Outsourcing: What a Waste!

Occasionally I have read stuff which seems so timely and apposite to work on which I am then engaged, that I’ve been motivated to provide an aide memoire of the text. This posting provides such a review of one 2015 text; it is not a summary and includes some personal interpretation; it is more a personal aide memoire of the opening chapter.

The book starts off with two rivetingly relevant-to-today quotes, one from 1936, the other from 1885.

Reading Review: What a waste: outsourcing and how it goes wrong, Bowman et al, 2015, Manchester University Press

Chapter 1 Outsourcing: organised money and disabled government

“We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs.  We know now that government by organised money is just as dangerous as Government by organised mob.”  F D Roosevelt, announcing the Second New Deal, October, 1936.

“The common rights of ownership have disappeared. Some of them have been sold; some of them have been given away by people who had no right to dispose of them; some of them have been lost through apathy and ignorance; some have been stolen by fraud; and some have been acquired by violence.  Private ownership has taken the place of these communal rights, and this system has become so interwoven with our habits and usages, it has been sanctioned by law and protected by custom, that it might be very difficult and perhaps impossible to reverse it.  But then, I ask, what ransom will property pay for the security which it enjoys?” Joseph Chamberlain, Birmingham Town Hall speech, January, 1885.

1.1 Introduction: The text addresses new problems created by outsourcing public services to private contractors. It considers the gap between efficiency rhetoric and delivery reality and between public service and the outsourcers’ profit maximising and tax manipulation.

1970s stagflation led to structural reforms aimed at improving efficiency. Thus, sale of state owned monopolies: Stage 1 those with retail customers eg energy, transport, water; Stage 2, tax funded or subsidised activities eg household waste collection. Result by 2010s: a franchise state, way beyond the original intent, now includes historical central state functions eg criminal justice admin and delivery of welfare; in 2010-2012 more than £1.5bn of incarceration and justice services outsourced, including biggest contracts of over £100m. In 2014 probation services for medium and low risk offenders let for ten year contracts worth £450m pa.

Scope and extent is remarkable and continuing to grow, creating a ‘public service industry’ of private providers which accounts for a third of government spend on public services. Operations outsourcing and goods procurement of around £187bn by 2012-13 (of which £40bn central government departments, £50bn NHS, and £84bn local government).  This vast and growing franchise state is socially wasteful and administratively inefficient with many examples of massive cock-ups, profiteering, withdrawals/bankruptcies with the state picking up the pieces, tax avoidance/evasion etc all specified in the text. Four huge conglomerates, G4S, Serco, Capita and Atos cover wide range of services without having specialised knowledge and expertise.  These are all financialised players (ie driven to maximise shareholder interests at expense of all other stakeholders).

Support for the franchise state is a political decision based on economic ideology – mainstream politicians don’t even examine the results of outsourcing, but plan to grant ever more local monopolies from which organised money (Roosevelt’s term) can take profit without capital investment or revenue risk.

The book’s argument is that the state and the giant outsourcing contractors are bound together, utterly co-dependent. The Thatcherite/New Labour intent was to inject market competition into public service provision. But the outcome is (according to 2014 HoC Public Accounts Committee) ‘evolution of privately owned public monopolies, who largely, or in some cases, wholly, rely on taxpayers’ money for their income’. The state strips itself of the resources and ability to assess outsourcing contract bids. Organised money drives outsourcing companies to game the contractual system and taxation regimes to take out more and pay back less into the public purse.

“In the 1960s, the state was easily the equal of organised employers and workers in the CBI and TUC. Now in the 2010s, the corporate actors are, in practice, the dominant partners in a new co-dependence as they game institutions and tax regimes and manipulate contract making; the central state is at best playing catch up when things go wrong and much of the local state lacks resources and expertise to contract on an equal footing.”

Public awareness of the extent of outsourcing is limited, but the failure of politicians to protest outsourcing is critical and urgent, as it is now outsourcing “the foundational economy” ie health adult care, welfare and security – ‘the basis of material security and the infrastructure of civilised life for the whole population.’

