how can the public sector become a more intelligent … all party parliamentary group on outsourcing...

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All Party Parliamentary Group on Outsourcing and Shared Services

How can the public sector become a more intelligent customer of outsourcing and shared services? A report from the All Party Group on Outsourcing and Shared Services

OCTOBER 2012

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HOW THE INQUIRY WAS ORGANISED The Group acknowledges that there are many competing views of what counts as outsourced and shared services. For simplicity, the Group took an outsourced or shared service to be a service or services supplied by a third party. In compiling the evidence, the Group aimed to draw out common themes from all the contributions and testimonials received, and we hope that the resulting recommendations have a wide application to all public sector contracts. The report comprises of findings from two evidence sessions in the House of Commons with witnesses from Whitehall, Local Government and industry. The Group also ran a consultation style process between July and October 2011, where members of the outsourcing industry and public sector bodies that use outsourcing and shared services were invited to submit written evidence to the Group and examples of best practice. The consultation process ended with two industry roundtable discussions, facilitated by the National Outsourcing Association, which aimed at formulating some guidelines for action. The report is arranged into four sections: addressing the skills deficit; true partnership working; outcomes-based solutions; and the future of outsourcing and shared services in the public sector.

1 Oxford Economics for the Business Services Association, April 2011

FOREWORD

The All Party Group on Outsourcing and Shared Services was set up in July 2011 with the aim to raise awareness of the benefits and best practices of the outsourcing and shared services industries; address the issues that face the industry today; and, to promote dialogue and understanding between industry representatives and Members of Parliament.

Outsourcing represents approximately 8% of the UK economy

1 with approximately 40% of

contracts coming from the public sector. But public sector outsourcing contracts have commonly been the focus of criticism for failing to deliver on time and achieve stated savings, for the lack of due diligence by either or both the customer and supplier, and for sub-par contract management arrangements by either or both parties.

The guiding principle behind this report, however, and one recognised by the Group, is that outsourcing, when delivered well, has an important role to play in the Government’s plan for deficit reduction, and can make the vital savings that Government needs. When Ian Watmore, former Chief Operating Officer at the Cabinet Office, addressed the Group in November 2011, he said that outsourcing and shared services were “at the heart of the efficiency and reform agenda.”

We hope that the recommendations in this report will provide insight into the industry and inform best practice in public sector outsourcing in the future. I would like to thank everyone who submitted evidence to the Group, the Group’s members and the National Outsourcing Association who covered the costs of the report.

Bob Blackman MP, Chair OCTOBER 2012

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CONTENTS

Recommendations in full Pg. 4

Addressing the skills deficit Pgs. 5-6

True partnership working Pgs. 6-8

Outcomes-based solutions Pgs. 9-10

Future of outsourcing and shared services in the public sector Pgs 10

Appendix A Outsourcing in the UK Pg. 11

Appendix B Written evidence Pg. 12

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RECOMMENDATIONS IN PRIORITY ORDER

The Group would like to see the following recommendations implemented by Government

and suppliers within an 18 month timeframe:

1. Government should aim to act as a better educated commissioner of services.

2. Clients should ensure that business objectives are clearly and simply stated from early on in the procurement process, and shared by all parties. If business objectives change in the near to long term, the contract should give the supplier the ability to make reasonable adjustments to service delivery.

3. Clients should place more importance on outcomes, rather than processes, and ensure that outcomes are always clearly stipulated in contracts.

4. Where possible, social outcomes should be articulated in contracts and the benefits of those social outcomes for the general public should be celebrated when achieved.

5. Outsourcing and shared services contracts should, where appropriate, make budgetary provisions for suppliers to offer training and education for clients as part of the services package.

6. Early and more flexible engagement is a desirable way of aligning the interests of the supplier and the customer. Both suppliers and customers need more clarity on how they should conduct these pre-procurement conversations to mutual benefit.

7. Clients should standardise service specifications where possible so that other potential participants within the sector can follow a successful model. It is preferable to maximise the commonality that exists between bodies rather than demand unnecessary individual bespoke services.

8. It is critical for newly created arm’s length bodies to review and adopt pre-existing successful service models rather than necessarily constructing their own systems from scratch.

9. Government should ensure that there is a robust and effective device through which best practice guidance can be communicated to public sector procurement teams.

