Pearse Ryan reviews a history of plans and policy documents on outsourcing and asks ‘where to next?’
Outsourcing in the public sector in Ireland is not a topic which has historically attracted much in the way of public attention, analysis or publicity outside of academic circles. In truth, there has not been much to discuss, analyse or publicise. However, given the current economic crisis and against the backdrop of recent policy decisions in the area, it is timely to survey the state of outsourcing as a component of public sector delivery of public services and its likely future development. As to whether I read the tea leaves correctly - only time will tell.
By outsourcing is meant the generality of scope typically included within the mainstream of the term, with an emphasis on IT and business process matters, from hosting, through managed to business process outsourcing services. Cloud computing is not discussed here in any detail for two reasons. Firstly, while it is arguably a form of outsourcing, or new variant on the theme, the industry prefer to consider it a new sui-generis industry and thus deserving of a new set of supply-side rules and norms. Secondly, there has not been much if any of it to date in the Irish public sector. That may well change, but most likely in the medium term, as government clouds are built and customer/supplier forums begin to develop norms in the contract and service level areas. The recent Public Service Reform Plan, discussed below, does sketch out the beginnings of a government policy in the area. Also, while shared services is discussed, it is considered primarily in the context of government policy insofar as it affects outsourcing. The area of shared services in the Irish public sector is a hot topic, which can be clearly seen from the discussion below, and will be the subject of a subsequent more in–depth article, looking primarily at structural and legal issues.
This article, on the other hand, considers outsourcing largely from the perspective of government policy. Of the two topics, shared services looks to have the greater potential for material and long-term impact on the delivery of public sector services. This article attempts to examine where outsourcing sits within the umbrella of public service reform and expenditure management. I think that the topics of shared services and outsourcing are closely linked, in that a programme of shared services must include, at least to some degree, an element of outsourcing in order to achieve maximum potential cost savings and efficiencies - how significant an element is a matter for decision making. That position seems broadly speaking to be developed government policy in the outsourcing area.
Overall, outsourcing has not to date been a material feature of the Irish public sector IT and business process landscape. Certainly, we have seen no mega-deals of the type seen in the UK public sector since the first Blair government. What deals have been done have tended not to register above single-function managed service on the evolutionary scale. The agencies, local authorities and other non-departmental components of the public service have historically been more favourably inclined to outsourcing than the core departmental public service. In the early days of the economic crisis central government seemed to be retrenching away from use of external service providers across a range of ICT related areas, with an emphasis on internal skill development. This shift, which would effectively render outsourcing a non-starter, seems not in its entirety to have found its way into current government policy, although the general air of caution in the outsourcing area is still a marked feature of government policy. Across the public service, we have seen no large scale multi-function business process outsourcing transactions to date, such as, for example, the outsourcing of a substantial percentage of the operations of a government department. No statistics in the area are available of which we are aware. The bulk of this article will review the as-is state and consider the possible to-be state.
The previous Fianna Fail/Green Party coalition government kicked off the public service reform programme, which the current Fine Gael/Labour coalition government has continued. The previous government initiatives include the Report of the Task Force on the Public Service, the Bord Snip Nua report and the Croke Park Agreement.
Transforming Public Services
The Report of the Task Force on the Public Service was issued in November 2008. The Task Force was appointed in May 2008 following an OECD review of the Irish public service. While the OECD report was conducted prior to the current economic crisis it provides the platform for much of the subsequent public service reform programme. The Task Force report discussed shared services in one of its ten sections, stating that "the Task Force recommends …. the greater use of shared services". In relation to outsourcing it is stated that, in relation to a list of functional areas, "the use of shared approaches, whether insourced, outsourced or co-sourced, should be prioritised" and under the heading potential benefits it is stated that "shared services in HR, Finance, Procurement and ICT enable a host of benefits including, …. greater engagement of external expertise and identification of opportunities for outsourcing where this would be advantageous". This caveated reference to outsourcing has by and large been reflected in policy and review type documents to date.
