A toolkit for insourcing in Wales - 4. Options appraisal methodology

Stage 1: Establish what the objectives are and how you will know and be able to demonstrate if they are being met

Decisions about how to provide public services are subject to general and sometimes specific legal requirements to make the best use of scarce public resources. Decisions must be reasonable in the sense that they should be in line with what would appear reasonable to a disinterested, fully informed, third party. This is not to say that in any given circumstances there will be only one reasonable choice, but it does suggest that a rational process should be followed to establish which of a range of possible options is to be preferred. This process is usually called options appraisal.

Options appraisal should always begin with establishing objectives. It is equally important to understand how progress against objectives will be measured, so it will be possible to know whether the service is delivering against them. This can be difficult for big corporate outcome objectives that are impacted by multiple factors, including many that are not wholly within the control of the wider public body, let alone an individual service. This is why, to be meaningful, broad outcome objectives such as social, economic and environmental well-being must ultimately be drilled down from to identify the specific service outputs that are expected to contribute to their delivery and which can be measured.

Drilling down from a non-specific corporate objective can be done through a series of questions and answers. The aim is to link the delivery of outcome objectives, such as a flourishing local economy, to the things that a public body can do to contribute to achieving them. Thus, whilst the answer to the question of how a flourishing local economy can be achieved is multi-faceted, the things that a council or other public service provider can do to help deliver it are specific and measurable.

Public bodies are, by definition, accountable to democratically elected leaders. The strategic objectives that they set for public services will always therefore be the starting point for establishing what a service is trying to achieve. Value for money will always be in the mix but this very rarely means lowest cost. Elected leaders often establish relatively specific outcome requirements but they also frequently stipulate what inputs are needed to achieve them. Objectives for effective policing, for example, are often accompanied by commitments to increase the number of police officers and even how they are to be deployed – an increase in beat officers for example. In these cases, these commitments, whilst they pertain to inputs should be regarded as outcome objectives by operational decision makers. In a democratic society it would be wrong for unelected officials to ignore or override the promises elected politicians make to the electorate.

Notwithstanding the above, there will in many cases, be multiple and possibly conflicting, objectives. An example is where a local authority has a clearly stated goal of achieving net zero carbon emissions but is also subject to strict affordability criteria that effectively rule out the purchase of electric vehicles when these can be three times the cost of fossil fuelled equivalents. Where such conflicts occur, there must be clarity over which objectives take precedence.

In practice decisions between options are rarely clear cut and whilst it is important to have an understanding about which priorities are most important, options appraisal is often a balancing exercise. Often this will include balancing organisational objectives against wider policy aims.  Where wider government level objectives are enshrined in legislation, such as those set out in the Well-being of Future Generations (Wales) Act 2015, these must be given priority.

Historically, the consideration to insource has tended to be a reactive, and not a proactive, one. This tends to be a pragmatic response to concerns about the current provision – for example, in relation to cost and value for money, workforce considerations, service quality, or market stability. Decision-making in relation to insourcing is therefore highly weighted to these factors, within the local context of the service in question.

The approach suggested in this toolkit is to embed a more systematic consideration of the implication of local choices in relation to service models for the local economy or through the framing of the Well-being of Future Generations Act, and that these factors should be more routinely considered and balanced against other issues as part of the decision-making process.

Stage 2: Current state assessment

If objectives and their associated measures have been properly identified, the assessment of the effectiveness of current arrangements is largely a matter of data analysis. The assessment should link back to output objectives to assess the effectiveness of the service. It must also include an analysis of cost and value for money. These indicators benefit from contextualisation against benchmark data and over time. The former should be drawn from organisations with similar objectives and requirements to ensure the validity of the comparison.

Cost should be broken down to ensure transparency. So, for example, data might include:

• over-all cost of service, including client-side costs, where contracted out
• the cost of taking any corrective measures or resolving contract disputes where relevant
• net cost of service after any income is taken into account
• unit costs, i.e. overall cost per user and/or per household
• cost of front-line staff as a proportion of total cost
• level of central charges

Value for money can be indicated by comparison with other service providers and by reference to cost/performance indicators such as units of service delivery per staff member and cost per member of staff.

The output from this stage will provide a baseline case against which alternative approaches can be appraised.

Stage 3: Review of delivery arrangement

For contracted out services this will include:

• An assessment of the effectiveness of contract specifications, including, in particular the degree to which they reflect the objectives for the service concerned.
• An assessment of the ongoing compatibility of contracting out with wider social, economic and environmental policy imperatives. In Wales this means considering whether outsourcing is the best way to meet the 7 statutory goals set out in Well-being of Future Generation Act.
• An assessment of the effectiveness of contract management arrangements.
• An assessment of the legal basis of the contract and whether provisions are adequate to protect the public interest. Where a pressing need for change is indicated this might include options for full or partial termination.

To be able to assess contribution to wider economic, social and policy objectives will require an understanding of the local context, for example by reference to any Wellbeing Assessment and locally identified priorities and relating these to the current delivery arrangements. For example, to assess impact in relation to local economic development and fair work objectives requires asking questions about the nature of current provision, and its impact from a fair work perspective, and for keeping wealth circulating for the benefit of the local economy.

For in-house services the review will include:

• An assessment of whether service standards are aligned to service objectives
• An assessment of whether the service in question is contributing to delivery of wider social, economic and environmental policy objectives. The 7 statutory goals established by the Well-being of Future Generations Act provide an effective frame of reference for this.
• An assessment of the efficacy of internal management and reporting arrangements
• An assessment of work systems – could they be improved to boost productivity and efficiency and/ or to further the well-being of employees?
• An assessment of the adequacy of resources 
• An assessment of whether there are opportunities to generate additional income through external charging or trading

Stage 4: Options identification and appraisal

Option appraisal is often treated as if it is purely about the make or buy decision. In fact, the judgement about whether to provide in-house or to contract out should be informed by decisions around the sort of service that is required and how elected leaders would like it to be delivered. Where there is a will to deliver services that are flexible, and responsive to changing local need for example it can be very difficult to create a robust contract specification and there will be a high risk of unexpected costs where outsourcing occurs. Similarly, where an organisation wants to make use of new technology or innovative delivery methods the risk of doing so is likely to be greater with a contractor than with an in-house team.

