Public sector cuts could lead to "golden age of outsourcing"

Interesting take on the government cuts in the Guardian. Seymour Pierce analyst Caroline de La Soujeole says government cuts might only hurt outsourced service providers in the short term. In the long term it will mean more public services being outsourced.

She says a “golden age of outsourcing awaits” as the government turns to the private sector to get more bang for its buck.

She says 14% by value – some £80bn – of public sector services are outsourced but she thinks that could exceed £140bn by 2015.

The report goes on to say that public sector service providers such as Capita, serco and Compass have been hit by the news of government cuts with share prices dropping.

Here is another take on the cuts from one of the suppliers affected.

Gary Bettis, president at Compass Management Consulting,  says that rather than just cut contracts the government should  learn more about IT costs.

“Rather than coming up with blanket figures like the £1m contract limit, there is greater potential for savings if the public sector understands what is driving its IT costs.

It is equally possible for the public sector to be paying too much for a £1bn contract and for lots of £1m contracts.  You can have inefficient contracts both large and small.

Analysis of public sector IT provision and comparisons with the wider market show that the public sector is typically paying 40% more than the market rate for IT services.   This poor performance reflects a combination of questionable procurement practices and inadequate management of the demands  on the service provider (for extra services and customisation, for example) which drive up costs.

It is only by transforming both sides of the deal – for example, demand management as well as a standard service framework –  that the large savings we need will be achieved.”

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Good points about the need to increase public sector understanding of the realities of the commercial IT sector, but they also need the wit and flexibility to change suppliers to get better value for money. For example, I have worked for public sector organisations that typically pay 30% above the market rate to hire contract staff via consultancies, with the consultancies pocketing massively inflated margins and often importing cheap ICTs to do the work (poorly), while the public sector client has even been barred by the government's own regulations from seeking cheaper alternative suppliers or recruiting from the local market. Madness.

In any case, outsourcing may not be the best solution to many of the problems in public sector IT, where massive budget over-runs, delays and ineffective solutions are often a product of organisations failing to take genuine responsibility for their projects, to understand what it is they are trying to achieve and how best to achieve their goals efficiently and effectively, and failing to communicate those goals clearly and consistently to their suppliers.

Delegating that responsibility even further away from those who should be exercising proper political and financial control will only make things worse. If government customers had enough understanding of their business requirements (and appropriate technical solutions) to ensure that external suppliers deliver the systems they actually need (rather than what they think they want) at a price they can afford, then they would already be doing so. The fact is that they do not do this now, so how is yet more outsourcing supposed to change that situation?

My view is that government organisations should not be downgrading their remaining IT resources, but should instead seek to re-generate and reinforce their in-house technical, managerial and commercial skills. They need to develop far better and more cost-conscious project management, and be prepared to confront the financial and business consequences of mistakes, as well as ensuring they acquire the technical insight and maturity to recognise an unworkable solution when it is presented to them with a hefty price tag by a "preferred supplier". It could be argued that instead of firing staff, they should actually be hiring the right staff with solid commercial experience to address these skills shortages in their own organisations - after all, with massive redundancies continuing across the UK IT industry there ought to be plenty of suitable candidates around.

Public sector managers need to wean themselves off their lazy dependency on grossly expensive external providers, and learn to identify for themselves which needs can be met by outsourcing, which can be best achieved in-house, and which can be met by changing business practices rather than IT systems. They need to be far more ruthless in forcing down external costs, and far more flexible in their willingness to adapt business processes to allow greater use of standard solutions, instead of giving suppliers free rein to indulge the client's ludicrously unrealistic expectations (while charging through the nose for every change request). Unfortunately, ruthless commercial acumen and adaptability are scarcely the hallmarks of most public sector organisations, while "Keep it simple, stupid" has rarely been a prominent feature of any government IT project that I've seen.

Sadly, political pressure to cut costs in the short term is likely to damage the potential for any public sector organisations to retain or invest in developing such skills in future. These organisations have spent years allowing themselves to be fleeced royally by external providers of needlessly complex and unsuitable solutions. With the loss of their few remaining in-house skills and with massive financial and political pressure for short-term fixes, this situation will only continue as there is more pressure to shift work from public to private sectors (and then straight on to India).

Our public sector organisations will become even more dependent on external suppliers, and even less willing (or able) to take responsibility for managing their own IT projects competently, effectively and responsibly. Those suppliers will be able to present themselves increasingly as niche specialists in a given government market, reducing competitive pressures on prices, and providing the ideal excuse to ratchet up costs once again as the "preferred supplier" to that particular market.

Business as usual, in other words.


Thanks for taking time to give such a detailed opinion. I will be going into a bit more depth on this issue and the points you make are very helpfull.


Statistics are showing a rise in the rate of temporary workers all over the world. What does this tell you? I think we are becoming one big freelance nation and the traditional way of working and doing business shall be broken - and laws can barely keep up with the fast pace of outsourcing. I wonder if we are in the age of work insecurity... and freelancing is the new way of doing work nowadays. As senator Schummer tried his desperate efforts to keep jobs in the US, it will still be a question of getting more for less. Now, you can just pay less for more. Nice sharing, I really think outsourcing is like one big global pandemic for some and a renaissance for others.