News and media

How successful has government outsourcing been?

Date of publication: 27th Sep 2019

Categories: Independent Healthcare Voices

In 2007, a government review of the UK outsourcing industry called it the “most advanced in the world”. Beginning in local government with services such as waste collection, successive governments have extended outsourcing to areas including front-line services and major information technology projects. But since then there have been several high profile “failures” which have certainly grabbed the headlines – who can forget the security at the London Olympics or Atos pulling out of the contract to provide work capability assessments after a third of its previous judgements were overturned. When you add to this Labour’s policy of bringing public services back into government by default it is not a surprise that government outsourcing is being scrutinised.

The Institute for Government (IfG) published a report this month which considers where outsourcing has worked (or not), reasons why, and makes recommendations on how to improve the way government contracts out services.

What is government outsourcing?

Before we start, it is worth clarifying what is meant by government outsourcing? The IfG define outsourcing as the private or voluntary sector delivering services to the government or the public after a process of competitive tendering. It also considers success in terms of whether outsourcing has improved the cost per unit of quality of delivering a service or delivered wider benefits, including introducing innovations or improving performance elsewhere in the public sector.

The IfG has three high level findings. Firstly, they argue that in some areas, outsourcing has delivered substantial benefits, saving money and improving services. They also state that instead of preferring public or private on ideological principle, government should base contracting decisions on what has worked and what has not, and why. They have done so with a largely consistent rationale: that applying market mechanisms and private sector expertise to the work of government can reduce costs, raise quality and achieve wider benefits such as innovations and improved public sector efficiency.

Secondly, the report found that politicians and senior officials often cite 20–30 per cent savings when making the case for outsourcing services. But while this was possible for some services outsourced in the 1980s and 1990s, they found little evidence that such savings are available today, whether for services outsourced for the first time or on second- or third-generation contracts. Where there is more recent evidence of savings, they are typically of around 5 –10 per cent.

Finally, the report states that government lacks the evidence it needs to inform current decisions on how to deliver services, including a paucity of evidence on the cost and performance of services that the public sector delivers in-house, not just those that are outsourced.

The report looked at 11 service areas including health care – the others being waste collection, cleaning, catering, maintenance, back-office HR and IT, prisons, employment services, adult social care, private financing of construction and probation. They collated evidence from approx. 50 interviews with current and former government officials, suppliers, academics and industry experts, to assess whether outsourcing has been successful. IHPN contributed information on independent sector treatment centres.

What has outsourcing meant for the health service?

So, let’s drill down into what the report found on health care – the IfG attributed an amber rating meaning that the evidence is mixed, with some studies showing no difference, others showing cost or quality improvements and others showing increased costs or lower performance or quality. As the amber rating suggests, the IfG’s view is that private provision has a mixed record in the NHS, with well-documented failures in some areas, but cost savings and reductions in waiting times in others. However, beyond individual case studies, they did not find good-quality, systematic evidence about the relative cost and quality of clinical services provided by non-NHS providers. While government agencies publish inspection reports, these do not account for important differences between public and private providers.

They view that Independent sector treatment centres are an example where, on balance, outsourcing worked. One study suggests that private providers delivered a quality of service that was broadly on a par with their NHS counterparts, with differences in outcomes small or insignificant after accounting for preoperative patient health. But their introduction led to significant wider benefits, such as allowing the NHS to reduce the price paid for ad-hoc purchases for services from private providers. Independent sector treatment centres were controversial when they were introduced because they were paid an average of 11.2 per cent more than the equivalent cost to the NHS. But sector experts they spoke to feel the benefits outweighed these costs.

The report suggests that other case studies show that the outsourcing of health care services has not delivered benefits. For example, Serco’s contract for providing out-of-hours GP services in Cornwall. In 2011, Serco won the five-year contract, worth £32m, after other suppliers dropped out because they could not submit a bid within the cost ceiling that the Kernow Clinical Commissioning Group had set. Serco’s bid was £1.5m below that of the local GP co-operative’s bid, but when it came to delivery, the company repeatedly failed to meet both its performance targets and national quality requirements, as it struggled to ensure that it had enough staff available, and a whistle-blower revealed that the company falsified performance data. In 2014, Serco agreed to terminate the loss-making contract, two years early.

What does the IFG recommend?

So, in summary what do the IfG recommend. Importantly, they suggest there are three conditions that make outsourcing more likely to succeed:

  • the existence of a competitive market of high-quality suppliers
  • the ease of measuring the value added by the provider
  • the service not being so integral to the nature of government as to make outsourcing inappropriate

These three conditions should sit very comfortably with a market that includes high quality services supplied by the independent sector. In addition, they found that four other key themes came up consistently in case studies of contracts that failed or worked less well, and which were avoided in contracts that worked.

  • government did not always engage with the market early in running procurements or establish enough understanding on both sides about the service that were being outsourced
  • an excessive focus on the lowest price and an insufficient assessment of quality in selecting bids
  • large contracts have failed when government has transferred risks that suppliers have no control over and cannot manage, rather than those which suppliers can price and manage better than government.
  • even when government negotiates and writes a good contract it often does not secure the outcomes it should as a result of weak contract management. Contract managers must have the capabilities and information they need to ensure good performance.

The report has a series of recommendations but to summarise they fall into 4 main areas.

  1. Ensure that the Cabinet Office and other government departments have sufficient resources to oversee implementation of the Outsourcing Playbook – it specifically details that all public bodies, including the NHS and local authorities, should adopt relevant policies from the Outsourcing Playbook, based on consultation with the Cabinet Office.
  2. The commercial skills and capabilities officials need to improve the way government outsources services.
  3. Improve scrutiny of, and accountability for, outsourcing decisions to ensure ministers and officials are accountable to Parliament and the public for the way they decide to deliver public services, and government collects the information needed to support this.
  4. Recommendations on how to improve the evidence that underpins contracting decisions

What does this mean for the independent health sector?

So, what has the report taught us. Many of the problems associated with poor outsourcing were and are due to the quality of commissioners – often officers being asked to do things without the appropriate skills, training and experience – and almost certainly thrown in at deep end. The report also highlights the importance of evidence – both in terms of commissioners knowing what they should be considering when making commissioning decisions and the potential risks associated with making decisions when evidence is not forth coming. The pressure that commissioners undoubtedly face to reduce costs and a desire to transfer risk will always have the potential to skew how they consider evidence when making their outsourcing decisions. This is all compounded when you add to it insufficient oversight and a lack of accountability. Independent providers are obviously not responsible for the quality of commissioners as well as a lack of oversight and would have entered into these arrangements in good faith.

These recommendations should be reassuring to the independent sector. The focus on improving official’s abilities to make the best possible outsourcing decisions and the increased scrutiny of those decisions should mean that commissioning is decided on evidence rather than ideological principle. This seems to be reinforced recently by the final recommendations for the Integration Bill which states that commissioners will not be permitted to directly award contracts to NHS statutory providers only and more than that commissioners should always, as now, continue to have the ultimate right to choose to use procurement where they consider this in the best interests of their population, without fear of unnecessary challenge. The proposals to strengthen patient choice also propose establishing in law the additional right to move provider once an individual has been waiting a long time, and the need to have a diverse provider market (through AQP and other means) to ensure that patients have real choices.

But what underpins this all, is the need for improvements to the quality of evidence that is used when commissioners make outsourcing decisions. This is a challenge for everyone but an opportunity surely for the independent sector – if the sector can provide good-quality, systematic evidence about the relative cost and quality of clinical services then commissioners will have no choice but to consider and untimately choose the independent provider route.

Danielle Henry is Policy and Research Manager at IHPN