outsourced services and ‘imbalanced’ supply markets

doi:10.1016/j.emj.2005.12.011

European Management Journal Vol. 24, No. 1, pp. 95–105, 2006

� 2005 Elsevier Ltd. All rights reserved.

Printed in Great Britain

0263-2373 $32.00

Outsourced Servicesand ‘Imbalanced’Supply Markets

HELEN WALKER, University of Bath

LOUISE KNIGHT, University of Bath

CHRISTINE HARLAND, University of Bath

In the UK public sector, procurement decisions foroutsourced services are usually taken at a locallevel, for example by a hospital trust or a local gov-ernment authority. Cumulatively, these fragmenteddecisions can lead to ‘imbalanced’ supply markets(too few or too many suppliers), to the detrimentof both suppliers and purchasers. This paper con-siders what can be done to manage imbalancedsupply markets resulting from the fragmented pro-curement of outsourced services across a sector,using the case of the English National Health Ser-vice. The types and levels of action available withinthe health sector are explored.� 2005 Elsevier Ltd. All rights reserved.

Keywords: Outsourcing, Supply strategy, Supplymarkets, Imbalance

Introduction

‘‘Outsourcing decisions that are logical and rational at the levelof the individual organization (operating unit) can have detri-mental and unforeseen consequences for the sector, or nationally’’

Knight and Harland (2001: 60)

Much of the research on the increasingly importanttopic of outsourcing is centred on the outsourcetransaction or relationship, or on the strategies ofthe outsourcing organizations. In contrast, the focushere is on the sector level implications of outsourc-ing, and options for sector level interventions, in par-ticular in relation to dealing with supply marketstructure. Previously the need for active consider-ation of the sector and national level implications ofoutsourcing decisions has been identified, in orderto mitigate the social, political and economic risks

European Management Journal Vol. 24, No. 1, pp. 95–105, February 2006

associated with fragmented local decision makingin the public sector (Knight and Harland, 2001).One such risk, which is firmly in the supply domain,is that the cumulative effect of locally taken outsourc-ing decisions can be to create a supply market struc-ture that is detrimental to the purchasers andsuppliers in the long term. This typically occurswhen there are just one or a few, dominant suppliersin the market, or very many, small suppliers whichare not viable in the long term. We term these ‘imbal-anced supply markets’. Both these situations can beassociated with excessive costs and prices, and lowlevels of innovation. The focus here is on the conse-quences for the buyers of the outsourced services,but it is worth noting that they can also be undesir-able from an industrial perspective.

In Knight and Harland (2001), it was argued thatthere should be some sector level monitoring and,if necessary, pro-active interventions to guide andregulate local decision making. Here, the implica-tions for practice of this assertion are considered.To do so, we draw on work undertaken as part of aprogramme of collaborative research in partnershipwith the NHS Purchasing and Supply Agency (‘theAgency’). The Agency is an executive agency of theDepartment of Health acting as a central contractingagent and centre of expertise in purchasing and sup-ply matters for the English, public sector, NationalHealth Service (NHS).

Though the extent of outsourcing varies from onepart of the English health service to another, all havebeen affected by competitive tendering regulationsimplemented since the 1980s. Subsequently, compet-itive tendering has also been replaced with best valuein the UK (Boyne et al., 1999, 2002). Significantchanges to government policy since 1997 mean thatthe underlying rationale for outsourcing has shifted,

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OUTSOURCED SERVICES AND ‘IMBALANCED’ SUPPLY MARKETS

but the extent of sourcing of services from the com-mercial sector by hospitals and other health organi-zations continues to expand. The NHS’s non-payspend exceeds £15 billion (NHS PASA, 2005).Though in many services, such as catering and IT/IS, the NHS is not the dominant customer, it is nev-ertheless an important player whose purchase deci-sions are capable cumulatively of shaping markets.The Agency is in a unique position to oversee andco-ordinate the fragmented purchasing of outsour-ced services across the health sector. Through the ac-tion research described here the aim is to develop anunderstanding of what could and should be done to‘manage’ outsourcing at the level of the sector, to re-duce the potentially detrimental effects of imbal-anced supply markets.

The following discussion is in four parts. In the firstpart, four key issues relating to outsourcing areexamined, first the reasons for outsourcing and theassociated benefits and risks, second a sector levelperspective of outsourcing, third the issue of imbal-anced supply markets and fourth the conceptualframework used to examine potential interventions.In the second part, the research questions and themethods employed are presented. The third part pro-vides a discussion of the findings. In the fourth part,conclusions on a sector level perspective of imbal-anced supply markets are drawn.

