Outsourcing and Politics

Politics and Outsourcing have been uneasy bed-partners for two decades now. Whether it is the Governor of Ohio banning all state outsourcing in an election year or it is the actions of inept UK government officials like Francis Maude "beating-up" on suppliers for 20% discounts only to walk away from real opportunities of 30%+ solutions being offered. This is because Whitehall could not countenance the change program and inevitable knock-on politics and fall-out with mandarins, unions and, oh yes, voters.

Paul Pinder the quiet, considered accountant heading one of Britain's most successful outsourcing service providers, Capita - recently chose to talk publicly about "criminal cuts to front-line services", directly attacking the lack of imagination shown by the police authorities and timidity of local council authorities to using outsourcing to absorb and reduce running costs. Was this Pinder's Gerald Ratner moment? His expressed his frustration with "90% of the UK's 774,000 civil servants are performing back office functions". Applying outsourcing to these administration and processing functions would easily achieve the cuts without messing with frontline services.

With billions locked into existing UK contracts and everything to lose but provoking government why did he choose the Financial Times interview to air publicly what other outsourcing CEO's discuss and debate in private. The answer is the coalition's big talk and zero follow through whilst at the same time Whitehall and other department throwing up all kinds of delaying tactics and extra layers of validation and approvals to stymie actual decision. The net result is that the cost of sale to government has increased by up to 300%. Few recognise the cost of maintaining a team in situ awaiting a decision, dealing with last minute additional scope, enforcing new measures or proof of value requirements. Suffice it to say that a £500k parcel of can cost £100k to bid. Several tier one suppliers have confirmed to Burnt Oak that they will not compete for business where they know that they need continuity of large pre-sales teams and there are obvious and visible inhibitors such as scheduled decisions being close to a financial year end, new budget season, a recent change of key decision maker, the annual holiday silly season, etc. Remember mega deals like the DII, Inland Revenue and Customs, and DWP can cost £20m plus to bid. Serious money.

Well Mr Cameron, this truly is a defining moment for your place in history. Why let Maude settle for 9% deals when 30% and more is available. No front lines services need be cut. As Pinder and other say, your back office is bloated. Show your mettle. Otherwise it is likely that history will show that your lack of courage in transforming government and its associated cost base set UK plc on a longer and more painful journey than was required.

 And then we have the French ... perhaps the most striking example of targeted government intervention in recent years came in 2004, when the French Government agreed to give massive tax breaks to the French media and communications group Vivendi Universal in return for creating jobs in France - but not even within its own business! Under the deal, Vivendi agreed to create 2,100 jobs among its suppliers in France, and was therefore allowed to unlock tax credits worth up to €3.8bn (US$4.6bn) over the following five to seven years. Reports confirmed that none of the 2,100 employees would work directly for the company. The tax deal with the government came after eight months of detailed discussions. How could this be?

The very French logic came from a certain finance minister, namely  one Nicolas Sarkozy and was part of his announcement of measures to encouraging companies to keep jobs in France rather than ... near or offshoring them! Mon dieu incroyable!

Then there are the more subtle European wide approaches which slip by most people peripheral vision, corporate or private. A good example of this is the 1^st January 2010 European VAT changes which imposed VAT on any and all offshore work. From that moment it was deemed that such activities will be ultimately "delivered or consumed onshore" and therefore VAT now applied. You did not notice ... or so what why are you telling me this? Well if this is your reaction then you probably do not work in the charity sector, finance and banking, government or a non-VATable industry. 20% non-recoverable VAT will destroy most every offshore business case. Was this a political move by Europe, some subtle protectionism of European jobs ... or merely the harmonisation and clarification of VAT standards as the politicians would have us believe?

Now let's turn to the "land of the free" and origin of most super-heroes, where subtlety is not exactly commonplace. On offshoring, an unpatriotic and festering ulcer in blue collar mid-American minds, Obama has spoken about American jobs for Americans and then mealy-mouthed his way out of certain political fall-out by spending billions on "job creation" strategies. However, the administration has dramatically increased visa fees ostensively as part of a bill to increase US-Mexico border security! But the "unplanned and unexpected side-effect" was to hit the Indian outsourcers economics. Individual fees for H-1B visas increased more than 700%, increasing to $2,320 from $320 per visa application (some have been known to be rejected - in fact rejections climbed some 56% after the new fees came into being).  The expected cost to Indian offshore outsourcing providers will exceed $250 million annually - source: CNN's Indian unit. However India's relationship with the US "is not just a one-way street of American jobs and companies moving to India. It is a dynamic, two-way relationship that is creating jobs, growth, and higher living standards", that is according to Obama in November 2010 on arriving back from visiting India. Of course it is, Mr Obama and if you say it long enough and loud enough, it might just come true.

Whichever way you look at it, Outsourcing is an emotional and tough decision which effect lives, livelihoods, companies and communities, nations and whole regions. However we should and must expect and embrace change and there are no sacred cows any more. Politics will always be present.

Author Robert Morgan also is a regular contributor to Outsourcings Lex Column, a regular, pithy and hard hitting observation of today's outsourcing events, companies and personalities. To view this try: http://www.burntoak-partners.com/viewpoint/outsourcings-lex-column/