The catastrophic collapse of Carillion last month, alongside the well-publicised financial woes of certain of its fellow service providers (most prominently Capita and Interserve), has placed the very future of public sector outsourcing in the UK in the full glare of parliamentary and media debate. More so than for many years, the question of how, and how much, the British government should outsource is now up for debate, with Labour leader Jeremy Corbyn calling for an end to outsourcing and the renationalisation of a huge swathe of activities, and the former leadership of Carillion pilloried in the press and humiliated in Parliament.
Clearly, much of the discussion is of an ideological nature – Corbyn believes in a strong state and restrictions on the ability of the private sector to profit therefrom, whilst his Conservative opponents on the government benches unsurprisingly tend to favour the opposite. However, it’s worth remembering that for two decades or more there has been a cross-party consensus on the value of outsourcing to British society and the economy, and however opposed to the model Labour may now be, much of the growth in the sector came under Blair and Brown. However ideological the political battle may now be, it was not ever thus.
Leaving politics aside (as much as possible, at any rate) it seems there are two key questions to address for anyone wishing to get an idea of where UK outsourcing now stands and what its future holds. The first – why did Carillion collapse and will others follow suit? – may be the more straightforward to answer, even if much pertinent information has yet to reach the public domain. The second – is public sector outsourcing doomed and if so why? – is, clearly, the more pressing, but needs to be informed by a response to the first.
Carillion’s fall is a tragedy of epic proportions: a company employing tens of thousands both here and abroad, with over 30,000 suppliers and partners, providing a broad swathe of services across the globe, gone in what felt at the time like the blink of an eye. Obviously, though, the warning signs had been there for quite some time: as was reported very quickly, a number of hedge funds had shorted Carillion as far back as early 2015, and it seems extremely unlikely that those institutions had been able to spot problems which the government (as the primary buyer of Carillion’s services) with its much greater visibility of the firm had missed.
The bottom-line seems to be – and of course it is still too early to be absolutely sure – that Carillion’s demise occurred because the company’s leadership screwed up royally. Yes, Carillion was operating in a highly competitive environment in which margins have been being squeezed for some time (especially with intense pressure on government buyers to keep contract costs to a minimum) – but, regardless of whether or not any actually criminal management or accountancy activity took place (and investigations here are ongoing) the firm was clearly in a royal mess long before its eventual collapse, with contracts being bid for at desperately low profit margins (or even, apparently, at significant losses) simply to get the immediate injections of cash which they entailed. Descriptions of the company as a type of “outsourcing Ponzi scheme” don’t appear to have been too wide of the mark, with money for today’s contracts being used to cover the costs of yesterday’s (and, unforgivably – and politically explosively – to pay dividends which rose every year, whilst running up a billion-pound pension deficit).
In the end no business, regardless of the sector in which it operates, could sustain itself indefinitely under those pressures. Carillion’s fall wasn’t so much a product of its environment as it was a result of a series of terrible (and apparently terribly unethical) decisions at the top: it wasn’t so much the outsourcing sector that was to blame as it was the leadership of this particular outsourcing provider.
So why has attention turned so quickly to Capita – which lost a staggering 50% of its value in one day last week – and other service providers like Interserve which came under the microscope even while Carillion was in its death throes? Surely this is a sign not of one bad Carillion-shaped apple but a sector full of them? Well, no: despite what politicians on both sides of the House may proclaim, and despite the chunterings of the press, there are reasons for the outsourcing sector to be cheerful.
Firstly, while Capita especially does have its problems – in an extremely frank announcement last week, aimed at pre-empting the kind of market furore which surrounded Carillion, Capita CEO Jonathan Lewis described his company as “far too complex” – at this point it appears that its debt is significantly more manageable than Carillion’s, its contracts are more profitable and its management team, with Lewis at its head, have far more options than did their disgraced counterparts at Carillion. It may no longer be the stock market darling it once was, and it may have to downsize further to reduce that complexity, but – while, again, it’s important to acknowledge that we don’t have the full picture – at this stage the fundamentals appear sound. Most relevantly to the broader topic, it does not seem that the conditions prevailing within the outsourcing sector are such that a large organisation cannot at least survive within them (and we must remember than for many years firms such as Capita have been doing very much more than merely surviving).
What then, to the broader question of the public sector outsourcing space? If Carillion is a genuine one-off, nevertheless the impact of its collapse can’t be ignored: currently hundreds and potentially eventually many thousands of workers laid off, pensions destroyed, suppliers ruined. Whatever else the government needs to do to react to this cataclysm it needs to address how such a chain reaction can be prevented in future. (Of course, if it isn’t a one-off the situation is much more alarming - for the public at large as well as for those within the outsourcing sector.)
However, it’s crucial to note that the government can take steps to shore up what is, after all, a sector of incalculable importance in terms of the state’s reliance upon it to deliver key services to taxpayers. First and foremost the state needs to be a better customer: the GSA has been highlighting for many years the need for government to up its game when it comes to contracting, and for governing services, and yet very little appears to have been done other than perhaps to focus too hard on cost-reduction (after all, while saving taxpayers’ money is a core responsibility of those buyers, hammering the supplier too much can lead to unprofitable contracts and, eventually, to a Carillion-type situation). A genuine willingness to work with providers right through the deal lifecycle, as a smart and informed customer, would go a long way towards shielding the government from the kind of problems it now faces following the demise of a major supplier and threats to the viability of even bigger ones.
The government also needs to revisit the kind of contract it wants to have with such providers. While deals in the private sector are trending towards agility, flexibility and a greater use of smart technology (particularly automation) the public sector does seem once again to be stuck in the past. Of course, many roles can’t be automated away, and many deals need to be of a certain size and duration to make them feasible from a provider’s point of view. However, that doesn’t mean that the public sector can’t also move with the times – and indeed it must. While the state will never be operating within exactly the same kind of environment as private sector organisations, it can learn key lessons therefrom – crucially, in and around the ways in which it both contracts for work and collaborates with its suppliers.
It may be that this is a watershed moment for public sector outsourcing – not because the sector is ripe for collapse, but because the Carillion crisis has finally forced both government and suppliers to address issues which have been allowed to fester for too long. The prevailing economic and political winds are changing and the old outsourcing paradigm is no more; however, that doesn’t mean that the whole model per se is broken, merely that as with anything else a period of introspection and renewal is now required. That it’s taken a tragedy of the scale of Carillion to force the issue is unfortunate; to ignore this opportunity would be unforgiveable.
In response to the issues arising from Carillion's collapse, the GSA is convening a special invitation-only public sector roundtable at the end of February, with participants seeking to formulate an industry response to developments; watch this space for more details. We'll also be addressing these issues in a wider forum at our Public Sector Conference in London on April 26th; for more information on attending please click here.