January 2009 saw the publication, by the previous government, of the Government Statement on Transforming Public Services. The potential of shared services as part of the public service reform programme is clearly identified – "we want to see the development of shared services on a wide scale across the Public Service as a means of reducing administrative costs and spreading best practice by building up centres of excellence. We recognise that such services, when properly planned and managed have the potential to improve both value-for-money and standards of service to the public. They can also engage private enterprise". This can be viewed as the initial government statement directly in the area of shared services and indirectly in the area of outsourcing. This indirect reference to outsourcing has been a feature of government statements and decision making to date, under both the previous and current governments.
An Bord Snip Nua
The Special Group on Public Sector Numbers and Expenditure Programmes, a body established for purposes of review and recommendation in the areas of cost savings, known informally as An Bord Snip Nua, reported in July 2009. The Special Group was established under the previous government and had a clear remit "to examine the current expenditure programmes in each government Department and to make recommendations for reducing public service numbers so as to ensure a return to sustainable public finances". Its report, as was an inevitable consequence of its remit, managed to upset, at least to some degree, all quarters. The report discusses both outsourcing and shared services. The view of the Special Group was that it was "convinced that there is considerable scope for increased resort to both shared services and outsourcing in the Irish public service. The main benefits to the Exchequer will derive from significant efficiencies and savings on the delivery of schemes". Their recommendation was that "accordingly, the Group's general recommendation is that the possibilities of outsourcing services should be actively pursued in each area of the public service with a view to building on the savings obtained through the successful launching of shared services initiatives". Thus, the Special Group saw shared services as the main component of a cost saving and efficiency programme, with outsourcing a material component, with degree a matter for decision making.
The Special Group gave the example of ICT as an area particularly suited to shared services, stating that it "represents a particular sub-set of activities for which shared services solutions should be actively explored. Approximately, 1300 staff work in ICT in the civil service at an estimated cost of €65m a year. In addition, the civil service spends just under €200m a year on external ICT resources (consultancies, contractors and external service providers) and on ICT support and maintenance services. Substantial additional costs are incurred on hardware, software, telecommunications and training". These figures are interesting in setting out the scale of current activities. Note, however, that they relate only to the civil service, which is part only of the broader public service. In relation to outsourcing, the report recommended pilot outsourcing schemes in areas such as accounts and payments.
The report, together with the various subsequent partnership agreements and statements of policy, discussed below, indicate the early phase thinking on an organised approach to both shared services and outsourcing. However, much of the report has not been directly acted upon. In the outsourcing area government policy as developed is more restrained than that recommended by the Special Group. Of the two areas, that of shared services is the less problematical and controversial to implement, both in terms of public sector union opposition and public perception. Shared services is now effectively government policy, as discussed below. As mentioned, an in-depth look at shared services will be the topic of a separate article. Outsourcing, on the other hand, occupies a less clear-cut future in the Irish public service.
Croke Park Agreement
April 2010 saw the conclusion, under the previous government, of the latest in a series of bi-lateral agreements between government and public sector unions. Unlike previous agreements it did not involve private sector employer representatives, being restricted to the topic of public service delivery. Formally known as Service Delivery Options to the Public Sector Agreement 2010-2014 and informally known as the Croke Park Agreement (after the sporting arena the venue for the talks), the agreement was intended to set the scene for public sector industrial peace and reform. In return for government agreement not to impose (further) public sector layoffs or pay cuts the public sector unions agreed to co-operate on wide scale reforms of the public sector. Against this background outsourcing made its first tentative formal entry into the public sector reform agenda and the formal public debate. What follows may not seem like a ringing endorsement of outsourcing as a component of the reform debate but it is noteworthy as the first formal bi-lateral acknowledgment by government and public sector unions of the role of outsourcing within the reform programme.
