Market volatility

With a huge amount of market volatility at present, is now really the right time for local government to be looking to the private sector for solutions?

The names Southern Cross, Connaught, ROK and Fountain have probably done more damage to the outsourcing agenda in local government than the collective writings of opponents of this approach since the dawning of Compulsory Competitive Tendering 30 years ago. Throw in recent headlines around A4e and you can see that for an industry that works so hard on its image, the last couple of years have not been a great time.

This is certainly not to say that all those involved in delivering outsourced public services are necessarily poor at delivery and teetering on the edge of bankruptcy. There are many companies out there that have built up excellent reputations for delivering services to councils. However, some of them have also faced significant organisational and financial restructuring in recent times.

When DeAnne Julius reported a few years ago on the burgeoning ‘public services industry’ she identified this had an annual value of £79bn. With profit expectation from the investment groups who own them, many contractors shaped organisational strategies on the longevity of growth and geared up accordingly. The recession arrived and public sector budgets were hit. A combination of diminishing growth, increasing risk and rising debt costs, resulted in the perfect storm for some contractors.

Some in local authorities will be familiar with tales of approaching partners and asking for help with 28% cuts that they faced, only to have a contract waved in their face. Where budgets were cut, contractors looked elsewhere to maintain their margins. Additional admin costs were levied, service levels suffered in other instances, as did staff terms and conditions. Key individuals whom long-term relationships had been built with during contract negotiations moved on.

So what does this market volatility mean for local government? It highlights the need to fundamentally reconsider the risk against potential benefit realisation, for proper forensic due diligence, to realise your worth and negotiate hard for the public purse. Recognise sometimes things can go wrong and you may need an exit strategy at some point in the future, it is important to understand that you are providing a revenue stream that has a resale value and you should gain some benefit from this if it is to be transferred on.

In these troubled times, local government should ensure that it has the commercial acumen to reset relationships in a way that maximises public value.