What can Australian public servants learn from the UK’s new Outsourcing Playbook?

By Stephen Easton

Thursday February 28, 2019

a danger hard hat area sign located at a construction site.

Key points:

  • Carillion collapse led to public concern and 11 major reforms
  • One key aim is to counter deep mistrust of outsourcing
  • Civil servants must understand what they buy, remember government is responsible

“Government outsourcing is under intense scrutiny,” writes a senior public servant.

The quote could easily be about Australia, but it’s actually the head of the United Kingdom Civil Service, John Manzoni, explaining the catalyst for major procurement and contracting reforms reinforced by a new Outsourcing Playbook.

In the UK, decisions to outsource government functions and the details of big government contracts are “firmly under the microscope” following the collapse of private-sector service delivery giant Carillion a year ago, Manzoni observes.

That could also be said of Australia, especially after the Australian Financial Review’s reporting on the Department of Home Affairs’ procurement of security and garrison services on Manus Island from various arms of the Paladin group, amplified in last week’s Senate estimates hearings.

In the same portfolio, plans to outsource visa processing in the future are also controversial and have been questioned by a former immigration deputy secretary. This reflects the widespread scepticism of government outsourcing that the UK’s outsourcing reforms aim to counter.

The sense of unease comes not only from a long list of expensive delivery failures, poor outcomes and cost blow-outs at all levels of the federation, but also the way governments often respond to specific concerns, leading to a suspicion they sometimes try to outsource accountability for policy outcomes along with delivery.

On the other side of the equation, suppliers often feel government contracts ask them to accept more than their fair share of risk, and encouraging them to make the cheapest offer they can may also lead to bad outcomes—as highlighted by the apocryphal quote attributed to various astronauts relying on equipment from the lowest bidders.

11 ways to improve outsourced public services

The collapse of a massive company that was relied on to deliver public services really sharpened the focus in the UK and forced a fundamental rethink of the private sector’s role in government.

Outsourced public services are clearly here to stay, but there is a lot of room for improvement in the standard processes. The UK reforms aim to improve decision-making about what services are outsourced, as well as the actual procurement processes, performance management and contingency plans in case it all goes wrong.

“The Outsourcing Playbook is about getting it right. Getting it right when we decide to deliver services using in‑house resources and getting it right when we decide to deliver them in partnership with the private and third sectors.”

The guide describes 11 new policies that aim to avoid common mistakes like “attempting to contract for the delivery of a service without the necessary expertise” and expecting too much from private-sector providers, while “forgetting that [governments] always remain responsible for the delivery of public services, no matter what commercial model is adopted”.

One wider aim is to improve public trust in government and the relationship between departments and the large sector made up of their suppliers, many of which contributed their perspectives to the project.

“The spirit of collaboration is also captured in the Supplier Code of Conduct, which sets out joint commitments to improve public service delivery,” the playbook explains optimistically. “Both suppliers and departments are encouraged to highlight if either party falls short of the expectations in the Supplier Code of Conduct or this Playbook.”

To avoid costly mistakes, UK departments are now expected to spend more time considering if it would be better to do the job themselves, before going to the market, and are encouraged to model what the total cost should be.

A “should cost model”, as it is known in the UK, is now mandatory for all especially complex or costly outsourcing ventures, and is supposed to ensure departments genuinely think about the desired outcomes, an operating model for the service, key performance indicators and so on.

Any bid that appears strangely cheap—10% or more below the average of all other bids, or the department’s cost modelling—must be referred to a “central assurance and scrutiny” process.

Going forward, KPIs have to be “relevant and proportionate to the size and complexity of the contract” as well as public—at least three for each new contract.

“Getting this right will form the foundation of smarter contracts that are designed to incentivise delivery of the things that matter and provide clarity to the public about how the service is working for them,” according to the playbook.

Another principle is having a good understanding of the “health and capability” of the relevant market well before calling for tenders—the guide suggests splitting big contracts up can “increase competition and improve market health” in some cases.

And UK public servants are now required to look before they leap into privatisation:

“Where a service is being outsourced for the first time, there is now a presumption that a pilot should be run.”

Complex outsourcing projects now have to go through a gateway review process that “brings together the full weight of cross government expertise at the early stages of the project to help assure deliverability, affordability and value for money” and which previously only applied to major government-delivered programs.

