Last Word: The UK’s Destructive Love Affair with Outsourcing

From the Post Office Horizon scandal to the NHS, Britain’s politicians are in thrall to a broken model of outsourcing government services, argues Alice Moore.

The recent ITV drama series Mr Bates vs The Post Office showed British television viewers what a High Court judge had found years earlier: the Horizon system installed in Post Office branches across the country was riddled with bugs and fell well short of acceptable security standards. Revelations in the wake of the scandal showed that the Post Office knew about these problems from an early stage but continued to defend the system and their supplier, Fujitsu. They prosecuted almost 1,000 innocent people based on an outsourced system they knew could be faulty.

The Horizon scandal is the latest in a long line of public scandals arising from contracts between government bodies and private suppliers. Before Horizon, it was the ‘VIP’ lane for Covid contracts, before that the collapse of procurement giant Carillion, and before that G4S and Serco overcharging for electronic tagging. Why does outsourcing keep failing? And why do governments of all colours keep doing it?

What went wrong?

The problems with the Horizon contract are typical of many government contracts. To start, low-quality bidders could undercut the competition in the initial award. The original was a private finance initiative (PFI), where the supplier themselves invests in whatever is being built – a hospital, school, a technology system – and gets paid by leasing it back to the government. The winning consortium, which would eventually be taken over by Fujitsu, won the contract because it offered to front the entire development cost. It scored worst on quality.

The contract was later renegotiated as a standard fee-for-service contract, but by then it didn’t matter. Fujitsu had built the system and getting rid of them would mean the cost and delay of starting again. Governments are vulnerable to suppliers offering deals that are too good to be true and renegotiating once they have become indispensable. Public bodies must rightly be open about the award criteria they will use and then stick to them. But suppliers can use that transparency and consistency to their advantage and come up with strategies to game the criteria.

The team that won the Horizon contract was ill-equipped to deal with a system of such scale and complexity. The huge contract also created a codependent relationship between the Post Office and Fujitsu. At the beginning, the contract was such a large part of Fujitsu’s business that they could not afford to lose it, giving them incentives to brush mounting problems under the carpet. Likewise, Fujitsu became an integral part of the Post Office’s operation. Doing anything to jeopardise that relationship or Fujitsus financial position could put the whole organisation at risk. That included openly acknowledging problems with Horizon.

Even now, the governments dependence on Fujitsu is insulating it from the consequences of the scandal. Over the years, Fujitsu bagged a host of other government contracts. It became a ‘strategic supplier on which a range of government services now depend, from flood alerts to the criminal records database. Despite the High Court ruling in 2019, which exposed Horizon’s failings, Fujitsu has since been awarded £4.9 billion in government contracts.

It is easy to chalk this up to cronyism or corruption, but there are more fundamental reasons why it keeps happening. The scale and complexity of what governments do means that few companies are able to supply the kind of contracts that they offer. In recent years, the government has tried to break up and impose limits on the size of its technology contracts but has struggled to find smaller providers or join up multiple contracts. Public procurement processes, while aiming to ensure fairness and transparency, create barriers to entry and advantage established suppliers who can play the game.

Why do we keep doing it?

The UK’s love affair with outsourcing began in 1980, when Margaret Thatcher introduced compulsory competitive tendering into local government. Although it was initially a Conservative policy, New Labour embraced it as part of their ‘third way. It could shake off the image of the party of big government, while still increasing government spending. The Blair government expanded PFI, originally introduced under Major, because it could keep the up-front costs of public projects off the balance sheet.

Outsourcing is a powerful political tool. Politicians can promise new or improved public services without appearing to give money to a much-maligned bureaucracy. They can also allude to the innovative power of the private sector to transform public services, without having to come up with or defend specific innovations.

The political appeal of outsourcing has not waned and it’s likely to remain on the table at the next general election. Labour has moved away from their earlier position of bringing public services in-house and is now considering further outsourcing. Shadow Health Secretary Wes Streeting has said that he will ‘hold the door wide open’ to private sector involvement in the NHS, which he claims will bring in cutting-edge treatments and technologies.

The image of an army of efficient and agile specialists waiting to take public services out of the hands of a slow, generalist government and transform them is a seductive one. Its a shame that more often public contracts are won by firms who specialise not in innovative service delivery, but in the area that really matters: winning government contracts.