19 April 2017

The motivation for councils to insource contracts

Ongoing austerity and the resulting economic constraints that have been imposed on councils over the last 10 years has forced councils of all types of political orientation and size to completely rethink how they provide services to local residents.

This article, by Dr Adam Read (Practice Director) & Brian Mayne (Regional Director, Wales) of the Resource Efficiency & Waste Management division of Ricardo Energy & Environment, looks at the reasons why councils are considering transferring the management and delivery of services back to the council (in-souring), something many consider a positive option in a period of financial restrictions [1].

Support

Consideration of insourcing as an approach has a groundswell of public support, according to a poll by ‘Survation for We Own It’. The survey identified that more than three in five (61%) people think that local or national government services should only be contracted out for private tender if it’s found that the service is too expensive or of poor quality when it’s run publicly [2]. Clearly this is not in line with waste management services where over 50% of current collection and disposal services are out-sourced.

East Cambridgeshire district council is bringing its collection in-house

There are a number of reasons why local authorities are openly considering insourcing their waste management services. Flexibility is frequently highlighted as a major motivation for example, because internal delivery offers the potential to respond quickly to emerging issues without the need to renegotiate a contract which often includes the possibility of a council incurring additional costs with an external contractor. This occurs because contractors will deliver the service required and detailed in their contract and nothing more without prior agreement. Any extra activities required once the contract is awarded will require additional arrangements and probably incur subsequent costs. This can be problematic in areas such as waste, where as we all know new agendas continue to be implemented on a regular basis.

Only recently East Cambridgeshire District councillors voted to bring the waste collections service in-house via a new arm’s-length organisation East Cambridgeshire Trading Company (ECTC) in order to obtain “greater control over services and flexibility to make future improvements” according to local Councillor Julia Huffer [3].

Ownership

Apart from flexibility Ricardo Energy and Environment identified in our recent members briefing paper [4] a number of other reasons why some councils want to retain full ownership and control of their services (as opposed to outsourced delivery by an external contractor). This included them retaining full ownership of the service ensuring a robust alignment with the strategic vision and objectives of the Council.

Other areas highlighted in the ‘briefing paper’ included, the benefits of an integrated service, whereby merging client and contractor functions can deliver a single team functionality and overcome perceived problems surrounding communication, differing priorities, staff frustration and a blame culture. This also embraces team-working principles within the context of working towards a shared goal of delivering excellent services. In addition, insourcing avoids the risk (albeit a small one in the waste sector) of an external contractor going out of business or wishing to terminate poorly performing contracts (something that is becoming more prevalent in recent years).

Finally, we also identified the issue of accountability. An insourced service will be solely responsible for delivering to a business plan and achieving the vision and strategic objectives of the council providing clear accountability. Senior managers will be held answerable for their decision making, actions and the resulting performance of their service.

Margin

However, the biggest driver for most authorities, or at least a critical factor in their decision-making, is that it is perceived as a way of saving money, as explained by Councillor Julia Huffer “we will no longer be paying a contractor’s profit margin and will be able to reinvest savings to provide better services for local residents”. By focussing on service delivery, with no proportion allocated to a contractor’s profit, services can have a local priority of being customer focused, rather than being profit driven. Any savings generated can be retained by the council for alternative services/uses.

Councillor Richard Watts leader of Islington council identified a £3m a year saving on waste, street cleaning and grounds services if insourced [5] whilst Slough Borough Council acknowledged in a recent cabinet paper that by bringing the waste management and public realm service in house it could yield a 16- 22% saving.[6] These savings of course aren’t guaranteed, and will only be realised if the in-house team can manage and drive performance as well as their private sector peers, but they are significant for many authorities and perhaps offer them an opportunity to make savings without changing the services they offer.

Apart from savings a key element identified by Slough BC was that by bringing the services in house it provided an opportunity for the Council to establish a Teckal Company to act as the commercial arm to the Council, allowing it to generate additional funds from waste and associated services. This follows the successful template used by Cheltenham Borough Council and Cotswold District Council in 2012, who created Ubico Ltd.

Ubico operates under the Teckal exemption

Ubico operates under the Teckal exemption which means that it has a governance structure that ensures its relationship between the company and the council is similar to one of its internal directorates where they have day-to-day control over its affairs. The company must predominantly undertake work for its controlling council(s), at least 80% of the turnover of the Teckal Company must be for its public sector owners; the remaining 20% trading can, however, be with third parties outside of their ‘Teckal’ contract.

