What a waste

Outsourcing and how it goes wrong

Andrew Bowman, Ismail Ertürk, Julie Froud, Andrew Bowman, Ismail Ertürk, Peter Folkman, Julie Froud, Colin Haslam, Sukhdev Johal, Adam Leaver, Mick Moran, Nick Tsitsianis, Karel Williams

• Publisher: Manchester University Press
• Year: 2015
• Print ISBN:
  9780719099533
  9780719099526
• eBook ISBN:
  9781784992408
• Topic: Business
• Subtopic: Operations
• Index: Business

This is the first ever book to analyse outsourcing – contracting out public services to private business interests. It is an unacknowledged revolution in the British economy, and it has happened quietly, but it is creating powerful new corporate interests, transforming the organisation of government at all levels, and is simultaneously enriching a new business elite and creating numerous fiascos in the delivery of public services. What links the brutal treatment of asylum-seeking detainees, the disciplining of welfare benefit claimants, the profits effortlessly earned by the privatised rail companies, and the fiasco of the management of security at the 2012 Olympics? In a word: outsourcing.

This book, by the renowned research team at the Centre for Research on Socio-Cultural Change in Manchester, is the first to combine 'follow the money' research with accessibility for the engaged citizen, and the first to balance critique with practical suggestions for policy reform.

Chapter 1

Outsourcing: organised money and disabled government

We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

(Franklin D. Roosevelt, announcing the Second New Deal, October 1936)

The common rights of ownership have disappeared. Some of them have been sold; some of them have been given away by people who had no right to dispose of them; some of them have been lost through apathy and ignorance; some have been stolen by fraud; and some have been acquired by violence. Private ownership has taken the place of these communal rights, and this system has become so interwoven with our habits and usages, it has been so sanctioned by law and protected by custom, that it might be very difficult and perhaps impossible to reverse it. But then, I ask, what ransom will property pay for the security which it enjoys?

(Joseph Chamberlain, Birmingham Town Hall Speech, January 1885)

1.1 Introduction

This book is about a new set of problems created by the outsourcing of public services to private contractors. It is addressed to the concerned citizen puzzled by the gap between the efficiency rhetoric of the modern outsourcing industry and the reality of delivery – which is marked publicly in the media by the reporting of fiascos and practically in service delivery by cheese-paring treatment of both employees and clients. And it is addressed to the citizen baffled by the smoke and mirrors of modern accounting, especially the way the modern outsourcer manipulates corporate tax obligations in a maze of corporate structures.

To begin, outsourcing needs to be set in historical perspective. The crisis of the 1970s led to structural reforms designed to improve competitiveness and win the favour of financial markets and international agencies. One consequence was a sale of the state-owned monopolies. In the first stage, through privatisation of activities with retail customers, the central state handed ownership and responsibility for the delivery of utilities, like energy, transport and water, to the private sector. In the second stage, through outsourcing of tax-funded or taxsubsidised activities, the central and local state issued fixed-duration franchises to private contractors which initially supplied mundane services, like local authority household waste collection.

The result in Britain by the 2010s is a kind of franchise state which has long gone beyond outsourcing non-core activities, the basis for the original private-sector practice of ‘contracting out’ services like IT or catering. Many of the key historical functions of the central state (like the administration of criminal justice and the delivery of welfare) are now partly in the hands of private contractors. For example, in the 2010–12 period, more than £1.5bn of incarceration and justice services were outsourced, with the largest supplying contracts worth more than £100m to individual firms (Centre for Crime and Justice Studies 2013). In 2014, the outsourcing of probation services for medium- and low-risk offenders offered ten-year franchises on contracts which were nationally worth £450m a year (Warrell 2014).

The franchise state has also gone beyond the traditional model of public-sector ‘procurement’, where the state invited bids for the delivery of particular goods or specific services. The local state now routinely franchises large and complex bundled packages of services to private contractors. Whitfield (2014) provides an overview of strategic partnerships signed by local and other authorities: between 2000 and 2013 some £14bn of contracts were agreed, with a clear move away from discrete service contracts covering one function like IT and towards bundled contracts covering multiple services. These bundled contracts initially covered support service for education, police and fire authorities and now extend to the full range of local authority services so that some councils are becoming commissioning bodies which buy all their services from outside (usually on a profitshare basis).

The scope and extent of these changes is already remarkable with much more to come. For example, in 2013 Staffordshire County Council entered what was then a record-breaking £1.7bn joint venture with Capita to supply educational support services across the whole county. By 2015, Northampton County Council was planning to transfer 3,850 of its 4,000 employees to four new dividend-paying service providers which would deliver all of the council’s services, including social care for the elderly (Brown 2015). This ‘commissiononly’ model is likely to be increasingly replicated in Conservativecontrolled shires and urban areas.

