What a Waste! the Process and Outcome of Outsourcing

Friday, 3 July 2015: 2:15 PM-3:45 PM
TW1.3.03 (Tower One)
Julie Froud, University of Manchester, Manchester, United Kingdom; University of Manchester
Adam Leaver, Manchester Business School, University of Manchester, Manchester, United Kingdom
Michael Moran, University of Manchester, Manchester, United Kingdom
This paper offers a broad, research based view of outsourcing in the UK which combines follow the money research and political analysis of outsourcing which covers government, contracts and companies. It redefines outsourcing as a relation of co dependence established at the intersection of abdicating government and opportunist private players responding to the demands of organized money. It argues that the outcome is institutional damage and a fragmented foundational economy which is not in the public interest.

The political right promises that outsourcing can deliver (costless) efficiency gains; the left protests that the outcome is value extraction, often levered on the workforce or the state. A more expert view comes from the National Audit Office and the Public Accounts Committee echoed in well-received academic studies like Crewe and King on The Blunders of our Government. This literature focuses on fiascos which are blamed on government failure to write the right contracts and monitor outcomes. All the standard narratives are idealist in that they assume private management + civil service have definite capacities for knowledge and control which drive outcomes for better or worse.


The complication is that outsourcing is a messy extractive process which is not always the same for several reasons: first, it has contract and company levels with high returns on individual contracts often combined with low returns in large outsourcing companies that hold portfolios of contracts; second, it has often unpredictable and uncertain results according to sector specifics so that large bundled local authority contracts may offer returns which are harder to get in activities like adult care where the austerity state is obliged to cut the price paid.

But it is possible to build up a “charge sheet” with supporting empirics which shows how the outsourcing process disadvantages the citizen and is difficult to control because government is complicit in the process.

ü  Charge 1: Outsourcing means blame shifting by government. Outsourcing allows government to abdicate from responsibility in toxic policy areas like implementation of new welfare eligibility rules and to ensure that others take the blame for pressing wage cuts and/or poor service delivery. Fiascos are inevitable when many contracts go to opportunist bidders with poor management control and limited sector knowledge; but that is not the only problem  

ü  Charge 2: Outsourcing means profit taking on many contracts which do not go wrong.  The concern here is that many contracts, like those of the train operating companies, offer opportunities for the franchise holder to take profit without making any significant investment or taking a risk on revenue that would justify profit; too often, cost reductions are levered on the workforce in ways which increase the social bill for subvention of low wages.

ü  Charge 3: Outsourcing sustains incompetent giant conglomerates. The giant outsourcing  conglomerates are accident prone  bidding machines responding to the demands of fund investors for growth and earnings. They lack core technical competence and depend on political connections with government which perform co dependence and ensure the outsourcers are not black listed after gross misbehaviour.

ü  Charge 4: Specialist outsourcing companies may have sector specific expertise but are financially predatory towards subsidiaries. They routinely behave towards owned subsidiaries by extracting special dividends, arranging inter- company loans which benefit the parent, loading subsidiary balance sheets and charging impairments to the customer. Much of this behaviour towards subsidiaries would attract public criticism if it was applied to independent suppliers.


The outcome is an increasingly sham capitalism. Because outsourcing offers the fund investors, who are the leading elements in organized money, increasing opportunities to make profits not from the market but from local monopolies in the provision of mundane goods and services. These monopolies are granted by the state whose sovereign capacity is weakened because it cannot forcibly transfer risk transfer to the outsourcer without excluding all bidders except large PLCs who will only bid if they see the prospect of profit with limited downside.


The institutional cost is the devaluation of the public company and the public service corporation; We should not idealise the traditional PLC or PSC but they did develop technologies, over- train and offer decent pay and conditions. Whereas outsourcing shrinks the sphere of public service and obliges it to compete on cost; and, outsourcing arbitrages the private corporate form to redistribute risk and reward to parental advantage by using the privileges of limited liability and tax relief on debt.


The substantive cost is a fragmented foundational economy with ever more toll booths for organized money. Outsourcing fragments the foundational economy into so many profit centres pursuing returns at a point for investors regardless of chain connections across the sector or roundabout  consequences eg of wage reductions requiring increased wage subventions. In historical perspective, this is nicely ironic because organized money pursuing high returns through contracts in the 2010s is a much more disruptive force than organised labour pursuing higher wages through bargaining in the 1970s. 

Intellectually, this sham is a form of Braudelian capitalism because the historical tendency of capital to feed off monopoly was asserted by Braudel; although it has been denied by most other analysts (right and left, for or against) who tend to equate capitalism with competition. Plus ca change because the new opportunity is being created by a financially embarrassed state in circumstances which echo those of the early modern period when sovereigns like Charles 1 ran out of money and used dodges like ship tax and sale of monopolies.  The difference is that in our own time, private capital now uses the cover of an enterprise rhetoric about competition and markets while seeking the easy life through monopoly niches.