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.

How to reform public services?

If you're looking for a little light reading, you might try this collection of essays by a group of Conservatives calling themselves Bright Blue.  All political parties have such groups, who want to demonstrate how progressive / radical they are.  This one interests us chiefly because one of the contributors is Jonty Olliff-Cooper, of A4e.  Scroll to page 47 (unless, of course, you want to read the rest as well).  It's entitled "Better, cheaper, more human - building progressive Conservative public services".  Jonty is obviously very proud of it.  To be sure, there's a disclaimer at the end of the article that it's his personal opinion and not necessarily that of his employers; but there's a great deal in it which chimes very well with ideas which A4e has been pushing since long before JOC joined them.

JOC and I start from fundamentally different positions, both philosophically and practically, on public services, privatisation and outsourcing.  I believe in a mixed economy.  There is a place for the private sector.  Conservatives believe in the free market unconfined, in the profit motif as the best incentive to doing anything.  Yet at the outset of the article JOC says: "As progressive conservatives, we should reject the orthodoxy that the private sector is the only route to growth. It is not. A flourishing economy requires quality public services too, to educate its workforce, get people back to high-quality work, keep its population healthy, reskill workers in declining industries, and attack the social evils of crime, disillusionment and addiction, which drive up taxes."  It sounds hopeful.  Public services are necessary.  But: "across the political spectrum, the expert consensus is that many public services intervene too late, are too bureaucratic and expensive, and do not give people what they really need or want."  This is an assertion without evidence, but it's preparing the ground for something which is introduced later in the piece.  Services, he believes, should be delivered on a "right to try" basis, ending the monopoly of the public sector; a position where "government stops trying to do everything itself, and instead pays whoever is best able to meet its objectives."  He continues to write in defence of the public sector.  It's not its fault if it doesn't work properly.  Where is this going, one wonders.

This country has a great deal of experience now with outsourcing.  We know exactly what can go wrong.  But this experience is never reflected in the visions of the ideologues.  As JOC developes his argument, and talks about "where we are going wrong" he neglects entirely the reality of years of private sector involvement in the delivery of public services.  "Current provision fails because it finds it hard to see the whole person," he says.  What follows is very much A4e's long-held belief in a sort of wrap-around contract which tackles all the perceived needs of the people whose behaviour government wants to change.  Mental health, addiction, offending, unemployment, debt - all should be addressed by an integrated approach rather than piecemeal with separate contracts.  While his analysis sounds perfectly reasonable, the implications are not.

He gives three options.  The first is to "Stop specifying the process; start specifying the end point."  This boils down to something like the Work Programme; a clear definition of an outcome and payment only on results achieved.  Well, that's working well, isn't it?  The WP was never solely PBR because it cost too much to deliver the service (I use the word loosely) before any outcomes could be achieved.  The new outsourcing of the Probation Service is to be on PBR but, we gather, in a modified fashion.  This option also leads to the "We don't care what you do as long as you get results" approach, which leaves the hapless client with no rights.

Second, JOC wants to "Slash commissioning bureacracy".  This is where the thesis unravels.  He wants a "let a thousand flowers bloom" approach, permitting anyone who thinks they can deliver a service to try to do so, a licence system, paying by results.  This would not exclude the public sector, he insists, which could compete if it wanted to.

In both the NHS and education we are seeing private and public sectors "competing" but the end result is not in doubt.  There was a move recently by Monitor, the body charged with overseeing the changes in the NHS, to recommend that private companies should not be charged corporate taxes because the public sector did not pay them.  This seems to have been quashed for the moment, but will certainly continue to be an issue.  In education, the public sector, i.e. local councils, are increasingly being left with no role except to pick up the pieces.  They cannot compete, and nor should they.

The fact is that, especially in the sort of services JOC envisages, the public sector cannot compete with private companies.  Who would be doing the commissioning?  A council cannot put a service out to tender and then bid for it itself.  Is it, then, supposed to watch a private company set up a rival service and pay them for outcomes?  That might be attractive to a big private business, but a council is answerable to its residents, not to shareholders, and would not be able to maintain a department which had a diminishing role; nor could it run a department at a loss, as businesses are willing to do.  There are instances of local councils bidding for contracts from government.  This works only as long as the contract is profitable.  In the current climate (or in any climate, come to that) no council or other public body would be in a position to lay out money on a gamble that it could make a PBR contract pay.

Experience also tells us that the flourishing start-ups JOC foresees would soon disappear.  We have three or four huge outsourcing companies in this country, and if the government wants to spread the net wider it has to look abroad.  Small enterprises rapidly get swallowed up or driven out by the big players, who are prepared to work at a loss if it secures them long-term business.  JOC's vision is a fantasy.

His third point returns to the delights of PBR.  "The deeper the need, the deeper the help", he heads it, and could add "the bigger the payment".  He rejects the idea that this is "naked Tory privatisation" (although nothing he has said convinces me otherwise).  He describes "a person down on their luck", with multiple problems, all of which could have a price to the organisation which could address them; "an organisation that would provide a single source of advice and support, and help you with all your issues, an organisation which understood you, your family, and the place where you grew up; one that would stand by you for the long term; treat you like a human, not a number; and back you to build a different future for yourself."  I don't think he means to be patronising.

As a vision of public service reform, this is deeply flawed.  It professes to admire the public sector whilst putting forward plans which would wipe it out.