A toolkit for insourcing in Wales - 2. Background

Key messages

The key policy driver behind the commitment on insourcing in the Programme for Government is the pursuit of a socially just, fair work agenda for Wales, recognising that insourcing can result in enhanced local employment conditions.

However, as is explored elsewhere in this toolkit, insourcing has the potential to contribute positively across a range of other domains, wellbeing goals and objectives.

The rationale for the approach outlined in this toolkit is that in exploring the potential to insource services and contracts, public sector organisations in Wales do so in a way that:

1. Systematically applies a Wellbeing of Future Generations lens to service design and delivery options,
2. Achieves strategic synergy – not considering insourcing in isolation, but instead having regard to the full range of policy commitments set out in the Programme for Government, in addition to existing statutory frameworks governing the public sector,
3. Takes account of the specific local economic context, and
4. Seeks to strengthen the public service core

The Well-being of Future Generations Act provides the high-level context for the desired outcomes which Welsh Government is seeking to achieve by prompting consideration of insourcing, and the proposed decision-making criteria to be applied by public sector organisations when doing so.

The table below provides an illustration of how insourcing can contribute, either directly or indirectly, to the wellbeing goals.

The 5 ways of working described in the Act are relevant to the decision-making criteria adopted and the process of insourcing.

Consideration of insourcing should be as part of a systematic and regular options appraisal of service design and delivery approaches – for example, in anticipation of the end of a procurement contract period and before considering contract renewal. The potential pros and cons of insourcing in relation to national and local strategic priorities should be explored as well as cost and operational service implications.

In terms of national priorities, other Programme for Government commitments are relevant in this context, as explored below.

Provide effective, high quality and sustainable healthcare

Insourcing could work in support of this policy objective, by reducing the friction in developing a collaborative public sector focus on prevention and tackling health inequalities. Whist this is not impossible to achieve via outsourced services – for example, a recent NHS Confederation report (Leisure and Culture Trusts Health and Wellbeing Support to the NHS in Wales. NHS Confederation, 2022 ) highlighted examples of collaboration between the NHS and leisure and culture trusts – direct collaboration between Public Service Board partners would arguably be easier if those services were all inhouse.

The process of outsourcing requires commissioners to delineate a specific service specification through the procurement process. In so doing there is a risk that specifications are narrowly described, inadvertently excluding opportunities to flex provision or innovate in the broader public interest.

Protect, re-build and develop our services for vulnerable people

Insourcing is of particular relevance to the commitments to pay care workers the real living wage and to eliminate private profit from the care of children looked after. However, insourcing can be positioned as part of a broader spectrum of more generative service models, including not-for-profit and cooperative models of delivery. Clearly this policy commitment is also contingent on social care funding to commissioners being commensurate with living wage staff costs, regardless of model of delivery.

Build an economy based on the principles of fair work, sustainability and the industries and services of the future

Insourcing can support the strengthening of local supply chains in that it is easier to influence supply chain relationships directly rather than through the procurement process. Outsourcing providers, particularly larger national or multi-national providers, will often have national supply chain arrangements and may not be able to flex towards more local provision. This is particularly an issue in more rural or remote areas.

Additionally, the public sector is arguably more influenceable than private, outsourced providers in terms of the 30% target for working remotely.

Build a stronger, greener economy as we make maximum progress towards decarbonisation. Embed our response to the climate and nature emergency in everything we do

The processes of service design or review and the development of options appraisals are opportunities to proactively consider how a service design or model could be adapted to support carbon reduction objectives. Insourcing can be a vehicle to achieve higher environmental standards as opposed to trying to influence the market through the procurement process. The closer the proximity of service provision to local policy, the easier it is to ensure adherence to those policies. As APSE reported (Insourcing: a guide to bringing local authority services back in-house. APSE, 2009): “in-house teams are far more likely to adhere to Green Accords and local environmental strategies”. This is particularly relevant in the current context where public bodies will be strengthening policy in line with climate emergency commitments. Again, however, insourcing is not the only model. For example, there may be opportunities to partner with a local social enterprise, community business or cooperative that has explicit environmental and social objectives – for example, one designed with circular economy principles.

