Labour’s new policy on local government ‘insourcing’ aims to reverse the 40-year extension of outsourcing by establishing a presumption in favour of in-house delivery. In doing so, it encourages councils to take services such as rubbish collection, cleaning and school dinner provision back in-house.
The policy is a serious contribution to the debate on how to deliver public services and it deserves reflection. However, it relies on a misreading of the evidence on outsourcing and insourcing – and underlines the need for future governments to base decisions such as these on much stronger evidence.
The policy adds flesh to the bones of Labour’s March announcement of its plans to bring certain services back in-house by default, including those dealing with ‘at-risk’ people. At the time, the Institute for Government said Labour was right to identify outsourcing failures but argued that a blanket approach could create significant implementation problems without necessarily improving services.
The full policy sets out 10 criteria that councils would need to meet to justify outsourcing a service, adopting principles from the Institute for Government and others. Some of these tests would help to avoid outsourcing in areas that haven’t worked: in probation, for instance, the Government lacked a market of high-quality providers and couldn’t measure good or bad performance. Labour’s policy also leaves councils with room to manoeuvre, enabling them to retain outsourced provision if they can show that it is the best way of mitigating operational risks or if they don’t have capacity to insource services.
There are big questions about how this would be implemented. The criteria don’t lend themselves to simple tests which could be put into legislation, while some could be arduous for local authorities to prove. But setting aside the spin, Labour is grappling with the same issues as the Government over when and where outsourcing is appropriate. Neither would like to admit it, but there is clear common ground between Labour's policy and the Government’s own Outsourcing Playbook.
However, Labour is wrong to say there is "not a shred of evidence" that outsourcing has improved the cost or quality of services. In fact, as an upcoming Institute for Government report will show, the picture is mixed. When services such as waste collection were first outsourced, companies delivered significant savings of 20–30%. A recent systematic review showed that outsourcing initially produced savings in a range of areas, but that these got smaller over time as the public sector became more efficient. While reduced labour costs accounted for part of these savings, private companies also found efficiencies.
There is also evidence in a range of areas, including prisons and healthcare, that competition has improved the quality of services delivered in the public sector and led to innovations. It is true that the evidence is often not as strong as it should be, but it is much too simplistic to conclude that outsourcing has failed.
It is also generous to say that there is "increasing evidence of the benefits of insourcing". The policy paper outlines potential benefits and cites several councils which have claimed insourcing successes, but it offers no studies to robustly assess whether these benefits were actually delivered. If anything, the evidence is even weaker than the evidence on outsourcing. Much more work is needed to understand where insourcing could work, and what the risks are – such as losing the benefits of competition and the possibility of costs rising over time.
Regardless of whether any future government is broadly in favour of continuing outsourcing or increasing insourced provision, it will need to develop much stronger evidence on which to base its decisions. A key barrier is data, with government often lacking information about the cost and performance of contracts or the comparative cost of in-house provision. Last year, the Institute for Government made detailed recommendations on how to improve the quality of government procurement data – and our upcoming report will set out how government can make better decisions on who delivers services.
Labour is right to say that outsourcing has not delivered on the promises of its strongest proponents. However, far better evidence is required if cheerleaders for insourcing are to avoid the same mistakes.