Outsourcing services, co-dependence and elite power

Outsourcing services, co-dependence and elite power

Julie Froud (Manchester Business School), Sukhdev Johal (Queen Mary University of London) and Michael Moran (Manchester Business School)

 

 It has been hard to miss the fiascos in outsourced public services in recent years. The various failures to deliver adequate numbers of security guards for the London 2012 Olympics, court translators, or out-of-hours GPs in Cornwall; or the fraudulent payments for electronic tagging of prisoners, or the problematic processing of claims for Work Capability Assessment all provide rich material for journalists.

Of course, there have been numerous investigations into these failures, led by the House of Commons Public Accounts Committee whose Chair, Margaret Hodge, famously claimed that outsourcing had become a ‘recipe for rip-offs’. Many questions have been asked about the role of civil servants in preparing and monitoring contracts; and about the capabilities of the providers. However, there has been little discussion of how the spread of outsourcing across central and local government has created a largely unobserved world of co-dependence between government and large companies. In many ways the transfer of taxation revenues to outsourcing firms facilitates the consolidation of elite power because it limits democratic accountability.[1]

But such processes and their effects are difficult to observe directly because we are not in a world where elites sit at the top of social, economic or corporate hierarchies, directing activities. Drawing on C Wright Mills,[2] we argue that elite power encompasses the ability to shape the agenda, to limit debate and (sometimes) be a direct beneficiary of shifts in policy. Specifically, the outsourcing of public services is presented as inevitable, with no plausible alternative, despite evidence that it can be highly problematic. Thus, public debate is displaced onto issues such as how best to organise bidding processes or to help civil servants improve their commercial skills. This article looks at the growth of outsourcing in the UK and argues that the franchise state that results creates accountability problems.

Public services have been subject to an ongoing process of transformation since the 1980s, including privatisation, corporatisation and contracting out. While some discrete events attract attention and require Parliamentary debate, such as the 2013 privatisation of the Royal Mail, outsourcing state-funded services has been incremental and relatively low-profile. According to the Information Services Group, expenditure on outsourcing in the UK since 2010 has reached £88 billion, more than double the £45 billion spent between 2006 and 2010.  Some 42% of outsourcing expenditure is from central government, with local government and health accounting for 30% and 13% respectively. The post-2010 austerity programme has increased the flow of new contracts as part of an attempt to reduce costs, with an accompanying narrative which emphasises citizens’ needs over ‘producer interests’, to explain redesign of access or entitlements in health and welfare. The expansion of contracts into new areas has allowed the development of a ‘public services industry’, which was valued at £72 billion in 2009 and has expanded rapidly since.

While contracting-out public services is not new, the scale and reach is now striking. The 1980s programmes of compulsory competitive tendering exposed services like rubbish collection, school meals and municipal leisure services to competition; by the 2010s this is extended to all manner of local government services, as well as central state functions like welfare and justice. Within this new industry are: a small number of large firms like Serco, G4S, ATOS and Capita, which bid for contracts across a wide range of service areas; specialists such as Veolia in waste management or Sodexo in catering; divisions of large firms such as BT or CapGemini; and small players who may also act as subcontractors on large contracts. The interests of this industry are represented by organisations such as the CBI Public Services Strategy Board, which lobbies to ‘open up’ more public services.

Outsourcing companies have become household names largely because of their high profile failures. Serco and G4S were both involved in the electronic tagging case, while ATOS achieved notoriety due to criticisms of its delivery of the £500m Work Capability Assessment contract which was terminated in 2014, a year ahead of the planned end date. While concern about such cases may be justified, especially with repeated failures in the implementation of welfare reform, the extent and impact of mundane, low-profile contracts are equally important. In local government, large contracts bundle up a collection of services and activities, resulting in a major shift in the role of the local authority.[3] For example, Staffordshire County Council entered a joint venture with Capita in 2012 to provide education services: 3,800 staff were transferred under a 20 year contract worth an estimated £85m per annum. Capita also established an earlier joint venture, Service Birmingham Ltd, with Birmingham City Council to provide a range of IT and support services. The contract, which was only published in 2014, covers 15 years, from 2006 to 2020, and about 10% of the council’s controllable budget. Service Birmingham’s accounts show annual revenues in the range of £126 to £208m, with a total of £1bn paid by 2012.