Make our cities, towns and villages even better places in which to live and work

Insourcing explicitly sits under this objective in the Programme for Government. It could also impact on other commitments under this objective. The commitment to “Establish Unnos, a national construction company, to support councils and social landlords to improve the supply of social and affordable housing” (Programme for government: update. Welsh Government) prompts an interesting question for the insourcing work, in that the same rationale on whether to bring services back into the public sector could also be applied to the development of new public sector provision as alternatives where there are market gaps or known extractive practices.

Build on our approach to the Foundational Economy and develop a Backing Local Firms Fund to support local businesses

The interface with foundational economy work, including the role of progressive procurement as a lever, is of particular importance, and a nuanced approach will be needed to ensure that exploring the potential for insourcing supports and doesn’t undermine foundational economy objectives.

As CLES set out in their recent publication on employee ownership in Wales :

The Welsh government is committed to strengthening the foundational economy in Wales as a cornerstone of their economic strategy. The foundational economy is a concept that has been developed to describe the economic importance of the goods, services and other forms of provision that are necessary for a “good life to be enjoyed by as many people as possible”. This can include a diverse range of policy areas including housing, childcare, utilities, health, education, public parks/recreation and culture. Traditionally, many of these goods and services were provided by the state as part of a collective endeavour because of their importance in providing the foundations of a better life for workers, and in recognition of their importance for a more inclusive economic system.

However, in recent decades, programmes of privatisation have disrupted traditional ideas about how everyday services are provided and also given powerful corporate actors access to public services, data and money. There is ample evidence that this transfer of ownership and provision means that these services are often delivered more for the benefit of private rather than public interest.

Measures which provide the basis to disrupt monopolies of foundational economy provision, or at the very least question its power, are vital to help ensure that workers, particularly those on the lowest incomes, can continue to access the everyday goods, services and other provision that are essential to help them live a life that they have a reason to value.

(Owning the workplace. Sean Benstead and John Heneghan, CLES. 2022)

There are both potential benefits and risks posed for the foundational economy agenda by insourcing. As set out above, insourcing can reverse the trend toward delivery of public services for private gain, restoring public values in public sector delivery. The foundational economy accounts for every 1 in 4 jobs in Wales, presenting a significant opportunity for insourcing to affect fair employment as a lever of progressive economic development. However, other mechanisms of delivery also have a potential role to play in this regard, including delivery via worker owned cooperatives, the not-for-profit sector, and social enterprise.

All these approaches can be used to progress the fair work agenda (better pay, improved terms and conditions, and better opportunities for development and career progression). They can also contribute to improved and more universal access to public services. However, these benefits are with caveats – it cannot be presumed that all private operators are bad employers (or indeed that all public provision is good). There have been significant efforts – supported by the Welsh Government procurement policy statement to drive social value driven through procurement, and there many examples of good private sector provision.

However, insourcing does provide for a more stable and sustained approach to achieving social value. When public procurement is flexed to deliver a positive social value return there can be a tendency for positive changes not to be sustained, for example if supply chains are subsequently offshored.

Public sector procurement can also provide a stable level of baseline demand for Welsh SMEs and other generative economic actors, which contributes to the objective to grow the “missing middle” - establishing a stable base of medium sized Welsh firms capable of selling outside Wales but which have decision-making rooted firmly in communities.

Nurturing the third sector, including social businesses, not-for-profit enterprises, and democratic businesses such as worker-owned co-operatives, is key to maximising the benefits of a foundational economy approach. These organisations, provided they sit within a generative business structure, are hard-wired to redistribute surplus and benefits locally, so increasing their prominence in the economy, locks more wealth and benefits into local communities. It will be important, therefore, to ensure that the insourcing approach does not result in reducing the very demand which is nurturing this generative local economic activity.

