If markets are failing, why are we so keen on them?
By Eric Bohl
Introducing Solace’s discussion: ‘can markets work?’
What’s going on? On the one hand, local authorities appear to be losing confidence in private sector providers as we take services back in-house. On the other, more of us are entering the market as investors and providers. Are we saying we can do it better?
2018 was described as an "annus horribilis for UK outsourcers"i as a string of companies crashed or tottered. It also saw commercialisation on steroids as authorities' entrepreneurial adventures grew nearly as fast as CIPFA's and MHCLG's anxiety levels.
Will 2019 be any different? In March, Interserve collapsed into administration and Capita reported a Pontefract office: fall in profits following on from last year's emergency rights issue. In February, Warrington Borough Off Southgate Council announced its planned £62m purchase of two wind farms and Peterborough City Council Pontefract approved a commercial strategy that represents "a new phase of enterprise, investment and West Yorkshire ii WF8 1NT commercial growth" . t 0207 976 3311 How should we make sense of this apparent dichotomy? e [email protected] www.Solaceenterprises.com Are we victims, ingenues or assertive 'shapers' in the various markets we operate in? Are we at a tipping point in our attitude as buyers? How confident are we in our abilities as sellers? Do we understand what influence and levers we have as shapers?
Solace will be posing those questions - and more - as it starts a series of debates that ask its members and partners in local government: 'Can Markets Work?'.
“The collapse of Carillion and other providers is a stimulus for us to overhaul our approach as the private sector continues to be an important source of delivery for public services”, says Niall Bolger, Solace Spokesperson on Commissioning and Innovation.
“There is an opportunity for a broader look at alternative service delivery models and how we intervene in markets”, suggests Bolger.
We'd like your help to start answering these questions and challenges over the next few months. Let us know your thoughts about how our approach to the market can change. Share your experiences (whether on or off the record) of what makes for success - and how things can go wrong.
Is outsourcing failing or just wounded?
2018 didn't start well with the collapse of Carillion and didn't get better as the whole outsourcing market seemed to wobble. It's hardly surprising that local government and the wider public sector lost a lot of its remaining confidence in the market for outsourcing.
More and more authorities (from across the political spectrum) either took services back in-house or have been talking openly about doing so.
After the Carillion shock, the news didn’t get any better with profit warnings at Capita and Interserve and Allied Healthcare teetering on the edge of bankruptcy before being bought up at the eleventh hour.
Sticking plaster was in plentiful supply in the form of 'living wills' and Whitehall-organised mass meetings of Capita clients.
Despite all of this, business continued as usual for many authorities and providers and even for Capita, which won new central government contracts.
Questions we'll be exploring this year
1. What exactly is going on in the outsourcing market? 2. Is this a temporary blip - an austerity-induced shakeout of the market? 3. Or is the market shrinking and changing forever?
What's our part in these problems?
The Public Accounts Committee investigation into the outsourcing market last year provoked some interesting insights, not least how far suppliers had gone off our sector with fewer providers being willing to bid for government contracts. Serco's Rupert Soames warned of "a market in which the only bidders are the dumb or the desperate"iii.
It is a sign of the health of the competitive process that margins for contracts have been shrinking. But providers had been taking on too much risk and notching up losses when the bid team had misjudged what would be needed to run the contract.
Losses were also incurred when companies were being pushed hard (unfairly, providers often claim) by clients needing to reduce costs on existing contracts. Suppliers also complained to the Public Accounts Committee about poorly run and unnecessarily complex procurement processes. Public sector clients were criticised for trying to transfer unreasonable levels of risk.
So it's all our fault, then?
Questions we'll be exploring this year
4. Are we getting the market we deserve? 5. Are we being unreasonable? Can we really get savings and better services and transfer risk? 6. Have we got the right skills - and if we haven't got them by now, when will we?
Where angels fear to tread
Undismayed by the squalls from the outsourcing market, we have plunged into the swirling waters of the housing, property and energy markets (and more), desperate to plug the holes in our finances.
