Government needs to improve its outsourcing approach

A lack of commercial skills within government, inadequate competition and too much risk placed with suppliers are key failings of government outsourcing, according to a select committee report.

The Public Administration and Constitutional Affairs Committee report, which follows the collapse of construction company Carillion earlier this year, described the failure of the government supplier as “one of the biggest commercial challenges the Cabinet Office has ever faced”.

With so much work tied up with the business services and construction provider, there was a risk that government services could have been severely disrupted, but it said the government was right not to bail out Carillion.

“The government was prepared for the consequences of this decision, and was able to ensure that public services kept operating as far as possible,” said the report.

But it added that “the failure of Carillion reflects long-term failures of government understanding about the design, letting and management of contracts and outsourcing”.

Carillion’s problems are unlikely to hit major IT services suppliers. Despite its large business services operation providing what are known as “blue-collar services” such as cleaning and property maintenance, this type of outsourcing is provided by different beasts to those offering IT services. However, it is a warning to government when negotiating IT contracts.

The report said although the government has processes in place when deciding how services should be delivered, it does not always stick to them. It also wants the government to publish how it comes to its decisions.

“This report calls for the government to follow its own processes to decide whether and how to ‘make or buy’, before any public contract is put out to tender, and to publish the justification (including its evidence) on which the decision is based,” it said.

Providing more detail about how decisions are reached will improve public confidence, added the report.

There is also work to be done within procurement departments, and the government has to improve its in-house skills and be able to see beyond low price as the best deal, it said.

“The government has been improving its commercial capability, but this must not simply be about beating down prices. The government must improve its skills in the negotiation and management of contracts, so that it best employs the strengths of the private sector while also understanding its limitations and weaknesses.”

The report said these skills need to be built into other skills, including IT capability as well as relevant subject knowledge and expertise.

The Public Administration and Constitutional Affairs Committee report also emphasised the need for more competition, along with a reduction on the pressure its puts on suppliers, which led some to run into problems through unsustainable business models.

“Despite their market domination, many of the major players have had to announce dividend cuts and recapitalisations to address over optimism and tighter margins from government contracts,” said the report. “The government must also take steps to improve competition and encourage more suppliers into these markets.”

Peter Schumacher, CEO at the Value Leadership Group, said: “The last word surely has not been written yet in the case of the spectacular collapse of Carillion. The issue is much larger and the UK government’s policy and practices of outsourcing are surely going to see more scrutiny. The Carillion disaster proves once again that you can outsource work, but you can’t outsource responsibility. 

“Peter Drucker once said management is doing things right; leadership is doing the right things. It appears that the architects of the Carillion outsourcing model have failed on both accounts,” added Schumacher.