The future of outsourcing: can A4e survive?

Many people may have wondered how the dismal failure of the Work Programme to achieve its targets for the second year in a row has been hailed as a great success by the government which is paying for it (with our money).  But in fact the lies have shown the flaw at the heart of outsourcing.
Public sector bad, private sector good: that's one of the basic tenets of a free market system.  The private sector, with profit as its driver, will always be more efficient and innovative than the public sector.  Evidence for this assumption is hard to come by.  The real rationale is actually much closer to what Thatcher believed - that an industry or service should always be making money for someone.  The last Conservative government privatised everything for which the public paid directly; transport, for instance, and the utilities, most of which are now owned by foreign companies.  The Blair government followed by outsourcing those services which were paid for out of the public purse, whether locally or nationally.  In theory it makes sense, at least initially. You don't have to have an army of staff, with all the attendant costs and hassle.  You specify what you want and contract with the cheapest company to provide it.  If they don't deliver, you don't pay.
When this bonanza started, A4e were well placed to benefit.  But in a few short years the problems with the model started to appear.  In their chosen sector the company was soon scooping up contracts, to the bemusement of their competitors.  Was A4e simply undercutting its rivals?  Or did they have some sort of favoured status with government?  In other sectors, similar things were happening with companies like Capita, G4S and Serco.  It costs a lot of money to put a bid together; if a company can't see a possibility of ever getting a contract, it will cease to compete.  The success of the big players meant the demise of competitors.  The supposed free market was rapidly becoming an illusion.  When the government recently announced that it was to outsource most of the functions of the Probation Service, everyone assumed that the only bidders would be G4S and Serco.  All the outsourcing companies left standing have diversified into fields in which they have no previous experience, including welfare-to-work, where they have been joined by foreign companies.  A4e is no longer the top player.
The targets written into the contracts, and promised by the private companies, became notional at best.  The strange procurement process meant that previous performance couldn't be taken into account, so companies could fail and fail again, but still get new contracts.  There was no risk.  A good example of this was G4S's incompetence over the Olympics security contracts.  Their reputation took a temporary knock, and their profits stumbled, but it did no lasting damage.  Fortunately, on that occasion there were the police and the army to step in.  The G4S event was also an example of how dangerous the private sector practices can be. The company had to recruit a lot of temporary staff, and did so in good time; but they didn't want to pay them until they absolutely had to, and so by the time they called in their recruits many of them had made other plans and weren't available.
Occasionally a contract would prove to be such a bad deal for the company (usually because it had made a bad bet) that it had to cut its losses and give up the contract.  A4e did that with a number of prison education contracts, after badly miscalculating the costs and incurring big losses.  More recently we've seen NHS Direct pull out of two of its 11 medical helpline contracts because they are "financially unsustainable".  Other companies must step in and pick up the pieces.  But what happens when there are no other companies?  When you have closed down the public sector departments and got rid of the staff, you can't bring a service back in-house except at enormous expense.
The power should lie with those commissioning the services; with government departments or local authorities.  But as the number of players shrinks, the power shifts.  The design of contracts is negotiated with the providers, who have the upper hand, as we saw with the Work Programme.  We've even seen A4e being paid to tell government how to design contracts!
The answer, from this government, is Payment by Results.  But that has simply made matters worse.  It automatically limits the numbers of companies which can bid to the largest and most financially well-endowed; those able to sustain a period without any profits.  From the outset, it wasn't quite what it was supposed to be.  An upfront "attachment fee" was negotiated, which kept the companies ticking over without any results whatever.  However, PbR satisfies the free marketeers, who disregard the fact that if a service is not being delivered, it's the service users who suffer.
It is very much in the interests of government that outsourcing should succeed.  They don't want to have to admit that they got the whole process wrong and have spent our money to no good purpose.  That was what made Emma Harrison such an embarrassment when it was revealed just how much money she had pocketed in profits.  She had to go.  And it's why the Work Programme data has been so misrepresented.  So the private companies and the government have a mutual interest in pretending that black is white, if necessary.  It's also why the companies employ people who have a direct line to government (think Blunkett and Olliff-Cooper at A4e).
A4e's last published accounts showed their business shrinking, and perhaps struggling.  The accounts for the year to March 2013 won't be published until the end of the year.  Will it survive?  Outsourcing isn't going away, so much will depend on whether the company can adapt to the changing environment.