Since the introduction of compulsory competitive tendering to broaden the providers of services in local government, outsourcing has thrived. 

But several decades on - after the collapse of Carillion and the shaky financial state of other providers - there are now considerable doubts over the best method and options for delivery of local government services. 

Outsourcing has worked well when the market is robust and diverse, and has been successful in driving down margins. But some authorities that have made extensive use of outsourcing arrangements are not receiving the benefits or quality of services anticipated or promised. 

At the same time, local authorities' overall spending power has fallen by nearly 30% in seven years, according to the National Audit Office. By 2020, with a predicted funding gap of £5.8bn, the scale of the challenge for local government finances will be considerable. 

Is this now a seminal moment for a change in commissioning and procurement practises – that will give local government a better deal? 

A new vision 

At a recent round table event, organised by SOLACE and Bevan Brittan, local government leaders discussed their vision for future commissioning and outsourcing. 

There was wide agreement that not enough thought goes into the role of commissioning – with too much emphasis on financial management, instead of focusing on ‘citizen outcomes' and interventions that achieve real social value. 

In recent years, local government has driven ever-harder deals with its contractors. Tenders that were supposed to be judged on both price and quality have often simply been awarded to the lowest bidder (or best bidder in the context of evaluation criteria). A weakness in contract management means desired outcomes are not being constantly delivered.

Piali Das Gupta, head of policy at SOLACE, said: ‘There is frustration in the value and performance of some PFI and outsourcing contracts, but authorities still desire partnership arrangements that enable them to generate income and, for example, build housing on a scale that might otherwise not be possible.

‘To drive improvements in public services, completely dismantling the outsourcing model would be a major and difficult step, as outsourcing has come to occupy a central position in how the public sector works. Some authorities also argue that they have also seen an improvement in the efficiency of public providers and in-house models, spurred on at times by competition - and other times by collaboration with the private sector.

‘There is an opportunity now to learn from local authorities who have gone back to first principles in their commissioning discussions by asking themselves what outcomes they are seeking to support in their communities, and only then moving on to questions about delivery models and providers.  

‘What we really want to encourage is a step back from taking entrenched ideological positions.  Effective commissioning will recognise that the ‘who and the how' of service provision can and should be different - based on local circumstances. markets, priorities, etc.'

The opportunity now 

Local government has considerable combined buying power – and, as a group, the ability to improve commissioning in the public interest. 

As a collective client, local government can work together to encourage more breadth and depth in the market. This could mean commissioning models and structures with better levers and methods for contract management when providers do not deliver, including the ability to take services back ‘in-house' when necessary. 

Andy Burns, CIPFA past president and director of finance and resourcing at Staffordshire CC, told the round table: ‘We know that outsourcing has made a major contribution to delivering savings and allowed us to protect the frontline. The Carillion collapse now presents the opportunity to take stock, revaluate and make sure that as a sector we're using the best contracting, commissioning and procurement models to achieve our outcomes. 

‘However, it does mean making sure we're learning lessons and ensuring we've got the right capacity and skills in our councils to evaluate the full range of options - from wholly owned companies, to in-house provision to community owned companies.'

Accountancy bodies are currently advising authorities to urgently review all their outsourcing arrangements - but resist outright rejection of new private sector solutions, particularly where organisations lack expertise, cannot maintain critical mass or are unable to invest fully in appropriate systems.

The rising number of authorities currently in financial trouble – and having to trim back to only essential services – emphasises the need for so-called ‘commissioning councils' to ensue robust risk and financial management within such arrangements.

There are likely to be more demands on the private sector to take account of the Social Value Act to respond to ‘economic, social and environmental well-being'. Similar demands for more ethical commissioning may see smaller enterprises providing services instead, therefore keeping more money and jobs within local economies. 

Effective commissioning and contracting

The Carillion collapse has already changed buying behaviour. In the first half of 2018, buying of outsourcing contracts by local government dropped by 43% to £77m, with many authorities deciding to bring running of services such as cleaning and school meals back ‘in-house'. 

Authorities are now facing even tougher choices over business models that give value for money and a high degree of certainty that vital services for local people can be delivered.

In reviewing current arrangements, questions that officers should be asking now include how long before a contract expires, how well the contract is being fulfilled, the cost-benefit calculation of terminating contracts and whether they can be renegotiated – but only do so fully informed of future options and their viability.

However, in the difficult financial climate, most authorities will still require a commercialisation strategy. But the default is not necessarily to outsource, and careful consideration is needed in deciding whether commissioning, procurement, in-house (or a combination) is best to deliver the desired outcome.

The Carillion insolvency has served as a reminder to all public sector organisations of the need for robust commissioning and procurement processes to test the suitability of bidders on projects, and in contractual terms to support ongoing monitoring.

In making these choices, authorities need to build in risk-sharing, flexibility and innovation - and securing financial discipline in the commissioning structure – with a strong emphasis on outcomes and local benefits. 

An effective strategy may be a mixed economy approach, but being fully aware of the service implications and risks of each option remains critical.

Conclusion

Local government can continue to improve its commercial mindset in contract management and in delivery, and there is now an expectation that private sector providers should respond to the market context and needs of the clients. 

Local government should not expect outsourcers to take on unacceptable levels of financial risk by bidding for contracts based on cost rather than quality of service. But in return, private sector providers also need to improve their accountability and transparency, and make sure their clients are getting the best social outcomes for the public pound.

One of outsourcing's most important effects has been to force public providers to up their game. There is a huge amount of commercial expertise already in action in councils across the country, and there'll be another networking opportunity for local authority leaders to share experiences, ideas, and best practice at the SOLACE summit in October. 

It is important that this critical knowledge is made available to senior decision makers to get the best outcomes from the range of commissioning and procurement options available.

If councils become better able to run their services efficiently, that is a sign of success in commissioning policy, not a failure.

David Hutton is partner and head of local government at Bevan Brittan