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The outsourcing advantage

Mark Fox, Chief Executive of the Business Services Association looks at how the industry is facing up to the current economic challenges to continue to be a major driver in the UK's economy

The UK outsourcing industry is a major driver of the UK economy, across every region of the country. It delivers choice, innovation and diversity. These are the talents and the attributes that will help see it through the increasingly tough economic and political environments.

The Business Services Association (BSA), as the industry?s principal representative body, is well placed to argue the case for light regulation and competitive taxation with the government and in Parliament. This work is even more important in the tough economic times arguably than it is in the good times.

In recent weeks, the BSA has played a leading role in the drawing up of the DeAnne Julius review of the Public Service Industry, commissioned by BERR Secretary of State John Hutton, and the publication of the Joint Statement on Access to Skills. We welcomed the findings of the review, which praised the role of the industry in delivering the full range of public sector services. It outlined ways to improve engagements with the private sector and also encouraged a broader role for the industry.

One of the BSA?s principal roles is to champion the benefits of outsourcing across the private and public sectors. The industry plays a crucial role in keeping the economy flexible and dynamic, and the Julius Review provides many new and good reasons why the industry?s role in delivering public services needs to be deepened and broadened. Worryingly, however, the review was given a cool reception by the trade unions and in recent weeks union leaders have renewed their calls for a slowing down of government outsourcing. The BSA is committed to positive and constructive relations with the unions, as evidenced by our participation in the Public Services Forum, but they will not inhibit us from energetically championing the real contribution the industry makes to creating employment, providing skills and training, and improving productivity.

The provision of public services on increasingly limited budgets is at the heart of the political debate and is set to be one of the dominating themes of the General Election, whenever it comes. Competing visions about how this can be done most effectively have been outlined in recent weeks by Gordon Brown and James Purnell for Labour, and Davids Cameron and Willetts for the Conservatives. The stakes are high because at the centre of the debate is how a whole swathe of central and local government services should be delivered, from education, health and defence through to environmental, transport and welfare services. That is why John Hutton has asked DeAnne Julius to conduct a review of the Public Service Industry.

At the moment, all the political parties agree that the private sector has an increasing role to play in delivering public services but there is little consensus on how it should do it. There is no agreement at all between the parties about how the private sector?s involvement in public sector service delivery should be characterised. The government, led by John Hutton and his Special Advisor John Williams, have developed the concept of the Public Service Industry. The Conservatives are deeply sceptical of the notion and talk straightforwardly about outsourcing contracts to the private sector.

The DeAnne Julius report says innovation in the services sector is hard to define and the Department of Business, Enterprise and Regulatory Reform, in partnership with NESTA, will be producing a report that will contribute to a better understanding of service innovation.

Also, developing innovative solutions for the public sector rather than for the private sector is more difficult. In a competitive market a firm can implement the innovative and if successful, reap its benefits. If there is a contract between a private supplier and the public agency the implementation of an innovation may require renegotiation. However, the BSA believes that innovation from the private sector has brought about cost savings for the public and improved standards in quality.

The evidence reviewed in the DeAnne Julius report showed that significant cost savings are generally achieved when services are opened up to competition, and this itself is indicative of innovation. Early experiences show 20% savings from competitive tendering and contracting. The prison sector has experienced cost savings of over 20% (CBI, 2003) and internationally across sectors, savings are found to be 10-30%. In the UK, contracting alternative providers of medical services found comparable results. The BSA/KPMG report on PFI contracts (2007) found that innovation in PFI contracts can be an important driver behind contract performance improvements; new ways of working helped 60% of the UK?s PFI contracts in place at the end of 2006 over-deliver.

However, contractors currently face a number of barriers to bringing innovative solutions to the public sector. Detailed contract specifications based on existing service delivery process means contractors are unable to renegotiate when they want to suggest a new way of delivering services. Many contractors experience that public sector workers are not prepared to accommodate proposed change and prefer to stick to old solutions.

Also, cost-saving innovations are usually preferred over innovation that improves quality. This is particularly the case if quality improvements are hard to measure or not incentivised by the contract. There are a number of solutions that can be used to break down these barriers and deliver improved public services to consumers. Public-private contracts need to be more flexible and allow for procurement teams and contractors to renegotiate initial terms in the contract. There needs to be a change in attitude towards embracing innovation in the public sector. For instance, contractors who work in the health sector have seen the NHS refuse to implement some of their innovative solutions to problems such as cleaning and combating healthcare ? acquired infections. Such behaviour reduces the benefits of contracting out support services.

Reducing bureaucracy in the process of delivering services will also significantly improve dialogue between contractors and the public sector and speed up implementing innovative services. This could include making documentation more consistent across certain sectors and reducing the contractors? obligation to achieve many social and environmental objectives. In the middle of this increasingly heated debate sits the UK outsourcing industry. The industry is the largest in the world, second only in size to the US, and operates across the private as well as the public sector. The public sector part of the industry, of course, is the bit that grabs the headlines and interests politicians and policy makers.

The scale of the industry in the public sector alone is impressive. In 2007/8, its revenues totalled £79bn, generating £45bn in value added and employing over 1.2 million people. Add indirect growth and employment and the PSI contributes £88bn of value added to the GDP and supports 2.3 million jobs. From this period and through the next general election, the BSA and the industry have to negotiate through an increasingly heated and fractious political debate. This task is increased by the very real economic challenges everyone is facing.

So this is an important time for the BSA and the industry ? and it is an exciting one too. There are huge opportunities to explain the positive aspects the industry brings across the private and public sectors. We will continue to work with policy makers and regulators to ensure the environment remains as competitive as possible and take on the critics to promote the value of what we offer.

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Added the 17 September 2008 in category Innovation UK Vol4-1

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