One year on from the CSR: has the outsourcing opportunity materialised?

30 November 2011

When the Comprehensive Spending Review (CSR) was announced in October 2010, it created excitement in Britain’s outsourcing and FM industry on the back of a significant outsourcing opportunity from local and central government.

After the dust settled, it was clear however that the CSR was conspicuous in its lack of detail and concrete answers on how to achieve the significant cost reductions. George Osborne, the chancellor, announced in the spending review that there would be “new opportunities” for non-state providers as the government “does not have to be the default provider.” It was clear that the private outsourcing sector would enjoy greater involvement in delivering some government services and that there would be an outsourcing opportunity, but the government’s emphasis on value-for-money raised concerns about margins.

A few months later, the main outsourcing and FM companies expressed confidence in the public sector outsourcing market. Capita issued an upbeat assessment, stating that the volume of work being put out to tender had rebounded to pre-election levels. For 2011 as a whole, it said it expected to deliver steady sales growth and an improvement in profit margin. At the same time, Serco said it expected to benefit from increased government contract opportunities in the medium-term.

In May 2011 however, the government back-tracked on policy to some extent, suggesting that the ‘wholesale outsourcing’ of public services to the private sector would be politically ‘unpalatable’ and prove politically sensitive. A combination of public unhappiness over spending cuts and a collapse in staff morale over the scale and pace of change triggered a political revolt.

Despite the government’s back-tracking and the industry’s concerns on margins, a significant number of large government contracts still materialised. Earlier in the year, the Land Registry appointed Carillion to deliver facilities management services in a first-time move. The decision was made following the review of pitches from seven bidders, as well as a Land Registry internal comparator, against best-value criteria. More recently, MITIE was awarded one of the first contracts by the Ministry of Justice within a new framework agreement set up as part of a nationwide review of how it manages its courts and related buildings.

Apart from these “first-time” contracts, one of the CSR’s main contributions was the seismic shift it created in the government’s mind-set on outsourcing. When a few years ago, it would only have outsourced a small set of specialised services, now, in the austerity climate, it will consider outsourcing any service. For example, G4S is now managing public sector prisons for the first time, which a few years ago would have been hard to imagine.

There are elements however that have limited outsourcing opportunities. MITIE expressed concern earlier in the year about the long lead times, with the company focussing on winning work in the private sector simply because it takes far longer to bid for state and local authority contracts. The public sector union also acted as a counter-force in the outsourcing with concerns about mass redundancies in government in-house FM departments.

Mike Daniels, Head of Business Services, Barclays Corporate commented: “Despite challenges such as long lead times, margin pressure and the lack of outsourcing strategy with some local authorities, government contracts have continued to materialise since the CSR was announced last year, and the pipelines of the major outsourcing and FM companies are looking healthy. (For instance, 65% if Mitie’s £11.4bn pipeline is in the Public Sector with a £1bn pipeline just with the Ministry of Justice. For G4S, 60% of its pipeline is in the Public Sector in the UK, indicative of the importance of government outsourcing programmes.)

“It should come as no surprise that the outsourcing drive following the CSR has had a slower start than anticipated, primarily because both central and local government were ill-prepared for it. On balance, although there has been no tidal wave of outsourcing activity there is ample evidence to suggest that both central and local government have created a new outsourcing impetus with significant opportunity in the years to come.”