Key Issues Relating to Outsourcing

Why Outsource?

Outsourced services can be defined as the ‘contract-ing-out’ of services that were previously performedin-house by an organization. Outsourcing is a supplystrategy often chosen by organizations as a means ofincreasing organizational efficiency and effective-ness. As Hendry (1995: 193) observes:

‘‘The rationale of this (the contracting-out) movement is simpleand compelling. If contracting something is cheaper than doingit yourself, outsource. That way you not only save moneythrough greater efficiency but also gain effectiveness by focusingmore clearly on those things that you can do better in-house.’’

One of the main motivations for outsourcing is costreduction (Gupta, Herath & Mikouzai, 2005; Hemp-hill, 2004; Lacity, Willcocks & Feeny, 2004). In theUK public sector, there is clear evidence that revenueand capital expenditure directly related to the ser-vices subject to compulsory competitive tender hasbeen reduced (e.g., Uttley, 1993: 56). Other benefitsinclude buying in expertise and allowing the organi-zation to focus on its core activities, some of whichmay even be outsourced (Baden-Fuller, Targett &Hunt, 2000). Whilst benefits for individual organiza-tions can be achieved through outsourcing, there is a

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growing recognition that there may be longer-termcosts not fully assessed by organizations (e.g., Bettiset al., 1992).

Risks of outsourcing include losing in-house exper-tise and knowledge (Boston, 1996; Earl, 1996), unin-tentional loss of control, reductions in quality and,at an extreme, corporate atrophy (Lei and Hitt,1995) where an organization becomes so ‘lean’through outsourcing that it becomes unsustainable.There is an increasing awareness in management lit-erature that the decision to outsource is a complexone with uncertain outcomes.

Having considered some of the outsourcing deci-sions facing organizations, the next section discussesthe concept of a sector level view of outsourcing.

A Sector Level Perspective on Outsourcing

As individual organizations make outsourcing deci-sions, there are cumulative and unplanned conse-quences at the sector level. In this instance, we usethe term ‘sector’ to refer to either a private or publicsector, such as ‘the IT sector’ or ‘the healthcaresector’. In contrast to the broad range of literaturefocused at the level of the firm or the transaction,there is a much more limited literature on the sectorlevel consequences of outsourcing (Knight andHarland, 2001).

When considering sector level outsourcing literatureseveral themes emerge. Outsourcing can impact onthe size, structure and competitiveness of purchaserand vendor sectors (Bettis et al., 1992). Outsourcingalso has an effect on employment levels, patternsand conditions (Beaumont, 1991; Postner, 1990). Sub-sequently, this shift in employment patterns (e.g.,from public to private sector) can lead to a redistribu-tion of union membership (Perry, 1997), which canparadoxically lessen the power of unions to combatworsening employment conditions. Social issues arealso affected by outsourcing. Cousins (1987: 169)found that when outsourcing services from the pub-lic health care sector to the private sector, staff expe-rienced ‘the loss of values of compassion and caringin the service’, and Gufstafsson (1995) suggests thatthe ‘care rationality’ is replaced by the ‘wage ratio-nality’. Crump and Slee (2005) investigated outsourc-ing and PPPs in the education sector and foundAustralians to be ambivalent about ‘privatisation’of public services.

There are political aspects to outsourcing; outsourc-ing reflects political and management fashion(Alexander & Young, 1996), and in outsourcing deci-sion-making, there is an interplay of political reasonsand economic effects (Young, 2005) apparent in insti-tutional politics which affect the ‘receptivity’ of pub-lic sector organisations to outsourcing (Butler, 2003).

pean Management Journal Vol. 24, No. 1, pp. 95–105, February 2006


Further, public sector outsourcing on a large scale af-fects local and national democratic control (Hood,1997; Patterson and Pinch, 1995). New Public Man-agement (NPM) presents a paradigm shift in the con-duct of public sector activities (Bevir, Rhodes &Weller, 2003), and entails a consideration of howgovernment may mix markets and bureaucracies toachieve objectives with emphasis on outsourcing(Lane, 2001).