Why should we be concerned about contracts like that signed by Birmingham City Council? We can explore the problem in two dimensions – financial and political – to explain how elite power challenges democratic accountability.  The financial dimension relates to the profits on the contract. Analysis of the accounts of Service Birmingham, from 2006 to 2012 shows revenue payments of £1,086m and pre-tax profits of £72m, a rate of 6.7%. This compares favourably with a private sector business like a supermarket, with margins of around 3.5% in 2012. However, the real attraction can be seen by looking at the return on capital invested in the business, where the return is 121%: on average each £1 invested in Service Birmingham produces £1.21 of pre-tax profit per annum. For a supermarket the figure would be 8.5% or 8.5p due to greater capital requirements. The high returns in outsourcing are possible because there is little capital in the business; given that the contract also protects revenues to a large extent, companies are exposed to limited risk.

High rates of profit on contracts represent one kind of problem, especially in the context of public expenditure cuts. However, in other cases companies have been unable to make a profit, which can lead to poor service and/or unplanned withdrawal of the contractor. Such problems may arise because the contractor’s bid was unrealistic: this may be a deliberate attempt to bid low to win and build expertise in a new area, or simply a failure to understand the nature of the service to be provided. When Serco withdrew from the Cornwall out-of-hours GP contract, the company cited ‘operational challenges’; according to the National Audit Office, an inadequate number of clinical staff had been recruited, leading to failures in service delivery. Of course, such failures displace costs onto other organisations, undermining any argument that outsourcing offers value for money. This takes us to the second dimension of political problems.

The exercise of walk-away rights, which has occurred in train franchising as well as in health and welfare contracts, tells us something about the nature of the relationship between government and the outsourcing companies. We describe this as co-dependence. Public service companies depend on a flow of new contracts just to maintain performance, let alone to grow. At the same time, government needs a group of companies to bid for new contracts to create the appearance of a competitive market; thus, while it can attempt to displace blame onto service providers and away from policy, attempts to punish failure by preventing companies from bidding for future contracts will undermine competition. Even where public scrutiny has revealed egregious behaviour, as in the electronic tagging cases, this has not led to any sustained moratorium on winning new contracts. An embargo excluded Serco and G4S from winning new government contracts while they were under investigation by the Cabinet Office, though they were not prevented from bidding. Thus, less than three weeks after their ban was lifted, G4S was awarded a £300m Help to Work contract.

Just because there is co-dependence, however, does not mean that the public sector will be effective in pressing its own interests. Contractualisation can be problematic in two ways. First it ring-fences revenues so that, for example, any expenditure cuts have to be found from other sources. Second, it locks-in a particular format of service delivery and organisation. Naturally contracts can be renegotiated, but at some cost. Service Birmingham, where a local authority wrote a contract that binds the hands of future administrations for 15 years, illustrates these problems. By 2014 the City Council had already taken its contact centre back in-house as a way of making further budget savings, but apparently ruled out cancelling the whole contract on the grounds of risk and cost. Making changes to contract specifications are likely to be necessary over such a long contract life, but can be costly: for example, the council was charged £1.2m to create a new website for the Library of Birmingham.

The difficulty of writing contracts has been considered by the Public Accounts Committee, which has repeatedly argued for better-trained public servants; however, even a commercially-aware civil servant will  have difficulties anticipating possible scenarios five or ten years in the future. Moreover, the problems do not stop with writing contracts; accountability can only be ensured if contracts are monitored. In the case of the Cornwall out-of-hours GP service where records were was deliberately falsified, the National Audit Office argued that the problems were highlighted by a whistle-blower, not by routine inspection.

How then are these financial and political problems of democratic accountability part of a story about elite power? In short, despite serial contract failures and concerns about the extent of cost savings, there appears to be no possibility of reform. C Wright Mills argued that ability to control the agenda was evidence of elite power: here we see the terms of debate pre-defined around making contracting work better, rather than considering other options to provide public services. While there is much scrutiny of failure, the framework for reform is proscribed. In doing so the central and local state is engaged in a process of self-limitation which redefines the competences of public servants as contract management.

Notes:
[1] These arguments are the subject of a forthcoming book, What a Waste, by Andrew Bowman et al, to be published Manchester University Press in 2015. See also Bowman, A. et al (2015) ‘Business elites and undemocracy in Britain’ in ‘Elites on Trial’, Research in the Sociology of Organizations, Volume 43, 305-336.
[2] Mills, C.W. (1956) The Power Elite, New York: Oxford University Press.
[3] The best source of information on such contracts is the European Services Strategy Unit. See, for example Whitfield, D. (2014).

 

Julie Froud and Michael Moran are at Manchester Business School; Sukhdev Johal is at Queen Mary, University of London. All three authors have been members of the Centre for Research in Socio-Cultural Change. Recent books include The End of the Experiment and After the Great Complacence.

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