Options appraisal should be evidence driven. This does not necessarily mean data driven but there should be some rational approach to estimating the potential for each identified option to deliver the required outcomes. As discussed, political or otherwise strategic commitments that would normally be.

Stage 5: Business case for change and/or service improvement plan

Where the options appraisal indicates a major change in the way that a service is to be provided a formal business case and/or service improvement plan (SIP) should be developed. As well as identifying (and justifying) any additional capital and/or revenue requirements, a business case should set out how the proposed change will deliver against strategic objectives and be legally compliant. The business case and/or SIP should incorporate a risk assessment and include measurable output objectives by which progress can be assessed. A typical balanced business case format could use the following or similar headings.

The strategic case

How the proposed change will contribute to the strategic aims of the council and wider social, economic and environmental policy.

The legal case

The legal basis for the proposed initiative, including any restraints or requirements.

The commercial case

Where there is a proposal to trade on a commercial basis there should be clarity over what is being traded, who the target customers are and who the competitors are. Crucially the case should provide answers to key questions such as what the likelihood of commercial success is and what this will mean in terms of additional income.

The operational case

This part of the business case sets out operational requirements including staffing, plant, equipment and vehicles and accommodation. It should provide clarity over what will be needed and where it is to come from. Where a service is being insourced TUPE is likely to ensure that front line staffing requirements are met but it cannot always be relied on for managers and/or highly skilled personnel who the outgoing contractor may try to retain via offers of other work. In some areas it can be difficult to identify office space for new staff or locations for depots where the outgoing contractor wants to retain existing ones.

The financial case 

The financial case is designed to provide assurance that the proposed change is affordable and/or to illustrate how and when any initial investment will be recovered. Where there is an expectation of external trading or charging it should include a profit and loss projection for at least the first 3 years of trading.

Stage 6: Implementation plan

The final stage before actual implementation is to create an implementation plan. This should provide a timeframe, show key milestones and who in the organisation is responsible for making sure they are met. The implementation plan is particularly important where there is a critical deadline such as a contract end point or where significant change is taking place. Without it a change project can easily lose impetus.

The timeframe required for change is often underestimated. Although there are examples of insourcing taking place quickly where, for example, a contract has failed, experience suggests that the review process should begin as far as 2 years out from a contract end date. This allows time for fully considered decisions to be made and to address difficult issues, such as meeting the accommodation requirements of a newly insourced service. It also recognises the sometimes-lengthy lead in times and processes that must be followed to procure plant, equipment and vehicles where needed.

All approaches to service delivery have risks associated with them. For in-house services concerns about capacity and resources will be dominant. For outsourced arrangements the main worries will be around the possibility of contractor failure and the lack of ability to effect changes to reflect new and emerging priorities.

Failure demand and risk premium

Outsourcing is often portrayed as a way of transferring risk to the provider. Aside from the fact that, as evidenced by numerous high profile contractor failures, risk is never fully transferred, it is always priced into bids. The greater the degree of risk transfer, the higher will be the price.

When contractors fail, public authorities often incur high costs in making arrangements to keep services going, but even where demand risks do fall on contractors, public sector clients can find themselves faced with having to renegotiate payment terms to maintain contractor ‘viability’ or risk the provider walking away, rather than make a loss.

Churn costs

Where profitability relies on minimising cost, i.e., for service areas with comparatively low margins and where staffing costs make up a disproportionate element of the cost, low pay and onerous working conditions can result in a relatively high employee churn rate and difficulty in recruiting high quality staff. This impacts on service quality, potentially adding to risk and costs associated with responding to service failure. It also leads to pressure on training budgets, which is likely to be passed on in the form of higher prices.

Variation costs

In a contractual relationship the provider party is obliged to do only the things that are demanded by the contract. Anything that goes beyond this is likely to result in additional charges or may not be done at all. It is almost impossible to know in advance exactly what will be required from a public facing service, particularly when contract terms can run to 20 years or more. As a result, it is rarely the case that the tendered price is the actual price paid for outsourced provision. Changes to requirements can be incorporated into specifications via a schedule of rates or benchmarked pricing but even where this is the case, can result in significant cost increases that would not apply to inhouse service provision.

Contract management risks

In many respects the objectives of contracting parties are in conflict. The purpose of a contract is to resolve this by setting out the roles and responsibilities as agreed by both parties. So long as these are kept to, the contract can be expected to meet the needs of both sides. Failures and breaches do occur, however, and effective contract management is essential if satisfactory performance is to be maintained and potentially expensive and disruptive disputes avoided. This can add significantly to cost and given that contractual payments are broadly fixed can be undermined when funding comes under pressure.

1. Organisational awareness

• of the Programme for Government commitment and related policy objectives
• of the potential contribution insourcing can make from a Wellbeing of Future Generations Act perspective
• of the strategic case for insourcing (place-based benefits and organisational advantages)

2. Embedding a systematic approach

• Strategy and governance
• Service design and review
• Cycle of commissioning and procurement

3. Review framework

• Stage 1: Establish objectives
• Stage 2: Current state assessment
• Stage 3: Review of delivery arrangements
• Stage 4: Options identification and appraisal
• Stage 5: Business case
• Stage 6: Implementation plan