‘MAKE OR BUY’ DECISION Outsourcing Guidance Note

February 2019

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Whether to deliver services in-house or procure from the market?

This note focuses on the factors to consider when deciding whether to insource or outsource. Referred to as ‘make or buy’, this is about the decision to buy in or self deliver public services. The guidance below assumes that decision making is policy neutral and based on achieving optimal service delivery and value for money. The objective of this guidance is enabling better decisions of when to outsource and more consistently realising the benefits of that decision, as well as highlighting some of the common challenges faced by government. Done well, outsourcing will free up resources that the buyer can deploy more effectively in line with changing public needs and government policy. The two fundamental decisions that drive any outsource are to determine: • what “must” remain in-house. This should be based on specific criteria, not whim. For

example; responsibility for the development of policy, the stewardship of tax spend, certain critical knowledge, reserved powers etc. are some examples of what should be kept in-house. Everything else can be a “candidate” to be outsourced.

• what, from the “candidates” in scope, actually to outsource. Outsourcing of those candidates should only be progressed if there is confidence that the private sector can deliver additional benefit, for example: higher quality, lower risk, lower cost, fewer oversight demands, additional benefit to the UK economy etc. and that the buyer can provide suitable oversight. Anything else should remain in-house until such time as that cost-benefit delivers additional benefits.

The perimeter of the future target operating model (TOM) may well have grey areas. In a large, complex, multi-service outsource it is likely that the design of the TOM will be a fluid and iterative process, as the Department builds confidence through dialogue with the private sector, and it may only be fully finalised part-way through the procurement process. The perimeter should be revisited periodically, in line with the speed of change in the market, as the market experience matures and technology changes the cost-benefit equation: indeed technology is increasingly creating imaginative new ways to deliver public services, reducing costs and creating new value streams for government.

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An overview of the Make or Buy decision process

When the decision should be made Public sector organisations should review their ‘make or buy’ decisions either as part of a regular strategic review of their operating model, or when a significant change is required, such as: the introduction of new services, delivery models or technologies; or when significant improvement to public service outcomes is needed (cost, quality, risk). The following questions should guide the approach:

• Can we introduce the change ourselves? • Do we have the skills and resource in-house? • Can we bring in the skills and manage the change programme in-house? • Can we define the change? • Can we improve the public service outcomes in-house (lower the cost, lower risk, raise

the quality)? • Can someone else deliver better outcomes?

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It is important to address both commercial and operational strategy decisions early in a project process. Yet, case studies show that there has not always been sufficient emphasis placed on this, particularly if a programme is moving at speed. The ‘make or buy’ decision is a critical, strategic decision and one which should be made on an informed basis as early as possible in the project process. Typically a ‘make or buy’ decision would be made in the following situations: • On the introduction of new public services, or the identification of a significant new

component of a service (such as a new technology requirement); • Where there is a need to re-evaluate the delivery method of existing services, for

example due to deteriorating quality of delivery, departmental cost reduction or transformation programmes; or

• Where identified risk can be better owned and managed by others.

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Considerations for the decision making process

Before you start, identify and appoint suitably skilled individuals that can support the make or buy decision process. When determining the best route to delivering future services, having sufficiently experienced individuals can provide greater insight into the key elements to consider in any outsourcing decision. Early planning on Target Operating Model: Assess the key functions, capabilities and processes needed to deliver the service early in the process. These decisions are time consuming and affect many parts of the department and wider government. Whilst the process should be commercially led, it is not merely a commercial decision: senior officials within policy, commissioning and operations should be involved from the outset, to provide optimal Ministerial advice. Decisions made with short deadlines create risk. Clearly define both the components (‘service stack’) and the bounds of the service: The Contracting Authority can minimise the commercial and operational risk of delivery by taking time to fully understand the service. It should be noted that whether or not a service is ‘commoditised’ or deemed ‘complex’ can often depend on where the service boundary is drawn. For example, services may be deemed less complex if the outsourced element excludes the making of discretionary decisions affecting citizens. Losing short or long term in house capability: Consider both long term and short term perspectives. Once service delivery has been contracted with the private sector it can be difficult and costly to revert back to public sector provision if required, be it on contract expiration, early termination or Contacting Authority step in. Clear understanding of the activity you are proposing to outsource: Fully understand what is being outsourced. There should be caution when attempting to outsource something for which there is little or no extant supply market. In certain cases it might be justifiable to make a market, but creating market capability brings its own challenges. The Contracting Authority should define the current service operating model, the target operating model, and what is needed to move from the former to the latter. The Contracting Authority should then clearly identify, and where necessary segregate, resources such as people, facilities and technology required to deliver the service. Address resolvable internal issues: Prior to outsourcing for efficiency gains, unless the Government has made the supplier aware that they are outsourcing or transitioning services which have fallen into specific problems, consideration should be given to the maxim "don't outsource a problem." However, where the problem is well defined, and risks appropriately

