face interviews were also held at all levels within the workforce to establish what improvements staff wanted to make.
Enterprise’s partnership with Liverpool City Council invests in skills development programmes for its entire workforce. A recent programme within street cleaning saw 26 cleaners progress to achieve NVQ levels 2-4 certification in waste management operations. This training was voluntary and available to all interested employees.
Dave McGuire
Dave was transferred to the partnership in 2002 from his previous post as a highways inspector. He was promoted three years later to supervise twelve colleagues, then again in 2006 when he was appointed Streetworks Manager.
“EnterpriseLiverpool has invested heavily in ensuring that we are all equipped with the right skills to deliver for Liverpool”, he said.
Mike Smith
Since joining the partnership, Mike has been promoted from highways manager to operations manager for highways and environment services. He says “EnterpriseLiverpool has made an enormous contribution to improving the environment of the city. Investment in people and resources and a better understanding of how services should be delivered has enabled Liverpool to become one of the best maintained cities in the country.”
Nicola McCabe
Nicola joined the partnership in 2002 as an administrative support officer and is now commercial support manager. “EnterpriseLiverpool introduced commercial systems and procedures which have achieved budget management and control. We now know at any time how much is being spent and on what. This has helped us deliver real efficiency for the city.”
Personal testimonies
from employees who joined
the EnterpriseLiverpool partnership
16 Outsourced and Business Services - Delivering More for Less
Case studies - community action
Lancaster Cleaning, part of Rentokil Initial, works in partnership with Tomorrow’s People, whose objective is to support the long-term unemployed of London. The scheme offers practical training and support to those who until now have thought they were unable to get employment. Over a period of three months, its own Academy has successfully trained 175 long-term unemployed people and provided employment within its own contracts to 45 of the new trainees, with the remainder on a waiting list for when work is available.
Sodexo has an outcomes-based contract to run HMP Peterborough - a category B prison. The contract is based on a social bond - the first of its kind - whereby private investors are paid according to the reduction of reoffending rates when prisoners are released. To deliver the contract effectively Sodexo has formed a partnership with local voluntary groups who deliver community care services. This benefits the government through lower re-offending rates and abrogation of financial risk. The voluntary sector benefits as it is gets the resources it needs.
Pinnacle offers services that link social housing management with wider community concerns. For example, on the Churchill Gardens estate in Westminster, Pinnacle took over management of the local youth club and introduced their charity Elevate to increase the life chances of young people in the local area. This has led to an independently verified reduction in anti-social behaviour which benefits the local community and reduces costs further.20
Enterprise established the Enterprise Foundation which is a ‘not-for-profit’ company dedicated to improving the quality of life for residents and promoting community cohesion. Initiatives include training and educating programmes for young people or those in hard to reach groups. For example, In the London Borough of Barking and Dagenham the Foundation worked with the Council, the Job Centre and local college to establish a work and training programme for young, long-term unemployed people in the Borough. Following the programme the participants were assisted with finding jobs with Enterprise or other local employers.
Babcock has undertaken around 40 community day projects providing 1,000 employees working around 8,000 hours in support of community causes such as hospice centres for the terminally ill, community centres and in support of protected land and species.
Capita’s ability to engage with the community is demonstrated by its success in running the government-funded Home Access programme since 2009. The scheme set out to reach up to 270,000 low income
households and provide computers and connectivity to families so that children are able to enhance their learning at home. The challenge was to engage a hard-to-reach audience without going direct to schools. Through innovative marketing, engaging with charities and support groups, setting up a dedicated helpline and an accessible application process, Capita has ensured that 258,000 eligible families have now received their grant.
