Responding to COVID-19: insight, support and guidance

Partnering Alternatives to Outsourcing

24-02-2020

By David Ayre, Property Networks Manager

Dave Ayre

A collaboration of individuals, universities and CIPFA Property met in 2019 in the House of Lords to launch a new Centre for Partnering to research partnering alternatives to outsourcing. Evidence is needed to fill the current policy vacuum and a bolder response to the failure of outsourcing and demise of PFI is needed.

Brexit and the removal of EU Directive-compliant procurement regulations provides the opportunity for public and private sectors to collaborate more freely and pilot new ways of working as part of a major academic research programme. This research project will be developed over the coming months and if successful in attracting Research Council funding, will be inviting local authorities to offer evidence and pilot new ways of working.

The collapse of Carillion has provoked a major rethink into the role of the private sector in delivering public services. It collapsed in January 2018 with some 420 public sector contracts, many of which were halted whilst replacement constructors were procured. The Local Government Association estimated that 30 councils and 220 schools were directly affected. Other major outsourcers have been under pressure as they go into decline. Capita and Serco are regularly in the media glare. Interserv went into administration and others such as Kier have posted profit warnings.

Government response

The government's response has been mainly technical, with proposals to strengthen the insolvency framework and alternative procedures to support business rescue in cases of major corporate failure. The National Audit Office and Parliamentary Select Committees have carried out major investigations. Perhaps understandably, they focused on addressing issues of corporate governance and the government’s capability to procure and manage major outsourcing contracts. In February of this year the Government Commercial Function published the Outsourcing Playbook – a guide to help procurement professionals make the right decisions on outsourcing.

Councils' reaction

The response of local government has been more varied. Several local authorities acted swiftly to bring services back in house that had previously been outsourced. Many more are carrying out a fundamental review of their current outsourcing arrangements. Some progressive local authorities were able to insulate themselves from Carillion's collapse. For example, Carillion was the main contractor on Birmingham City Council's Paradise Birmingham regeneration. The works were being delivered through a limited liability partnership (LLP) which was not a 'contracting authority' under the public sector procurement regulations. This allowed the swift appointment of another constructor following the collapse of Carillion. Had it been procured directly by the council, it would have taken nine to 12 months for a replacement constructor to be appointed in compliance with procurement regulations.

PFI

The private finance initiative (PFI), although promoted as a form of public/private partnership, was in reality just another form of privatisation. PFI was introduced in 1992 by the major government and embraced by New Labour who had signed 850 deals by the end of Blair's term as Prime Minister in 2007. The key principles were the transfer of debt and assets, and the consequent risks, to the private sector.

In 2011 there was around £300 billion of debt owed by public bodies to PFI companies to deliver new public assets worth just over £50 billion. More recently, the IPPR has found that an initial £13bn of private sector-funded investment in new hospitals will end up costing the NHS in England a staggering £80bn by the time all contracts come to an end. PFI has faced growing scrutiny and criticism by the National Audit Office and Parliamentary Select Committees for failing to demonstrate value for money. Even the concept of risk transfer was difficult to sustain as it became clear that the public sector not only carried the ultimate liability but also the risk as major PFI deals collapsed such as the London Underground PFI, which was bought out by Transport for London.

Despite attempts to revive PFI with the introduction of PFI2, the Chancellor in his 2018 Budget recognised the shortcomings and announced that no further PFI or PFI2 projects would be approved.

Policy vacuum

The loss of confidence in outsourcing and the demise of PFI has created a public policy vacuum. In March Labour announced proposed guidelines to bring services back in house if they involve services for people 'at risk'. There would be some exceptions for low value contracts and contracts between public bodies. There is also recognition that some councils or government departments may have lost the capacity to insource services. Labour propose to support the expansion of council capacity through the provision of model contracts, access to the Government Legal Department and support for collaboration amongst councillors across the country. Organisations such as CIPFA also have the breadth of knowledge and experience to be able to assist those councils wishing to reinstate services previously outsourced.

Set against the £284bn per year spent by the public sector on buying goods and services from external suppliers, a third of all public spending, Labour's proposals will still leave a significant proportion of public services delivered by external providers. The challenge remains as to how public, private and third sectors can best work in partnership to deliver public services which improve the quality of life of communities. Looking at past successes and failures does go some way to help.

The search for genuine public/private partnerships

New Labour were elected in 1997 and began to replace the compulsory competitive tendering (CCT) regime introduced by the Thatcher government with best value. Councils were invited to pilot new forms of public/private partnership and those that were selected were given exemption from CCT.

A further driver of partnering as a concept came from the manufacturing sector. Rather than constantly put out tenders and choose different suppliers on the basis of lowest price, assemblers entered into long-term, but relatively informal agreements with a few suppliers. Suppliers work together with the assembler to deliver continuous improvement in products and processes over time. As a result, all parties deliver lower costs and improved quality without squeezing each other's profit margins. Steady profits then provide the basis for investment in improved products and processes, and a virtuous circle of continuous improvement is established.

