Outsourcing: Problems and pitfalls

Those who promote outsourcing must have a realistic appreciation of how dramatically it reduces the practical ability of a public authority to maintain proper control of service provision, says Richard Clayton QC.

FINANCIAL pressures and budget cuts mean that many public authorities are implementing radical transformation of their functions by, for example, outsourcing services.

The key problem outsourcing creates is that a public body alone remains liable for any fallout, even if a private sector provider of its services acts unlawfully. This was confirmed in 2001 in R v Servite Houses ex p Goldsworthy, when two care home residents alleged that they had received assurances from a housing association that they would be provided with a home for the rest of their lives. Sir Alan Moses, then a High Court judge, decided that the housing association could not be challenged in judicial review proceedings when Servite terminated their tenancies.

Similarly, complaints about breaches of human rights cannot be brought against a private sector provider. In L v Birmingham City Council in 2008, the House of Lords decided that a private care home would not be liable for breaches of the right to life, for inhuman treatment contrary to Article 3 and for violating the right of respect for private life and the home (although legislation was subsequently enacted specifically to bring care home providers within the scope of the Human Rights Act).

Consequently, the service contract made between the public authority and the provider sector is the only vehicle through which an authority can address failures to provide the agreed service to the contractual standard. Outsourcing, therefore, requires an authority to face up to the fact that it will lose a significant degree of control over service provision. The way the authority tackles these control issues will be critical in making any outsourcing arrangement work.

When drafting the service agreement, a few key points must be recognised. First and foremost, the risk the authority must guard against is not going to be a large scale and catastrophic systems failure (which is a type of risk contemplated by a boiler plate outsourcing contract for IT or for back office services). In reality, the difficulty facing the authority that outsources is something entirely different: a localised but systemic failure to deliver a service by, for example, a private provider of social services failing to assess applicants for adult care in a specific locality. So it is vital to ensure that the service agreement allows the authority to terminate only part of the service contract, and not the whole contract.

Richard Clayton QCSecondly, the authority must retain the power to initiate change and improve service provision. It would be a huge mistake for the authority to concede this power entirely to the service provider. A properly drafted service agreement will invariably include a rectification procedure and an improvement procedure that will allow the authority to step in if there is a serious breach of contract by the service provider.

In my experience, many public authorities do not find it straightforward to manage contracts they make with private sector partners. An authority's first concern should be to ensure that the service arrangements are performed in accordance with the contract rather than working in some informal, more improvised manner, which may operate to waive any rights and obligations created under the formal agreement. Because so many outsourcing exercises work off contract, it is vital to identify the actual contractual terms the service provider is working to. 

A real danger arises where the performance of a contract departs significantly from the formal agreement. If an authority tries to rectify the position when re-letting the agreement, there is a risk that the new agreement will be treated as a variation of the original contract. This could trigger a fresh public procurement exercise, as in R(Gottleib) v Winchester City Council, where Ms Justice Lang held that the authority's decision to sanction variations to a development agreement was unlawful because it failed to carry out a procurement process, as the regulations required.

Furthermore, there is a world of difference between councillors providing anecdotal snippets about poor outsourcing practices to officers, and creating effective procedures that ensure officers can collate the evidence needed to prove breaches of contract. Unless proper contract management procedures are in place, there is no realistic prospect of an authority demonstrating that complaints about poor service provision amount to repudiatory breaches of contract that would entitle the authority to terminate the service agreement.

Drafting an effective service agreement for a public authority is no easy task. However, it is most unlikely that off-the-shelf outsourcing agreements will confer the rights and remedies that an authority actually needs in practice. A more nuanced approach, which is tailored to meeting the specific situation under consideration, is essential.

Richard Clayton QC specialises in public law, particularly in local government and public procurement and practises from the 7BR barrister set of chambers.

In Numbers: Outsourcing

  • £814m - Local government outsourcing spend in 2016, according to the Arvato UK Outsourcing Index.
  • 8% - Year-on-year increase in council spending on outsourcing, despite overall UK market declining by 5%.
  • 75% - Annual increase in council spending on outsourced IT to £463m.
  • 25% - Drop in average value of agreements in 2016 compared with the year before, signalling a shift from traditional large, multi-process contracts towards procuring smaller, more focused deals.
  • 72% - Nearly three-quarters of outsourcing agreements last year were for new work, up from 60% in 2015. 
  • £20bn - Predicted growth in outsourcing of public services over the five years to 2020 to £110bn. By the end of the decade, £1 in every £3 spent by central and local government will go to private providers, according to research by OC&C Strategy Consultants.