1.2 From standard narratives to the charge sheet – standard narratives are the politically motivated arguments which are made without due attention to facts and data – gives examples re rail since privatisation. The National Audit Office and HoC Public Accounts Committee are not in pockets of outsourcers, but not effective either since they only look at fiascos and catastrophic errors. They do not provide a balanced overview – that’s the aim of this book and it makes a number of charges:

Charge 1 – Outsourcing allows blame shifting: If governments outsource, ministers avoid direct responsibility when things go wrong. Chapter 2 suggests government is a rather dubious agency whose self-interested agenda includes protecting politicians and their advisors – outsourcing  fits this agenda by allowing abdication!

Charge 2 – Outsourcing contracts in sheltered mundane activities, routinely cover profit-taking without risk at the expense of the taxpayer and workforce. Eg NHS ward cleaning, the outsourcer takes over former NHS staff, cuts their pay and employment rights and pockets the profit with no risk and no capital expenditure. Such contracts have not gone spectacularly wrong so do not attract attention, but they serve no other interest than maximising investor gain as shown in Chapter 3.

Charge 3 – Outsourcing has created giant conglomerates which are bidding machines focused on winning new contracts, turbo-charged through acquisitions. Over the past three decades politicians and civil servants, in thrall to the mainstream neoclassical economic ideology, have doubted the judgement of government in industrial or commercial matters, putting faith instead in capital markets to set financial objectives and discipline inadequate managements. Chapter 4 shows how misplaced that faith is, providing examples such as Serco and G4S encouraged by capital markets into financialised strategies of merger and acquisition rather than developing competence in any particular area. Chapter 5 shifts the focus from conglomerates to sector specialists which develop specialised expertise but which is subordinated to financialised parent-subsidiary relations exploiting limited liability for the maximisation of shareholder interests.

1.3 The mess we’re in: co-dependent government and sham capitalism – The financialised mess ignores the realities of capital development and innovation, replacing them with the superficialities of financialised conglomerates. Outsourcing is opportunistic, succeeding or failing as political expedience of the central state intersects with the financial opportunism of the outsourcing companies and their investors (not to be confused with traditional shareholders). [cf the competing narratives of outsourcing companies (an ordered process with predictable outcomes) and TUs (an ordered process which fleeces employees and other stakeholders)].  But outsourcing, which is disordered, unreliable and unpredictable , gives up power of the central state, which should be focused on the common good, to the opportunistic, financialised entities of ‘organised money’.  Some of the complications or outsourcing are listed:

  • Returns from outsourcing are variable and unpredictable – outsourcers not obliged to bid or rebid for unprofitable work and can exit from work if unprofitable.
  • Austerity is screwing local authorities down further but leaving them with the unprofitable contracts. Government’s contradictory claim of seeking value for money, but only outsourcing where profit can be made.
  • Underperforming penalties and costs of walk-away are hugely variable, resulting in many areas of the local authorities left with the non-viable contracts.
  • Outsourcing is mostly of labour-intensive service activities where the contractor is not required to make big capital investment and can achieve savings simply by cutting wages and manpower – many of which effects being offset by subvention by the state ie tax payer.
  • Contractors are encouraged by financial opportunism to overreach their ability to manage contracts and to move into areas where they have no experience or competence.
  • Contractors have no concern for the mess they may leave when their contract ends – that will be picked up by the tax payer.

Because of these complications outsourcing is financially extractive, promises more socially than it delivers, and is rarely good for the citizen. The basic problem is that outsourcing contracts bind the state to the financialised providers which very often bid without understanding what is involved and having no concern re the mess they will leave when the contract ends.

With all these problems it might be expected that some caution in outsourcing would be exercised and some research conducted of the pros and cons. There are many reports of cock-ups, explanations of missions impossible (eg as book was written, government took back the Sellafield nuclear clean-up contract, and Circle Healthcare walked away from Hinchingbrooke Hospital).

