Norse Group CEO Justin Galliford looks at the options for local authorities as traditional outsourcing falls out of favour.
There has been much talk in the media suggesting that local authorities are now looking more favourably on insourcing services rather than sticking with traditional outsourcing. My own discussions with local government leaders certainly support this view.
Now, with a new Labour government, and following further Conservative losses in May’s local elections, the trend away from outsourcing looks likely to accelerate.
Local authorities would, I’m sure, agree that contractors have themselves been under severe financial pressure, and this has resulted in service shortfalls in many cases, leading to increasing dissatisfaction amongst councils and their communities. One of the other complaints I often hear is that the market has become increasingly uncompetitive, with fewer providers prepared to bid for public sector contracts.
Local government is under enormous financial pressure; following years of austerity, the pandemic and sustained inflation, it is becoming harder and harder to balance budgets, and we have seen several section 114 notices – with others likely in the future. Recent reports indicate that more than one in ten councils are at risk of financial collapse.
Any new funding settlement, even with the greater autonomy resulting from devolution, is unlikely to plug the budget gap. At the same time demand for key services is increasing, and the expectations of residents rising. Ever-upward pressure on adult social care and SEND is leaving other services starved of funds.
The need to change the way services are delivered, either to reduce costs, or because of new statutory requirements (such as the new waste regulations) means that greater flexibility is becoming more important. This is much easier to achieve when services are insourced: there is no protracted contract re-negotiation, and no variation costs.
Achieving best value
Against this backdrop councils have no choice but to look closely at the way they deliver services, with a pressing need to review service delivery and reduce costs. This is undoubtedly causing many local authorities to move away from traditional outsourcing to meet the demands of residents, and to achieve best value.
So, if we are entering the post-outsourcing era (a term coined by Localis chief executive Jonathan Werran) what options remain open to local authorities? There is of course the obvious temptation to bring services inhouse, either via a DLO or by setting up a LATCo. But neither of these is simple, especially when services have been contracted out for a long time.
Once the decision has been made to insource, councils are faced with the choice of a traditional DLO or setting up their own trading company (LATCo). The LATCo model offers a range of benefits beyond the control of service delivery and greater social value of a DLO: increased ability to trade and develop external revenue streams; greater innovation; and the creation of a commercial culture.
However, it isn’t a silver bullet. Many local authority trading companies have failed to meet expectations, and several have collapsed. There are a number of reasons for this: often the objectives of setting up a company are unclear and not fully thought-through; failure to recruit the right people at the top, with appropriate commercial experience, can mean that a DLO mentality prevails; insufficient investment prevents growth; governance arrangements may lead to risk aversion; and too many LATCos continue to use their council’s support services (HR, payroll, finance etc), limiting flexibility and hampering the development of a commercial culture.
It is all too easy to underestimate the levels of expertise and resources needed to work through a whole raft of multifaceted processes. In my experience, councils often fail to appreciate the difficulties of running a commercial operation; and it doesn’t take much for things to go wrong, wiping out planned cost savings – without achieving any significant improvement to the service.
And a shortage of resources is often the biggest stumbling block. We have been through fourteen years of austerity, with budgets pared back to the bone. This has led to significant downsizing, and the loss of experienced, highly trained people. This, combined with the knowledge lost when services have been outsourced to the private sector, means that most councils do not have the wherewithal to bring services back inhouse. They run the risk of services deteriorating – or even failing – and seeing costs increase rather than decrease.
While members may be keen to move away from outsourcing for ideological reasons, or because they believe that services will be improved and costs reduced, officers are less inclined to embrace this approach, recognising the difficulties and the risks.
So what is the answer?
Sitting between the extremes of traditional outsourcing and self-delivery (whether through a DLO or LATCo) there is another option – partnership working. The model we have developed at Norse (a LATCo itself, owned by Norfolk County Council) is based on co-ownership of a joint venture trading company, which serves to combine public service values with commercial expertise.
As well as delivering cost savings through increased efficiency, the partnering council’s shareholding and board representation gives them direct control over service delivery, making it an insourcing rather than outsourcing model. This level of control is highly valued by local authorities, making any changes to services much less complicated and less costly, as well as satisfying residents’ preference for their council to deliver frontline services such as waste collection, repairs and maintenance, FM and property services. And of course the public sector roots mean that social value is a top priority.
Any surpluses are returned to the public purse rather than private shareholders, and at a time of severe financial pressure councils value their share of the spoils. Returns can be boosted by external trading, making use of Norse’s commercial skills and resources to develop revenues by competing in the marketplace.
Over its 36-year history, Norse has been able to maintain the balance between commercialism and public service ethos, never losing sight of our roots. The company has joint venture partnerships with more than twenty local authorities, all tailored to the specific needs of each partner council.
Our central teams provide all of the support services, from HR and finance to health, safety and wellbeing, and, crucially, sales and marketing. Using our highly experienced bid team, we are able to tender for external contracts on behalf of our partnerships, competing for – and winning – work across the UK. This not only increases turnover and profits, but it also serves to create employment opportunities and provide job security for our people; and it helps us to increase the local skills base wherever we operate.
Our talented environmental specialists work closely with our partner councils to create bespoke net zero strategies, using their experience and skills to help with their decarbonisation plans, including retrofitting of the local authority’s corporate and housing stock.
A new era
Recent research by the thinktank New Local concludes that 39% of councils plan to outsource less. The report comments: “This dwindling confidence in outsourcing suggests that councils are seeking greater control over service delivery arrangements, driven by funding and demand pressures. Evidence also shows that councils are increasingly exploring new, innovative forms of partnerships such as trading companies and joint ventures.”
This chimes with my own experience in our existing partnerships, and in wider discussions with local government leaders. If we are indeed in a post-outsourcing era – and there is every sign that we are – then partnership working can offer all the benefits of insourced services without the risk.
Norse Group is the UK’s leading local authority trading company. Wholly owned by Norfolk County Council, Norse has pioneered an alternative to traditional outsourcing and in-house delivery – the joint venture partnership model. The company now has partnerships with over twenty local authorities, providing a wide range of services including waste and environmental, highways, FM, property consultancy, transport and community equipment services.