The overall background is, of course, the country's economic position. December 2010 saw the conclusion of the EU/IMF Programme of Financial Support for Ireland, which sets out clear expenditure control targets and broad requirements in the area of public service reform. The current government has inherited from its predecessor the Croke Park Agreement, which it seems equally committed to implementing. Outsourcing is something which, either the public sector unions had been historically set against, in any material form, or public sector bodies had themselves chosen not to engage in, again in any material form. In reality, a mix of the two likely applied, although neither was formal policy. The government did not come to power with an absolutist agenda on outsourcing and, in truth, a strongly pro position would have been unlikely to win public backing. Rather, the writer believes they share the general public sector lack of familiarity with the business model, as well as with the industry generally, and are keenly aware of the dangers of headcount reduction as a political issue. Outsourcing is not a topic which typically wins either public favour or elections. Overall, the government policy on outsourcing is marked by a strong sense of caution, reflected in a series of requirements which do not exist in the shared services area or in relation to other components of public service reform, as discussed below.
Under the heading 'Service Delivery Options', the Croke Park Agreement sets out the agreed policy on outsourcing. The statement of introductory principle states that "the Public Service is committed to the provision of public services through efficient, high quality and cost effective employment. It is also committed to the use of direct labour to the greatest extent possible, where consistent with the efficient and objective delivery of public service". Where outsourcing is being considered as an option for the delivery of a service a process is stipulated:
(a) Government and Public Service Representatives will consult with a view to agreeing a plan. The plan will "evaluate the existing in-house service, the outsourcing option, and compare both". In addition, the evaluation exercise will include consultation "with a view to agreeing a plan to address the service changes necessary to retain the service in house".
(b) The evaluation will take into account "a number of factors", which include overall cost, quality of service, effectiveness and the public interest. In particular, it is stated that, "all relevant costs will be included in the evaluation but it will not be determined by unit hourly rates of pay".
(c) Where management decides to proceed with outsourcing there will be regular consultation with trade unions.
(d) The pay rates, pension and employment conditions of employees remaining in the Public Service will not be permitted to worsen as a result of outsourcing.
(e) There will be no compulsory redundancies in any outsourcing.
(f) A number of further employment related provisions apply:
· private sector employers "acting under a Public Service outsourcing contract" to comply with "all statutory terms and conditions relating to employment of people in Ireland";
· "as a matter of public policy" public contracting authorities to "make clear" to tenderers the requirement that statutory industrial relations procedures apply;
· public contracting authorities to require, with the exception of certain smaller contracts, the right to information to allow the authority to assess compliance with employment legislation; and
· parties to establish a "mechanism to monitor compliance with employment law".
The above is a fairly stringent set of rules and seems to be a set of relatively high barriers to the implementation of any outsourcing project. In particular, the retention in-house point would of necessity delay any project, as it would likely take some time for the relevant organisational function to develop a service catalogue and pricing model to explain what is being supplied, together with current cost and potential cost reduction. It would seem that the case for any particular outsourcing would have to be quite compelling for the project to proceed. Notwithstanding the rules the outsourcing industry seems to be of the view that compelling cases can be made. As far as I am aware the rules have yet to be tested in relation to a material outsourcing. We can be fairly confident the testing will not escape media scrutiny. A number of outsourcing procurements have and will continue to come to market and while most are relatively modest in size a number of possible future projects may involve application of the rules. In this area, time will tell.
Programme for Government
The Fine Gael/Labour coalition government came into power in March 2011, breaking three terms of Fianna Fail power. A comprehensive programme for government was published, entitled "Statement of Common Purpose". The programme in its section entitled "Public Sector Reform" contains a number of statements in the areas of shared services and outsourcing, which include:
· "we will go beyond the recommendations of An Bord Snip to rationalise core processes that are duplicated across the public service, by establishing shared back-office operations for information technology, human resource management, payments and entitlement applications, business inspections and procurement";
· "we will investigate a government-wide review to identify and eliminate non-priority programmes and outsource, where appropriate, non-critical functions". Note the reference to non-critical functions; and
· "where appropriate we will open up the delivery of public sector services to a range of providers".