Balfour Beatty WorkPlace works in partnership with North East Lincolnshire Council to regenerate and transform the area. This brings together a broad range of council services into a single outcomes-based agreement aligned to the council’s strategic objectives. The benefits of this unique relationship are already being seen with development initiatives such as proposals to turn the region into a renewable energies hub, with the possibility of establishing a centre of excellence, combined with a full-scale regeneration of run-down neighbourhoods. Councilor John Fenty reacted by saying: "Some of us thought we should have carried on with the way things were and done it in-house. But it seems like they have taken the bull by the horns and I am delighted with what I have heard of the progress so far”. Councillor Steve Norton said “I think we're on the cusp of something magnificent that will create a reversal in the fortunes of Grimsby but it is important not to forget we will also need a great deal of investment " which links to another outcome which Balfour Beatty have committed to achieve - raising the necessary investment.
Case studies - energy efficiency
MITIE works with North Somerset Council to provide maintenance and energy efficiency services to its 12 secondary schools, 70 primary schools and many other public buildings. It helped North Somerset’s schools reduce their spending on energy by 15% using its CarbonCare services which offer a full range of integrated services that help organisations manage down their energy use and carbon footprint. Not only has MITIE’s work led to energy consumption falling by a third and savings of £11,000 across North Somerset, but school children are also benefiting through MITIE’s seminars on environmental awareness.
Babcock through its joint venture, Debut Services, has worked with the Royal Navy to reduce their energy usage across ten naval establishments in the South West and save money. The innovative scheme used advanced computer software to reduce the Navy’s energy bill by more than £200,000. In addition, Babcock’s professional energy advisors have been engaged with the Army over the last 5 years. £10 million has so far been saved through a variety of energy efficient initiatives.
Going above and beyond - helping to build stronger communities
There are numerous ways in which private sector organisations can contribute to community goods - outcomes which benefit civil society in a non-monetary manner, or go beyond the terms of the contract to deliver extra. In addition, the industry is at the forefront of energy efficiency innovation - reducing its own and its clients’ carbon footprints.
Morrison works with local authorities to deliver the Community Energy Saving Programme scheme which offers grants - drawn from levies on energy companies - to retrofit social housing with more energy efficient technologies.
The Clearsprings Group, a provider of accommodation services to the public sector, was recognised by the Home Office with a Supplier Value and Innovation Award in 2010. This was for significant investment outside their contractual requirements to reduce the Home Office’s carbon footprint through innovative energy management in their properties
Strand, part of the OCS Group, provides cleaning services to Hinxton Hall - a subsidiary of the Wellcome Trust, one of the biggest medical funding charities in the world. After taking on responsibility for waste management, OCS reduced the amount going to landfill from more than two thirds to under a half - 19% below the national average for UK businesses. Furthermore, Hinxton Hall’s on-site crèche has become a hub of environmental education - children are taught about the importance of recycling right from the start.
Balfour Beatty Workplace achieved a 23.7% reduction in energy consumption across 99 schools for Stoke-on-Trent City Council and reduced consumption costs by approximately £0.4 million per year. A partnership approach engaging both teachers and pupils alike and investment in the latest technology was critical to securing the achievement, which was recognised with a Green Apple Environment Award. The Award’s Campaign Manager Mark Wolens, said: “To show continued interest in environmental issues during the current financial climate shows great foresight and they deserve the recognition of being Green Apple Award winners. To then go further and become Green Heroes
is an even bolder statement of environmental intent, and organisations that go the extra mile and become Green Heroes are demonstrating a serious commitment to the world around them. They invest in a better future for us all and deserve to be recognised for their efforts.”
Initial Industrial Services, part of Rentokil Initial, worked in partnership with Northumbria Recycling Ltd to develop a ground-breaking waste picking facility. The innovation has been used for IIS’s client Nissan at their Sunderland car production plant. Nissan’s annual waste recovery of recyclable materials has since increased by 30% and waste disposal cost has been reduced by £70,000 per year. Contract Controller, John Bearby, commented: “We are thrilled with the results that have been achieved to date and the hard work that has been put in by our waste management partners. The initiative complies with Nissan’s Green 2010 Program, our global campaign to reduce manufacturing emissions by 7% by 2010, and the facility is believed to be unique in the UK motor industry.”