In Knight and Harland (2001), it was proposed that anational and sector level perspective on outsourcingis lacking. We identified only one paper (Bettis et al.,1992) that specifically addressed the aggregated con-sequences of individual organizations’ outsourcingdecisions, suggesting that individually logical andrational decisions can be counter-productive whenconsidered collectively and cumulatively. Consider-ing the outsourcing decisions of individual publicand private sector organizations in isolation of theaggregated effects of these decisions is an importantomission on the part of academics and practitioners.It is this requirement for a sector level perspectivethat this research project broadly aims to address.

Supply Market Structure: ‘Imbalanced’Supply Markets

A premise of this project is that, from the purchaser’spoint of view (at least, and possibly also from thesupplier’s), it is not desirable for there to be too manyor too few suppliers in the market place. At either ex-treme, direct and indirect costs (notably transactioncosts) can rise, quality can suffer and innovationmay be stifled. Sustainable, profitable, competitiveand balanced supply market structures are in thebuyer’s long-term interests.

One of the motives for outsourcing is that the pro-vider of an outsourced service is able to achieve econ-omies of scope and scale that are not available to thepurchaser. A fragmented market of many small sup-pliers is less likely to provide such benefits in the longterm. Whilst in the short term such circumstancesmight lead to lower prices, often these are not sustain-able and are sometimes achieved at the expense of thelong-term health of firm. At the other end of the spec-trum, individual purchasing organizations maychoose the same supplier, unwittingly creating a situ-ation of ‘supplier dominance’ at the sector level(Milne, 1993; Patterson and Pinch, 1995).

An example of this can be identified in the supply ofIT management services to the public sector. EDS isone of the biggest providers of information manage-ment services in the world. It is estimated that EDShas between 67% and 81% of all published UK Gov-ernment outsourcing contracts, handling at leastsome of the data needs of the Dept. of Social Security,the NHS, the Driver and Vehicle Licensing Agency


and the Inland Revenue, the Ministry of Defence(Pfeifer, 2005) amongst others. Its contracts with theBritish Government are reported to be worth £bil-lions. This is an instance where the fragmented pro-curement of outsourced IT management services bydifferent government departments has led to animbalanced supply market, and more specifically asituation of ‘supplier dominance’.

Unchecked outsourcing within public sectors maycreate problems, such as powerful players whoassimilate many independently arranged outsourc-ing contracts, gaining leverage and power over thesector (Harland, Knight, Lamming and Walker,2005). One of the consequences of a supplier provid-ing more services across the sector is that other sup-pliers are less able to compete (Bettis et al., 1992),further reinforcing market dominance. Transactioncosts may increase, and innovation may decrease.Imbalanced supply markets may lead to difficultiesin managing within the supply network (Ford,1997). There may be detrimental consequences forpurchasers, suppliers, or both. This paper reportson research in progress within the public health caresector to consider what can be done by the purchas-ers of services in such instances in response to imbal-anced supply markets.

The next section moves on to consider the nature ofpublic sector purchasing and supply.

Supply Strategy for the Public Sector:A Conceptual Framework

The UK central government is one of the largest pur-chasers in the UK, spending an estimated £12 billionannually on the procurement of goods and services;inclusion of defence, health and local authorities in-creases this figure to represent 40% of UK GrossDomestic Product (Cabinet Office, 1999). Outsourc-ing as a supply strategy has been pursued by thepublic sector since the 1980s, whereby services rang-ing from catering to IT management have beenoutsourced to the private sector.

Some researchers have developed a framework(Freytag & Kirk, 2003; Momme & Hvolby, 2002,Canez et al., 2000; Vining & Globerman, 1999) and astrategic positioning process (Baines et al., 2005) toaid ‘make versus buy’ decision-making and out-source supplier selection (Dulmin & Mininno, 2003),yet all of these have been developed in a private sec-tor context. Burnes and Anastasiadis (2003) compareprivate and public sector outsourcing and suggest theprivate sector could benefit from the public’s morestructured approach, while the latter could benefitfrom the more strategic orientation of the private sector.