The new government came into office on a programme which included quite express and functionally specific reference to both shared services and outsourcing. The reference to shared services is more definitive than that to outsourcing, but both are on the agenda. These statements are, we believe, a first in Irish politics. The programme is of course a political document and history tells us such programmes tend not to be strictly adhered to by elected governments. It is, however, quite recent. The balance of this article discusses government progress in implementing the programme in the shared service and outsourcing areas.
Public Service Reform Plan
The Minister for Public Expenditure and Reform, Brendan Howlin TD, published the results of the comprehensive spending review in November 2011. His Department of Public Expenditure and Reform (DPER) is a new entity, resulting from the splitting of the Department of Finance in two, demonstrating the importance government gives to the public service reform agenda. The Department has recruited and is in the process of further recruiting a number of key external appointees, including the head of a new Reform and Delivery Office within the Department and a specialist shared services manager. This deliberate recruitment of sector specific skilled personnel into the public service is seen as an integral part of the reform agenda.
The spending review document, known as the "Public Service Reform Plan", contains provisions relevant to shared service and outsourcing, which can be summarised as:
· acknowledgement that "public services are essential to the functioning of our economy and society" and stating that "however, it is clear that they must be radically reformed in light of the challenges that we face. This is why this government is driving forward significant change, underpinned by its historic mandate";
· committing to new ways of delivering public services and in particular "across the public service, we will develop new ways of working in the delivery of services. For example:
· we will streamline administrative operations and eliminate duplication through business process improvement and the implementation of shared service models within each sector;
· HR, Payroll and Pensions shared services projects are commencing for the Civil Service with the intention of streamlining operations and removing duplicate activities on a phased basis commencing 2012 and to be completed by 2015; and
· Sector specific shared services implementation plans will be in place by end Quarter 2, 2012. Initial priority areas have been identified".
The above is by reference to the history of the public service a series of unparalleled statements in the area of shared services. The area of outsourcing is not the subject of such definitive statements, being dealt with not in the main body of the plan, which focuses on shared services, but rather within an appendix. Appendix 1 sets out reform plan details and discusses the topic of what is termed external service delivery. Here it is stated that "a number of different sourcing models for service delivery exist in terms of in-sourcing, co-sourcing or outsourcing. These models range from basic managed services, through parallel/partial private sector delivery to full outsourcing of functions. In line with the Programme for government, the external service delivery of non-critical functions should be considered by all public bodies, where appropriate". Note the restriction of external service delivery options to non-critical functions and reference is also made to "non core activities". No guidance is given as to the meaning of these terms, which can, thus, potentially be interpreted both broadly and narrowly. A list of key deliverables is set out, including a timetable, which includes:
· appointment of a Head of Commercial Delivery within the Department of Public Expenditure and Reform to "oversee the development and implementation of a commercial strategy for public service reform to include external service delivery" (Q1 2012-Q2 2012). See above in relation to DPER personnel appointments;
· identification of "further potential non-core activities suitable for external service delivery. This will be done by public service organisations and will be informed by the baselining exercise" (Q1 2012-Q4 2012);
· consolidation of identified opportunities for external service delivery and "development of an appropriate business case" (Q4 2012-Q1 2013);
· the conduct of a "targeted consultation exercise with Public Sector organisations, the market and relevant representative bodies" (Q1 2013-Q3 2013); and
· the strengthening of "commercial capability including analysis and delivery skills across government organisations" (Q1 2012-Q3 2012).
The above sets out a timetable specific series of steps within the overall umbrella of public service reform and with specific reference to the issue of external service delivery. What we have here is a timelined form of consultation process, albeit limited to non-critical or non-core functions. It is likely that the potential scope of application of these terms will be tested in the medium term if not the short term.
Outsourcing and the Public Service – Where to next?
