Outsourcing vs Insourcing
Outsourcing is not a new concept, nor is it one that is often met with any amount of glee, especially in the public sector, but maybe it’s not the bad egg it’s made out to be.
A report in Government Businesssuggested that “outsourcing is perceived negatively by swathes of the UK public and politicians alike, largely because it is misunderstood”, and goes on to suggest that much of this misunderstanding stems from confusion around terminology.
Business process outsourcing (BPO) is, according to Investopedia, “a method of subcontracting various business-related operations to third-party vendors”. This is frequently confused with shared services which is “the provision of a service by one part of an organization or group, where that service had previously been found, in more than one part of the organization or group” (Wikipedia.org)
Neither of these should be confused with privatisation (though they often are) which of course, removes ownership of the service from the governing body in its entirety.
Additionally there is the media’s impact on public perception to take into account, suggesting as the Guardian did in their October 2020 article on care homes that “management consultants such as Deloitte and Serco are running large parts of a system where shareholder value appears to have trumped the needs of our frontline services” further noting that competitive tendering was biased towards the lowest price only with no experiential acumen taken in to account. (Guardian 2020)
Reports such as this may well be quite right in their assessments of an individual case but they imply that these practices apply across the board of outsourced or shared services which taken together with the misunderstandings can create quite a substantial cultural barrier to meaningful change.
it’s hardly surprising that with so many high profile so called “outsourcing” failures hitting the headlines since the height of its popularity in the 90’s, outsourcing has become the poorly misunderstood relative of public sector planning.
But that is not the world we live in anymore.
Public Sector Outsourcing Costs
Shared services and interoperability in relation to outsourcing have evolved beyond recognition over the last decade and have experiences an unprecedented growth spurt of late, so given that the UK currently spends approximately £251 bn – 13.7% of GDP on public procurement, (Institute for government, 2019) -maybe they deserve another look.
The UK are not alone in our outsourcing habits, though it is encouraging to note that we are perhaps the most stable.
“ The UK spends 13.7% of GDP on public procurement, which is not significantly different from countries such as Denmark (14.16%) or Germany (15.05%).” (Parliament Publications, 2021)
Looking further afield; an academic report published in 2020 noted that:
“The use of public sector outsourcing varies substantially across OECD countries. In Japan, the Netherlands, Germany, and Australia, outsourced production accounts for more than 50% of the total costs of publicly provided goods and services. At the other end of the scale, Mexico, Greece, Norway, and Latvia outsource between 28% and 33%.” (iza.org, 2020)
The report goes on to analyse the changes in outsourcing spend between 2007 and 2017 where the UK appears very centrally within the spread and with little change over the decade of analysis.
Despite these numbers there is a general perception in the UK that we are shifting heavily towards a more “insourced” model – reintegrating previously outsourced business functions back into core operational public sector teams. Although there is some good evidence that this is working well in many specific areas, the data as a whole does not support the mass movement theory.
“In a recent survey conducted with the National Outsourcing Association (NOA) members, 92 per cent of those on the buy-side agreed that outsourcing delivers business value, with 59 per cent planning to increase the scope of their outsourcing over the next five years.”(Government business)
Thankfully the truth of the matter seams to lie somewhere in the middle, as regardless of public perception, the drive towards efficiency continues though perhaps with a more measured approach that focuses on outsourcing only the skills that it really needs and making use of inherent inhouse skills that cannot easily be procured elsewhere.
Interviewees from both government and industry told us that the old outsourcing model developed since the 1980s that focuses narrowly on cost reduction is “outdated”; government bodies are now more interested in improving quality and gaining greater flexibility to change the design of services.(institute for governement, 2020)
It is no surprise then that the early knee jerk reaction to outsource in response to budget cuts resulted in a few public failures which gave way over time to the realisation that the ability of an organisation to deliver a service inhouse does not always translate to the skills required to manage it out of house.
Outsourcing failures can often be absorbed and even rectified quite easily in smaller organisations but when applied at scale, and especially in the public sector where there is so much public scrutiny, a whole new set of skills are required to manage the transition and maintain high performing and seamlessly integrated functionality.
This in itself presents a service challenge which is again subject to the “shall we shan’t we” see saw of the outsourcing decision.
Procurement practices and our ability to accurately measure services have evolved substantially over the last few decades, and continue to do so, with ever more robust and regulated tendering practices, measurable and enforced service KPI’s and dedicated management teams, inhouse or otherwise.
The Shared Services Strategy for Government lays out a very clear direction and structure for delivering services that ensures optimum use of specialist skill sets, both internally and externally, with a welcome focus on the consistent and interoperable provision of common services.
But that’s still not all of the answer.
In the government outsourcing report: “When and how to bring public services back into government hands” published in June 2020 it was suggested that whilst there is a perception that many services are being brought back inhouse, on balance the trend remains flat.
“for example, in adult social care and children’s services the level of in-house provision has been flat; and in waste collection there has been a small fall in outsourcing. In IT there is no spending data available, but case studies show government departments and public bodies have brought a wide range of large IT contracts back in-house.”
