It’s time to follow local government’s lead and embrace the savings and service improvements driven by outsourcing. By John Deverill, Elaine Bennett and Lucy Reynolds

Illustration about outsourcing

The NHS can learn how best to use outsourcing from local authorities

Outsourcing involves shifting business activity to an external company, traditionally focusing on back office functions such as IT, HR, finance and estates.

In the private sector, outsourcing is used to increase commercial profit as it enables non-core activities to be divested and delivered externally at scale. While this seems to sit uncomfortably with the public sector’s focus on service to the citizen, outsourcing’s potential to save money is complemented by its potential to enhance user experience, since outsourced providers tend to be expert specialists in what they do.

‘The challenge now is for the NHS to identify functions that can be shared or outsourced’

Therefore in today’s NHS, where a focus on service performance drives cost reduction commitments, outsourcing represents a valuable win-win opportunity both for cutting costs and improving service quality.

Size of the opportunity

The scale of the outsourcing opportunity is significant. The UK is home to almost a fifth of the world’s outsourcing contracts and turnover of the outsourced services industry in 2009 was £207bn (equivalent to 8 per cent of UK economy-wide output), while 40 per cent of the UK’s outsourced services are provided to the public sector.

Within local government, substantial strategic partnerships already exist between local authorities and outsourcing firms, with savings of 5-30 per cent of budgets. For the NHS, the financial opportunity is similarly large.

Reviews undertaken by the treasury, the National Audit Office and the UK Public Services Audit Agency calculate potential savings on back office and administrative spend of between 20-30 per cent, as well as estimating that outsourcing of front and middle office functions could deliver an additional savings potential equivalent to 5 per cent of turnover.  

NHS outsourcing

Outsourcing is already taking place in the NHS. For example: 

  • 38 per cent of NHS support services are now outsourced.
  • NHS Shared Business Services provide shared financial, procurement and payroll services to more than 120 NHS clients, saving 20-30 per on like for like services.
  • Around a third of the NHS estate and hotel service costs are now provided through private sector contracts. 

Strong local examples of outsourcing also exist: NHS Anglia Partnership Services has outsourced £300m of front and back office services; North and West Surrey hold a five year, £90m contract for outsourcing community health services; and NHS North Mersey holds a seven year, £27m outsourcing contract for HR, payroll and recruitment services across 12 NHS trusts.

Despite this progress there still remain relatively few examples of NHS outsourcing at scale compared to the wider public sector. 

This reluctance is borne of several factors including disinclination to “go first” in the absence of centralised leadership; concerns that outsourcing will be difficult as health is a “more complicated” system than other public sector organisations; misconceptions about what outsourcing is and the scale of opportunity; resistance to potential job losses; concern over private sector involvement; anticipation of public and patient kickback; and the daunting scale of the cultural change required.

Learning from local government

Our work with a range of clients demonstrates that many of these concerns are perceived rather than actual and that most could be significantly allayed by looking to comparable local government outsourcing successes. 

A recent survey of 101 local authority CEOs and senior managers showed that nearly three-fifths of councils consider outsourcing critical to achieving their savings targets. Outsourcing is not a new agenda − following compulsory competitive tendering in the 1980s local government has tested and expanded its reliance on outsourcing to achieve cost savings. The NHS can take courage from this experience to overcome barriers to change:

  • Think scale and collaboration: Local authorities outsource extensively, from housing benefits and revenue services to street cleaning, schools and IT.  New research suggests that local authorities intend to increase their outsourcing levels from 20 per cent average in 2011 to 34 per cent by 2014. Compared to large local authorities, NHS organisations may not always be big enough on their own to make a viable business case for outsourcing. However, joint endeavours, whereby multiple organisations come together to create a compelling shared business case, should be explored (as in North Mersey), and local authorities should be considered as potential partners given the growth agenda surrounding local government outsourcing.
  • Build long-term partnerships: Successful outsourcing happens when longstanding strategic partnerships are developed between clients and contracted outsource providers. As with long term public-private partnerships, which have enhanced service performance and value for money, many local government partnerships are now entering into second or third generation outsourcing rounds and yielding the advantages of a longstanding partnership arrangement. The NHS should seek to model this long-term trajectory or to piggy-back on existing partnerships if already established locally.
  • Look beyond the back office: Local authorities are now looking beyond traditional back office functions to a wider range of services and retained side savings. This again requires wellfounded partnerships rather than traditional outsourcing contracts, as these provide longer term flexibility to adapt to changing circumstances. In the NHS, a significant opportunity has been identified for outsourcing front office functions (customer entry points to a hospital) and middle office functions (support services to clinicians), and these should be harnessed where possible.
  • Aim for quality: Local authorities have improved user experience by outsourcing to firms who provide control centre and one stop shop services. For instance, Southwest One now has a combined service website, providing a single point of access; integrated customer contact teams; and a new customer relationship management system for handling customer enquiries − 85 per cent calls are now answered within 20 seconds. By contrast, patients cannot email or call their local hospital in a similar way. Rather than resisting outsourcing due to high public scrutiny of its services, the NHS could leverage opportunities for improved customer access and experience that local government outsourcing has yielded.
  • Learn from early adopters: The National Audit office’s 2012 report into shared services outlines why they have not always delivered successfully within central government. Issues include complex ERP implementations; failure to win new customers; failure to focus on outcomes; and non-standardised processes, as well as lack of shared vision and failure to promote new ways of working. The NHS can learn valuable lessons from government colleagues, both in replicating best practice and in avoiding predecessors’ pitfalls and mistakes. 

The right time

Finance was the catalyst behind the widespread development of local government. As the health economy now faces its most significant financial challenge to date, there is a similar impetus to explore the considerable beneficial potential of outsourcing. 

The challenge now is for the NHS to identify functions that can be shared or outsourced at an organisational, regional or national level; and to establish the necessary local leadership and partnerships to drive transformation. 

The platform of NHS reform may not be a sufficient catalyst to drive these changes for the long term, but combined with a compelling evidence base and strong lessons from local government, the time is right to revise the way in which functions are provided, and to reap the cost and quality benefits of outsourcing.   

John Deverill is managing director at Finnamore. Elaine Bennett is a director at Finnamore. Dr Lucy Reynolds is a senior consultant at Finnamore