The above discusses the history of government policy in the area of outsourcing in the period 2008 to date. Overall, the issue of outsourcing as a component of the public service reform agenda occupies a position ranging somewhere between 'to be examined' and 'secondary'. It is not primary. Of course, outsourcings have happen and will continue across the public sector, but what we are considering here is the potential for a step-up in activity and value in the area from the historical base. Shared services on the other hand is a primary component of the reform agenda.
As per the Public Service Reform Plan, in relation to outsourcing a series of timelined steps are outlined, which relate to overall identification of opportunities, development of business plans and, importantly, strengthening of public service "commercial capability" in the area, which should include the challenging area of project structure and supplier management. It is an essential feature of outsourcing that a strong customer commercial function is needed to manage suppliers. This area of historic relative public sector weakness is, we understand, under review by DPER. Overall, the outsourcing industry must welcome the specifics of the plan and feel they can present suitably compelling arguments for outsourcing in appropriate circumstances and with reference to the stipulations of the Croke Park Agreement.
It would seem that to succeed an outsourcing project will likely contain one or all of the following components:
· relate to a new public service;
· relate to non-core or non-critical activities;
· pass the Croke Park Agreement series of tests; and
· be concluded within the scope of a broader shared service project.
The above are a stringent set of requirements and the Public Service Reform Plan will, as per its timetable, identify opportunities for outsourcing by end Q4 2012. By end of year we should have a better understanding of the likely extent of outsourcing over the short to medium term as a component both of the delivery of public services and the public service reform programme. Again, it will be interesting to see whether material outsourcings are identified and whether they are shared-services related or stand-alone. In recent times we have seen a number of stand-alone outsourcing public procurement exercises, which overall fall within the new public service requirement.
It is understood that the EU/IMF troika have an interest in the development of the shared service programme and are not, it is thought, opposed to outsourcing on policy grounds. Against the backdrop of the current economic crisis, time is not, unfortunately, on the side of the government. Overall, it is likely that, were it not for the current economic crisis, outsourcing would not now be a formal possibility as a material component of public service delivery. The open questions are to what extent that possibility is acted upon in the short to medium term, firstly, in terms of project numbers and, secondly, in terms of project size. As per the timetable above, these questions are in the process of being answered.
Pearse Ryan is a partner in the Technology & Life Sciences Group in Arthur Cox, Dublin. He specialises in the IT, outsourcing, cloud computing and related areas.
 The Department of Finance, ICT Control Unit, issued two Circulars, No. 02/09 and 02/11, dated 9 February 2009 and 3 February 2011, respectively. Circular 02/01 in particular emphasised ICT self sufficiency. Section 2.3 states "Government Decision S290/05/25/0015D of 15 July 2008 also requires each civil and public service body to reduce its dependence on ICT consultants, contractors and external service providers and enhance its self-sufficiency in ICT development, operations and management. All civil and public service bodies must now develop plus, that includes multi-year targets if necessary, to achieve these requirements". Document available at http://www.finance.gov.ie/documents/circulars.
 Anecdotally, a figure of spend on external service providers as a percentage of total public service spend at 6% is mentioned. By comparable international standards this is low.
 Document available at http://www.taoiseach.gov.ie/evg/publications.
 OECD review of the Irish Public Service – Towards an Integrated Public Service, dated 6 June 2008, available at http://www.oecd.org/documents.
 Document available at http://www.taoiseach.gov.ie.
 Document published 16 July 2009 and available at http:www.finance.gov.ie.
 Document available at http://per/gov.ie/wp-content/uploads/public-service-agreement-2010-2014-final-for-print-june-2010.pdf
 Document available at http://www.taoiseach.gov.ie
 Available at http://per.gov.ie/wp-content-uploads/public-service-reform-181120112.pdf
 Recent notable public procurements include the management and operation of the Irish Government Temporary Partial Credit Guarantee Scheme and the Irish Bank Resolution Corporation Limited procurement of a range of potentially insourced/outsourced services in the areas of IT, facilities, back-office and human resources. Also, the various local authority appointment of private sector waste collection providers involved aspects of quasi-outsourcing. Details are available at http://www.etenders.gov.ie