10. Both Government and suppliers need to educate their employees so they clearly understand the benefits of outsourcing and that they can act as partners to achieve mutually positive outcomes.

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1. ADDRESSING THE SKILLS DEFICIT

A repeated criticism levelled against government outsourcing projects, particularly those at the larger end of the scale, has been that the people who commission the projects lack the commercial expertise and nous to be intelligent buyers, and the people who eventually manage or lead the project similarly lack the necessary skills to do so. This skills deficit and lack of leadership culture has been acknowledged as a key cause for failure in many projects in recent reports by the Public Administration Select Committee (PASC) on Government and IT and the National Audit Office on Shared Services. The 2011 PASC report on Government and IT for instance found that: “Managing suppliers is as important as deciding who to contract with in the first place. To be able to perform both of these functions government needs the capacity to act as an intelligent customer. This involves having a small group within government with the skills to both procure and manage a contract in partnership with its suppliers. Currently the Government seems unable to strike the right balance between allowing contractors enough freedom to operate and ensuring there are appropriate controls and monitoring in-house. The Government needs to develop the skills necessary to fill this gap. This should also involve recruiting more IT professionals with experience of the SME sector to help deliver the objective of greater SME involvement

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According to Ian Watmore, former Chief Operating Officer at the Cabinet Office, in his evidence to the Select Committee, Government had, "…Either abdicated, giving it all away, or…retained an army, which has just added to cost and bureaucracy on both sides." He suggested that the government needed a, "Smaller intelligent group that can procure and manage a contract in partnership, and hold them to account when they need to, but help them fix things when they need to as well." He said that this was a difficult skill set to find but that the current Government was "buying it in". A similar view also emerged from the written evidence that the Group collected. Many suppliers echoed their frustration that they were not dealing with public sector staff with a high enough level of expertise and skills. Others provided more specific examples of things going wrong in-house: Allan Robertson, former president of the Chartered Institute for Purchasing and former board member and Chief Officer to several Government departments, put some poor buying down to lack of training and misunderstanding of how to operate under procurement regulations: “With fragmented buying there is difficulty in justifying staff gaining market and product expertise as any one organisation may not be able to justify the training of expert staff…The rules under which public sector procurement staff operate, both under standing orders if a local authority, and also under EU Regulations inhibit the actions and innovativeness of the buyer... EU rules need to be followed but they do allow considerable flexibility on such aspects as negotiation if they are initially spelt out in the tender. Many buyers I have met do not realise they can negotiate or are unwilling to do so.” Robertson went on to advocate: “…Streamlining and co-ordinating the buying organisations within the public sector in central and local government ensuring they are involved with projects from the outset, raising the profile and status of procurement staff, enforcing the policy and procedures and improving the expertise of staff employed.” A position paper submitted by Olswang, procurement law specialists, also highlighted regulatory issues: “…The regulatory regime is not as inflexible from a commercial perspective as is commonly made out by the press and others. More often that not, restrictions arise because those who interpret the rules in central government either adopt an overly restrictive

2 Government and IT- "A Recipe For Rip-Offs": Time For A New Approach, Public Administration Select Committee,

28th July 2011

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approach – for fear of European Commission infringement proceedings against the UK – or simply do not provide guidance on an issue and thus leave small, less expert, individual public authorities to find their own (inevitably risk adverse) way through the Regulations.”

Olswang said that the UK public authorities are out of step when it comes to interpretation of the EU Public Procurement Directive in comparison to other EU member states such as Germany - who are more confident and relaxed in their approach. A similar confidence, they said, could help cut UK procurement red tape.

CapGemini drew attention to the lack of sophistication when it came to negotiating contract terms: “We have seen clients delaying the start of key money-saving projects over small pricing queries, the value of which are dwarfed by the lost savings due to the delay.” They found that one of the blockers to a successful negotiation was when buyers concentrated on ‘price’ rather than ‘value’. They suggest that value for money measures should be built into an arrangement, and clients should maintain a value register through the life of a contract. With the changes to commissioning public services underway, and the willingness of government to open up and promote new models of service delivery and widen the pool of potential suppliers, the need for in-house skills will grow ever more important and the Government will need innovative and skilled managers to manage these changes. A recently published report by totaljobs.com

