Why Outsourcing Works for the Public Sector

Why Outsourcing Works for the Public Sector

Outsourcing has had some bad press recently but criticism of it is often ill informed and flawed, argues Matt Sims of outsourcing company Teleperformance

In the last few months, the concept of outsourcing services from the public sector to private companies has been the focus of a great deal of debate and not a little criticism, often ill informed. Whether it concerns a commercial security firm failing to provide enough Olympic Games security guards, leaving the army to step in, or the debate over the merits of private rail companies against the nationalised service of British Rail, all too often easy and simplistic assumptions are made about the relative merits of public versus private sector practices.

The welter of news stories about the impact of outsourcing have tended to ignore the clearer lesson that all successful business relationships are built on the strong management of a contract by both parties, irrespective of whether they involve public sector or private sector management teams. Such relationships succeed on working together, drawing on the strengths of all concerned to achieve the mutually agreed outcome required.

Outsourcing remains an attractive option to government agencies, not least because of the limits on public finances. In the light of the likely on-going reduction of in-house budgets, funding may be curbed, yet  there will still be a demand to maintain and increase customer satisfaction. Flexibility will be the key to delivering efficiency and savings for government, and outsourcing will be one option for achieving it.

In-house operations face a huge range of cost challenges. High amongst them is the pressure to maintain human resources, with staffing during unsociable hours, recruitment, training, and the retention of talented managers added to continuing staff salary costs. These can account for up to 70% of the operating budget. Maintaining property, from physical maintenance of a building to compliance costs, adds to the expense, while acquiring, maintaining and updating hardware, software and infrastructure lead inexorably to expensive ongoing investment.

Not only can these costs be draining for departments or agencies, they can also show considerable variability, making monthly and quarterly financial management extremely challenging.

Historically, government departments and agencies have felt compelled to own and operate all customer facing-administration and processing facilities, in order to provide the compliance with regulatory or government targets.  But over the last few years, more departments and agencies have moved towards outsourcing.  One driver is the need to reduced overheads. By engaging with an outsourcer, enterprises are able to remove fixed costs from their balance sheets, including the property, technology and human resources. This frees up more money for their core operations. Another is to establish a fixed cost contract. By eliminating in-house operations and working with outsourcers, organisations take away cost variability from their monthly operations, and pay a regular, predetermined price that makes financial management much more straightforward.

There is also a new trend emerging in third-party service provision – that customer service and processing work should be onshore as opposed to overseas. This is due in part to quality concerns around offshore agent language skills, but there is also an unwillingness to move work overseas at the expense of domestic jobs.

In research undertaken by Datamonitor for Teleperformance, estimates showed that cost savings realised through successful outsourcing are approximately 30% but could potentially rise to 50%. All overhead risk is transferred to the outsourcer and the costs are known and fixed, with significant savings achieved. Lifetime costs of set up and change, traditionally handled through government borrowing, are also borne by the outsourcer through commercial arrangements based on risk and reward.  In addition, the strong position of outsourcers as corporate entities enables them to invest in new technologies and technical support, which in turn enables them to help their public sector clients achieve their business goals as well as maximise their budgets.

At its best, outsourcing gives control to the client to demand and expect excellent service at a mutually beneficial cost. It demonstrates the benefits of partnership. The key to a successful partnership is to put robust governance procedures in place. In practice, it means making sure that all of those involved have the same aims and are looking for the same outcomes. It is also vital to ensure the on-going relationship is strengthened by regular reviews of the process, enabling any problems to be identified and solved before any significant problems arise.

To blame outsourcing as a business strategy for any highly publicised – and uncommon – failures is flawed. Outsourcing simply offers one party the opportunity to buy in the expertise of another in a way that makes the supplier a partner in delivery. It is an option that most often brings cost and services benefits to both parties and helps to establish a solid and mutually beneficial business relationship for the future.

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