Harland (2002) considered supply strategy for thepublic sector, identifying factors particular to public

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Nature of sector

Network features

Type of action

Level of action

Political factors Economic factors

Societal factors Technological factors

Supply

market

factors

Recipient

factors

Regulation

Accountability Stakeholder

influence

Competition

factors

GOVERNMENT ACTION

PUBLIC SECTOR

NETWORK

MACRO ENVIRONMENT

SECTOR

CONTEXT

SUPPLY

Figure 1 Initial Conceptual Model for Public SectorSupply (from Harland, 2002)


as opposed to private sector decision making. A vari-ety of conceptual frameworks for supply werereviewed (e.g., Achrol, Reve and Stern, 1983; Zhenget al., 1998), and found that no one model adequatelyaddresses all the issues that differentiate public fromprivate sector supply. Harland proposes an initialconceptual framework for public sector supplyshown in Figure 1, where all public sector servicesare provided in the macro-environment containingpolitical, economic, societal and technological factors(Porter, 1980). Next, there are factors concerning thesector context, including supply market factors, reci-pient factors, regulation, accountability, andstakeholder influence and competition factors. Cen-tral to the framework is the public sector under con-sideration and its particular supply network factors.

At the centre of the framework, two aspects of gov-ernment action are suggested – type and level of actionor intervention. Type of action is used here to refer topolicy, strategy, management or operational supplyaction. Level of action refers to the decisions thathave to be made as to which type of action shouldbe made at international government, national gov-ernment, departmental, regional, local or individualgovernment organization levels. Harland (2002)draws attention to the sector and macro-environmentcontext within which public sector supply decisionsare made. The type and level of government actiondepends on the constraints and realities of the supplymarket. This research explores the different typesand levels of actions, policy options and interven-tions available to one of the largest purchasers inthe UK to respond to imbalanced supply marketsresulting from fragmented outsourcing.

Research Questions

Drawing together the themes from the literature re-view, a lack of sector level perspective in outsourcingresearch can be observed. One consequence of frag-mented outsourcing decisionmaking is that supply

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markets may become imbalanced, either with a lotof small suppliers, or conversely with supplier dom-inance (Patterson and Pinch, 1995), either extremenot being ideal for the purchaser. This research con-siders what policy options, actions and interventionsare available to address imbalanced supply markets,building on a conceptual framework suggested byHarland (2002). The research explores the followingquestions:

v What different types and levels of actions areavailable from a sector level perspective toaddress imbalanced supply markets resultingfrom fragmented outsourcing?

v What are the implications of implementing theseactions?

Method

In order to investigate options for managing imbal-anced supply markets, this research adopts a casestudy approach (Numagami, 1998; Ragin & Becker,1992) and focuses on the English NHS, consideringthe procurement of outsourced services across thehealth service from a sector level perspective. Thestudy is a form of policy analysis (Harrison, 2001),using various methods to frame a policy issue, andidentify options for relevant interventions. TheNHS Purchasing and Supply Agency has a nationalremit to help manage the procurement of goodsand services across the NHS, which places it in agood position to take a sector level perspective onthe aggregated consequences of outsourced services.NHS PASA has a role in network management with-in the supply network (Knight and Harland, 2005).Outsourced services are of particular interest becauseover the last decade, the NHS has seen a hugerestructuring of supply markets because of changingpurchasing patterns driven in part by market testingregulations.

A sector level perspective on outsourcing has notbeen widely researched (Harland et al., 2005). There-fore, an exploratory approach was necessary. Casestudies were conducted in three markets to give dif-ferent insights into outsourcing activity at the sectorlevel, and to identify options for monitoring andintervening in imbalanced supply markets. The casestudies were equipment leasing, agency nursing, andcatering. The case studies involved interviews withNHS staff at different levels (e.g., Trust SuppliesManagers, Agency personnel, Department of Healthstaff), and members of Trade Associations. Docu-mentary data were collected such as Department ofHealth reports, a market testing survey, media re-ports etc. Beyond the case studies, interviews wereconducted with academics on social policy, andgroup work was conducted with Agency members.

The findings of the research, drawn from these datasources, are presented below.



Findings

The NHS leases a variety of equipment, includingvehicles such as ambulances, medical equipmentsuch as diagnostic equipment and non-medicalequipment including photocopiers and vending ma-chines. Whilst not strictly an outsourced service, theleasing case study is of interest because it is anemerging market. Expenditure on equipment leasingin the UK increased by an estimated 4.9% in 2002, to£27.44 bn. The challenge at the organizational level isto improve Trust awareness of what leases they have,as different departments have responsibilities for dif-ferent leases; often the vending contract sits with theCatering Department, forklift trucks with Estates etc.At the sector level, there is a need to monitor theemerging market, to see which suppliers enter orleave the market, or merge. Some ‘independent’ leasebrokers, for example, are actually part of bigger leas-ing companies. Leasing will continue to increase, tosave the capital investment of buying equipment out-right. This case contributed to our understanding ofmarket monitoring, and gave an opportunity to lookat different ways of collecting market information onthe UK leasing market and other countries.

