Public open markets are private closed shops
Is a Social Serco possible?
Challenging the public sector monopoly on some public services has the potential to deliver better social impact. However, the difficulty in opening a public sector market to competition from other sectors is that market making is an inherent feature of the private sector. Public and third sectors, apparently, are not structured to respond in the same way. It is in particular a function of the large publicly-listed outsourcers like G4S, Capita and Serco, and their facilitators in the big consultancies like KPMG, EY and PWC. So they are able to dominate and control any market making, as evidenced in the ongoing outsourcing of the NHS (http://www.theguardian.com/society/2014/aug/30/nhs-bosses-summits-contracts-unitedhealth-insurer).
One of the most evident and significant differences between the private, public and third sectors is their approach to business development (BD).
Serco recruited me as the first Managing Director of a new Welfare to Work business. We then invested in excess of £2 million in shaping and engaging with the welfare to work market in order to, a) make ourselves more attractive to that market, and b) make that market more attractive to us. We introduced the notion of the ‘prime contractor’ and secured three Flexible New Deal contracts, including the single largest ever, in Greater Manchester. In our fourth year of business, we had a turnover of just under £100 million.
In my last six months at Serco, I was asked to bring together a central bidding team for their UK central government division. This entailed pulling in all the different people from the disparate businesses (health, transport, welfare to work, home affairs), to create a slimmer, more efficient resource that could be deployed in response to a more coherent sales pipeline of opportunity. So, instead of running disconnected BD teams in each business, we would develop one central pool of expertise, with efficient resource management. There were around 100 people in this pool.
If Serco had been allowed to bid for the current outsourcing of probation services, they would have deployed a core team of around 20 people, drawing in more than 30 at peak times in the bidding process. After all, if you can secure three of these contracts, it will be worth more than £35 million a year or £200 million over the contract life.
There are two key reasons why Serco can make such an investment in BD, and other sectors cannot. Firstly, Serco will account for the cost and return of the contract over the full contract life. The investment decision, and then its financial reporting, will be based on average annual return over five or more years. Actual ‘cash’ in the business is a bit of a moveable feast.
Secondly, the value of the business – i.e. its share price – is linked to growth. This is a greater driver than profitability. As long as they keep winning more, and manage to report something to do with profit that feels like comfortable swimming (around 8% margin seems to keep the City happy), then the business fulfills its purpose.
Both the public and third sectors, on the other hand, appear tied to a short-term business model. This blog has previously talked about the consequences of ‘spend it or lose it’ as the end of the public sector’s financial year approaches (https://buyingqp.com/2012/11/14/the-council-catch-22/). The third sector is equally as constrained, with actual cash in the bank preventing any significant BD spend: earnings five years from now are irrelevant, if this year there is an inadequate surplus and reserves are either too small or too sacrosanct.
This is exacerbated by the small size of the charities, as well as their dependence usually on just one or two markets and commissioners. Serco derives over a billion pounds of annual business from a myriad of UK central government markets, in addition to global earnings.
The problem is exaggerated further with the current (and perfectly justified) emphasis on outcome-based funding or payment by results (PbR).
The Cabinet Office continue to attempt to build a capacity to compete in the third sector. A commitment of £10 million in the Investment and Contract Readiness Fund bucks the austerity trend and is a most welcome recognition of the problem. However, individual grants are between £50,000 and £150,000 only, which is a drop in the BD ocean. (https://www.gov.uk/government/policies/growing-the-social-investment-market/supporting-pages/supporting-the-development-of-more-social-ventures)
What would it take to create and build a ‘social prime’, i.e. a contractor of the scale and scope of Capita or Serco but either sitting in the third sector or otherwise structured: so that social outcomes are its primary purpose, but it still has a strong commercial focus? Will we ever be able to have a Social Serco?
This would appear to require:
- A different relationship with (social) investors, enabling a move away from accounting constrained by annual cycles. A long-term interest in the social prime must be jointly owned by investors in the same way the City ‘owns’ Serco’s long-term performance.
- Visibility/transparency over opportunities. A pipeline must be built and shared across the sector, showing what commissioning is coming up when, with what value, to be tendered on what timetable. This informs the business case and the investment decision. (It wouldn’t hurt central government to have this single, coherent view of outsourcing either.)
- Clear separation between the social prime and the service providers. The role of the prime is raising investment, shaping the markets, creating the service solutions and managing contract performance. The prime should bring together different pan-sector local networks of subcontracted providers for each opportunity.
- A shift in the commissioners’ perception of value for money. You get what you pay for. There is a wider social impact and return when the contractor, for example, employs local people and pays a living wage, and when the service reaches the most vulnerable instead of ‘parking’ them.
- The third sector to accept that operational efficiency (including commercial performance) equals better social impact. It is not enough to say you are motivated by a mission to do good – that only has meaning when it is translated into real outcomes for service users.
- The commissioner to accept stewardship of the market. It should be a condition of prime contractors that they share best practice, develop public sector expertise and build local third sector capacity.
- Someone to take the plunge. Someone has to take the risk, find or create the team that can grow into the social prime, and put in the investment.