World-beating at what?

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The first time that I came across Vilfredo Pareto and his eponymous principle was some 40 years ago in the context of a computer system managing the stocks of spare parts for repairing appliances. In this application, the 80/20 rule tells us that by holding the right 20% of all possible spare parts close to the point of use, 80% of faults could be repaired without having to order parts in. The savings in stock holding costs are significant – the hardest part is identifying which 20% need to be stocked, and that’s where the computer came in. In some ways, the principle can be thought of as a mathematical representation of the law of diminishing returns.

The 80/20 rule isn’t a precise law, but it’s a pretty accurate and highly useful rule of thumb which applies in many other spheres as well – like contact tracing, for example. Whether it was part of the thinking behind the 80% target set for the outsourced track and trace service in England is unclear, but its benefits to the outsourcer are very, very clear: the costs of achieving an 80% target are likely to be around 20% of the costs of achieving a 100% target. The graph between cost and target isn’t linear, but it rises only slowly up to about the 80% mark after which it rises sharply. I worked in outsourcing for a while, and experience suggests that anyone who wanted to maximise the profit margin on any service would choose an achievement target of around 80%; it’s a ‘sweet spot’ for the balance between cost and reward. If I could get away with no penalties for under-achievement as well, I’d think I was in outsourcers’ heaven. Fair play, the test, track and trace system may be an operational disaster having only a marginal impact on control of the pandemic, but no-one can criticise the outsourcers’ negotiation skills.

As for the government’s negotiation skills, on the other hand … the words generally attributed to PT Barnum spring to mind. As far as we know, Chris Grayling had no hand in this contract, but his spirit certainly lives on in government. They have an ideological commitment (and if ideology isn’t enough, an occasional political donation tends to help) to the idea that the private sector will always do better than the public sector, where ‘better’ is taken to mean ‘lower cost’ or, as they would prefer to phrase it ‘better value for money’. Sometimes it’s even true; the profit motive can indeed encourage a focus on costs and waste which an annual budget-setting approach does not. But often it isn’t true – apparent savings are just a mirage, a pretty picture hiding an approach based on corner-cutting and under-achievement with an approach to charging for change management which quickly devours those apparent savings in the initial price. One thing that the private sector is undoubtedly better at than the public sector is writing and negotiating contracts. It helps when those with whom they are negotiating are predisposed to believe whatever the outsourcers say. When the government refers to the service as world-beating, they are not lying completely, they are just referring to the profit margins rather than the service delivery.

Efficiency savings explained

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I’ve noted previously that the phrase ‘efficiency savings’ is generally a euphemism for budget cuts.  The two are not at all the same thing.  An efficiency saving is doing the same thing with less resource; providing a lesser service may well generate a saving, but it has little to do with efficiency.

The difference is often not recognised, but it was made crystal-clear last week by one of the UK’s biggest outsourcing companies.  Capita have been busily re-assuring their shareholders and investors that government pressure on them to reduce costs won’t affect profits at all; they’ll simply provide a reduced service.

It highlights the different priorities depending on viewpoint - protecting services versus protecting profits.  But it’s also an honest and straightforward appraisal of what will actually happen.  In practice, exactly the same thing will be happening with services provided ‘in-house’, but I doubt we’ll see the process described so clearly.  It’s a pity, because an honest assessment of what budget cuts actually mean would enable a more enlightened discussion about whether they’re acceptable or not.

Exporting jobs

Tweet It's not often that spam e-mails attract my interest, but one I received yesterday did. It was advertising this event, a conference to help the private sector to 'Prepare Now for the Coalition Government’s Significant Push on Outsourcing'. The e-mail also said that the event "will examine various outsourcing models (including off-shoring)".

I know a little about outsourcing. I found myself 'outsourced' in 1996, and then sat on the other side of the fence when I went on to manage parts of transition projects, as my new employers helped other companies to 'outsource' their IT in our direction.

In theory, the process allows organisations to concentrate on their core business – the bit that they're allegedly best at - and let experts in other fields take over the running of the rest. In theory, it allows the companies to which work is outsourced to gain benefits from economies of scale as they combine operations from a number of different organisations into larger teams, and share expertise. And, again in theory, that allows them to 'share' those savings with the outsourcing organisation.

The practice doesn't always live up to the theory of course. The companies taking on the work and staff, unsurprisingly, have more experience in drawing up the contracts and service level agreements than do their customers. And once the service to be provided is tightly defined, it's not unknown for the customer to find that 'contract variations' are expensive animals.

It's not going too far to suggest that, sometimes, it's the contract variations which make all the profit, after the base contract has been sold as a 'loss leader'. Such variations also make it difficult to know whether the original employer has actually saved money or not - they've often paid less for the defined service, but more by the time the 'extras' are added in. Whether there are real 'savings' often depends on how the numbers are presented – but I suppose that is what bean-counters are for.

There are other ways in which the contractors can squeeze profit out of the situation as well. One is by working the employees harder – more hours for no more pay, for example - and another is by worsening their terms and conditions. The second is supposed to be prevented by TUPE regulations, but staff wastage over time combined with new recruitment can reduce the average staff cost without breaking TUPE rules. And TUPE rules themselves are not as insurmountable as some believe.

The other aspect of all this is 'off-shoring'. It means taking a service currently provided by staff in the UK, and transferring it to another country, where labour costs are lower. There's no doubt that there are direct savings to the customer organisation and increased profits for the contracting organisation - but what about the wider economic questions?

If the staff made redundant are snapped up by other employers at similar rates of pay to those they previously enjoyed, then there can be an overall plus to the UK economy. But if they end up claiming JSA, then the 'savings' made by one government department can quite easily turn into increased expenditure for the DWP.

Clearly, there are those in the private sector who believe that government spending cuts will create new opportunities for off-shoring, and they will rush to seize them. But do we really want government to be saving money by exporting public sector jobs, which is effectively what this would mean? It'll be interesting to see how Conservative and Lib Dem apologists explain why this would be in the national interest.