The NHS spends £1 billion a year on temporary,agency and locum staff, and flexible staffing serviceswas one of the fastest growing markets in the healthsector in the 1990s (Financial Times, Tuesday 15 May2001). There are worries that public money is beingwasted on the profits made by the agencies involved,and that the activities of the agencies are actuallyexacerbating NHS staffing problems. The market ishighly fragmented, and there is a trend towards con-solidation, in part driven by NHS Trusts looking forlarger organizations with which they can negotiatecompetitive contracts. The outcome of this case wasthat Trusts which had previously negotiated theirown contracts, agreed to select approved commercialagencies from a regional framework. The agencynursing case study provided an example of a strate-gic regional supply market intervention in responseto a highly fragmented market.

The contract catering case is an illustration of a ma-ture market in which there is significant supplierdominance. The sector has become highly concen-trated, with two companies taking 80% of all salesand four companies claiming a combined share of92% of all sales. Leading contract caterers now alsooffer other services in areas such as waste disposal,cleaning, security, and maintenance, and are in-volved in a number of PFI deals for new hospitals.More hospitals have outsourced their catering activ-ities and larger hospitals have established food andretail malls, incorporating branded outlets. At theend of September 2000, the Government announcedthat compulsory competitive tendering for cateringwould cease, replacing it with a ‘best value’ modelthat stresses quality and patient satisfaction as well


as costs. The new system will involve consultationswith patients and staff every five years.

In the catering case, options for managing imbal-anced supply markets were considered at national,regional and local levels of the NHS. Due to the dom-inant suppliers in this sector, action at a nationallevel may be the best strategy that the agency couldadopt, focusing on relationship management withthe dominant suppliers. In some regions, central pro-cessing units operate under NHS control, servingeither a number of sites within a Trust or serving aconsortium of Trusts within a specific geographicalregion of the country. In another region, one Trustprovides catering services for other hospitals. Mostoutsourcing activity occurs at the Trust level. Pur-chasers want quality nutrition at affordable prices.A large percentage of Trusts (25–30%) have outsour-ced catering services. Trusts often cannot afford thecapital investment associated with new kitchens, sooutsourcing is an attractive option. This has implica-tions for the option of bringing the service back in-house in the future, as Trusts will lose cateringequipment. There are also problems with recruitingstaff in this sector, and NHS staff lost to commercialcatering contractors may prove hard to replace.

The case studies gave different insights into out-sourcing activity at different levels. To keep costsdown, many NHS Hospital Trusts have purchasedservices, such as catering or laundry services, fromsuppliers rather than retain those services in-house.In a number of important supply markets, the frag-mented procurement of outsourced services acrossthe sector has led to situations of supply marketimbalance. In some cases, there are a lot of smallfirms in the market (e.g., agency nursing). In othermature markets, one or two national or internationalsuppliers provide services to NHS Trusts across thecountry (e.g., catering). Some emerging markets re-quire monitoring to anticipate supply market imbal-ances (e.g., equipment leasing).

There are several general observations to make as re-gards the findings of this research. Firstly, it isimportant to acknowledge that an imbalanced sup-ply market need not be a problem for a purchaser –in some circumstances choosing a dominant suppliermay be the best choice an organization can make.Problems may only become apparent when a sup-plier abuses its dominant position and purchasersthen discover there are no viable alternative suppli-ers left in the market.

The research found that there is much anecdotal evi-dence of imbalanced supply markets having detri-mental consequences for the NHS, but it has rarelybeen quantified. Once a problem has been identified,it can be difficult or even impossible to address. Con-tract cycles are typically 3–5 years, and PrivateFinance Initiative (PFI) deals are being set up forbetween 10–30 years; there may be an inability to

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respond to problems until contracts terminate. A fur-ther confounding factor is that EU regulations statethat invitations to tender must be open to the EU,and the choice of suppliers cannot be restricted,which does not ‘square’ with any central national ef-forts to suggest to purchasers an alternative choice ofsupplier if one is becoming dominant.