For potential suppliers, the reforms force UK departments to plan ahead better and publish “commercial pipelines” to help the market prepare for upcoming opportunities, and conduct “meaningful market engagement” about how they intend to allocate project risk.

“The pricing and payment mechanism goes hand in hand with risk allocation and will similarly be subject to greater consideration and scrutiny to ensure it incentivises the desired behaviours or outcomes.

“This change is fundamental to making the outsourcing sector a thriving and dynamic market that is sustainable in the long‑term.”

The civil service also has a new minimum standard for assessing and monitoring the financial viability of potential suppliers, and new requirements for contingency plans in case they collapse.

“Resolution planning helps ensure continuity of critical public services and their orderly transfer to a new supplier or in-house in the event of supplier insolvency,” the guide notes.

More often, however, they do quite well out of taxpayers, as Serco chief executive Rupert Soames recently commented while announcing a profit upgrade.

“A government may decide whether it wants to invest in a major new outsourcing project, and can more or less speed up or slow down such projects at will,” said Soames. “It cannot, however, suddenly decide it does not want to house 20,000 asylum seekers, or move its ships and submarines, or clean its hospitals.”

Will Paladin be Australia’s Carillion moment?

The Paladin controversy has a long way to go before becoming Australia’s Carillion moment, but it does highlight community concern about the bona fides of any outfit that works for the taxpayer, what it is contracted to do, and how much it charges.

It is an atypical example of outsourcing, which emerged from an extraordinary policy, with Home Affairs rapidly arranging and paying a fairly unconventional and mysterious web of companies for security and garrison services provided abroad, on behalf of the Papua New Guinea Immigration and Citizenship Authority.

There are concerning questions about the quick single-supplier procurement process when other firms had expressed interest, the integrity of the Paladin web of companies, and the extremely high price Home Affairs is paying for its services, even as its staff strike for higher pay.

The answers provided to date, mostly in estimates, have failed to allay these serious concerns, although more will be provided on notice. A lot of people watching-on were surprised to hear key advice about commercial and probity risks of the contract was also outsourced, coming from KPMG and Maddocks lawyers, respectively, while accountability lies mainly with the department secretary.

The affair is a good example of the bunker mentality in public sector media handling—mostly hiding, before unleashing the occasional barrage to supposedly correct the record—which is a key factor in public trust. Legitimate questions were raised about the procurement but received only slow, incomplete and dismissive responses.

After refusing to address the newspaper’s various questions multiple times, Home Affairs published a response just in time for its marathon hearing, but this failed to quiet the controversy.

At the time of last week’s estimates hearing, secretary Michael Pezzullo said he couldn’t remember if any of the articles quoted one of his spokespeople, and didn’t know the journalists had contacted the department.

“I don’t know that they did, because I suspect that this would have been escalated to me, at least for my advance awareness,” said Pezzullo, suggesting his media team had improbably failed to see the significance.

Deficiencies of the department’s explanations were pointed out the following day by the AFR journalists, who confirmed:

“The Financial Review first contacted Home Affairs on February 8th and then again on the 11th, 14th, 17th and 18th with specific questions. After an initial response providing some detail about the Paladin contract, the Department said either it had ‘nothing further to add’ or did not respond.”

The sympathetic chair of the Legal and Constitutional Affairs committee, Liberal senator Ian Macdonald, was keen to dismiss the reports as “factually erroneous” and move on. But even he was confused about why, if Home Affairs had perfectly reasonable explanations for everything, did it not provide them to the reporters earlier?

“I will need to reflect on that, because there is a suggestion that has been forming in my own mind, that perhaps we could have put this torpedo in and hulled the ship of this story last week,” Pezzullo told Macdonald.

The response exemplifies the bunker mentality, where the walls are built from wishful thinking and, despite having well-resourced media units, government agencies and ministers often display convenient and improbable ignorance of what is going on in the world around them.

The department’s terse list of facts was more than enough for the committee chair, who declared himself satisfied that “everything is being done with the utmost propriety”, while opposition and cross-bench senators fumed. Senator Rex Patrick pointed out they hadn’t seen the outsourced advice about Paladin, and Labor’s Kim Carr gruffly interjected.

“Let’s see what auditor-general has got to say about this,” he said. “Let’s just see.”

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