The £45 billion outsourcing challenge

  • A quarter of local government expenditure now goes on outsourced services
  • Strong contract management is essential to ensure councils achieve value for money and protect themselves against their liabilities when outsourcing
  • With larger councils outsourcing 60% of their services, what are councils liable for?

Public sector service delivery has experienced a period of transformation over the past two years, with a particular trend towards outsourcing.

Our New World of Risk: Change For Good report revealed that in 2012/13, 20% of all local council services were outsourced. This figure has now risen to 32%, and among those councils facing bigger budget cuts, outsourcing now accounts for up to 60% of their services.

Understanding liabilities, including non-delegable duty of care, is essential if councils are to outsource effectively.

Councils must also have excellent contract management skills, and detailed knowledge of their suppliers, including their financial stability.

Here, we identify some of the key contract management and liability considerations for local authorities.

Achieve value for money

Local authorities spend a quarter of their annual expenditure – a total of around £45 billion – on procuring goods and services from third parties. However, councils must balance their desire to reduce costs with their duty to ensure the service can be delivered effectively.

“Finding value for money does not always mean securing the lowest price, and it’s important not to squeeze your suppliers too hard,” says Gavin Chalmers, Strategic Risk Management Practice Team Leader for Zurich Risk Engineering.

“If you are outsourcing a service to save money, you have to remember that you are expecting your supplier to be able to provide that same service and make a profit,” adds Chalmers.

Councils must also ensure they make a realistic assessment of the likely cost of outsourced services.

Have a back-up plan

Councils should ensure they are doing all they can to minimise the risk of supplier failure, including due diligence on the financial viability and resilience of suppliers. Our New World of Risk: Change for Good report found more than half (54 per cent) of councils are concerned about the financial stability of organisations in their supply chain.

Demand for public services can change suddenly and unexpectedly. For example, an increase in population and child birth rates can increase pressure on a council’s children’s services department.

It is essential that councils plan for scenarios in which the outsourced provider fails too. Councils need to consider how resilient their supply chains are and whether they could quickly source an alternative provider or bring the service back in-house at short notice.

“Availability of suppliers is a key issue for services of a bespoke nature,” continues Chalmers. “For example, there might be numerous IT suppliers, but there are limited options for children’s services or adult social care.”

Understand your liabilities

Councils must understand outsourcing a service does not end their responsibility for ensuring it is delivered safely.

In particular, local authorities need to be aware of non-delegable duty of care. In certain circumstances an organisation will remain ultimately responsible for the safe delivery of a service even if that service has been outsourced to a third party.

Non-delegable duty of care gained press coverage following the decision by the Supreme Court in 2013, in the case of Woodland v Essex. In this case, a school had outsourced the provision of its swimming lessons during school hours to a third party at a local swimming baths. Tragically, a pupil sustained a severe injury as a result of a near-drowning incident.

Although the school had delegated the swimming lesson to a third-party provider, it was deemed to owe a non-delegable duty of care to the pupil. The school was therefore found liable for the negligent performance of the third-party provider.

We want to help by making sure councils are aware of, and are effectively managing, the risks they are entering into with contractors.”
Gavin Chalmers, Strategic Risk Management Practice Team Leader for Zurich Risk Engineering

Sound contract management is essential to protect a council against such exposures. This requires robust contractual agreements with any suppliers performing functions relating to young people or vulnerable adults, and evidence that suppliers have adequate insurance to protect the authority in the event of a claim.

Councils must also ensure they have staff with the right skill sets to manage contracts successfully.

Chalmers concludes: “Many councils are already procuring contracts very successfully. We want to help by making sure councils are aware of, and are effectively managing, the risks they are entering into.

“Please talk to us for more information on the training we can provide on how to manage risk in contracts.”