UK government is rewriting the outsourcing rule book

Changes in the way the government buys IT services were reflected in the latest figures from TPI,

Changes in the way the government buys IT services were reflected in the latest figures from TPI, which revealed that the number of outsourcing contracts signed by the UK public sector in the first half of this year was 70% higher than the same period last year, whereas the total value of these contracts was 47% less.

Similarly, the number of public sector outsourcing contracts awarded in continental Europe increased by 70%. However, in contrast to the UK, the total value of contracts also grew by 40% on last year.

Research from TPI revealed this was the result of the restructuring of existing agreements in the UK, whereas continental European public sector organisations were adopting large outsourcing projects for the first time.

Steve Tuppen, UK president at Compass, predicted that the extensive restructuring of outsourcing contracts in the public sector will result in more innovative agreements and service integration. "Looking ahead, we expect to see an increase in the standardisation of public sector outsourcing contracts and increased use of multisourcing, both of which will result in a strengthening of service, as well as greater flexibility," he said.

Government adopts new ways of outsourcing

He said there are already some examples, but he expects many more in the near future.

The recent contract awarded by the Department of Work & Pensions (DWP) in its IT transformation plan is one example. The contract was split into five lots, with HP, IBM, Capgemini and Accenture sharing deals. This would not have been split into five in the past.

Tuppen said the standardisation of IT services and contracts will move control to the centre of government and improve governance.

Another example of a new way to outsource is demonstrated by the structure of a civil service pension administration. My Civil service Pension (MyCSP) was announced earlier this year as the first example of a government body spun out into a mutual and partnered with a private sector company. MyCSP will administer 1.5 million civil servant pensions. It will be owned by three groups: the 475 staff, the government and a private company that will run the service.

All final bids from the four short-listed companies are now in. Capita, Wipro, Xafinity and JLT are the final four bidders, after 14 bids were received initially. The private sector partner will use its expertise to run the service, and will become a shareholder and be paid for running the contract. Like any other outsourcing contract, the private sector partner will have to compete to win the contract after five years.

John Worthy, technology partner at law firm Field Fisher Waterhouse, said deal structures are changing, with a move away from public sector mega-deals. He said the public sector is also showing an appetite for mutualisation as well as shared services. "We have seen a number of public sector deals that are being promoted as having potential to become mutuals."

He added that there will be much more multisourcing in government, with risks spread across a group of suppliers.

Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner, said the introduction of a mutual to run government administration functions is a "potentially enormous development". A number of these types of deals have been announced, and they are public/private partnerships.

Shared services, where a public sector organisation supported by an IT supplier offers a service to organisations with similar requirements, is also a growing trend. The NHS Shared Business Service, which provides NHS trusts with back office systems, is an established example, but it could go much further, said Lewis.

Commercial opportunities for government

New models for outsourcing are not new and have been muted before. The Labour government under Gordon Brown commissioned former civil servant Gerry Grimstone to find ways to raise money. The plan recommended the creation of massive public sector companies, out of administration departments, that would eventually be floated on the stock market. They would compete with big public sector service providers such as Capita in providing administrative services.

At the time, Grimstone told the Financial Times that there are lots of things in the public sector that are akin to business activity. "We are just embarking on what could turn out to be a radical piece of work on identifying business activities within government and corporatising them," he said.

Lewis at Berwin Leighton Paisner, said there is great potential for public sector organisations to share back office services. "For example, HR is HR, and although you might want a small core team of your own, the processes are the same."

Robert Morgan, director at sourcing broker Burnt-Oak Partners, said the government "could and should" be giving this serious consideration.

"If you put all the civil servants' payroll administration in a shared service, for example, it would be the largest BPO [business process outsourcing] deal ever seen," he said.

Morgan said this could be a good way for the public sector to reduce its workforce significantly without incurring huge costs and providing the workers with continued work in a private organisation with the same benefits.

The public/private partnerships model, which is on the agenda, works for the public sector because the supplier will take on the capital investments and the supplier will benefit from the business and a share holding, he said.

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