Eden Foodservice, part of Rentokil Initial, has worked with the Isle of Anglesey County Council not only to bring healthier meals to schoolchildren but also to boost the local economy and help the environment. A third of its produce is now sourced locally, including meat, fruit, vegetables, milk, bread and mineral water.
Sodexo along with the Ministry of Defence and Bright Management Associates, were recognised by the National Recycling Committee as the ‘Best Partnership’, having achieved a 79% waste recycling rate at all Ministry of Defence sites in London.
18 Outsourced and Business Services - Delivering More for Less
2
Opportunities to extend competition
Public services are delivered by a mix of providers but two-thirds are still provided by the public sector21. Health and
education in particular are run as near monopolistic services. There is enough evidence available now to show that a lack of competitive pressure means these public sector providers are not always the most efficient providers, often producing lower output at higher cost than would be achieved in a competitive market. The 2010 Spending Review confirmed the government’s commitment to increase diversity of provision in the delivery of public services.22 However, it
limited these ambitions and the most radical reform to specific areas such as youth services, early years and court and tribunal services.
The BSA believes the government is missing out on some huge opportunities to make savings while improving standards. An analysis of public expenditure suggests that a further £100 -150 billion of annual spend on public services could be opened to competition.23 The savings
made through applying competition to public sector delivery have been estimated to be between 10 and 30%. 24 Based on this, savings could
be as much as £45 billion.
An example of a missed opportunity can be found in the health sector where only 30% of support services are currently outsourced. These services include cleaning, catering, portering, building maintenance and security services. BSA members make cost savings of, on average, 15% per contract in the NHS. Exposing the remaining 70% of services to competition could achieve savings of £1 billion per year. Although this is only 1% of the entire NHS budget it could be done easily and without impacting the front line.
In the provision of social housing management, only 2% is currently outsourced to the private sector. The companies in this sector have a proven track record of delivering services at lower cost than either local authorities or social landlords while being contracted to provide services to a higher standard. Using the savings already achieved through outsourcing as a benchmark, it is estimated that £1.5 billion per year could be saved if this market was opened-up to private sector competition.25
The current financial situation tells us that more of the same will not do. In addition to the two areas mentioned above, the following list summarises where the market can be extended.
There are approximately 492,000 UK civil servants.
1. 26 These are
employees who work in central government departments. They are not the public sector staff who we associate with front-line delivery - such as teachers, nurses and police. Only 5.3% of those civil servants are involved in policy development (something the BSA believes is a core function of the state). More than two thirds (71.3%) work in an ‘operational delivery’ role - which includes call centre staff and personal advisors. We refer to this as ‘middle-office’ (as opposed to front or back-office). Middle-office can mean providing services direct to the public, but it can also involve making other front line provision, such as clinical services, more effective, for example, improving the speed at which a patient receives different stages of care. We believe there is a huge opportunity here to re-evaluate the core role of the state and to refocus on that role while making the support functions as effective as possible. The outsourcing of these functions transfers staff into the private sector, reducing the size of the state while not impacting the front line. Our members estimate that typical savings when these services are outsourced are in the region of 30-40%, with exceptional contracts saving 50%. We calculate that a third of those 492,000 roles can be effectively outsourced using current policy and contractual mechanisms. This therefore represents significant opportunity to make savings. Similarly in local government, almost every local authority has 2.
its own call centres, IT services and council tax collection, when these services could easily be shared. Shared services have traditionally been back-office functions such as payroll and HR but the government should also look at how these middle-office services can be streamlined.
The government could be much more creative about how it 3.
currently outsources administrative functions, as there are many ways in which this can be broadened and deepened. Taking a government building as an example, the inclusion of property services with the current outsourcing of facilities management means that providers can view the entire running costs of the building, making them easier to reduce.