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managed, departments should consider whether the innovation and expertise of the private sector can be utilised. Learn from the past and experience of others: Government should draw on the considerable experience and skills of colleagues across government and the private sector, who have worked on similar programmes, to enable a best practice approach. Planned consultations with others should be a key part of the decision making process to capture a broader range of opinions and evidence that helps to challenge bias or historic norms. Central government teams can provide benefit of cross government learning and supplier or department contracts. The private sector can provide feedback directly if consulted in the make or buy decision process. A clear understanding of any TUPE considerations or asset transfer considerations: Ensure you have sought legal and commercial advice on any issues. Please note that asset right to use may also be considered. Pensions may also be an issue in relation to TUPE. Conducting thorough supplier and market engagement and ensure you are content there is a viable market with healthy competition - You need to understand how your market is able to meet your requirement and understand its cost and quality drivers. Conduct a comprehensive supplier analysis. This should include an analysis of the strengths and weaknesses of the market and public sector in providing the total service and/or the individual components of the ‘service stack. Benchmarking of both costs and processes should be undertaken to establish what ‘good’ looks like. The Government should have a full understanding of the true capabilities, aptitude, assets, intellectual capability and maturity of the market to deliver the service. A clear risk profile and understanding of the risk allocation: You should aim to minimise risk. You should understand the remaining risks and which risks are to be reasonably allocated to the service provider (See Guidance Note on risk allocation). There should be a clear plan in place for monitoring service delivery and quality. This should also link to your benefits realisation plan. Ensure there are thorough contract management mechanisms in place and you are able to monitor performance effectively: You must ensure you have sufficiently skilled individuals in place to manage and support the process and appropriate plans in place for contract exit whether planned or unplanned. You have effective contingency plans in case of supplier failure or contract breach leading to early termination (See Financial Distress Guidance Note). Government ultimately remains responsible for the delivery and continuity of public services and therefore it is essential that plans are in place to ensure this in the case of supplier failure. Consider both long term and short term perspectives: Departmental priorities, resources and skill sets change over time. Reverting back to public sector provision means the Government will also need to consider the cost and complexity of TUPE transfer.

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An informed ‘make or buy’ decision process will offer best value for money to the taxpayer, reduce downstream risks, which can range from avoidable programme delays and cost overruns through to major contract renegotiations, bail-outs, early contract terminations or even (temporary) renationalisation. In order to consider outsourcing a service (whether new or existing), a Contracting Authority should therefore: Consider the balance of risk: The operational and commercial complexity, and therefore the risk profile, is significantly lower when outsourcing a commoditised service. The risk profile identified should drive the approach to options evaluation, with due consideration given to all options available such as mixed economy of supply, pilots to establish proof of concept and an appropriate pricing mechanism.

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A structured, evidence-based approach is essential

It is often the case that key stakeholders have varying views on the sourcing approach based on precedent, incomplete analysis, personal preference and experience. For example, keeping services in-house may be preferred because the capability and capacity already exist internally. Outsourcing is sometimes proposed as a way to fix processes that have become inefficient and outmoded, or to deliver new services whose true potential is not completely understood. There is evidence of optimism bias towards both government’s and the market’s ability to flex, innovate and deliver at significantly lower costs than currently. The Contracting Authority should conduct detailed analyses that thoroughly evaluate the costs, benefits, risks, and the possible consequences — economic, human, and technological — of outsourcing or maintaining internal operations. This should include Total Cost of Ownership including all non-contract costs, (e.g. contract management). An evidence-based structured methodology is essential to assess benefits and risks, consistent with the options appraisal approach prescribed in the Green Book, to which the advice here should be considered as supplementary.

Criteria for ‘make or buy’ decisions Some services will carry more risk than others when outsourcing, for example: New or novel (complex) services present the Government with more commercial, operational and reputational risk, not all of which could or should be transferred to the market (see Risk Allocation Guidance Note). Historically, as a consequence of improper assessment, there are major outsourcing programmes of complex public services that have experienced issues in relation to higher than planned costs, worse than expected services, government bearing risks it sought to outsource (perhaps inappropriately) and both parties suffering on cost and reputational damage. Many service categories have well-developed supply markets, such as Facilities Management, IT and Digital, with case studies and evidenced credentials to support the decision making process, which is typically influenced by:

• Needing access to the latest technology • Feasibility and terms and conditions of technology transfer • Product life cycle

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• Government Digital Service policy (e.g. IT disaggregation) As with all strategic sourcing decisions, cost is only one of the criteria to be evaluated. A desire to simply cut costs through outsourcing can result in an unacceptable degradation of service delivery; factors other than cost should always be considered as part of the sourcing decision. The factors below should be comprehensively assessed when deciding whether to outsource or in-source - some service characteristics lend themselves more comfortably to outsourcing, but no two sets of circumstances are the same. In considering whether to outsource or in-source, the Contracting Authority must take a balanced view of the risks and benefits in the specific circumstances. Due consideration should be afforded to impact, acceptability and feasibility.

Table 1: Service characteristics of simpler and more complex public services

Benefits of outsourcing more easily realised

More challenging to realise benefits of outsourcing and increased degree of risk

Service is highly commoditised Service can be easily detached / disaggregated Service could be easily transitioned to new delivery model Service needs to flex and change easily Mature market exists to provide service Service is well understood, with adequate and accurate MI Difficult to attract and/or retain in-house skills for the service Underlying processes and technology are well established Effort and cost to switch suppliers in future is manageable Service or infrastructure needs to be significantly transformed (but is currently operating well) Service may benefit from multiple sourcing

Service is complex or high risk and without proven market capability Service is novel Service does not have mature market capability Service has many operational dependencies Service is poorly understood or defined Likely high effort and cost to bring back in-house in future

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In addition to the characteristics of the service itself, the Contracting Authority should consider the risks presented by potential loss in capabilities and infrastructure. As the risk of loss increases, the risks associated with outsourcing increase. Should you need more help, speak to your departmental commercial team. It is a precondition of sustaining a strong, competitive outsourcing sector that Government is rigorous in ensuring that risks which arise in the delivery of a contract are allocated appropriately – i.e. with the party best able to manage those risks.