Critics have suggested that investing in commercial property is putting all our eggs in one basket when our two main sources of income are property taxes. Others suggest we are investing in a bubble, which could pop thanks to Brexit or the collapse of the high street.
Frustrated by the loopholes in planning regulations which enable developers to wriggle out of affordable housing commitments, more authorities have intervened directly in the residential market. Housing companies have been set up to deliver more social housing (or to generate income from market rents).
More contentious were the joint ventures designed to deliver major regeneration programmes. Haringey Council's new administration cancelled its development vehicle with Lendlease and others have stepped back from similar schemes. Others have proceeded with joint ventures, arguing that such schemes increase the control and influence of the council in new developments.
Authorities have been entering other markets, such as municipal trading and energy. Both are not exactly sure-fire bets when losses have been reported at some local authority trading companies and private sector energy companies have been falling like ninepins and are under even more pressure since the regulator Ofgem introduced price caps.
Bristol Energy and Robin Hood Energy have proved that local authority companies do have something to offer by making it into this year’s Which? magazine top 10 for customer satisfaction among energy providers.
Questions we'll be exploring this year
7. Why will local authority trading companies succeed when longstanding private sector companies have struggled? 8. How safe are our energy companies when some private energy companies are struggling? 9. When we join the market as suppliers, how confident are we that we can manage the risks?
Getting on the front foot
Given the financial cliff edges we are facing, we'll need to come up with answers to all these questions about our relationship with the market.
As buyers in the market, now might be the time to be more assertive – together - in our relationship with our outsourcing providers.
The Digital Declaration many authorities signed up to last year has some very interesting features, not least a clear signal to the market about the conditions (eg open standards) for us to work with them in future. It was a collective statement of our 'terms of trade' with the market.
Some claim to be eager to listen - to take part in a different type of dialogue. There are providers that many clients think are stuck in a model of the past. But some are trying to adapt fast to a world in local government which the demand for business process outsourcing is shrinking fast.
As we invest more in commercial property and housing, as we target income generation from other authorities and the public, we will need to understand better the commercial realities of each market in which we operate.
Questions we'll be exploring this year
10. Can we take the approach of our Digital Declaration further? Can a collective voice be applied to our outsourcing providers?
Join in the debate
Solace is keen to help the sector and its partners in the private and third sectors to explore together how local government can best work in the various markets in which it buys or takes part.
We will be encouraging a debate that helps us to define the conditions in which local authorities should engage in the market and the terms of that engagement.
We will be sharing what others have learned (for better or worse) and exploring how best to build the capacity and skills needed to manage the risks involved.
We will also be listening to the private and third sectors about what they can contribute and what they need from us. This will involve lifting the lid on some painful experiences - sometimes off the record.
We will also be talking to employees and their unions about the experience of working in the private and third sectors on our behalf and the buffeting they often feel as they are TUPE transferred, sometimes repeatedly.
We will also pose the question of what it's all for. Have commissioning practices and their fetishisation of the market led us into expending more intellectual effort in thinking about sourcing and delivery models, than about the fundamental purpose of local government?
Above all, we want to hear from you. Let us know about your experiences, including your successes and your lows. Tell us your views and ideas. And take part in the debate as we try to make 2019 the year in which we answer the question: 'Can markets work?'.
Niall Bolger says: “Let’s rethink our ethos on public service delivery. We’re in transition and we need to find answers that deliver value-for-money and have the confidence of our citizens”.
Question for you
11. Where do you want us to focus our efforts in this debate and how can you help?
Eric Bohl is Director of Public Services at Activist Group and is the author of “When the Salami’s Gone”, Solace’s guide to commissioning and sourcing. Activist is a Solace Business Partner.
Contact Eric via [email protected]
i "UK outsourcers at risk of financial contagion", Gill Plimmer writing in the Financial Times on 16 December 2018. ii "Commercial Strategy 2018-21", approved by Peterborough City Council's Cabinet on 4 February 2019. iii Rupert Soames, Chief Executive of Serco, as reported by Rhiannon Curry writing in the Daily Telegraph, 21 January 2019.