Public-Sector Outsourcing After the Recession (Part III)

To read part I, click here 

To read part II, click here 

Alongside developments in the nature of the pressures impacting upon public sector organizations the world over, as discussed in previous installments of this series, there needs to be a discussion of changes in the very nature of the public sector itself - changes which are at least as much ideologically driven as they are motivated by today‘s post-crisis financial pressures upon governments. What services should and should not be provided by the state, and how such provisions are to be funded and operated, are issues of as great a relevance now as they have been throughout modern political history - and in some corners of the globe the answers seem no closer now than they were at the times of Keynes, Marx and even Hobbes and Locke before them. As such, opportunities currently exist for outsourcing providers and their supporters within governments to propose genuinely new operational solutions to even some of the most vexing political problems; the extent to which such solutions can, will and/or should be adopted depends of course on a multiplicity of issues within each state in question but from the perspective of the outsourcers themselves this means that it is the pitch, rather than the solution, which becomes crucial - since outsourcing solutions to these disparate quandaries are almost invariably founded on similar ground comprising efficiency and effectiveness gains in combination with cost savings.

The politico-economic winds prevailing in the Anglophone west since the Reagan/Thatcher era (certainly at least until the onset of the 2008 financial crisis) have, of course, been profoundly conservative. The vehemence of the opposition to President Obama’s current healthcare proposals - during the debate over which the word "socialist" has become little more than a particularly distasteful piece of invective in a manner almost beyond the comprehension of, for example, many of America’s allies within the EU - is a reflection of the extent to which a conservative modus operandi has become deeply embedded within the American political psyche (admittedly never the least conservative of mindsets). Meanwhile within the UK the Labour government which came to power in 1997 partly on the back of a high-profile abdication of one of the party’s cornerstone philosophies - the insistence on public ownership of certain services and means of production outlined in the famous Clause IV of the Labour constitution - has continued its Conservative predecessor’s drive towards privatization to the extent that even the hitherto-sacrosanct National Health Service (the target of much Republican ire during the ongoing healthcare debate in the US) is now effectively in transition towards a market-based operating dynamic - the "privatization by stealth" claimed by many in Britain’s left-wing press.

In the second part of this article I noted that "in some ways it could be said that, rather than changing the public-sector playing field altogether, the crisis, downturn and tentative recovery have all contributed to an acceleration of a process that was already underway within much of the Anglophone world prior to the events of late 2008" - that process being driven by budgetary pressures and increased technological capability, as well as the flowering of successful outsourcing projects within the private sector and the consequent exchange of ideas and talent between sectors. However, it should be borne in mind that ideology is also a crucial driver behind this process, perhaps even more so than the aforementioned budgetary considerations. The rise of neo-liberalism and neo-conservatism, alongside a proliferation of the belief - however accurate - that the collapse of communism from 1989 onwards also discredited to a great extent socialism as a political force (reflected in a marked shift to the right across western politics as evinced by the ongoing centrist/centre-right hegemonies in France and Germany) has led to a widespread acceptance among both governing and governed that the market should be the first port of call for those looking for solutions to political problems. (Recent sharp increases in public-sector spending as a share of GDP within the US and UK both prior to and as a result of the post-crisis bail-out measures are actually pretty anomalous (even the first three years of the Labour government in the UK saw public-sector expenditure fall by nearly 2% of GDP) when considering an increase of barely 0.7% of GDP over the last decade across all OECD nations.) And when so many of those problems are (or perceived to be) derived from the question of how to do much with little (again, in budgetary terms) who better than outsourcers to step in to remove at least some of the burden from governments desperate for funding to facilitate vote-winning policy changes?

Ideologically speaking, outsourcing is very much of the zeitgeist in that it provides a solution for those who maintain that "big government is the problem" and that the private sector will always provide a more efficient service than can state-run operations (both politically contentious assertions, particularly in the wake of the 2008 bust, but generally speaking descriptive of the prevailing political discourse in the west). By handing over the management of any given public service - and here we are not just looking at the back-office operations which are the domain of much of SSON’s membership, but also an array of "front-line" services ranging from transport and healthcare to detention services and security contracting - to an external provider, a government should be able, according to this prevailing discourse, to provide cheaper and more effective services to its electorate. As noted in earlier parts of this article the need for governments to cut costs has rarely been so pressing as it is now as the post-crisis recovery shuffles onwards; the ready-made solutions which outsourcers can offer have, in consequence, never been so appetizing.