Buildings are responsible for considerable energy usage. 4.
Including the outsourcing of energy management within a facility management contract can reduce the risk that public sector assets, such as schools and hospitals, incur penalties for carbon emissions.
Public sector clients can transfer the risk of meeting carbon reduction targets to the provider who are in turn incentivised to reduce energy and utility bills.
In the education sector, academies and free schools are high up 5.
the agenda, but Local Education Authority functions should also be looked at. Currently the market is only used as a last measure for failing authorities. But what about those LEAs delivering reasonable education outcomes but spending too much doing it? There are a number of local services that are provided in-house 6.
and rarely tested for value through competition. For example, street cleaning, town planning, building control, foster care and adoption services. For instance, approximately 32% of local authority street cleaning is outsourced, 38% of household waste collection, and 0% of libraries (as of 2007).27 Without challenging the delivery of these
services through contestability and an open market it is impossible to know whether they are achieving value for money or not. It is important to note we are not advocating the diminution of service provision, merely that services are provided more efficiently. In the provision of healthcare there are a number of providers, 7.
but the current non-NHS market share is still less than 5%.28
There are many examples of front line health services that could be outsourced, such as community health services, outpatients’ management, blood/tissue typing, medical records management and distribution, and homecare.
In policing, support services and non-core activity could be 8.
outsourced to free up officers’ time to focus on the kind of front-line policing so desired by the public. All back office functions - excluding the work of frontline officers, but including activities such as forensics - should be considered for outsourcing.
In the criminal justice system outsourcing could extend to 9.
transcription of interviews, overseeing suspects in custody, forensics and the delivery of court services. Probation and rehabilitation are further areas which could be included. Apart from its impact on victims, it is worth noting that the biggest driver of costs in the penal system is the reoffending rate, which currently stands at 65%.29 One way to tackle this is to incentivise
outsourced service providers to rehabilitate ex-offenders through social and employment programmes. For too long the system
has focussed on inputs - namely, the number of people in prison - and failed to focus on outcomes - the reduction of reoffending. BSA members would be keen to discuss how contracts could be designed to bring down reoffending on the proviso that no outcome means no payment. For instance, if Sodexo’s success in reducing re-offending rates were replicated across the prison estate, 6p could be taken off income tax. This has been achieved not just by blunt cost cutting by through innovation.30 The
Spending Review agreed probation is an area that could benefit from more innovative contracting techniques but the government must avoid using private sector capability in a piecemeal way. The greatest benefits in terms of innovation and efficiency will be achieved through long-term, strategic partnering.
Contestability could be extended to commissioning bodies 10.
themselves. One example is the Learning Trust, a not-for-profit company which commissions education services in Hackney. The trust has a 10-year contract with Hackney Council to run its complete education portfolio and replaces the previous local education authority. Another example is the BBC which recently sourced a single provider to manage its third party agencies. In the first six months alone this resulted in £1.1 million savings and they are now working towards a further 10% cost savings.31
20 Outsourced and Business Services - Delivering More for Less
3
Removing the barriers
In order for the industry to achieve its potential we are not asking for market intervention. Instead we are asking the government to tackle the barriers that exist and let us get on with providing better services. The following barriers need to be addressed:
l Public sector cultural inertia
l Inconsistent procurement
l Unfair competition
Public sector cultural inertia
The cultural inertia that exists in the public sector manifests itself as a structural resistance to change. The public sector as a whole has a fear of change and is risk-averse. We are not talking about individual public servants here but the culture they operate in lends itself to a prescriptive and box-ticking mentality - which in turn leads to a race to the bottom at the expense of quality and innovation. This is fine for cost trimming but no good for the kind of radical reform we need today.
