The outsourced services industry as an engine of economic growth

Author : Mark Fox

23 December 2011

The BSA has this month published ‘Outsourced Services Industry: An Engine for Sustainable Growth’, the latest in our series of annual reports on the state of the outsourced services sector in the UK.

The message from the report is clear and simple. Outsourced services are a great British industry, and a UK success story. As the government rightly switches its attention to ensuring the growth of the UK economy, we argue that outsourcing must play a key part in achieving that goal, and recommend some specific steps the government can take in order to make this happen.

Over the last few decades, our industry has expanded rapidly, as organisations, both public and private, look to focus on their core activities and let expert outsourced service providers deliver non-core functions. In addition, what is considered ‘core’ has shifted over time. BSA members now manage offenders, improve schools, dispose of waste, build and maintain roads, and administer social housing, among other things.

As a result of this growth, our industry now directly employs 10% of the UK workforce - more than financial services and public administration put together; turns over £207 billion per annum, equivalent to 8% of economy-wide output – comparable in size to the financial services sector; and pays around £31.3 billion in direct taxes - some 11% of all government revenues from these sources. Given that the UK is a world leader in providing outsourced services, and because companies delivering those services make up such a substantial portion of the UK economy, encouraging growth means encouraging outsourcing.

A boost to the UK’s outsourced services will help to achieve the balanced economic growth our country needs. Our members help create or sustain jobs in every region of the UK – indirectly as well as directly. For example, a recent survey of BSA members showed that they support more than 250,000 SMEs as part of their supply chain. Likewise, it is a conservative estimate to suggest that each year in the UK, our members provide over 50,000 days of training to their staff. This helps to ensure that our economy has the skilled workforce it needs to compete with the emerging economies of China, India and Brazil throughout this century and beyond.

Furthermore, outsourced services are a successful export from the UK - bringing wealth into the country from overseas and helping Britain to earn its way. The UK has a global reputation for developing creative outsourcing solutions to complex problems. We are second only to the US in terms of outsourcing and the home to a fifth of all outsourcing contracts. Exporting enables innovative and high-productivity firms to achieve a level of growth not otherwise attainable. In the UK for example, exporting firms account for 60% of productivity growth. In addition, exporting firms support stronger, more sustainable employment growth and higher wages. Evidence from the BIS SME Barometer has consistently found stronger employment growth among exporting firms. Some 45% of exporting firms recruited new employees in the past 12 months compared to 31% of non-exporters. As significant exporters, outsourced service providers are therefore a key to economic growth and stability.

What steps do the government need to take in order to catalyse these benefits and boost the UK economy out of recession using the outsourced service industry as an engine of growth?

First, we support the government’s ongoing commitment to providing fiscal certainty. Deficit control is the rock of stability on which recovery will be built. At a time when lending to businesses needs to expand, a credible fiscal strategy has also helped to contain borrowing costs by keeping interest rates low.

Second, the government should take action to remove barriers which distort competition between public and private service providers. Both the public and the private sector need to be judged on the same regime and there needs to be a level playing field in the bidding process. This means honesty relating to pensions pricing in some public sector bids, and the cost of overheads and/or capital. For example, the public sector equivalent cost of £29,000 per inmate in prison does not include significant private sector costs such as capital repayment, depreciation, insurance, pensions and other overheads. Just removing capital repayment would lower the private sector cost to £21,000. Similarly, our members have long been concerned that current VAT rules provide a major disincentive to employ otherwise efficient strategies such as outsourcing. This is because many clients of BSA members are unable to reclaim the VAT they are charged if they go down this route.

Third, the government has rightly put infrastructure at the heart of its growth review, and we welcome their commitment of aiming to create the most competitive corporate tax regime in the G20. However, recent studies show that the UK’s current position is unfavourable in terms of allowances for capital investment. Since 2008, buildings have not qualified for relief, and classifications for plant and machinery have not kept pace with current practice and advances in technology. This has the effect of discouraging infrastructure investment. We are keen to see the government explore a number of ways in which some meaningful tax relief for infrastructure investment could be reintroduced.

Taking these three steps - maintaining fiscal stability, removing barriers to fair competition, and devising a tax regime conductive to increased infrastructure investment, would allow the government to catalyse the benefits of a thriving outsourcing sector and harness those benefits for the growth of the UK economy.

The author, Mark Fox, is Chief Executive of the BSA www.bsa.org.uk