Don't all try to find a partner at once...
Local Government Chronicle – 31 March 2011

A potential spike in outsourcing contracts may limit councils' options, writes Mark Smulian

We all know that faint pit-of-thestomach feeling when you've blitzed the house, set the drinks and glasses, put out some nibbles, stuck some nice music on and ... nothing happens. The clock ticks loudly and you're waiting for the doorbell to ring.

Without wanting to push the analogy to breaking point, this is pretty much where large portions of local government are at today: frantic table setting and sprucing up in the hope that some nice, friendly outsourcing firms are going to come to their party and take lots of expensive stuff off their hands.

But what if nobody comes? It may sound unlikely and in normal times such invitations would, of course, be manna from heaven for outsourcing firms. But, from next autumn, as a clutch of large councils try to outsource most, or all, of their services, real fears are growing that a sudden glut of tenders could exceed the industry's capacity to respond.

This could leave councils with fewer options to choose from than they would like, or even with no suitable bidder.

The problem has arisen because of the government's decision to front-load cuts in local government spending into the first half of the four year spending review period.

Yet outsourcing numerous services from any all-purpose council - or from a combination of districts - requires a lengthy tendering process, and so any council that wants to make savings two years from now must go to market in the autumn.

Council outsourcings are highly complex and the tenders require bidders to invest significant sums just to prepare their responses.

Clearly, too, there is a limit to how many bids each firm can handle at any one time, which is why a sudden spike in attempted outsourcings in the autumn may limit the response each receives.

And, worryingly for local authorities, while the industry does not exactly think it has councils over a barrel, it does think it can afford to be choosy.

David Clark, director general of the Society of Local Authority Chief Executives & Senior Managers, has talked to councils that are about to go through this process and are concerned about whether the glut will prevent them getting a sufficient selection of high-quality bids.

He says government ministers are convinced that councils can easily make efficiency savings by outsourcing and that the market will have no trouble in providing this.

"The concern will be over the complexity of contracts," he says. "The issue is them all coming out at once; there has been a steady trickle of contracts but that will become a torrent and the challenge is bidders being able to respond to those."

The Treasury is the ultimate driver of this round of outsourcing, and it has failed to think through how it can be made to work, worries Martyn Hart, director of the National Outsourcing Association, the industry trade association.

He notes that the Treasury is expecting hard-pressed officers and councillors to go through complex outsourcings while doing their own jobs and without the benefit of consultants, whose use is frowned on by central government.

"If the Treasury was really totally serious about it you would have thought it would have geared up to spread best practice and offer its own consultancy," he says.

The Treasury and the Office of Government Commerce neglected to set up framework contracts for approved outsourcing companies that would have given councils a choice of, say, five to ten without the need to launch a complex tendering from scratch, Mr Hart points out.

As it is, he says many public sector bodies have no experience of outsourcing - at least not on a large scale - "and so they do not know how to do it, which is not a criticism, but now the government has told them they cannot employ consultants to tell them how to do it either".

Mr Hart adds: "That means they are on their own. If you do outsourcing properly there are a million and one things to consider and you have to be doing your own job at the same time, so there are inevitably problems that are not foreseen."

A deal can take 18 months to negotiate and in the public sector "the difference is the politics in it, but even in private industry no negotiation over something this big is going to be quick".

Equally worrying, Mr Hart expects established outsourcing companies to "cherry-pick the deals they like, as bidding is an expensive process".

But will they? Capita is one of the largest players and Richard Marchant, its local government strategic partnerships director, says: "We won't go for every opportunity."

He points out Capita already has ample options. "Our annual results in February noted that we saw a pipeline of opportunities so we've already got quite a strong visibility of councils that are coming down the line," he says.

Suffolk CC attracted attention last year with its intention to become "a commissioning council", with almost all its services outsourced. Bury MBC followed suit in March and Mr Marchant expects many councils that previously shunned outsourcing will now look at it, given the pressures to make savings.

He thinks most councils would want around six initial bids, and "time will tell if in the autumn there will be enough companies with the capacity to bid".

Jonathan Prew, managing director, business solutions, in the local government division of Serco, also thinks the "autumn glut" could well be an issue and that selective responses will come through.

"There are quite a number we are planning to respond to and tender costs are a factor, but we have strong selection criteria as to which we go for," he emphasises.

Mr Prew says Serco has enough people with local government backgrounds to put in the management skills needed in any contract it does win, and that contracts can be structured so that councils gain the savings they need over the next two years.

He explains: "I think councils that are clear about what their requirements are can get upfront savings.

"We often use guarantees that say they get savings from the start and the risk passes to the private sector, which gets its reward later," he adds.

Two Lincolnshire districts, East Lindsey and South Holland, have formed Compass Point Business Services to handle their back-office work, and while this is publicly owned, its managing director Stephen Bayliffe is a veteran of many private outsourcing firms.

He says: "Some operators will be concerned about tender costs and whether what councils ask for is doable, but I think you have the capacity there, though some of the solutions used by the private sector just won't fit the stresses and strains of something with democratic accountability."

One route to savings, particularly favoured by new entrants to the outsourcing market, is probably closed.

"The strategy for 10 years has been to move services to cheaper locations in India or eastern Europe, and clearly politically that would cause huge tensions in the public sector," Mr Bayliffe points out.

The government has set great store by efficiency savings and appears wedded to the idea that the private sector will provide them for councils.

But any "autumn glut" will mean a seller's market for outsourcing firms. And a seller's market, of course, is never the best climate in which to buy.