The result so far is a ‘public service industry’ of private providers which the Institute for Government estimated had turnover of £100bn a year by 2011 because ‘roughly £1 in every £3 that government spends on public services goes to independent providers’ (Gash et al. 2013, p. 4). This fits with other claims (e.g. Oxford Economics 2011, p. 6) which put the value of public outsourcing at some £80bn in 2009. But these are all guesstimates of a rapidly increasing total because it is impossible to separate new-style service outsourcing from traditional goods procurement in official statistics. These show that total government spending with third parties (including local government and National Health Service (NHS), operations outsourcing and goods procurement) for 2012–13 was £187bn, of which £40bn was accounted for by central departments, £50bn by the NHS and £84bn by local government. Indeed, local government is currently the fastest area of growth, as authorities respond to expenditure cuts: at the start of 2013 ‘Seymour Pierce … identified 1,789 outsourcing opportunities worth £84bn in the government pipeline’, with much coming from local government (Plimmer 2013a).

Our title, What a waste, compresses this book’s argument: that this vast and growing franchise state is socially wasteful and administratively inefficient – contrary to the promise in the rhetoric of advocates of outsourcing. That is why it concerns all citizens and explains the audience addressed in this book. What is happening should certainly be a concern of taxpayers who are getting an inferior service for their money. But taxpayers are not a segregated social group. They are citizens linked to others: they have children, grandchildren, parents, grandparents who may or may not at any particular moment be taxpayers, but whose lives are affected by outsourcing.

Citizens should be concerned because this outsourcing is not taking place in a controlled way after elected politicians and civil servants have carefully chosen between outsourced private contractors or direct public service provision by determining the ‘best buy’ for cost and quality on a contract-by-contract basis. Outsourcing contracts are typically announced in press releases making unsubstantiated claims about the millions that will be saved. But questions about what exactly is going on and what is finally delivered cannot be answered because contracts are usually withheld on the grounds of commercial confidentiality (House of Commons Public Accounts Committee 2014c, p. 5); and outcomes usually only receive official scrutiny when they go egregiously wrong. This excuse routinely conceals contract terms which favour the outsourcer by guaranteeing revenue or allowing walk-away without sanction. For example, in the case of the 2014 probation contracts, the Public Accounts Committee discovered a break clause which guaranteed outsourcers their profits if the contracts were cancelled after the 2015 election by an incoming Labour administration (Warrell 2014).

It is also the case that comparisons of public-service provision by state agency and private provider are inherently very difficult. Like-for-like comparisons are difficult when the shift to outsourcing often coincides with major changes in policy regime or delivery. Furthermore, from the citizen and the state’s point of view, it is not sensible to consider the desirability of outsourcing within the narrow frame of individual contract value for money. The state is responsible for roundabout repercussions and has to face the costs when savings on one outsourcing contract generate increased costs elsewhere. Laid-off workers may be reabsorbed, but cuts in pay and conditions which make one service cheaper are likely in a roundabout way to increase other social costs of wage subvention through tax credits, housing benefit and such like.

Another complication is that outsourcers typically consolidate many contracts into portfolios held by sometimes imprudent and often fragile companies. Outsourcing may sustain a diverse ecology of providers but it is increasingly a field that is dominated by large players: the Cabinet Office maintains a list of just forty strategic suppliers that account for 25% of the value of central government contracting (National Audit Office 2013b, p. 5). Specialists dominate sectors like waste management where Veolia (UK), the British subsidiary of a French multinational, is the market leader in outsourced waste management in the UK. Four huge conglomerates, G4S, Serco, Capita and Atos, have established a presence across a wide range of outsourced sectors. Outsourcing is also big business for an assortment of service, consultancy and facilities management firms, like BT, Amey, Capgemini and VT Group (Department for Business, Enterprise and Regulatory Reform 2008), which are not immediately thought of as outsourcers.

These companies are different in their national and historical origins, and in the extent to which they specialise in the provision of services for the British state. Atos in the UK is the subsidiary of a large French quoted multinational, while Capita is a FTSE 100 company built virtually entirely from British outsourcing contracts with a large private-sector business. Some outsourcers are British public companies in their own right, others are subsidiaries of foreign public companies or investments for private equity or hedge funds, while a small number are subsidiaries of state-owned mainland European utilities. But all have similar investor and financial market defined priorities: they seek high rates of return combined with growth of capital value through retaining profitable contracts and seeking favourable exit strategies to manage risk and realise gains.