This structured approach to insourcing, taken alongside the Outsourcing Playbook (2020) and the 2019 report: Government Outsourcing: “What has worked and what needs reform?” and of course the aforementioned shared services strategy, shows a much more balanced and consistent approach to service provision overall.
“Many parts of the public sector have become more efficient in response to outsourcing. This is an important benefit of competition, but it has eroded one of the key arguments in favour of private provision as in many cases there is now little difference in cost with in-house delivery.” (Institute for government, 2019)
Does Outsourcing Work?
Outsourcing it seams then can work if managed properly, as can in house provision if you have the skills and dedication to manage it, the answer here it would appear is not to treat an outsourced provision as a salve for all financial ills that now fit neatly into the “somebody else’s’ problem box” – but to manage it much as you would an inhouse team with clear measurable boundaries and hand off points.
Robust mapping of system requirements and workforce skill sets, also ensures that outsourced services can be knitted into an existing operational framework more readily, reducing issues as the services develop and grow with the organisation.
With this more flexible approach to procuring a clearly defined bundled networks of skills as a solution to skill shortages or location issues, not just cost cutting, it makes sense then to potentially merge these requirements and share their associated costs, with partner organisations.
A problem shared is a problem halved
It could be that shared services are the half-way house between outsourcing and insourcing
As of the end of the 2018/19 year, the LGA reports that councils across England are collectively participating in 626 shared-service arrangements. These have delivered cumulative savings of £1.34bn – some £200m of which was realised in FY19 alone.
Though shared services often get tarred with the same brush as outsourcing, there are a few distinct differences, most notably the co-ordinated direction of the businesses opting to share the provision of a specific service and the use of specialist inhouse knowledge that cannot be acquired elsewhere.
Similarly, however, their weaknesses are worryingly familiar, again highlighting the need to set out clear and measurable delivery models and ensure that good communication channels are in place and well maintained.
Karen Kennedy-Milne, principal for local government and healthcare at Boomi, picks out two key issues that need to be addressed before commencing shared services delivery.
The first of these is setting out clear and measurable models for costs and performance – including a baseline against which progress can be measured.
The second is ensuring any “cultural issues” are dealt with, and that the move towards shared services is supported from both the top-down and the bottom-up.
Mike Kiersey, EMEA principal technologist at Boomi, advises that local authorities should “start simple” and look at bringing together core back-office functions. This can then be used as a platform for further transformation.
Another recent article on shared service collaboration noted that even though shared services are technically exempt from many of the legal constraints associated with outsourcing, they should still be held accountable to each other in much the same way so as to ensure that their relationship remains robust enough to deliver the services in a sustainable way.
If outsourcing to the private sector is not working for a public sector body, why would outsourcing the same services to another public sector body be any more successful? Careful planning and consideration should lead to a shared service model which genuinely transforms services for all parties as well as satisfying the exemption. (localGovernmentLawyer.co.uk, 2020)
Here again, the 2021 shared services strategy steps up to lay out a clear direction for how common services are delivered, focusing heavily on the user journey, data consistency, the removal errors and duplication with the use of connected technology solutions, centralised frameworks and cloud services.
It also provides a strategy and methodology that leverages scale as oppose to being constrained by it stating that “There are four considerations in deciding the number of Shared Service Centres: scale, competition, affinity, and time to deliver. Five Centres for all of government creates affinity, encourages competition and retains sufficient scale.”
This overarching drive to create a solid foundation for truly comprehensive solutions on a massive scale is further supported by the fact that in April 2021, HM Revenue and Customs signed a new and improved deal with Amazon Web Services that will be worth up to £94m over the course of the next three years, this will provide them with unlimited access to their cloud services and an additional “digital skills fund” that has been established to support training for 6,000 civil servants. (publicsectortechnology.net, 2021)
Is Outsourcing Worth It?
Outsourcing, insourcing, sharing or in another way devolving a process from the main operational hub requires an accurate map of the service and set of well-defined and actively managed KPI’s as well as a comprehensive knowledge of the wider inhouse expertise that already exist.
It is clear that outsourcing isn’t the bad egg that it may historically have been seen as, but nor is it the golden goose it was once thought to be. It can be a highly beneficial solution in the right circumstances, but its merits must be assessed on a case-by-case basis with really robust data evidence to both support the case for change and to manage it.
As we move further into a post covid world, the need for highly specialist skill sets and fully co-ordinated services would under most circumstances put our ability to outsource to the test across the board.
However, the pandemic has provided organisations and policy makers alike with the opportunity to accelerate technological change, promoting national investment in a robust platform of interoperability and drive towards a unified optimisation of core skills.
This new foundation presents an encouraging landscape in which to design, build and manage the next generation of service models. With access to so much data from so many sources, we have the ability to make substantially better-informed choices, thus allowing us to do more of what we are good at, and place everything else in exactly the right hands.