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Industry Research : Drop in ‘Traditional' Outsourcing Contracts
The value of contracts signed by councils for outsourced IT and back-office services plummeted by more than £250m last year, according to research.
The 28% drop between 2013-14 saw the total value of the deals fall from £845m to £606m while the total number of deals signed fell from 32 to 20.
However, research by industry analyst Nelson Hall, shared with LGC, found the average value of a deal increased by 17% from £26m to £30m.
Industry experts told LGC the figures reflected the fact that local authorities were outsourcing in different ways: sharing services with or outsourcing to other councils, and setting up arms-length companies.
A Local Government Association spokesman said it was not a "surprise" that the total value of contracts was going down as councils had been "driving down costs in back offices fairly actively since 2010 and before that".
"They should be going down over a period of time because there is less money being spent on these particular services as a result of reduced costs," he said.
John Willmott, chief executive of Nelson Hall, which carried out the research on behalf of business outsourcing provider Arvato UK, told LGC the drop in the number of contracts signed "did not represent a market in decline" because of the increase in average contract values.
A National Outsourcing Association spokeswoman said local authorities were expecting more from service providers than hitting ‘day-to-day’ targets and wanted services to transform as well.
"Generally, across the board everyone is trying to get more value for less [money]. I think local government is probably becoming a more intelligent buyer," she said.
The research showed the average contract length dropped from 66 months in 2013 to 53 months in 2014.
It also found 60% of all the contracts signed in 2014 were extensions, renewals or replacement of incumbents. In 2013, that category represented 37% of the contracts signed.
Helen Randall, public sector commercial partner at law firm Trowers & Hamlins, which works with local authorities on outsourcing deals, said: "We have seen a massive increase in local authorities wanting to broker variations which indicates some of the deals that were signed in the early part of the millennium – the long-term deals – are no longer fit for purpose."
While "traditional" outsourcing contracts might achieve short-term savings, Ms Randall said they were not as "flexible or as responsive" as local authorities need "in the age of austerity". She said: "The outsourcing contracts we have been working on really are all about how you can have a contract that is quite flexible and supple to cater for changing budgetary pressures."
One outsourced service area which saw a big uplift was revenues and benefits. Five contracts worth £87m were signed in 2014 compared to one contract worth £15m the previous year.
Debra Maxwell, managing director at arvato UK, who leads on public sector and contact centre business, said it was "a symptom of the increased financial pressure local authorities are under" and added more district councils were beginning to follow the actions of larger authorities.
"We expect to see this continue and new sources of demand are likely to come from smaller district councils forming consortia with neighbouring authorities in order to unlock greater economies of scale through outsourcing," she said.
Posted by Veronica Silva Cusi, news correspondent
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Published: Monday, February 2, 2015