3, which questioned 100 senior managers across Local and

Central Government, showed that a lack of expertise is already harming the sector's ability to manage contracts. Over half (55%) the decision-makers who responded identified the need for improved project management skills, and a third admitted a lack of skills was the key reason for cancelling outsourcing contracts in 2011. The report proposes the idea of a rightsourcing advisory group to oversee a programme of work to improve the skills needed for delivering public services. While admirable in its intention, the All Party Group wonders whether such a group can exist in times of straitened finances, and alongside the closure of the public sector’s training school – the National School of Government. Certainly, skills education needs to come from somewhere and this will be a combination of intelligent recruitment from the private sector and additional training for retained staff. One way to achieve the training could be for the supplier to offer an education service as part of the package.

RECOMMENDATIONS:

Government should aim to act as a better educated commissioner of services.

Outsourcing and shared services contracts should, where appropriate, make budgetary provisions for suppliers to offer training and education for clients as part of the services package.

Both Government and suppliers need to educate their employees so they clearly understand the benefits of outsourcing and that they can act as partners to achieve mutually positive outcomes.

2. TRUE PARTNERSHIP WORKING All outsourcing or shared services agreements are at face value a partnership between the customer, supplier and the end users. However, the Group believes there is value in making the distinction between cosmetic partnerships and authentic partnerships. It seems that some of the projects criticised in the past suffered either from a breakdown in the existing partnership arrangements, or from the fact that the partnership was only ever in name but not in practice in the first place. Many of the written submissions the Group received wrote in terms of true partnerships and shared culture and values. Specific criteria of partnership working were also cited by a number of contributors, for example:

3 ‘Future of Outsourcing’, totaljobs.com, March 2012

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Alignment of business interests If alignment of business objectives is important in private sector outsourcing between two private sector entities, it is critical in a public/private partnership where cultural differences risk making the interpretation of objectives rather different. It is, therefore, clear to the Group that the business objectives of both the customer and supplier need to be aligned from the outset of a contract, as they would be more difficult to align once a contract has been signed. Written evidence submitted by Fujitsu confirmed this: “A significant factor in the overall success of the Local Government Shared Services (LGSS) endeavour has been a clear focus on the objectives and a strong alignment of all parties involved…what really makes everything work is the behaviour and attitude of all those involved. We have a very clear vision of what we are trying to achieve and no-one runs back into their organisational silos – it’s a very mature relationship. It simply wouldn’t work unless it was a true partnership.” The Group noted that over the course of a long-term contract it could be the case that interests of both the supplier and the customer might become misaligned – owing to a variety of factors such as changes in end user needs, Departmental finances, new technologies etc. Spot-checks or a mechanism to ensure that objectives are re-aligned are a vital safeguard in this instance and will help to avoid drift. Tim Leaver, Chief Procurement Officer at Land Registry, noted in his written submission to the Group that a key lesson learnt from his experience has been that: “More openness between parties would have avoided wrong assumptions being made. Face to face meetings or joint working environment would have sped up problem identification and resolution.”

RECOMMENDATION:

Clients should ensure that business objectives are clearly and simply stated from early on in the procurement process, and shared by all parties. If business objectives change in the near to long term, the contract should give the supplier the ability to make reasonable adjustments to service delivery.

Shaping the Business Case

In a panel discussion organised by the National Outsourcing Association, and attended by more than 20 stakeholders, there was general agreement that the best procurements had been those where the suppliers have been involved in producing and shaping the business case early on in the process.

Pre-procurement was brought up as an important stage of a successful project, but it was agreed that there could be more clarity around the conduct of these conversations. Stakeholders felt that the pre-procurement conversations could be unhelpfully overshadowed by various factors – Official cultural inertia to politically driven change, oversensitivity about equitable treatment in procurements, inherited practices unjustified by commercial good sense, and misinterpretations or inflexible use of EU procurement rules. For instance, one stakeholder said that there are “...Phantom rules or urban myths about what conversations you can have before the procurement comes out which inhibits suppliers from having properly constructive conversations about what it is that the client might want to have.” In an oral evidence session held by the group in March 2012, Phil Pavitt, CIO at HMRC, said that HMRC would really welcome more approaches by suppliers with innovative ideas. Somehow, these artificial barriers must be stormed in order to encourage the injection of transformational creativity.

