By Daniel Hunter

The amount spent by government of outsourcing public services is set to grow by £20 billion by 2020, taking total spend to £110bn, according to research by OC&C Strategy Consultants.

OC&C analysis of 176 of the largest local and central government bodies has revealed that the share of departmental spending on outsourced services has increased from 22% to 28% over the course of this Parliament. After steady growth over the last 25 years under both Labour and Conservative governments this represents a moderate acceleration in the rate at which public services are being outsourced.

Despite a 2% annual real decline in spend on public services over the course of this Parliament, OC&C’s analysis indicates that spending on third parties within the largest public sector organisations has grown by 4% between 2012 and 2014.

Vivek Madan, Partner at OC&C Strategy Consultants, said: “Even without austerity measures, demographic changes in the UK and growing demand for public services will require a fundamental re-think to ensure outcomes can be delivered safely and effectively. Well managed outsourcing can have an immensely positive impact on the country’s ability to deliver world-leading public services. People often forget that frontline staff such as nurses, soldiers and teachers only represent 15-20% of departmental spending and that most outsourcing is politically uncontroversial.”

OC&C’s findings reveal that the public services market is extremely diverse, with tens of thousands of private and third sector organisations supplying goods and services to local authorities. Public services contracts are currently responsible for 36% of all charity funding in the UK. One of the biggest players in local government outsourcing, Capita, accounts for just over 1% of local authority spending on third parties. The top 15 suppliers, including well-known names such as Veolia and Serco, account for just 10%.

The research highlights a range of contracts across the country where outsourcing is driving efficiencies in the public sector. The Department for Transport’s HGV road user levy, for example, generated £25 million for the public purse last year. Northgate Public Services was hired to ensure the 130,000 foreign HGVs taking 1.5million trips across the UK every year were contributing to the maintenance of British roads. The Foreign Operator Payment System they introduced resulted in 95% of HGV operators complying with the new levy. The service was developed through an innovative model that saw the private sector taking on the risk of cost of development and implementation.

Mr Madan added: “We believe the next Government would better enable innovation in public services by actively collaborating with the private and third sector to improve services and reduce administrative costs, rather than continuing with the zero-sum approach that is still used in some quarters. This will require greater focus on defining and investing in operational best practices, and adopting payment mechanisms that fairly apportion risks and rewards to do so.

“Controversial cases of public sector outsourcing risk overshadowing the overwhelming number of examples where outsourcing is working well. With innovation in technology and a new wave of research into areas like criminology, there is more opportunity than ever to reduce costs and increase the quality of public services.

“Outsourcing neither fundamentally guarantees nor fundamentally prevents the delivery of world-leading public services. What we’ve seen all too often is successive governments and organisations committing one of the three deadly sins of outsourcing — focussing on inputs rather than outcomes, devolving too much or too little control to the contractor, or letting politics rather than reason drive decision-making.

“Regardless of the outcome of this election, it will be up to politicians, civil servants and vendors to find a way of working together that prioritises the common good over salami-slicing short termism.”