In 1994 'Constructing the Team', the Latham Report, the final report of the government/industry review of procurement and contractual arrangements in the UK construction industry was published. The report advocated the transfer of some of the successful practices from manufacturing to construction and indicated partnering as a way forward to improve efficiency and profitability in the UK Construction Industry. This was followed by 'Rethinking Construction', a report by Sir John Egan in 1998. One of Egan's central recommendations was to replace job by job tendering with longer term strategic alliances between clients and constructors.

Early forms of collaboration took the form of design and build contracts which evolved to overcome some of the problems of traditional procurement. This involved collaboration between the construction team along part of the supply chain (for example the architect, cost consultant and contractor). In this scenario, one party (usually the principal contractor) manages the design and cost consultants on behalf of the client, thus integrating the cost, design and construction processes.

Demonstration projects extended this early form of collaboration to project partnering. This goes beyond design and build by getting more members of the project team together including client, contractor, sub-contractors and consultants to work as a team at design stage. Partnering agreements are often entered into with collaborators agreeing to share associated risks as well as the benefits of cost savings. The demonstration projects identified the following benefits:

  • Increased collaboration of the supply chain provided more benefits than those resulting from the traditional design and build process.
  • Improved communication between the team resulted in identifying difficulties earlier than with traditional procurement and in design and build contracts.
  • Predictability of both cost and time improved as late design changes became less likely with specialist sub-contractors adding to the expertise of the main contractor at design stage.

However, the potential of the early Best Value pilots and subsequent initiatives were increasingly constrained in the public sector by proscriptive procurement regulations and a determination by the Treasury that PFI should be the primary partnering model supported by the government. EU law, particularly the EU Treaty and the Procurement Directive 2014/24/EU, currently underpins the broad terms under which public procurement and competitive tendering operate. The rules have been transposed into national UK law as the Public Contracts Regulations 2015 and establish how public authorities purchase goods, works and services.

There is one presumption in traditional procurement approaches and that is "the client or commissioner knows best". Clients and procurement professionals draw up a document specifying what services should be provided and more often than not, how they should be provided. Yet, managers are taught that one of their most valuable assets are their workforce and the best people to improve services to customers are often those at the front-line day in and day out. When it comes to procuring works and services, these management principles are turned on their head. This is despite the conclusions of early demonstration projects showing the very real benefits and added value that could be achieved by early constructor engagement in the design/build process.

Some 25 years beyond the Latham Report a review of collaborative working in the construction industry noted that the handful of high-profile demonstration projects from the 90s were still mostly unrepeated. In 2017, the Project 13 infrastructure initiative was established by the Institution of Civil Engineers (ICE) at the peak of a significant amount of collaboration and alliancing. It notes that governance of procurement and delivery is often based on obtaining the lowest price through a competitive tender and then delivering the construction on time, within budget and to quality. The flaw in this approach is that it assumes that lowest price represents best value and that completion on time, within budget and to quality defines the desired outcome.

As an example, the high-speed rail link between the Channel Tunnel and London's St Pancras Station was delivered within the original budget and schedule but has failed to achieve the revenues forecast from international passengers and property development. Project 13 advocates a new approach to tackle this problem by establishing long-term relationships between the owner, the integrator and their key advisors and suppliers. The relationships should be based on a shared commitment to deliver continuous improvements in performance over periods of several years. Project 13 studies showed that engaging the right suppliers at the right time and integrating them into the team is critical to developing the right infrastructure solutions and to delivering value over the long term. This is more important than extracting the lowest price from suppliers through competition. A few percentage points saved in the price of a supplier's services pale into insignificance when they have a technology that can transform the solution.

They conclude that successful owners and clients understand their suppliers' capabilities and know when to integrate them into their delivery teams to obtain the best results. They invest time in visiting their suppliers' offices and factories and in exploring the products and services they offer. They also commit management time to integrating people from different organisations, professions and backgrounds into a single high-performing team with shared culture, processes and practices.

Effective teams are networks of collaborative relationships that encourage an exchange of knowledge and capabilities to drive improvement and innovation. Owners and clients should take the lead in designing coalitions of suppliers to deliver their programmes and should not allow their supply chains to be the consequence of a series of traditional procurement decisions.

Opportunities for change

These initiatives have clearly demonstrated that longer term strategic partnerships can deliver real benefits and some of this learning has been adopted by the public sector in procuring public services. Instead of services being delivered either in-house or by the private sector, many authorities established arrangements whereby in-house services worked with private sector partners who were insourced to top-up capacity and skills. The more innovative authorities have gone further, applying principles of reciprocal working where in-house services used spare capacity to work for their private sector partners, generating income for the authority.

However, this enlightened approach is still far from becoming the norm especially for building and housing construction where collaboration is more likely to be promoted than actually achieved. Partnering has more often than not stopped at the level of client and principal or management constructor, with the supply chain being procured on a lowest cost basis. Not surprisingly this has limited the potential for the industry and its customers to deliver the right outcomes for the wider economy and society in general. The need to explore fundamental alternatives to traditional procurement and outsourcing is long overdue.

This article first appeared in the Terrier in autumn 2019.

Explore more

  • Later this year CIPFA Property will be partnering with industry experts and public sector organisations that have PFI buildings in their portfolios. This series of events will provide practical advice and support for all bodies considering how best they can manage their property assets, how to ensure they remain fit for purpose and financially sustainable. Dates will be announced shortly so do key an eye on CIPFA Property.