It is an epochal transformation, the sort of which no country has ever experienced.
By Russ Banham
It is an epochal transformation, the sort of which no country has ever experienced. Always at the leading edge of HR evolution in the European Union, the United Kingdom is now poised to begin an historic shifting of public sector functions and services to third party business process outsourcing providers.
Several factors are conspiring to prod both central and local governments to take this action, chiefly the steep and nagging government deficits in the wake of the 2008 financial crisis. By outsourcing procurement, job recruitment, processing, payroll, and diverse social service functions, the new coalition central government and financially strapped local governments are hoping to decrease costs, increase efficiency and stimulate the private sector by funneling work and jobs to it.
While the U.K. began a process of shifting various government services to the private sector during the administration of Prime Minister Margaret Thatcher in the 1980s, the current era is one of renewed resolve to pare government to its essentials. “There are all sorts of outsourcing frameworks kicking off over the course of the year,” says Andrew Buggy, solutions director at the large London-based business process outsourcing support services provider Capita, which is amongst many local firms anticipating a boost in business, many of them small, and medium-size enterprises. “We’ll see some fairly big deals in sectors like the Ministry of Defence and the National Health Service this year, but the central government, once the strategic frameworks are built, will take off next year.”
No one anticipates that the burst of outsourcing activity in the U.K. will quickly spread to the rest of Europe, given different cultural, regulatory, and, especially, economic differences. Fiscally troubled countries such as Portugal, Greece, and Ireland have other fish to fry, and language barriers challenge more economically secure nations such as France and Germany. While English-speaking countries such as the U.K. and the United States can take advantage of low-cost labour environments in India and the Philippines, where educated populations also speak English, France and Germany do not have this leeway.
Still, the planned shifting by the public sector of functions and services to the private sector, from traditional outsourcing engagements to the privatization and sale of shared service centers within government to third parties, is perceived by many as a grand experiment. It could set in motion a greater scale of public sector outsourcing across the globe. Many current shared service operations are on tap to be outsourced entirely to third party service providers. Government workers are set to become members of the private sector, helping to fill depleted tax coffers and boosting the nation’s economy. And new companies will be formed from previous shared service centres.
At least that is the hope. As Tim Lloyd, a founding partner at sourcing advisory firm Alsbridge in London puts it, “Extraordinary opportunities are in store for outsourcing providers.”
The U.K. has long had a big government, a necessity given the range of social services, such as free healthcare, that are provided to the populace. In the 1980s, realizing that government-run functions were inefficient, costly, and wasteful, Prime Minister Thatcher set in motion a series of remarkable reforms. Financial markets were deregulated in what became known as the Big Bang, ushering in a new era of meritocracy, free market doctrines, and global competition. Similar moves were afoot in the U.S. during the administration of Ronald Reagan, but in England the idea of deregulation and privatizing government functions was akin to attending the horse races at Ascot in jeans and a T-shirt.
Not that Thatcher automatically dumped government services in the laps of the private sector. “She instituted a system called compulsory competitive tendering, whereby the public sector had to test the efficiency and value of the many different services it handled against what the market could offer,” explains Duncan Aitchison, president of global sourcing advisory firm TPI’s EMEA operations in London. “There was now an obligation to go and find out if the private sector could provide services at a more advantageous price and delivery point. This then rolled into the development of shared service centers over the past ten years—and we’ve seen many of these—leading into the current outsourcing initiatives in the U.K.”
A substantial number of major outsourcing transactions have been completed in the country, many of them involving organizations within the private sector, but most—north of 70 percent of all deals, Aitchison estimates—have involved the outsourcing of public sector activities. “It initially was predominantly IT services, but has expanded into areas that some people would consider to be the more traditional BPO things like HR,” he adds. “We’ve even seen some esoteric work done that’s more specific to the public sector, such as attempts to reduce traffic congestion in London, an outsourcing initiative that went to Capita.”