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The panel said that there are some mechanisms available such as Intellect’s Concept Viability Process – which was endorsed by the Public Administration Select Committee

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been taken up slowly and more should be done to implement it. There was also a problem in terms of accessing the right people with whom to have the initial conversations. Suppliers felt that conversations should only be conducted with senior Officials, but that outsourcing conversations are squeezed down in terms of priority.

RECOMMENDATION:

Early and more flexible engagement is a desirable way of aligning the interests of the supplier and the customer. Both suppliers and customers need more clarity on how they should conduct these pre-procurement conversations to mutual benefit.

Trust Trust between the supplier and the client has been cited as a key factor in a good working relationship, especially in large deals where there are many different interests at the table. Ian Watmore pointed out to the Group in an oral evidence session in November 2011 that when trust slips, contracts can get into an ‘arms race’ with both sides upskilling and bringing in more consultants. In oral evidence, Paul Bamford from Logica recommended that in the future we need to avoid a ‘rectangular table approach’ where negotiators park on opposite sides of the table, debating SLAs, contractual obligations and deal price – “This results in vendor relationships, not partnership relationships where over-performance can be rewarded.” From the supplier side, it was agreed that keeping key people from the public sector in the partnership throughout its lifetime was an important factor in ensuring trust between all parties and helping to develop meaningful relationships between all sides. Atos mentioned in their written evidence that optimum results arose when the bid team was also the delivery team – another way of keeping the key people in the relationship.

Another clear way of maintaining trust throughout the lifetime of a contract is to ensure that the risks and rewards are shared equally, for example not penalising a supplier for reducing costs by reducing their income stream, perhaps instead letting both sides keep some of the savings but "spend" some (maybe the a major share) with the supplier to introduce a new function or service.

Shared Culture The Group received some encouraging examples of how partnerships developed a shared culture. Agilysis for instance said in their written submission that: “One of North Somerset Council Chief Executive, Graham Turner’s stated aims for the partnership was that it would be so seamlessly integrated with council working that a visitor to the offices would be unable to pick out council staff from partnership ones – and we’re proud to say that in the less than a year, that is truly the case. This close collaborative working and integration at all levels of the organisation has been fundamental to our successful delivery against the council’s overall strategy and objectives.” Fujitsu stated how wider stakeholder participation helped to customise the service delivery model that they eventually implemented: “Key stakeholders in Cambridgeshire and Northamptonshire were given a high level of influence over the design of the service delivery model – customers had to buy into the project from the outset. As a result, these systems have become a critical enabler of sharing transaction services whilst still retaining the individual organisations’ priorities.”

4 http://www.parliament.the-stationery

office.co.uk/pa/cm200607/cmselect/cmpubacc/113/113.pdf

http://www.parliament.the-stationery/

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3. OUTCOME-BASED SOLUTIONS A theme highlighted in the written evidence collected by the Group was that when outcomes were stated in the contract, it was easier for suppliers to deliver. Steven Barker from Atos said that specifying outcomes in contracts should be a core principle: “…If we understand the ‘what’, this will allow for a wider range of innovative options which will be the ‘how’ of delivery.” It was thought that clients paid more attention to the processes that deliver outcomes rather than the outcomes themselves. The Group thought this should be addressed, with more emphasis placed on outcomes. Stakeholders from the NOA panel discussion agreed that generic back office processes were not as different from each other as thought. They said that there must be recognition of commonality – a ‘vanilla consciousness’. EURIM’s (The Information Society Alliance) submission to PASC enquiry into the effective use of IT made the point that Government is too focussed on looking for solutions elsewhere. They said that: “More time and money is spent hiring outside expertise (consultants) to look at new technologies than at what is being done better by other Departments and agencies using existing technology. The need is not for more spend on benchmarking, but for rewards to those who re-use what is being done elsewhere, as well as those whose solutions are copied. Those who claim their needs are unique, so they cannot reuse what is done by others, should be made to feel embarrassed.”

RECOMMENDATIONS:

Clients should place more importance on outcomes, rather than processes, and ensure that outcomes are always clearly stipulated in contracts.

Clients should standardise service specifications where possible so that other potential participants within the sector can follow a successful model. It is preferable to maximise the commonality that exists between bodies rather than demand unnecessary individual bespoke services.

