Outsourced IT typically more efficient, finds Institute for Government

The Institute for Government has called on permanent secretaries and other senior officials to do more to improve commercial skills in departments due to “repeated outsourcing failures”.

But IT deals were picked out as being among the more effective externally provided services. Many have delivered tangible benefits, the IfG found – although those that have gone badly wrong “have cost taxpayers dearly”.

In a review of the government’s outsourcing policy, which followed a number of high-profile failures including the collapse of major supplier Carillion, the think tank called for an enhanced role for permanent secretaries in boosting government skills to agree outsourcing deals.

The review, based on more than 50 interviews with current and former government officials, suppliers, academics and industry experts, found senior politicians had consistently overstated how much money is saved by outsourcing services, but also warned that implementing a Labour Party policy to bring all services back in-house by default would be a mistake.

The report said government's outsourcing of public services to the private or voluntary sector had been expanded over the past four decades. Beginning in local government, successive governments have since extended outsourcing to areas including frontline services and major IT projects, and more recently to probation and employment services, as well as private financing of construction projects.

The IfG found outsourcing had worked best in the initial round of support services first outsourced in the 1980s and 1990s, such as waste collection, cleaning, catering and maintenance.

The think tank rated these four areas as green in its traffic-light scale for assessing whether outsourcing of various services has worked.

The outsourcing of back-office functions, including IT and human resources, achieved a second-tier green-amber rating.

The report said: “HR and IT outsourcing appear to have delivered some savings, although in some instances the evidence is mixed, suggesting modest savings or even cost increases. The impact of outsourcing on quality is less clear, partly because it is difficult to make precise comparisons. Case studies show that companies modernising systems have been able to deliver substantial benefits, although others show that major IT projects have cost taxpayers dearly when they have gone wrong.”

The IfG said that the UK has been a leader in outsourcing IT services; by the mid-1990s, technology contracts worth a cumulative £2bn had been awarded to private-sector firms. By 2007, an annual tally of around £12.7bn was being spent on IT outsourcing deals.

“However, the appetite for large IT contracts in central and local government diminished after 2011, with some departments taking greater responsibility of their IT through insourcing, which resulted in lower spending with some of the largest IT suppliers,” the report added. “Local government spending on IT and other back-office technology-intensive functions such as HR and payroll declined from a peak of £708m in 2012/13 to £535m in 2015/16.”

The report set out a number of recommendations for government to improve provision across all areas, with a particular focus on the role of permanent secretaries to ensure departments adopt best practices. They should also work closer with government commercial chief Gareth Rhys Williams to strengthen commercial skills and capabilities, the report said.

Perm secs should work with commercial and HR directors to ensure that officials have the time and resources needed to implement the government’s outsourcing playbook of contracting standards. The playbook includes requirements for pilots in any new outsourcing, the development of key performance indicators, and living wills in cases where the outsourcing provider fails. It also requires government to undertake a make-versus-buy analysis to determine if services should be run internally.

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The authors also called on officials to be made more accountable for contracting decisions. They said select committees should be able to recall ministers and officials who have subsequently left their post to answer questions about the decisions made during outsourcing projects.

However, overall the report concluded that bringing all outsourced services back in house “would end 40 years of continuity”.

While outsourcing has suffered a string of recent failures, the evidence does not support the view that outsourcing overall has failed, IfG senior researcher Tom Sasse said.

“A lot of confusion continues to crowd the debate over outsourcing. Labour’s policy of bringing services back into government hands by default risks throwing away the benefits of outsourcing. But at the same time, the government must address the causes of repeated outsourcing failures.”

A Cabinet Office spokesperson said: “This government will always champion the private sector's vital role in delivering our public services. Over the past year we have made great strides in improving how we work with the private sector, including introducing an outsourcing 'playbook', which has been welcomed by industry and bringing in new rules to ensure government suppliers pay their bills on time.”