The cost of this incursion by financialised players is ultimately as much political as economic. The democratic tragedy of the franchise state is that today’s mainstream politicians are not protesting (or even examining) the outcomes of outsourcing but are planning to grant ever more local monopolies from which organised money can take profits (in many cases without the capital investment or revenue risk which legitimate capitalist profit). The chapter opens with quotes from President Roosevelt and Joseph Chamberlain – both radical, non-socialist politicians – showing how an earlier generation of statesmen routinely supposed that the power of organised money should be curbed and that private interests should pay something back after claiming public rights. The modern British politician instead implies that we should thank outsourcers for their efforts because (except in the case of the NHS) they all agree with David Cameron who, in a key speech, argued that one ‘principle of modernisation’ is ‘opening up public services to new providers and new ideas’ (2011).

Our explanation for this default towards outsourcing is that the giant contractors and the state are now bound together in co-dependence; these corporates have become what we can call governing institutions. The aim of Thatcherite reform and New Labour experimentation was to inject market competition into public-service provision. But its paradoxical result is, in the words of the House of Commons Public Accounts Committee (2014c, p. 3) ‘the evolution of privately-owned public monopolies, who largely, or in some cases wholly, rely on taxpayers’ money for their income’. The franchise state which exists to award and monitor contracts at the same time strips itself of institutional resources and intelligence previously used to deliver goods and services. As outsourcing proceeds, the (central and local) state is increasingly disabled in that it no longer has the capability to deliver public services. That produces the outcomes summarised in the title of this chapter. Organised money drives outsourcing companies to game the contractual system and taxation regimes so as to take out more and put back less into the public purse; in response, a state with limited organisational capabilities has to make a virtue of this necessity.

Our language of governing institution and our notion of co-dependence owes much to Middlemas’s (1979) classic study of an earlier era of co-dependence, that of 1960s and 1970s tripartism involving a partnership between the state, employers and trade unions. But in that partnership the state was the deliverer of public services, controller of the utilities and had the self-confidence of high Keynesianism. In the 1960s, the state was easily the equal of organised employers and workers in the Confederation of British Industry and the Trades Union Congress. Now in the 2010s, the corporate actors are, in practice, the dominant partners in a new co-dependence as they game institutions and tax regimes, and manipulate contract-making; the central state is at best playing catch-up when things go wrong and much of the local state lacks resources and expertise to contract on an equal footing.

All this is neglected in public debate because many of the outsourced activities are mundane or, if important, the services matter only to marginal or disreputable groups: most citizens are not aware of who runs their local leisure centre and cannot know much about what goes on inside prisons. But the failure of politicians and policy makers to protest outsourcing has become an urgent matter because the state has outsourced or is now outsourcing services which are part of what we call the ‘foundational economy’ in health, adult care, welfare and security. Many of these services are or will be used by most families or individuals because the foundational economy is the basis of material security and the infrastructure of civilised life for the whole population.

On outsourcing, we are all in it together and so this book is designed with the concerned, but busy, citizen in mind. This first chapter does more than give the usual introduction to themes; it provides a comprehensive but succinct summary of the whole argument and content of the book, and concludes with our policy recommendations. The reader who wants to dig deeper can go to the four subsequent chapters which present and elaborate an investigation – using a series of charges – into the way outsourcing is presently organised.

This introductory chapter is divided into three sections. Section 1.2 begins by observing that the standard arguments for and against outsourcing have a very narrow focus. It then broadens the field of the visible by examining some undisclosed issues and adopting what we call a charge sheet approach in Chapters 2 to 5. The charges are that outsourcing facilitates blame-shifting by government; allows egregious profit-taking on contracts; does not curb imprudent growth by undisciplined conglomerates; and creates new spaces for the gaming of limited liability by the predatory parents of outsourcing subsidiaries. Section 1.3 develops a new and more radical account, which first tackles the question of how we got into this mess and then explains how the result is a kind of sham capitalism. The final section (1.4) considers policies towards outsourcing, focusing on the question of what is to be done, especially if, as we argue, government is part of the problem, not the solution.

1.2 From standard narratives to the charge sheet

Research by campaign group Transport for Quality of Life (TFQL) shows that extra costs of over £1bn per year are being incurred through a combination of debt write-offs, dividend payments to private investors and various administrative and legal costs. TFQL estimate that fare cuts of up to 18 per cent could be achieved if these costs were eliminated by bringing services back within a nationally-integrated railway under public ownership.

(Action for Rail 2015)

The franchising model has enabled train companies to generate significant financial returns for the Government, played a crucial role in delivering unprecedented growth in journey numbers, and provided passengers with improved services and better value.

(Association of Train Operating Companies 2013, p. 30)

Since privatisation, journeys have doubled. The network is roughly the same size as 15 years ago. But...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• List of exhibits
• List of abbreviations
• 1 Outsourcing: organised money and disabled government
• 2 Outsourcing, blame-shifting and major fiascos
• 3 Unjustifiable profit-taking on mundane contracts
• 4 Undisciplined outsourcing conglomerates
• 5 Outsourcing specialists and the gaming of limited liability
• References