These and other successful public sector outsourcing engagements over the last 10 years have set the stage for the next act in this long-running drama—the aforementioned grand experiment. Driving it in the U.K. is the remarkable coalition government led by Prime Minister David Cameron and Deputy Prime Minister Nick Clegg. “When the coalition government came into power, they asked a number of different organizations like ourselves to come up with ideas on how to support their initiatives of taking cost out of all sorts of different departments,” says Buggy. “Our CEO and senior team got all the different parts of Capita together to ask what they could do to abet the central government’s objectives. We then developed a series of papers and presented them to the government behind closed doors.”
Buggy adds that the papers are confidential, and the information within is considered proprietary. Nevertheless, he points out that the advice comprised certain areas for outsourcing that were compelling from a prioritization standpoint to test this year and in 2012. “When the new government came in, they did some fairly fast reviews of different sectors, such as the NHS, taking an early view of what efficiencies could be gained if services were to be outsourced,” Buggy says. “At the same time, the government encouraged some sectors to take their own look at outsourcing.”
As an example, he notes that NHS is being encouraged to go down the shared services path, yet is being tasked with making its own decision whether to build it internally or buy it from a provider. “If they decide to outsource everything under the sun in terms of HR functions, they can do it without having to go through a complicated procurement exercise, which bogged down central government departments in the past,” he explains. “And this is just NHS—others are doing the same exercises.”
Capita recently was involved in what Buggy says was a complicated HR shared services engagement with the Northern Ireland Civil Service. “We moved 12 different departments from a creaking mainframe to Oracle on a wall-to-wall basis,” he says. “Pretty much everything was included—payroll, recruitment, case management, occupational health, learning and development—everything but strategy. We also did a deal with the BBC to outsource all their HR service operations, recruitment, and occupational health, which they estimate will save them more than £50 million.”
Vassily Serafeimidis, a member (or “partner” stateside) at PA Management Group, a London-based consultancy with significant experience in public sector outsourcing, cites an outsourcing arrangement involving the U.K. Ministry of Defence, in which certain services such as payroll are now provided via a combination of internal shared service centres and external outsourcing providers. “MOD, as you would imagine, has a huge number of employees that require payroll and correlated services. Now it has let it be known that they are thinking about outsourcing recruitment, which is a bit sensitive. A tender offer has been sent out indicating that they want to hear ideas on whether to outsource the function or just have an external provider monitor it for them.”
He adds, “We’re even seeing a lot of police-type functions being put up for sale—privatization to a degree. And recently the Department of Transport, which has a shared services function for HR, finance, and procurement, put it up for sale. They want to pass on the liability to the private sector, while achieving better services and upfront cost benefits. The government needs cash now, not in 10 years’ time. They have to show that the deficit is reducing.”
Certainly, these announcements indicate that people in central and local governments are quite open to pretty much everything. “It’s an exciting time, although things are progressing slowly,” Serafeimidis says.
The pace will soon quicken, in what the observers predict will be a massive escalation of HR outsourcing in the public sector this year and next. “From maybe one or two big deals a year being concluded, there will be an enormous number ahead,” Buggy projects. “Given the scale and complexity of these deals, many will need to sort themselves out. From a provider standpoint, it’s a nice problem to have.”
Serafeimidis agrees: “I see a tidal wave of things hitting the markets very quickly in the next quarter or six months. If you look at the stock exchange values, some major outsourcing players like Capita, Group Four, and SecuriCo are seeing major increases in their share prices, even though their revenues have remained stable.”
Brother, Can You Spare a Quid?
So what’s driving the coalition government to tout the virtues of outsourcing so strongly? In a word—deficits. At the end of December 2010, central government debt was £1105.8 billion, equivalent to 76.1 percent of the country’s gross domestic product (GDP). The U.K.’s general government net borrowing of £148.9 billion last year was equivalent to 10.2 per cent of GDP. “The U.K. government faces quite a significant deficit and is very much a sick public sector,” Serafeimidis says.