The reasons for cultural inertia include:
l Vested interests in not reforming. Empire-building managers that perceive success to be the number of people they employ rather than the outcomes they achieve.
l The lack of incentive for strong decision-making and a lack of individual responsibility when things go wrong - or indeed when things go right.
l Fragmented policy-making across different departments. Artificial divisions between official jurisdictions may make sense in Whitehall turf wars, but they are inexplicable to external observers and create decision-making voids.
l Political masters who are fixed on short-term results. This gives little incentive to save money over ten years if an investment in the first two is needed.
The risk-averse culture manifests itself in the following traits:
l Pointlessly complex procedure to get anything done. l Process-driven inputs rather than results-driven outputs. l Wasteful spending.
The public sector now has no choice - there is no money so it will have to reform. And it is not all bad news. BSA members report on a growing number of public sector clients with real imagination who have the courage to make a mental leap and redefine what they do and how they do it. These clients are now seeing significant improvements in performance, efficiency and costs.
We believe the following steps can challenge this inertia:
l There should be less ring-fencing of budgets, greater flows of capital and more critical evaluations of where and why money is being spent. This would be complemented with the introduction of zero-based budgeting in departments. This
means departmental budgets start at zero each year so every expenditure must be re-approved, rather than the current
system where only increases need approval.
l By replacing the payments system with one closer to a system of payments by achievement rather than activity. The 2010 Spending Review announced this could be trialled in the probation sector but we believe more innovative payment techniques can be more widely used.
l The top-down nature of central government needs to be challenged. Local government should be seen more as an enabler. l Challenge from the bottom up should also be encouraged. There
needs to be more evidence of good service transformation. l Decision-making structures need to be simplified allowing
individuals to take responsibility for decisions and therefore be accountable for results.
l The challenge goes out to the industry too. The industry needs to be more pragmatic and proactive rather than resting on long- term contracts. For example, in an attempt to shift perceptions, one BSA member has started to host client days. These include roundtables and tours of facilities such as prisons.
Inconsistent procurement
The aim of procurement should be to secure value for money from public spending. Good procurement can save money and drive innovation from suppliers. Public bodies bought goods and services worth £220 billion in 2008/9 - one third of all public sector spending. To ensure the government is getting the maximum value for money through its outsourcing decisions, procurement must be made quicker, easier and cheaper than it currently is.
The cost of poor procurement is well documented. For example, Bernard Gray’s report into the performance of defence procurement found that £2.2 billion per year could be saved through reforming processes. The inefficiencies were due to delays, complexity and duplications - all of which could be avoided.
Sir Philip Green’s recent efficiency review found huge sums are being wasted through government procurement because of the following reasons: 32
l Data is very poor and often inaccurate.
l Government acts as a series of independent departments rather than as one organisation.
l There is no motivation to save money or to treat cash “as your own”.
l There is no process for setting and challenging detailed departmental budgets.
l There hasn’t been a mandate for centralised procurement. l There are inconsistent commercial skills across departments. The scale of potential savings is also clear. The Audit Commission found that the 25% of top-spending schools could save over £400 million a year if they bought equipment and services in a more intelligent way.33 In
addition, a report found that nearly 60% of local government efficiency savings (about £2.8 billion) could be made through councils developing and implementing a co-ordinated procurement strategy.34
We recommend the following:
Apply a tight-loose model to procurement. There are nearly 50 professional buying organisations across government. The public sector procurement landscape is fragmented, with no overall governance. This has meant the cost of tendering has soared. For example, a 116% variation exists between the lowest and highest price paid for the same specification of paper - 745% for black toner cartridges.35
There are examples of where government has better co-ordinated its buying processes. For example, the Prison Service made savings of £120 million and has improved the quality of the goods and services it procures through centralising procurement and developing tailored procurement strategies.36 As at May 2008, over 72% of the Prison
Service’s procurement expenditure was under the management of the central procurement function. Energy is another example. Over the last four years, the purchase of 75% of Government electricity and gas requirements has been centralised in an expert team, resulting in cumulative savings of £500m.37
Cabinet Secretary Francis Maude has spoken before about the need for a “tight - loose” approach to public services where some issues, such as pay and strategy, will be controlled tightly from the centre, but the rest will be devolved to departments, councils and citizens. The BSA believes this should begin with a model for tight-loose procurement. Some services are best procured from a centralised framework whereas some should have the greatest scope for innovation. The government must decide which services need to be ‘localised’ and which do not. Those which involve a high level of contact with people (for example, welfare services and social services) should retain localised and flexible commissioning (a ‘loose’ approach to procurement). Extra costs accrued in these areas could be offset by ‘tighter’ approaches to procurement centrally for services such as cleaning and catering.
