Public Sector Outsourcing After the Recession - Part 2

2009 is ending, economically, on a significantly more optimistic note than last year: while performance in most major economies continues to be sluggish compared with the boom years leading up to the financial crisis, the paralyzing uncertainty characterizing the turbulent days at the end of 2008 has given way to a calmer climate in which definite concerns about the future are nevertheless tempered by good-news stories from emerging markets and an increased faith in the economy generally, underpinned by the vast support mechanisms put in place by the world’s leading central banks.

Nevertheless, for many economies – including some of the world’s biggest – the outlook is now clouded by the consequences of the aforementioned state support: specifically, how to repay the truly colossal sums borrowed to fund the gaps which have emerged in national budgets as a result of bailout schemes, increased welfare responsibilities and declining tax revenues; and how to reduce those budget deficits to less traumatic levels without putting the brakes on the nascent recovery. The US – already facing the largest national debt in history – is expected to confront a budget deficit of over $1.5 trillion by the end of the year; meanwhile in the European Union, the world’s largest economic bloc, some 13 member-countries have been ordered to reduce their deficits below the 3% threshold by 2014. According to a recent KPMG survey, 84 per cent of senior public sector executives globally expect their budgets to shrink in the short-term as a direct result of the crisis and subsequent downturn.

While governments the world over continue to wrestle with these extremely pressing dilemmas, part of the solution for many will inevitably be found in an increased utilization of the outsourcing option for public services. Outsourcing, of course, was already an increasingly commonly-used (if not necessarily popular, in the strictest sense) state tool in the lead-up to the crisis; now, providers are queuing up for new contracts as the pressure to cut costs and increase efficiencies opens doors which in a more favourable economic climate might have remained firmly shut.

In the UK – viewed as one of the economies hit hardest by the crisis thanks to an over-reliance on financial services, and facing a budget deficit of over £175bn – outsourcing contracts already account for around 13% of government spending; the UK is widely viewed as a ‘world leader’ in public-sector outsourcing. Since the production last year by former outsourcing luminary DeAnne Julius of a somewhat controversial ministerial-level report heavily backing increased outsourcing, a drive towards efficiency via outsourcing has become entrenched policy.

However, with a general election around the corner and the opposition Conservative party’s (consistently ahead in the polls for many months) commitment to swingeing cuts in public sector funding driving savings to the top of the political agenda (not to mention an upsurge in funding and lobbying efforts from the eager providers themselves) it’s hard to see how the next parliamentary term would not see further recourse to the outsourcing of public services. Already, in the words of Mark Fleetwood of investment manager and analyst Brewin Dolphin, "consultants and outsourcers are so entrenched in the system that they're actually the ones sitting there and making the decisions for the government": the prospect of billions more pounds entering their coffers will certainly not disincentivize the country’s major outsourcing players from deepening that entrenchment.

Many of the gains to be gleaned by outsourcing providers are to be found at a local level rather than a national one. The move towards local shared services – frequently in association with private-sector outsourcers – in the UK was already underway pre-crisis in accordance with the recommendations of the Gershon Efficiency Review of 2004-5. With local coffers under as much pressure as the national budget, outsourcing is in many areas seen as being the only feasible option to prevent administrative insolvency – despite the political ramifications (which can in some instances be ameliorated by passing the buck onto an unpopular national government).

Across the Atlantic the picture is less cut-and-dried, as a traditional distaste for public-sector outsourcing (reinforced by heavy pressure from organized labor to keep jobs under state control and within national boundaries) runs up against the overwhelming need to bring public finances back under some semblance of control. Muddying the water still further is the conflation in the minds of many both within and outside government of "outsourcing" with "offshore outsourcing"; the obvious political difficulties of moving jobs overseas, plus the consequent losses in tax income of such job-migration, make that specter a particularly tricky one to combat regardless of how accurate such a conflation actually is - and most major providers do indeed benefit to some extent from the potential labor arbitrage associated with offshoring.

Aware of such deep-rooted concerns, however, providers have moved to counter them by increasing their onshore capabilities (the rise of "farm-shoring", reflecting the growing competitiveness in wage terms of some rural areas of the US, was a growing trend even before last year’s crisis) and by playing on the traditionally all-American fear of ‘big government’ – especially in the wake of the titanic (and, in some corners, much-loathed) TARP expenses rolling out from the Obama administration in the last 12 months – to position themselves as "part of the solution, not part of the problem".

Their cause has been boosted by an increase in interest in outsourcing at a state, rather than federal, level. Spending by the states has declined by over 7 per cent since 2007 and budgets are expected to tighten further over the next couple of years despite an improved economic outlook: the National Conference of State Legislatures (NCSL) puts the shortfall at $60 billion by 2011. While fire-fighting remains the order of the day for many state governments, there is a growing belief that the downturn might have tipped the scales in terms of ushering in a new (and, in many eyes, long-overdue) wave of public sector transformation): "The current crisis offers an opportunity to find better ways of doing business and better ways of providing service," according to Patrick Moore, Georgia’s state CIO.

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