Considering imbalanced supply markets leads logi-cally to a consideration of what ‘balanced’ supplymarkets are. Participants in the research were askedwhat they deemed to be ‘balanced’, and suggestedhaving 5 or 6 suppliers in the supply market, withouttoo much supplier dominance or fragmentation, pro-viding choice and competition, and driving downcosts.

As regards the ‘macro-context’ within which publicsector supply is set, current influences include themove away from compulsory competitive tendering,public procurement policy objectives such as Valuefor Money and the Efficiency review (Gershon, 2004)and wider NHS policies as represented in the NHSPlan and patient choice resulting from GP commis-sioning. PFI extends outsourcing contracts to 20–25years, and are a model of public private partnerships(PPPs), which are viewed with increasing ambiva-lence by the public sector (Crump and Slee, 2005),and reflect the adoption of norms and ideals from pri-vate sector management (Grimshaw, Vincent andWilmott, 2002), a trend observed in New Public Man-agement (Newman & Clarke, 1994).

More specifically, there is also an increasing trend inconsidering the provision of clinical services by theprivate sector, such as pathology, radiology and re-nal services. The commissioning of private sectorfirms to provide clinical services has been arguedto be ‘‘creeping privatisation’’ (Whitfield & Dix,1998). Outsourcing these sorts of services raises ques-tions over what is core to the National Health Ser-vice. One reason for outsourcing is to allow agreater focus on core services, raising the questionwhat are the core services of the NHS if not clinicalservices? One political argument calls for pragma-tism over dogmatism, yet these choices are tied upwith how the future of public sector health care isperceived.

There is also the viewpoint that all services, eventhose that have traditionally been outsourced, arecore to the NHS (e.g., catering impacts on nutrition,which impacts on patient care; or cleaning impactson infection rates, which impact on patient care).Questions arise whether the NHS should lose controlover such services. A counter argument is that theNHS always has purchased services from the privatesector, it is just that now the boundaries of what ser-vices are ‘acceptable’ to outsource are blurring.

Having considered some of the complex factorsaffecting outsourcing decision-making in the NHS,

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the possible monitoring and intervention of out-sourcing activities are discussed.

Monitoring Supply Markets: How to Tell WhetherSupply Markets are Imbalanced

The first observation to make is that, in order toknow whether supply markets are imbalanced, amonitoring system needs to be established of out-sourcing activities across the English NHS. Collect-ing and collating market information, informationfrom healthcare providers and suppliers would al-low the NHS PaSA be in a position to make informeddecisions with regards to imbalanced supply marketinterventions. At present, information available tothe Agency is gleaned from specific outsourcing con-tracts with which the Agency has helped NHSTrusts, and it is therefore patchy. Efforts are beingmade to collect information via NHS Estates, a ‘sis-ter’ Agency to which NHS Trusts have to make man-datory annual returns, consisting of financial andfacilities data. An exploration of the best way to cap-ture this information is part of this research. Ongoingdata collection can allow the NHS PaSA to monitorand ideally forecast changes in supply markets. Suchan early warning system would allow proactive ratherthan reactive interventions to counteract supply mar-ket imbalance. As such, the purchaser would not be‘responding to’ imbalanced supply markets resultingfrom fragmented outsourcing decisionmaking, butmaking strategic interventions. Early indicators ofsupply market imbalance being explored in this re-search include whether the choice of supplier isbecoming too restricted, rising transaction costs, mar-ket information on mergers and acquisitions, cumu-lative information on Trust level outsourcingdecisions showing that at a sector level one supplieris becoming dominant etc. Having decided upon thetype and level of action (see next section), a feedbackloop would allow the consequences of those actionsto feed into the system, so that organizational learn-ing can occur. This monitoring / intervention systemis summarised in Figure 2.

Purchaser Responses to ImbalancedSupply Markets

In order to manage imbalanced supply marketsresulting from fragmented outsourcing, a nationalagent such as the Agency has a number of optionsavailable to it. To date, a variety of policy optionsand strategic interventions have been identified.The following decision-making framework sum-marises the type (Policy, Strategy, Management,Operations) and level (National, Regional, Sector,Organization) of actions available to the NHS PaSAto manage imbalanced supply markets (Table 1).