What next?

Any council deciding to go down this route will need to ensure that they have the capability, knowledge and experience of mobilising major contracts, which includes transferring staff, assets, purchasing vehicles, plant and equipment. This is clearly where private expertise is paramount, and is certainly one of the most significant risks we have identified when assessing the opportunity of in-sourcing services for a number of our clients. And if your team are light on the relevant experience then the use of interim project managers and consultants to assist with the core tasks (setting up work procedures, method statements, backroom systems etc.) early on will be vital.

They will also be required to manage a large workforce once the service is up and running, which may be a challenge for many local authority recycling officers and contract managers, whilst the additional loading of costs onto the HR department may be at odds with many authorities outsourcing this department! Again support in preparing the staff for this role is available and the experience of other authorities in going through this transition will be invaluable.

But, if that wasn’t enough they are also going to be required to develop the entrepreneurial skills, to commercialise their services and generate the income the decision to insource to a Teckal company or other alternative service delivery method was likely to have been made on. The likelihood is that officers given responsibility to mobilise and manage the in house service have been running a contract as a client and developing strategy for several years with little or no operational experience, so support mechanisms such as training, experience sharing by those that have gone through this, cultural change and external support are going to be key in the early years of delivery too.

With appropriate support in place the potential for savings and generating income certainly seem attractive, although not every authority thinks so, and many are more than happy with their outsources service and its efficiencies and light touch contract management requirements etc.

Trend or not?

According to the Arvato UK Outsourcing Index, the local government outsourcing market experienced substantial growth during 2015 [7] (the last year for full data) so we can assume that most Councils continue to outsource contracts because they are providing good value for money. But a number of authorities have made it clear in recent months that they plan to insource (Liverpool, Hounslow, Slough, Peterborough etc.) so is the tide turning?

Not yet, but perhaps the data derived from the next cohort of authorities will encourage others to jump on-board and follow suit? Any decision to insource should be based on detailed information, and robust decision-making, and that means challenging what you do now and determining if it offers value for money or not…. but how many authorities are really doing this when their budgets and staffing levels are being restricted?

Regardless of whether the services are provided in house or outsourced councils should be reviewing their performance anyway (annually if in-sourced or ongoing as part of their contract management process). This will ensure that they have a robust baseline data and a clear idea of the quality and cost of the service that they are providing.

Ultimately, however the service is provided, it should allow for efficiencies to be developed and ensure customers are getting the best possible value for money service, and that should be transparent and demonstrable.

In conclusion, insourcing appears to offer a number of benefits for some councils, but it is imperative that before any decision is made a baseline review (technical and financial) followed by a full options appraisal is undertaken and it is against this that any decision to change to providing in-house or continuing with an out-sourced delivery model should be made.

Authors
Dr Adam Read is Ricardo Energy & Environment’s Global Practice Director for waste management and resource efficiency. He is a waste management specialist with over 20 years of operational experience in waste management strategies, local authority decision-making, technology options appraisals and procurement. He is currently leading teams who are in-sourcing, and outsourcing waste management services across the UK.

Brian Mayne is Ricardo Energy & Environment’s Regional Director (Wales) for waste management and resource efficiency. Brian is responsible for project direction and management, business development and technical delivery across a range of resource efficiency areas for Ricardo Energy and Environment. He has a background in strategy policy and operational management at a senior level within local government. Brian is leading Ricardo’s insourcing and outsourcing support to UK local authorities.

References 
[1] www.unison.org.uk/content/uploads/2013/06/On-line-Catalogue201223.pdf
[2] http://survation.com/three-quarters-say-public-should-be-consulted-before-public-services-are-outsourced-survation-for-we-own-it/
[3] www.letsrecycle.com/news/latest-news/veolia-loses-out-as-serco-and-teckal-contracts-awarded/
[4] http://ee.ricardo.com/cms/assets/Documents-for-Insight-pages/Resource-efficiency/Member-briefings/Insourcing-briefing-note.pdf
[5] www.theguardian.com/society/2016/mar/02/councils-outsourcing-cumbria-public-private-partnership-in-house
[6] www.slough.gov.uk/moderngov/documents/s43527/Report.pdf
[7] https://app.croneri.co.uk/whats-new/growth-local-government-outsourcing?topic=3868&section=3538&product=21

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