Outsource Magazine

There has been a change among policymakers and public sector managers across the country, from local education authorities to cabinet offices. There is a “new normal” in which no one is expecting conditions to stabilise any time soon.  But coincident with this new understanding is a completely new form of hope.

This hope revolves around transformation and the opportunity to use drastically reduced tax receipts and public reluctance to take on new debt to rethink how governments operate. And central to these transformation plans is a new-found interest in outsourcing.

In the 2000s, outsourcing was viewed as a tool that could achieve quick results – a means to achieve immediate budgetary savings and to delay long-term technology investments across the life of the contract. Today’s interest in government outsourcing is still based on cost savings, but the ambitions are far broader. Governments around the world are now considering outsourcing as a means to a completely new way of delivering services in a highly cost-effective manner.

Several factors are driving this change.  First, budgetary pressures are mounting at all levels of government as many nations reduce spending. In the US for example, with the bipartisan debt deal signed in August 2011, it’s clear that we’ve entered the age of austerity. In addition, heightening the pressure for state and local governments are the continuing and increasing cost of Federal mandates – in particular, the expected costs of implementing the 2010 Health Care Reform Act.

With the downgrade of US government debt by Standard & Poor's (S&P), US state and local governments are under increasing pressure to keep capital expenditures under control. Threats of municipal defaults are a dark cloud over state and local government bonds. But the reality is that the US, UK and other governments cannot simply put technology spending aside. Many governments have made software investments that will lose warranty support if upgrades are not purchased soon. More forward-looking governments have begun e-government initiatives that require hardware and software upgrades to remain cost-effective.

Outsourcing is a highly attractive option for governments in either situation. Through outsourcing, governments no longer need to pay for software upgrades – it’s part of the contract and the upgrades are frequent. Furthermore, outsourcing companies have lengthy case histories with e-government solutions and can offer the most cost-effective off-the-shelf services, which achieve the best “bang for the buck.”

Mandated services are also driving outsourcing growth. The combination of pre-election promises and legislative requirements often leads to promised service improvements for employees and the public, but no money to achieve them. Outsourcing provides governments with the opportunity to expand the scope of government services in a decreasing headcount environment.

Another factor driving outsourcing growth is the fact that governments have to deliver many services at the local level. Voters like having “satellite” offices nearby to receive government services. But this has a cost: operations are often redundant and built to be optimised at the agency or department level, not the enterprise level. Organisations often lack the will or expertise to make these installations work efficiently. Outsourcing provides governments with the opportunity to make systems “speak the same language” and provide a common source of data for the first time ever – at an affordable price.

In the new normal, governments will continue to focus on their mission-critical tasks. This will lead to a greater diversion of resources and a drive to innovate. Technology cannot mediate political disputes – but it can help governments of all sizes and missions work more effectively. In our new normal world, outsourcing may become the taxpayer’s best friend.

About the Author

Glenn Davidson is Managing Director, Shared Services & Outsourcing Advisory for KPMG. He is a seasoned executive with over 30 years of experience working in or with public sector organisations.  As such, he has led initiatives to transform both their mission-critical and mission-support operations – including information technology, human resources, financial management, citizen/customer contact services and procurement – for purposes of achieving higher performance. 

He was chief of staff to the governor of Virginia and also served as the Commonwealth’s communications director and press secretary.  Glenn also served as a congressional aide.  In the commercial sector, Glenn worked as both a consultant and a service provider.