Why austerity means opportunity for outsourcing

Has there ever been a better time to be involved in outsourcing? Although many have greeted the government’s decision earlier this year to slash costs in the public sector with derision, it’s becoming increasingly clear that it presents a real opportunity for those with a vested interest in outsourcing services in both the UK and across Europe to flourish.

The cuts have been introduced against a backdrop of economic uncertainty, with analysts speculating that a double dip recession is nigh, and big spending government departments scurrying for cover as they start to feel the pinch. Indeed, cost-cutting initiatives such as the G-Cloud plan have already been well publicised, and we’ve seen much wailing and gnashing of teeth from experts who have predicted that the only consequence will be a poorer level of service, and an increased number of inefficiencies. But how fair is this assessment?

Saving potential
When the government announced the G-Cloud initiative, it was amidst claims from the Treasury’s Operational Efficiency Programme that it could save the government £3.2bn of its annual £16bn IT budget by 2013/14. By encouraging government departments to share resources and by replacing the existing government network of department-hosted systems with a dozen dedicated secure data centres, costing £250m each, the plan has been to reduce costs gradually, over a sustained period of time.

But what will this initiative mean for outsourcing suppliers? Although there were some initial fears that it would have a negative impact on suppliers, with the number of traditional private sector IT contracts reduced in favour of shared services, it’s become clear that the G-Cloud could provide a very real opportunity for outsourcers everywhere, in addition to the much-vaunted cost-efficiencies. It’s worth remembering that the G-Cloud itself could well support a variety of functions, including everything from pooled application libraries to a communal e-mail solution, and collaboration tools – but who, exactly, is going to manage these new services?

Opportunities for outsourcing
It’s clear that there’s a real opening for providers of IT outsourcing to change the way public sector IT projects are managed. After all, the G-Cloud will need to be constructed and then maintained, while software for all of its applications will need to be delivered – all of which could prove fertile ground for outsourcing service providers. It’s no exaggeration to say that the way individual contracts to deliver these services are managed, as well as the willingness of suppliers to change the way they deliver services, could play a big part in defining the role of IT outsourcing services in the public sector for years to come.

However, it’s clear that the government’s austerity measures are not confined to the realms of IT services. Supply-chain management, finance, procurement services, facilities management and human resources, are all areas where government will be looking to make deep cuts. It would be wrong for outsourcing service providers, however, to become complacent and for them to expect to see new public sector contracts falling into their laps with large profit margins.  

Although some contracts in the past may have seen the public sector paying more than the market rates for services, it’s important to recognise that under new streamlined procurement processes, these inefficiencies and poor management processes will most likely be squeezed out – with many procurement functions outsourced to the private sector themselves – a move which could help to achieve more competitive quotes from
prospective bidders.

Understanding public sector needs
Today, it’s estimated that 14 per cent of all public services are outsourced, with analysts forecasting that this figure will increase exponentially over the next five years, as the government looks to ensure that central government provision of services is replaced with high quality providers from the private sector.   

However, it’s also true that public sector bodies have very stringent tendering and contract procedures, and prospective suppliers from the private sector service providers will need to understand the way the public sector operates if they are to succeed. In order to successfully negotiate the bid process, service providers should expect strict KPIs, as well as being able to demonstrate a strong track record in their areas of extertise.

They may also need to add a greater deal of flexibility to their approach, and look to provide shorter term contracts, rather than the long-term deals they have been used to. A performance-based approach is much more likely to mean that long-term fixed deals are a thing of the past, as bodies will require the option to re-shape services at relatively short notice to react to changes in the way they operate.

Outsourcing firms will also find that they need to be adequately capitalised in order to take full advantage of these new opportunities. With the pressure and focus on whether companies are adequately resourced to provide the services they are offering, the inevitable scrutiny and political backlash surrounding any difficulties or failures is sure to intensify.  
    
Greater resources
It’s clear that cost is not the only reason that outsourcing holds such a strong appeal for the public sector. It’s worth remembering that by outsourcing services, the public sector can call on much greater resources, which is something that the public sector outsourcing naysayers would do well to note. Indeed, organisations in the private sector are structured to be able to effectively deliver some of the larger supply chain requests necessary when dealing with a large, national contract.

For example, it was recently reported that the NHS had a requirement to source 47 million cotton wool balls for the health service. It’s extremely doubtful that the order could have been delivered through the public sector at all – and certainly could not have been delivered as quickly as they eventually were, by international logistics group DHL, to which the NHS had outsourced its supply chain. The fact that cost savings in excess of £200 million were achieved was an added bonus.

Of course, as with any deal, if outsourcing is truly to thrive in the public sector, then it will be necessary to ensure that that due diligence has been undertaken. If the public sector rushes into outsourcing, looking for a quick fix, without first ensuring that their service providers are a good cultural fit, or that they can deliver an improved service, then it’s inevitable that problems will arise.  

Clearly, there is a danger that public sector departments could look to outsource cheaply, at the cost of improved service – although it’s worth pointing out that by initiating a project of any description based on cost alone, it’s likely to end in failure. If performed correctly, however, and for the right reasons, it’s clear that outsourcing can achieve real results for the public sector.

Although the government’s plans to slash public spending have been greeted with widespread pessimism, there’s no doubt that there’s a real opportunity for outsourcing to revitalise the sector and play a leading role in improving the efficiency of government – not to mention the profitability of business.

For more information
Web: www.noa.co.uk