Back office functions such as IT services, human resources and finance could be standardised and centralised. Standardisation for services can reduce bureaucracy and duplication and improve value for money. It would also allow the government to better compare costs around the country. One way of doing this is through OGC framework agreements. Another is through local authority procurement consortia. There are already examples of local authorities and PCTs sharing chief executives, as well as collaboration across police forces.
22 Outsourced and Business Services - Delivering More for Less
Avoid overly prescriptive contracts. The public sector is too intent on trying to buy products rather than services. For example, a business process outsourcer is paid for the items they do such as logging a call or replacing a square metre of carpet rather than the service they provide. Public sector contracts are often input-driven and determine organisational structures, and in many instances, staff numbers and hours of work. So long as commissioning follows this route there will be no value achieved.
Innovation can best be unlocked through outcome-based contracts which do not overly specify how that service is to be delivered. When too many restrictions are placed on contractors, procurement becomes an issue of “pricing it rather than inventing it”. This can lead to a race to the bottom with procurement officers getting less for the least amount of money.
Price rather than value. There is a tendency in certain areas to award contracts based on short-term price rather than full-term value. Cost management is a vital part of the outsourcing process but the criteria for defining total price are often flawed, for example, excluding client savings or additional revenue streams as well as asset lifecycle costs.
More public services should be subject to market testing.
This does not mean re-tendering, but means that providers’ prices are benchmarked against the industry competitors. This has the benefit of helping to reduce the cost of services and incentivising providers to keep the quality high.
Create greater consistency in procurement skills. There is a serious lack of consistency in procurement skills across the public sector, particularly in the area of contract management. Expert procurement skills need to be promoted across the public sector from the bottom-up and officers need to be trained in the same way to avoid overly varied interpretations of the rules. Contracting and acquisition are specific skills and must be undertaken by professionals. Softer skills are also important as clients who are prepared to ‘partner’ with contractors through a strong working relationship are likely to achieve far more value in the long run than a client who hides behind a contract and never talks to the contractor.
Set a framework for comparing costs and service levels across the public sector. A recent review of government efficiency describes procurement data as “shocking” - both inconsistent and hard to get at.38 In-house contractors often fail to
ascertain the actual cost of delivering a service from end-to-end
- with the only costs highlighted being disparate activities such as instillation of a window, or laying of a new floor, or petrol to drive to a building site. Instead, the entire process needs to be included (somebody answering a call, sending a person to inspect the work, typing an invoice and sending it to the property department). Once this cost is considered and data identified, contractors are then able to compete far more effectively for contracts and achieve best value. We support the recommendation in the Green Review that government should standardise financial reporting so it is easier to compare costs.
Unfair competition
A level playing field requires all providers to meet the same level of compliance and adhere to the same level of scrutiny and regulation. However, this does not exist in the current market to provide public services. Providers of public services are treated differently depending on whether they are from the public, private or voluntary sector. The biggest obstacle to creating a level playing field and the biggest deterrent to companies entering the market for public service provision is that of public sector pensions. Public sector pensions are heavily subsidised for public sector providers but not for private or voluntary sector providers. This means public sector providers can win bids on the basis of artificially cheaper prices. This distorts the market and means the best provider does not always win the bid. The BSA has made recommendations in this area which are pragmatic and practical but which also protect employees’ benefits.39 The
government is also alive to this barrier and Lord Hutton is currently preparing his final report on reform of public sector pensions to be published in time for the 2011 budget.