Public sector bodies will also want to have in view the relative pros and cons across the spectrum of service delivery models. For example, social enterprise/cooperative models can result in:

• The ability to access different forms of finance, including grants and income generation from commercial activities which can in some cases cross-subsidise other aspects of service delivery.
• Enhanced citizen engagement in decisions and delivery – e.g., member-led businesses. Social enterprise tends to be based in, and formed of, the local community.
• Ability to work across geographical administrative boundaries.
• Ability to integrate with communities, for example, by working with existing volunteering and community activity.

However, there are only limited circumstances in which procurement can explicitly be ringfenced for social enterprises, and not all social enterprises have a generative ownership structure (for example, some social enterprises are arms of profit-making corporations).

As CLES pointed out in its recent report on employee ownership in Wales (Owning the workplace. Sean Benstead and John Heneghan, CLES. 2022), even when democratic businesses do feature in public sector supply chains, these have tended to be management buyouts, as opposed to worker cooperatives, and be at risk of corporate acquisition. Whilst there should always be an imperative to develop progressive procurement approaches which seek to maximise the role of generative business in supply chains, the reality of competitive procurement is that these may be displaced by more extractive competition when tenders come up for renewal. Insourcing, conversely, can lock in these local economic benefits over the longer term.

There are some services where there is a particularly strong case for their delivery via social enterprise or cooperative models – including some aspects of social care. However, there is also a compelling argument that Welsh Government will only be able to fully maximise the levers at its disposal for fair work in the social care sector if significant elements of provision are brought within the public sector.

Housing is another example of where social enterprise models have realised additional benefits – since the move towards stock transfer to housing associations, delivery has often stayed in the ‘public sphere’ but with additional freedoms to innovate. Particularly in Wales, housing associations have tended to have remained smaller, and firmly committed to a public service ethos. These include mutual models providing an equal voice for tenants, owners, and community.

However, some social enterprise organisations will likely not be able to match the pay and conditions of the public sector unless additional funding is made available through commissioning.

Choices in respect of service design and delivery should be made having regard to the specific local economic context, in particular the make-up of the local economy in terms of its ‘generative’ capacity, and the nature of provision of foundational economy goods and services.

Issues of scale may also be relevant, with insourcing particularly prioritised on larger-scale provision, where the current delivery mechanism is more extractive, as opposed to smaller contracts where insourcing could potentially conflate with the Welsh foundational economy agenda of supporting the development of the cohort of medium-sized firms in Wales.

A central consideration ought to be the extent to which services are seen as a core to the public service being delivered. No public sector organisation could ever be, or would want to be, fully self-sufficient – there will always be a need to procure some goods and services. The NHS in Wales, for example, does not want to be in the business of manufacturing hospital beds or surgical equipment. However, what we have seen over many years across the UK has been large scale outsourcing of some essential frontline and back-office services as if they are peripheral.

These services – catering and cleaning, for example - are often delivered by workers at the lower ends of the pay scale and frequently have female dominated workforces. Their cost-base is predominantly labour costs, so any ‘efficiencies’ from outsourcing are inevitably at the expense of terms and conditions, most notably pensions contributions. The services these workers provide are as vital to public service outcomes as other parts of the public sector workforce, so there is a moral, as well as a social and economic case, for them to be brought back into a strengthened Welsh public sector. Consideration of what is core versus peripheral should therefore be a key part of a public body’s decision-making. Additionally, insourcing of core services will then yield greater ability to influence the peripheral.

In so far as insourcing can contribute to fair work objectives, the approach complements fair work objectives being pursued through the Social Partnership and Public Procurement Bill.

The Bill provides for a framework to enhance the well-being of the people of Wales, including by improving public services, through social partnership working, promoting fair work and socially responsible public procurement.

Key messages

Insourcing has the potential to deliver long-term benefits for local places and communities, particularly relevant in the context of the Wellbeing of Future Generations Act, as well as advantages at the organisational level.

