Growing together: the case for group outsourcing

Steve Bishop is strategic director for South Oxfordshire and Vale of White Horse District Councils. This article was originally published in Issue 4 of Room151 Quarterly magazine. 

South Oxfordshire (South) and Vale of White Horse (Vale) district councils are well versed in  the practice of outsourcing services. We haven’t taken the big leap that some of our colleagues  have towards being a fully commissioning  council but, looking at the numbers, we’re  currently about half way there. Half of everything we do is contracted out to the private sector. The largest white collar contract we have (for financial services) is shortly coming to the end of its 10-year life and we’ve taken the opportunity to reflect on the various service delivery models that are taking root in local  authority. We’re embarking on an exciting and innovative new strategy.
Rather than just re-tender our current outsourcing arrangement, which largely covers revenue and benefits along with some other facets of  our financial services, we’ve decided to explore  extending the deal in two ways. Firstly, we’re considering adding in a whole host of other services which, if you exclude planning, will account for about 80% of all council business.
Subject to political decisions in the autumn,  accountancy, HR, IT, procurement, facilities  management, engineering and car parks are  all going to be market tested and, if the market  demonstrates better value for money service  delivery, we’ll recommend outsourcing them.  For South and Vale, this would represent a £9m annual outsourcing contract (NB: each council has an annual sum to be financed of approximately £12m).
Secondly, and perhaps more unusually, we’re speaking to three other district councils in the south of England who will potentially join us in the deal and jointly procure the same outsourced services. While we’re not in a position yet to say  who we hope our future partners will be, what  I can say is that we haven’t been constrained by  the mantra of “nearest neighbours” or anything else equally unhelpful.
What we’ve learned from our arrangement with Capita, who run our current financial services contract and manage much of the work offsite in Coventry, Carlisle and Mendip, is that you don’t need to work locally in order to deliver quality services in your district. Similarly, if groups of  clients (i.e. councils) are coming together to  achieve economies of scale through a large joint  procurement initiative, there’s no reason why  they all need to be next door to each other.  Actually, the fact that they all have histories of outsourcing is much more important to us than where they are on the map.
It’s early days, and all four of us (or five if you  count South and Vale as two separate councils)  need a political mandate to make this a reality;  but the benefits, as far as many of the officers  involved are concerned, are clear.
One of the councils involved in these discussions is smaller than South and Vale, and its primary concern is that if it goes to the market to renew a current contract alone, the only interest they  may receive will be from the incumbent provider;  who, assuming they get wind of the dearth of competition (and they usually do), will probably  price the renewal accordingly.
It’s an often unreported aspect of council procurement: we are always hearing about the council who spent too much but you don’t often hear about the council who was had over a barrel because the only provider interested in  the business knew they had the contract sewn  up. Coming to the market as a group of five will give us the clout to attract a greater number of more serious suitors who will like the size of the contract but won’t be all-powerful at  the negotiating table. Providers would much  rather have five small contracts than one big  one because they understand that some of the  savings have to be passed back to us (‘divide and  conquer’) – but it’s not a piece of business you  can afford to pass over lightly. Our situation as five separate procuring agents would actually also put us in competition with each other to secure the services of the best provider. As a group, we stand a good chance of all working with a top provider and saving on costs.
Conservatively, we think we stand to save around £0.5m per annum across the five councils, if we get agreement on outsourcing  all the services we think could be managed  more efficiently elsewhere. The challenges to getting this off the ground are by no means straightforward though.
Firstly, in order to qualify for some of the government’s Transformation Challenge Awards pot for 2014/15 we’ve had to demonstrate  an in-year saving. Clearly, savings from the procurement itself won’t kick in until some point after we’ve done the deal so we couldn’t apply for funding based on the central rationale for the contract. Instead what we’ve been able to do is build a case for jointly procuring consulting services to help with the overall business case and contract. Since all of the councils involved had earmarked consultant spending this year, we’ve been able to demonstrate the in-year saving we needed, which – as a double whammy – also unlocks the £5m procurement  saving down the line. Something which should appeal to the government.
Secondly, the market testing I mentioned is essentially a process of going to our different service areas and asking them to embrace this opportunity to test their own in-house service value for money against the market. That’s not going to be easy and any transformation of this  kind is bound to ruffle feathers even though  we’re unlikely to see any net job losses.  I’m pretty sure the directors of the councils  involved are all swayed by the overwhelming  financial benefits of the plan but our politicians, who aren’t opposed philosophically to  outsourcing, may take more persuading that  they’re not ceding sovereignty. South and Vale have taken the lead on the project so far, given our earlier contract expiry deadline, with the blessing of officers at the other three councils.  But will politicians from all of the districts continue to see this purely in commercial terms?
Lastly, we’ve also had to come up with a plan for  the associated client-side services across all the councils that will remain in house – the finance team here at South and Vale who are responsible  for managing the contract, for example. What we’re considering is merging these services into a joint client side. So it won’t just be the outsourced services that are affected by the work. The joint client-side team may need to be located somewhere in only one of the five councils, or we could be looking at a virtual team spread over the five, but five times as resilient as  any single team. So, when you consider the staff that will be TUPE transferred to the contractor and the in-house merged client side staff who may have to move, that’s a lot of human resource challenges and headaches to overcome.
It’s an exciting and difficult time in local government and if we are to make the necessary savings to see us through a period of severe funding cuts, these challenges are precisely the ones we’re going to have to take on.