The BSA believes that by tackling these barriers, great gains can be made through the extension of competition in the public sector. The business and outsourced services industry improves standards and reduces costs. Investment in training, communities and the environment makes the industry a leader in corporate responsibility. And as a key source of UK competitiveness, the industry deserves more attention and better understanding.
REFERENCES
1 From Bentham, J. (1825) The Rationale of Reward. London: John and H. L.
Hunt, cited by Gary Sturgess, Market testing, Ethos Journal, Autumn 2010
2 For instance, the concept of outsourcing is discussed in Plato’s Republic c.380 BC 3 Gary Sturgess, Images of Contracting: Rediscovering Contracting History, Journal
of International Peace Operations, May - June 2010
4 Economist, 3 March 2005
5 Survey by Bain and Co Consultants (2005), quoted in
the Economist, 3 March 2005
6 Logica FM (2005), cited in the Economist, 30 June 2005
7 BIS (2010) Professional and Business Services: A 2020 Vision for Growth 8 BIS (2010) Professional and Business Services A 2020 Vision for Growth 9 BIS (2010) The UK as a global hub of professional and business services 10 Keynote (2007) Contracted-out Services, cited in KPMG (2007) UK Support
Services - Industry Snapshot
11 BERR (2008) Public Services Industry Review 12 BERR (2008) Public Services Industry Review
13 CLG (2009) Roots Review: Review of arrangements for efficiencies from smarter
procurement in local government
14 Based on Office for National Statistics (June 2010) Population Estimates 15 BERR (2008) Public Services Industry Review
16 Serco Institute (2009) Competitive Edge: Does Contestability Work? 17 Audit Commission (2007) Healthy Competition: How councils can use
competition and contestability to Improve services
18 NAO (2008) Protecting staff in PPP/PFI contracts. The study looked at 15,400
staff who transferred from the public to private sector as a result of 43 PFIs signed between 1992 and 2004.
19 Serco Institute (2006) Good People, Good Management: What public service
managers say
20 Joseph Rowntree Foundation (2002) Approaches to community governance
21 Nick Timmins, Financial Times, October 18 2010 22 HM Treasury (2010) Spending Review 2010
23 Colin Cram, Outsourcing - we’ve got to get smarter, Public Servant Magazine,
July 2010
24 Based on savings found in BERR (2008) Public Services Industry Review 25 Pinnacle PSG (2008) Social housing management: The case for competition 26 HM Government (2009) The 21st century civil service
27 DCLG (2007) Developing the local government service market: Working paper of
local authority shared services
28 Based on BSA estimates
29 Policy Exchange (2008) You’re hired: Encouraging the employment of ex-offenders 30 Reform (2010) Reducing the deficit and improving public services
31 Colin Cram, Outsourcing - we’ve got to get smarter, Public Servant
Magazine, July 2010
32 HM Government (2010) Efficiency Review by Sir Philip Green:
Key Findings and Recommendations
33 Audit Commission (2009) Valuable lessons - Improving economy and efficiency in
schools: Briefing for head teachers and school staff with financial responsibilities
34 Localis/ KPMG (2009) The bottom line: A vision for local government 35 Audit Commission (2010) A review of Collaborative Procurement across the
public sector
36 Public Accounts Committee (2009) The Procurement of Goods and Services by
HM Prison Service
37 HM Government (2010) Efficiency Review by Sir Philip Green:
Key Findings and Recommendations
38 HM Government (2010) Efficiency Review by Sir Philip Green:
Key Findings and Recommendations
39 See www.bsa-org.com for more information
Business Services Association 2nd Floor 130 Fleet Street London EC4A 2BH Tel: 020 7822 7420 www.bsa-org.com November 2010