Place-based benefits can include:

• Local economic benefits – such as improvements to local labour market conditions, the strengthening of local supply chains and keeping more wealth circulating in local economies.
• Increased community wellbeing and satisfaction – for example, when insourcing leads to improvements in service quality or accessibility.
• Environment and sustainability – by bringing service delivery within the direct remit of a public sector organisations own environmental or sustainability policy it may be easier to achieve higher standards than by trying to influence the market through the procurement process.

Organisational advantages can include:

• Strengthened governance – by bringing decision-making and service delivery closer together.
• Increased flexibility – by not being constrained by narrowly described service specifications which can limit the ability to flex provision or innovate in the broader public interest. This flexibility can also be used to develop more integrated approaches to service delivery, for example at the neighbourhood level.
• Stability of provision – by removing risks associated with potential market instability or market failure.

It is important that these factors are routinely considered, and not just as a reactive response, for example to concerns about the cost or quality of current provision. This means embedding a systematic and proactive approach to considering the implications of choices in relation to service models and approaches. Such an approach would take a rounded view of value for money, applying a Wellbeing of Future Generations Act lens to service design options.

This agenda provides a further opportunity for public bodies to reflect on their wellbeing plans and assessments and ensure that consideration is given to how the potential organisational benefits associated with insourcing link back to their wellbeing objectives.

It is also a further opportunity to ensure that spending and procurement are considered at the strategic level – consistent with the expectation in the Social Partnership and Public Procurement Bill to produce a procurement strategy.

Local economic benefits

At the local economy level, labour market conditions have significant bearing on wellbeing objectives. Good work is an essential component of a more inclusive local economy geared towards reducing inequalities and improving health. Good work means:

• Paying fairly and offering lasting security
• Ensuring good working conditions
• Enabling a good work life balance
• Providing training and opportunities to progress

Insourcing to a strengthened Welsh public sector can be used to positively influence the local labour market, using the direct employment relationship to ensure good terms and conditions for groups who would otherwise be in weaker labour market conditions. Public sector organisations are often sizeable local employers so this can also have a wider influence in the local economy beyond any benefits for the specific insourced workforce.

Insourcing can also support the strengthening of local supply chains in that it is easier to influence supply chain relationships directly rather than through the procurement process. Outsourcing providers, particularly larger national or multi-national providers, will often have national supply chain arrangements and may not be able to flex towards more local provision. This can particularly be an issue in more rural or remote areas where tier 1 suppliers may themselves not be locally based.

In the context of local economic development insourcing can be a key tool to support local economies by combating wealth extraction. Here, there is particular potential to prioritise the consideration to insource where the Welsh public sector is reliant on providers which extract wealth that could otherwise be used to provide additional benefits for citizens and the state. Removing the role of private-equity- and venture-capital-backed providers in the care sector would be one such example. Recent reports have highlighted the prominent role of private equity firms in the UK care home sector. This includes firms with beneficial ownership via offshore tax havens which use debt and financial restructuring arrangements to extract profit disguised as rent and loan repayment costs (Plugging the leaks in the UK care home industry. Vivek Kotecha. 2019). More generally, businesses which are geared towards generating returns for distant shareholders are likely to generate less local economic multipliers than locally rooted and more democratic businesses.

Community wellbeing and satisfaction

For many public bodies the decision to insource has been a pragmatic one, driven by concerns about the quality of service provision. Insourcing leads to greater direct control and therefore enhanced ability to focus on improving service quality to increase user satisfaction levels.