It is critical for newly created arm’s length bodies to review and adopt pre-existing successful service models rather than necessarily constructing their own systems from scratch.

Social Outcomes The Group felt that it was very important for the social value of contracts to be better communicated and this would help to detoxify the image of outsourcing. A way of doing this is to specify social/public-oriented outcomes in contracts. In oral evidence, Ian Watmore raised the point that contracts were successful where there was a visible end goal. He used the example of prisons: “They are a clear example of where social impact can be seen. There is a difficulty in showing social impact/public good in intermediate contracts like IT. Contracts therefore need to have a public service oriented agenda.” A further example of this can be seen in the NHS Blood and Transplant’s written submission to the Group which stated that their outsourced national contact centre had helped to deliver their key objective– “Our principal requirement is to encourage people to become and remain Donors and research has shown the National Contact Centre to be a significant factor in this achievement.” Joint business ventures like NHS Shared Business Services (NHS SBS) similarly had clear social merit – written evidence from NHS Havering said that savings made by SBS were fed back into the NHS.

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RECOMMENDATION:

Where possible, social outcomes should be articulated in contracts and the benefits of those social outcomes for the general public should be celebrated when achieved.

Promoting best practice The Group believes that one of the factors that might contribute to inconsistency in outsourcing contracts across the public sector is an absence of formal best practice guidance.

The Group is aware that Special Interest Groups on best practice and governance exist in the private sector, and wonder whether the formation of such a group for public sector buying might also be of some value.

The Group also sees merit in a repository or online portal, perhaps hosted by the Cabinet Office, which holds best practice examples and details successful models. This device could be used to encourage re-use and give public sector colleagues a forum to discuss ideas and experiences as they go through their phases of outsourcing or shared service.

RECOMMENDATION:

Government should ensure that there is a robust and effective device through which best practice guidance can be communicated to public sector procurement teams.

4. FUTURE OF OUTSOURCING IN THE PUBLIC SECTOR

The UK as a destination for outsourcing During discussions with the various evidence groups a number of delegates said they felt that the lack of skills in the UK were a contributory cause to organisations moving work away overseas. The UK had many rich skill areas and that there were examples where these areas had actually attracted services here. However, there may be ways that the public sector in placing outsourced, shared service or mutual contracts, could encourage skills and competencies to be developed here.

Multi-source vs. big supplier Single-vendor, long-term outsourcing contracts are not presently regarded that highly but should still be considered in the portfolio of solutions to achieving efficiency savings. Big contracts bring with them the possibility of upfront investment and a long term payback, enabling the public sector to make the transformation they need using private sector investment. The supplier delivers the lowest overall pricing due to economies of scale in procurement, operation and management. The size of the contract is a very powerful influence on the supplier. Clients should not underestimate the leverage that large deals gives them over their suppliers, nor the constant focus on value for money.

Beyond the back-office? Criticism of outsourcing in general could breed reluctance to extend outsourcing to non-typical areas such as the middle office and front office. If there are benefits to be gained – why impose a false dichotomy?

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THANK-YOU The Group would like to thank all the speakers who addressed the Group in oral evidence sessions, and all the suppliers, buyers and end users that contributed written evidence and case studies to the investigation.

APPENDIX A: OUTSOURCING IN THE UK Oxford Economics estimated that turnover across all ‘outsourced’ markets amounts to some £207 billion per annum, equivalent to some 8.0% of economy-wide output. The table below sets out some detail in terms of service provided and institutional sector of the client. The split private/public sector split is approx 60:40.

Table 2.1 f prepared by Oxford Economics for the Business Services Association, April 2011

The £82 billion of outsourced provision to the public sector compares with total public sector procurement (of goods and services of all kinds) of £196.4 billion in 2009/10

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5 HM Treasury estimated out-turn, PESA 2010, table 5.5.

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APPENDIX B: Written Evidence (in alphabetical order) Agilisys Agresso Arvato Atos CapGemini Capita Channel 3 Consulting CSC Direct Path Solutions EURIM Fujitsu InTechnology LGSS Land Registry Logica Norse Commercial Services Nelson-Hall NHS Blood and Transplant Olswang NHS Havering PA Consulting Procession Spend Vision UNIT 4

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