Outsourcing by the public sector and the sale of government shared services centres are the continuation of the trend in the U.K. of privatizing government assets, one that is expected to help cure the patient, he adds. “To address the need to reduce the costs of offering public services, we anticipate further acceleration ahead,” he explains. “The government also seeks to move the delivery of these services to a wider space of suppliers, which would be a very good stimulus for the economy. One of the major ‘headlines’ coming from the government is to give the work to small and medium companies, rather than to the mega-suppliers—to allow the SMEs to take a slice out of it. It’s a well thought-out approach.”
As part of this approach toward pushing business to SMEs, the U.K. government put the brakes on all public sector consulting initiatives last year, notes Lloyd from Alsbridge. “There is now a portal for all central government consulting engagements below £100,000, so anybody essentially can apply for the engagement,” he says. “Consulting engagements above that figure will now be going through the new framework agreements. It’s a much more structured approach.”
He and others project that outsourcing back-office services, from HR to finance transactions and even property management, will reduce current government expenses by at least 20 percent, narrowing the deficit. Possibly hundreds of millions of pounds in government costs will be pared, while the business for private sector companies will spike revenues for many. To get a sense of the financial savings, three councils in London—Hammersmith and Fulham, Kensington and Chelsea, and Westminster—recently merged their services to create a “super council.” Each retains its political identity with elected leaders and councillors, but together they share services. Altogether, they expect annual savings of up to £100 million.
That’s just shared services. Other local authorities are outsourcing public services at a frantic pace. John Harris, Capita solutions director of learning and development, says the provider has negotiated four major contracts in four counties in as many months. “Various public sectors are seeing learning development being quite strategic, but have realized that running the operation efficiently isn’t easy,” Harris says. “They’d rather transfer the stuff to us. We can provide LEAN and Six Sigma work to assure the processes around learning development are streamlined and the courses are aligned with their business processes.”
“For authorities in Southampton,” he adds, “we created a manager academy to up-skill managers to ensure they had basic HR management skills around recruitment and performance management, those sorts of things. It took pressure off the HR organization and, as a result, headcount could be reduced in the shared services centre from 21 people to 12.”
And the Rest of the EU
Other European countries are closely watching the burgeoning BPO developments in the U.K. but are not expected to push for similar reforms any time soon. One issue is labour, Capita’s Buggy explains. “Employment laws are complicated across Europe more so than in the U.K., and costs are prohibitive,” he says. “We just haven’t seen much in the way of public sector or even private sector HR BPO. The U.K. is leading the charge.”
Serafeimidis from PA Management Group cites another key factor why the rest of Europe is lagging. “There is no history of countries like Spain, Portugal, Ireland, and Greece—countries that would definitely benefit financially from outsourcing—of much outsourcing,” he explains. “Statistics indicate that 90 per cent of all outsourcing in Europe, in terms of revenues, is done in the U.K., which has this history. Other countries like Germany just don’t have the same pressures to reduce costs and increase efficiencies.” Lloyd points to the aforementioned language issues impeding the development of offshoring in non-English speaking nations. “The cost ratio from the labour arbitrage between Western and Eastern Europe, where much of the non-English speaking offshoring takes place, is still attractive but not as attractive as for the U.K. or U.S.,” he says.
Nevertheless, all signs point to public sector outsourcing across Europe—some day. “We’ve seen some public sector outsourcing in the Nordic countries and Holland, and the odd one or two in Germany, but nothing huge,” TPI’s Aitchison maintains. “As for the troubled countries like Ireland and Greece, do I think they will go this route eventually? I’d have to provide a cautious ‘yes.’ The same response I’ll give to the rest of Europe, with caveats. Germany is enjoying very healthy growth, and is in the midst of a boom economy. So the pressures are not there [to outsource]. France, where we’ve seen significant activity in terms of private sector outsourcing, is still a ways off of cutting into the public sector. We will need to see an inflection point, where one of the big economies comes online in ways that the U.K. did years ago.”
Until then, it’s all systems go in the U.K.—to the provider space.