Starting at the top left of Table 1, one national policyoption available to a national body such as the NHS


Table 1 Managing Outsourcing at the Sector Level

Level Type National Regional Sector Organization

Policy � Central control

� Laissez-faire

� Manage supplier dominance

� Level playing field

� Flexible supply base

Strategy � Partnerships

� ‘Nationalize’ services

� Competition authorities

� ‘Second choice’ model

� Preferred supplier lists

� ‘Regionalize’ services

� Encourage competitors

� Trust-supplier matching

� Trust incentives

Management � National monitoring � Awareness-raising

Operations � National contracting � Trust guidance

manuals

Data collection• Hospital Trust information• Market

information• Supplier

information

Monitor

No action

Early warningsystem• Market imbalanceindicators

Action

feedback

feedback

Figure 2 An Overview of Outsourcing Monitoring and Intervention System


PaSA with regard to outsourcing is central control.This would involve managing the procurement ofoutsourced services centrally, preventing NHSTrusts from choosing a supplier that is gaining adominant position, but restricting their autonomy.Alternatively, a laissez-faire approach can be adopted,where the centre abstains from interference in theworkings of the market, and where imbalanced sup-ply markets are an accepted risk. Either extreme canbe construed as undesirable for either Governmentor for NHS Trusts. In between are a variety of policyobjectives, such as focusing on avoiding supplier dom-inance (a key theme in this research), or ensuring alevel playing field between in-house and commercialand voluntary sector provision, to support theachievement of value for money. A further policyobjective might be ensuring a prosperous (but notprofiteering), innovative, flexible supply base thatunderstands and directly contributes to improvingpatient care.

Moving to strategic options, the NHS PaSA canencourage the pursuit of partnerships (this could ap-


ply to all levels), bringing the private sector ‘on side’,as is the case with the Private Finance Initiative (PFI)and Public Private Partnerships (PPP). A further op-tion is to ‘nationalise’ services (i.e. organize on a na-tional basis), such as awarding a national franchiseto a big supplier for a particular service, to supplyNHS Trusts across the country. A further optionmight be for the NHS PaSA to call in the competitionauthorities if there is concern over a particular mergerleading to supplier dominance. A further strategicoption would be to get NHS Trusts to specify theirfirst, second and third choice suppliers (the secondchoice model). NHS Trusts could continue choosingoutsourcing suppliers, until a critical level is reachedwhere there is a risk of supplier dominance, at whichpoint Trusts are allowed their second choice ofsupplier.

At a regional level, strategic options include preferredsupplier lists, already being piloted in some regions inaccordance with EU procurement regulations. A fur-ther option being pursued is the ‘regionalisation’ ofservices, where services are consolidated and outsour-

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ced to a supplier for a region. At the sector level,attempting to encourage competitors to enter themarket, possibly by managing risk through under-writing, can counteract supply market imbalances.A further option to pursue a balanced supply marketis to attempt to match NHS Trusts and suppliersdepending on their size (other health care providerssuch as Primary Care Trusts could be included in thisoption). A final strategic option at the organizationallevel might be to offer incentives for choosing certainsuppliers over others, such as contract discounts.

As regards management options, monitoring supplymarkets and collating information from NHS Trustsand suppliers can be seen as a management optionat a national level. A further option could be termedawareness raising, to pursue an education programmeacross the health care sector, giving NHS Trustsfeedback regarding the aggregated consequences oftheir outsourcing decisions. Finally, a further optionassisting in operations at the organizational levelwould be to provide Trusts with outsourcing guid-ance manuals, to assist them in the contracting outprocess.

Discussion

This research has drawn together some of the tacitknowledge existing within the Agency and amongstother stakeholders with regard to outsourcing from asector level perspective. Having identified someexisting and potential monitoring and interventionoptions to counteract imbalanced supply markets,these options are being investigated and revised as

Figure 3 Range of Interventions

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part of the ongoing research. One of the limitationsof this framework is the complexity of factors thathave an effect upon outsourcing decisions. The typeand level of action depends on the constraints andrealities of the supply market, and macro-environ-ment factors.

