BEHIND THE fiasco of last year's vanishing Revenue and Customs disk lies an everyday story of outsourcing folk. You can imagine how it went. Senior HMRC manager to junior manager, on telephone: 'Hello? Sir Humphrey here. The National Audit Office wants some numbers on families receiving child benefit. They don't want sensitive stuff - names, addresses, bank accounts - just the basic figures. Can you get it off to them? ... Oh. Why not? ... You mean we don't have anyone here who can remove the personal details?... Yes, I know we outsource data management to EDS, but surely - well, never mind, get EDS to do it then... What do you mean, it's beyond the scope of the contract?... How much?... Good God! OK, just send the complete disk, then. Let the NAO desensitise it.'
Behind this story is another. The reason the extra charge was so high - reportedly thousands of pounds - was only partly that the outsourcer had its customer over a barrel. More fundamentally, many customers drive such hard bargains upfront that outsourcers can only make money through extras and small print that makes contracts heavily back-end-loaded. 'If it's not a fair price, something has to give - either quality or cost,' says Geraldine Fox, of Compass Management Consulting.
HMRC ought to be a star exhibit in the inquiry currently being conducted by economist DeAnne Julius into the pounds 44bn-a-year market in outsourced government services, ranging from IT and payroll services to prisons, and how it can be made to function better.
Of course, 'make or buy' decisions have to be made in any business, and apply to services as much as manufacturing. But it's hard to resist the feeling that Julius is addressing the wrong question. Her remit assumes that outsourcing is the right thing to do, and the route to efficiency is doing it better. Yet the real issue is how to make public services work better as a whole, rather than the outsourced part of it. In this larger issue, as we should know by now, outsourcing is often an irrelevance and a distraction, the wrong answer to the wrong question.
HMRC handily epitomises some of the most obvious pitfalls. For starters, when a service is outsourced, the accompanying know-how usually goes with it - even for such simple things as removing information from a database, or how to keep a hospital ward clean and infection-free. Since it's impossible to specify all eventualities in a contract, such indirect costs are never counted, and costs of non-standard items always exceed predictions (and budget). In many cases, exasperated users end up creating internal specialist groups to fill in the outsourcing gaps, thus negating the reason for doing it in the first place.
Another casualty of the outsourcing decision is the ability to manage the function. IT and cleaning still have to be managed. Rather than tough bargaining at the procurement stage, 'to get value from outsourcing you need a top-notch governance group - and they are as rare as hen's teeth. It takes smart customers to get good deals,' says Fox.
Alas, in most cases the emphasis is reversed. In their determination not to be ripped off, and meet fierce individual cost targets, buyers rely heavily on aggressive, legal-led purchasing teams focusing on short-term contract prices rather than the long-term needs of the business - an approach almost guaranteed to be self-defeating. What looked an attractive deal in year one, already looks a good deal less so by year three. 'To get deep starting discounts, organisations are signing seven-, eight- and even 10-year deals,' says Fox. 'That's consistently bad practice - the economy will change, the business will change, and you'll be locked in. Some organisations will be paying 40 per cent over the market rate by the end of the contract, and for antiquated processes. That's not a good place to negotiate from.'
It's disappointing, she says, that after three generations of IT outsourcing, organisations still make the same mistakes - believing they can get rid of problems by outsourcing them, underestimating the management overhead needed to make contracts work, and overestimating cost savings. Indeed, with companies panickingly squeezing suppliers as recession bites, this round of mistakes may be bigger than ever.
At the heart of outsourcing is the Fordist faith in mass-production: specialisation, division of labour and economies of scale. But while the formula worked for Adam Smith's pin factory, the diseconomies of scale - in the shape of massive demoralisation and labour turnover - were already becoming apparent by the time of Ford's Model-T.
HMRC, and the vast shared-service factories being imposed on local authorities and other public service providers, are today's equivalent of Ford's River Rouge plant. Behind the automated document handling and batteries of computers sits a rusting, outdated hulk of a management model - and no amount of outsourcing can change that.
The Observer, 30 March 2008