However, simply because outsourcing fits into the zeitgeist does not mean the ideological argument is done and dusted - indeed, major political issues persist which outsourcing providers will have to hope (and lobby) that governments will be able to overcome or work around. Firstly there is an inconsistency inherent in many of the arguments against "big government" (which, it must be said, often results partly from nationalistic sentiments), in that while many voices clamor for drastic cuts in public spending which can be assisted by outsourcing, they are equally vociferous in their opposition to jobs "going abroad"; ie, the labor arbitrage which is one of the great tools of the outsourcing industry is a very difficult political pill to swallow for governments and electorates alike - particularly at a time when unemployment has reached already-unpalatable proportions in many economies (and, considering the bigger picture, when certain economies - most notably the UK - continue to struggle to find a robust foundation in an era of declining manufacturing bases; if an economy is shifting towards service-sector orientation and service-sector jobs begin to migrate en masse to lower-wage economies, whence the next generation of jobs?).

One solution for outsourcers, as noted in Part 1, is to increase their onshore capabilities: at the cost of lower savings (and therefore lower profit margins) than would be achievable in lower-wage locations, providers can set up operations on-shore which fulfill governmental objectives of job-retention and efficiency gains. This also sidesteps the awkward issue of many customers’ (and hence voters’) notorious unhappiness with having to deal with customer-service operatives based abroad, often from very different cultures - an issue which, however unattractive, remains a very pressing one for many (although this is more relevant to front-line customer-service operations than oft-invisible back-office activities - it’s no surprise that many outsourcing operations retain onshore customer-service units while sending transactional work offshore). A crucial factor here is that while many consumers are able to accept - however grudgingly - the need to liaise across national boundaries with representatives of provider companies, they tend to be a lot less happy with the idea that state services (for which they pay via taxation and from which they cannot "opt out" in the same way as they could, if they wished, shift their business to another company providing onshore rather than offshore services) could be provided offshore: there appears to be a somewhat atavistic distaste for public-sector monies being poured into foreign economies, despite the obvious realities of globalization.

Another issue which governments looking to outsource need to confront is the problem of workforce dissatisfaction. Reducing headcount is often a key element of efficiency programs - fine, relatively speaking, when your organization is a private company which merely has to negotiate severance payments and a modicum of negative PR, but a very different issue when the organization doing the downsizing is a government, and those being made redundant are voters with a say in electing the next administration. Furthermore even those able to keep their jobs often find themselves working under significantly different terms and conditions and with their jobs governed by different labor legislation - not enough, perhaps, for a worker to seek different employment, but enough for discontent to manifest itself in protest votes. Here an outsourcer’s challenge is not so much to manage public opinion, but to allow the government in question to save as much political face as possible; this manifests itself in agreements on the part of the provider either to keep headcount at certain levels, or to slow the rate of downsizing to a pace much less than might be the case without these considerations - again, at a cost of decreased savings, at least over the short-to-medium term.

Decreased levels of political activism in recent decades in the west - recent US election campaigns notwithstanding - alongside a decline in the power of organized labor across the board have allowed governments (even in some traditionally left-leaning societies in the EU) to claw back many of the concessions made to labor since as far back as the Great Depression. However, the impact of the wholesale transfer of jobs from public to private sector, and some degree of downsizing in consequence - no matter how well disguised by the governments of the day - cannot be shrugged off. 

The temptation may be there for providers to ignore political considerations on the basis that their offerings speak for themselves in terms of cost, efficiency and effectiveness: "if governments need to cut costs, here’s how, and let them sell it to their voters". However, to give in to such temptation would be lunacy in that governments themselves simply can’t afford to ignore the political consequences of their actions, and the major lesson learnt by outsourcers during the recent slump has been that they need to work as closely as possible with potential clients to create a service proposition that goes above and beyond what previously might have been acceptable. The potential revenues from public sector outsourcing are so vast - outstripping any other industry sector in the long term - that investment in lobbying and advisory roles, as well as in staff au fait with the political environments of their target locations, is now simply a sine qua non for any firm looking for a slice of the pie. It’s no coincidence that the major advisory firms operating within the shared services and outsourcing space have all ramped up their public-sector operations within recent years, some to a quite remarkable extent.


In conclusion, then, both the pressures affecting public sector operations, and the nature of the public sector itself, are changing very rapidly, both as a consequence of recent economic events and ideological and technological developments over the past few decades. Outsourcing, increasingly seen as a solution to some of the questions thrown up by these developments, can indeed provide governments with an array of tools with which to tackle key issues going forwards. However, those looking to take on the work in question cannot simply provide governments with a value proposition and expect their potential customers to come on board merely on the basis of the savings they expect to generate. If real outsourcing is a question of forging partnerships between client and provider, then those looking to scoop up some of the treasure offered by the sector need to be aware that the partnerships between government and provider can be immeasurably more complex, and under extremely different pressures, than those typically at play within private enterprise. Only those firms willing to work with governments to help them negotiate as easy a path as possible towards their goal will be able to tap into this extraordinarily promising sector.