One constraining factor associated with the monitor-ing of outsourcing activities through data collectionconcerns the time and cost of such an undertaking.It may be best to focus efforts, identifying whenand where it is most appropriate to look in moredepth at a market. Similarly, deciding when andwhere to act or intervene appropriately, and whatthe potential consequences might be, require consid-eration. Future research includes incorporating suchfactors into a framework to assist in outsourcingdecision-making about the appropriateness of certainactions, based on the outcomes of previous actions.Some of the following dimensions might be usefulto aid risk assessment and guide outsourcing deci-sion-making at a sector level.

v Macro contextv Service features (e.g., criticality, health specificity

and the complexity of service provision)v Frequency of need for servicev Value of transactionv Commitment to an outsourcing decision (e.g., the

reversibility of decision-making)v Supply market features, such as emerging vs.

mature markets, supplier dominance vs. manysuppliers

v View of stakeholders (e.g., political sensitivity)v Competences, capabilities and resources



A further observation is that these actions can beviewed in different ways in terms of purchaser-sup-plier relations; some are more aggressive, some morecollaborative, some involve central action, others areaimed at regional and Trust levels. Figure 3 capturesthis continuum; either extreme can be seen as a ‘redalert’ situation requiring more central action.Depending on factors such as the maturity of themarket, actions may be more or less successful.

Conclusions

Imbalanced supply markets occur when there arejust one or a few, dominant suppliers in the market,or very many, small suppliers, either extreme poten-tially leading to rising costs and a lack of innovation.Imbalanced supply markets matter because in thecurrent policy context, service provision in the NHSdepends on slack and competition in supply mar-kets, to drive down costs. The stakes of imbalancedsupply markets and limited competition are rising,with changing patterns of provision resulting fromGP commissioning and the drive for patient choicefor whom they want to provide their treatment (Lip-sey, 2005), and the option of choosing private provid-ers of healthcare. Due to the size of spend andpurchasing power of the NHS, it is possible for theNHS to create whole sectors where it is the sole pur-chaser of healthcare services. EU procurement regu-lations are intended to support competitiveness insupply markets, yet the paper shows how unplannedand fragmented outsourcing is unintentionally lead-ing to uncompetitive markets.

This paper considers what can be done in responseto imbalanced supply markets resulting from thefragmented procurement of outsourced servicesacross a sector. Individual organizations decide tooutsource services to suppliers, which can haveunplanned aggregated consequences leading toimbalanced supply markets. At one extreme, supplymarkets may consist of lots of small suppliers, and atthe other a situation of ‘supplier dominance’ mayemerge. Options for purchaser responses to imbal-anced supply markets are explored in a case studyof the English National Health Service (NHS), lead-ing to a decision-making framework for strategicinterventions.

The issues and argument presented are broadly rele-vant across various parts of the public sector andinternationally. How relevant the findings of this re-search are to other areas will depend primarily ondifferences in structure. At the least it provides in-sights with regard to public sector supply practice,and the applicability of this decision-making frame-work to other parts of the public sector could be use-fully explored. Learning from other countries aboutgovernment policy and strategy on outsourcing from


healthcare sectors to the private sector will enrich thepossibilities suggested in the framework further.

The short-term benefits of outsourcing for the NHSmay prove costly in the longer term as supply mar-kets become imbalanced, and the potential for thisframework to assist in risk assessment will also beexplored. A complex mix of factors (such as emerg-ing vs. mature market) will affect the appropriate-ness of these actions, and our aim is to developfurther this framework to assist in outsourcing deci-sion-making from a sector level perspective.

Acknowledgements

The authors gratefully acknowledge the support ofthe NHS Purchasing and Supply Agency. The viewsexpressed in this paper are those of the authors, anddo not represent Agency policy.

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HELEN WALKER,Centre for Research inStrategic Purchasing andSupply (CRiSPS), Univer-sity of Bath School of Man-agement, Claverton Down,Bath BA2 7AY. E-mail:[email protected]

Helen Walker is SeniorResearch Fellow, workingon a collaborative research

programme with the NHS Purchasing and SupplyAgency to investigate supply strategy andimplementation.

LOUISE KNIGHT,Centre for Research inStrategic Purchasing andsupply, (CRiSPS), Univer-sity of Bath School of Man-agement, Claverton Down,Bath, BA2 7AY. E-mail:[email protected]

Louise Knight is SeniorResearch Fellow at CRiSPS,currently investigating col-laborative research in man-

agement and the social sciences. She is at present editing abook based on an international, comparative study ofpublic procurement.

CHRISTINEHARLAND, Centre forResearch in StrategicPlanning and Supply(CRiSPS), University ofBath School of Manage-ment. Claverton Down,Bath BA2 7AY. E-mail:[email protected]

Christine Harland is Pro-fessor of Supply Strategyand Director of CRiSPS at

the University of Bath School of Management. Herspecialist field of research is strategic supplymanagement.


European Management Journal Vol. 24, No. 1, pp. 95–105, February 2006 105

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