Preparing for outsourcing failures

Three different outsourcing failures have hit the headlines recently.

Seventeen Edinburgh schools were closed down after it emerged that private contractor Edinburgh Schools Partnership had botched their construction.

It has also emerged that the Government has paid out millions in compensation to learndirect. Learndirect was frontrunner to win a new Driver and Vehicle Standards Agency (DVSA) contract to provide driving theory tests; it received the pay-out when DVSA decided instead to extend the contract of current provider Pearson.

Finally Coperforma, the new provider of non-emergency ambulance services in Sussex, has come under fire for failing to meet standards and forcing patients to miss appointments. So many patients have become stuck at Royal Sussex County hospital in Brighton, that the hospital has paid for taxis to take patients home - effectively paying twice for the same service.

These stories suggest that, as the IfG’s research has repeatedly shown, all is not going smoothly in the world of government contracting. Some will conclude that government should stop outsourcing services altogether. But perhaps we shouldn’t be so hasty.

Companies construct thousands of schools that don’t fall down. We don’t know how good a job Pearson is doing providing theory tests, but the fact they are being asked to continue suggests that they have not lost the DVSA’s confidence. And there are private transport providers that do a perfectly good job of getting citizens to and from medical appointments.

There are some services that are very hard to outsource effectively – but the above three don’t fall into that category. Instead, the failures highlight three ways to ensure government avoids such problems in the future:

1. The Government must ensure that those who cause failures pay the costs. The questions in all these cases are who pays, and how much. For example, do the failures of Sussex health transport services sit with the new provider, or has the previous provider of services failed some duty in their handover? And should building contractors pay for temporary facilities for students, or compensate for harm done in terms of learning outcomes? It should be the norm that government and contractors work through a range of failure scenarios before contracts are signed. They should also consider the impact of external shocks on the ability to deliver. If they do, they not only avoid expensive disputes and legal actions but can provide much greater reassurance to service users that appropriate contingency plans are in place. Sadly, such stress-testing is far too rare.

2. Commissioners must ensure contracts can be transferred smoothly from one provider to another. Another scenario that should be investigated before contracts are signed is how a future transfer of responsibilities from one provider to another will work in practice. Across government, there are probably hundreds of contracts that have stayed with one set of providers for too long precisely because government has failed to do this. Providers end up holding intellectual property or assets, for example user datasets or processing software, and government can be held to ransom when they consider trying to get a new provider in: this is how super-profits are made. There is also a more subtle set of incentives that benefit incumbent providers and block the path of new providers who might do things cheaper or better. As the hospital transport case shows, transfers can lead to short-term performance dips – and the media often focus on these, not long-term value for money. Many prefer not to take the risk, but taxpayers and service users suffer when they don’t – and the right response is to prepare better for transfers when initial contracts are signed.

3. The government must take responsibility for improving outsourcing. The good news is that there is a drive to improve Civil Service commercial skills with the appointment of a new Chief Commercial Officer, Gareth Rhys Williams. There are plans to make the Cabinet Office the single employer of commercial professionals and to more actively manage and support careers, through enhanced training and status and new pay flexibilities. And some departments, such as the Ministry of Justice, are pushing their own improvement agendas. But there have been a myriad of similar drives over the past ten years and progress has often faltered. It will take more than improved commercial acumen to improve matters – most contracting problems emanate from decisions made by policymakers who lack sufficient understanding of when and how to contract. The promised transparency clause (based on the one the Institute for Government produced in 2015) will be critical in allowing organisations like ours to scrutinise contractual terms and details on provider costs and performance.

Government contracting, like so much of what government does, is not easy – so some failures are inevitable and to a degree, even acceptable. What is unacceptable, however, is to make the same mistakes over and over, without learning the lessons.

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