But outsourcing continues to gather pace – TINA! It suits the political convenience of government with a 5 year maximum self-interest time horizon, and suits the outsourcers and their investors – the two parties are thus bound together in the process. Government ministers avoid direct responsibility for negotiating wage settlements with public sector workers, can abdicate responsibility if the contracts go badly wrong and take credit for reduced costs resulting from wage and manpower cuts.  [NB UK post-1979 position complicated by GDP growth being funded by sell-off of state assets (eg housing etc)].  The outsourcing contractors benefit from profits in local monopolies in sheltered sectors, which are difficult to achieve in competitive markets.  UK manufacturing was financialised so opportunism replaced innovation – “Thus Serco and Capita replaced ICI and GEC in a new outsourcing sector which the CBI now represents as ‘a great British success story.’” The fact is different – rather than a success story it is a ‘sham capitalism’ authorised by government and exploited by ‘organised money’.

Thus outsourcing prospers from co-dependent government’s politically convenient abdication of responsibility and the financially motivated opportunism of ‘organised money’. Hence the additional rewards offered to and by individuals through the revolving doors between the two sectors of ‘sham capitalism’.  This process of financialising public service, defeats democratic control of the economy, reducing concern for the common good to those items which might generate returns for ‘organised money’.

1.4 What is to be done? – ‘the problems with outsourcing are fundamental and deep seated in our governing institutions’. The text aligns ‘government, corporations and organised money’ as resisting ‘serious policy reform’ while ‘offering what they consider to be tolerable concessions’.  This analysis echoes the slightly more widely defined self-perpetuating industrial, financial, media, academic and political establishment (SPIFMAPE)  (https://gordonpearson.co.uk/2015/12/07/transatlantic-trade-and-investment-partnership-revisited/#more-1415).  The common problem is ‘what is to be done?’

In the outsourcing context the following recommendations are made:

  • Some outsourcing contracts to be prohibited so as to ensure state authorities do not simply abdicate from their responsibilities. These include large scale outsourcing of bundles of contracts; outsourcing politically toxic activities (eg welfare cuts, border controls); the complete outsourcing of any activity (eg care homes), which might thus completely disable the state in that activity.
  • Limit the opportunities for financial extraction by outsourcing. This could be done by offering management contracts for a fixed fee, rather than the complete contract including capital investment and employment. This could follow the East Coast main line (2009-2015) model, the complete outsource having failed. Capital investment would be retained by the state which can borrow more cheaply than the private sector, and which in the end still carries the risk since outsourced activities have to be maintained by the state even if the outsourcing contractor fails. Management contracts could be agreed only with contractors who have the particular skills and expertise required for the relevant activity.
  • Move beyond the ‘government, corporations and organised money’ establishment’s commitment to an economy based solely on tradable goods and services which can be made to contribute to the private sector (ie the ‘franchise state’). Move from that to a commitment to the foundational economy of services essential to everyday life in a civilised society. These include (both public and private) health, education, care and welfare, pipe and cable utilities, transport and much retail and hospitality, accounting for 35% of UK employment
  • An interim requirement would be to require all outsourcing contractors to respond to the ‘social ask’ ie how they will contribute to improving the foundational economy. Such a real commitment in every outsourced contract would help limit the franchise state focus on cutting labour costs and employment, fragmentation of cherry picked services and territories etc.

Social innovation as suggested by the last two bullet points above will not come naturally to the ‘government, corporations and organised money’ establishment (or even less to the SPIFMAPE).

The opening chapter ends with the following:

“Compared with a limit-and-deter regulatory approach, this social ask approach would be a clumsy, slow way of curbing the excesses of outsourcing. But, when politicians drag their feet, it is something which concerned citizens in civil society can campaign for and extract concession on. At the same time, such campaigns would raise consciousness about how the co-dependent and complacent state is as much a problem as the big corporates.”

The following four chapters provide more detailed analysis as follows:

Chapter 2 – Outsourcing, blame shifting and major fiascos

Chapter 3 – Unjustifiable profit taking on mundane contracts

Chapter 4 – Undisciplined outsourcing conglomerates

Chapter 5 – Outsourcing specialists and the gaming of limited liability

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