Environment and sustainability

The processes of service design or review and the development of options appraisals are opportunities to proactively consider how a service design or model could be adapted to support carbon reduction objectives. Insourcing can be a vehicle to achieve higher environmental standards as opposed to trying to influence the market through the procurement process. The closer the proximity of service provision to local policy, the easier it is to ensure adherence to those policies. As APSE reported (Insourcing: a guide to bringing local authority services back in-house. APSE, 2009): “in-house teams are far more likely to adhere to Green Accords and local environmental strategies”. This is particularly relevant in the current context where public bodies will be strengthening policy in line with climate emergency commitments. Again, however, insourcing is not the only model. For example, there may be opportunities to partner with a local social enterprise, community business or cooperative that has explicit environmental and social objectives – for example, one designed with circular economy principles.

Strengthened governance, continual improvement, responsiveness, and flexibility

Insourcing can strengthen governance by bringing decision-making and service delivery closer together.

More generally, good governance in the public sector should go beyond a narrow focus on service and cost efficiency. It should also be about place stewardship and maximising public sector organisations contributions as positive agents of change, working towards a strategic vision for their locality. Consideration of insourcing as part of an options appraisal of potential service delivery models has a role to play in this regard – by evaluating options through a Wellbeing of Future Generations Act lens, and taking account of the broader social, economic, and environmental implications associated with different service model options, as well as issues of service delivery and cost.

One of the functions of governance in the public sector is to create the conditions under which continual improvement can take place. This is typically achieved through the service planning process - an ongoing process that uses performance monitoring data to feed into service improvement planning and implementation. Whilst there are clearly definable elements to service planning, the process is cyclical. Examples of models include Plan Do Check Act (PDCA) from Lean Six Sigma. The diagram below illustrates how this is an ongoing process focussed on continual improvement through marginal gains. This approach is intended to avoid the disruptive and often counterproductive upheaval that major, periodic change creates.

Image

Plan

• Current state assessment
• Setting targets
• Implementation planning

Do

• Implementation process
• Ongoing data collection
• Training

Check

• Monitor and measure progress

Act

• Continual progress

Outsourcing can limit the effectiveness of this approach. This is because although in theory the same principles ought to apply to contracted out services and should inform contract management strategy, in practice contracts are essentially linear, with defined beginning, review and end points. Most of the time contracting authorities are in a relatively weak position and unable to force through changes outside of contractual mechanisms. Unexpected changes in priorities can be difficult to accommodate, reducing the ability of authorities to respond to supply side pressures or demand side changes.

Contract change mechanisms are often constrained, ineffective and costly. It is only at the contract letting and contract renewal stage that contracting authorities are really able to act to ensure that changing priorities and objectives are reflected in contractual terms. In between these points they are often in weak negotiating positions. Long term contractual arrangements can therefore mean that opportunities for significant change rarely come along.

Image

Contracts exist to define and crystalise the terms of an agreement between the parties to them. They are intended to protect parties from unilateral changes implemented by other parties. The benefit of this is that parties have clarity over risk – suppliers have guaranteed income, so can safely invest in staff and equipment, whilst contracting authorities have guaranteed supply at a pre-agreed price. Notwithstanding that contractors do nonetheless sometimes walk away from contracts or secure increases in price or reductions in requirements, under threat of doing so, the process of crystalising contractual terms does as a matter of course drastically reduce the ability of contracting authorities to adapt to changes in patterns of demand or supply side pressures.

Directly delivered services, however, organised for continual improvement are often more able to adapt to supply side pressures such as reductions in funding or labour shortages. Resources can be moved within and between different service areas to create dynamic synergies that can be very difficult to achieve in a far less fluid contracting environment. A whole system approach that integrates different activities to deliver joint strategic objectives can achieve high levels of efficiency whilst still being responsive to changing needs and requirements. This includes periods when patterns of demand are distorted by external factors or events. This was clearly seen during the COVID-19 pandemic when directly provided council and other public services proved to be highly flexible and adaptable to new requirements, such as organising support to vulnerable people.

Stability of provision

Insourcing can also provide for more stability of provision, removing the risks around potential market instability and market failures. There are prominent recent examples of significant market failures in outsourced services - the collapse of Carillion and the recent decision to bring probation services fully back in house in England and Wales being notable examples.