UK Government to Race Ahead in Offshoring, Outsourcing

IT projects don’t need to be huge -- they just need to be able to talk to one another.

by / February 16, 2011
Prime Minister David Cameron PM's web page

Some call it the greatest British political story of this age. Others say it could be the hardest test for the new coalition; a historically new form of government. But as the recently-elected UK government led by Prime Minster David Cameron guns for an unprecedented level of budget cuts and reduction in public spending, it has chosen to depart significantly from what most other governments do while facing the toughest of times.

Instead of leaning toward protectionism, the UK government, which has outlined plans to cut spending by £83 billion ($134 billion), says that it would look at more outsourcing and even offshoring to deliver quality services at lower cost.

“We have a huge budget deficit. One of the biggest tasks of my government is to make sure we can live within our means again,” said David Cameron recently in an address to the press, adding that his government is prepared to look at outsourcing and ownership rights across the world.

Undoubtedly, Britain today is still fighting its longest and deepest recession. The new coalition government claims that it has inherited a government that was spending £4 for every £3 it gets in. Consequently, Britain is now “standing on a burning platform” with a deficit of £155 ($249.5) billion and a national debt of over £900 billion [$1.5 trillion].

“There is clearly a need for improved efficiency and increased efficiency given the direction on trying to reduce the UK structural deficit,” says Bill McCluggage, the deputy government CIO and director ICT strategy and policy.

“We are working towards how we can reduce the cost structure of IT certainly from the central government perspective.”

Although the government is still working out the exact areas for public-sector spending reduction in IT, McCluggage says, the government's first target would be to “cut out duplicated and wasteful spends and also spends on new IT programs and projects that are not aligned to the new coalition government’s policies.”

UK’s government spends £16.9 ($27.2) billion a year on ICT across the public sector, of which about £6.5 ($10.4) billion is spent by the central government including local authorities, the police, etc.

“We are working on developing a new approach to ICT procurement to encourage greater use of the privately held small and medium enterprises as well,” said McCluggage, adding that the government has already set a moratorium of £1 million on pubic-sector IT projects.

Besides, the government has also decided to scrap all IT projects more than £100 ($161 ) million because, as it says, IT projects don’t need to be huge -- they just need to be able to talk to one another.

“From the central government perspective, these were part of a series of actions to primarily drive out cost and improve value for money,” said McCluggage.

Indeed the new government has few other options. Critics say that although the previous government spent more per capita than any other government in Europe on IT -- £108 billion ($173.4 billion) over the past 8 years -- Britain comes in at the bottom of the average range in the E-government ranking.

The previous government had also been reluctant to outsource for fear of being interpreted in a negative light by UK voters. However, according to Simon Scarrott of ProBenchmark, an IT outsourcing consultancy outfit, with saving of money being the greatest concern now, the government will have to increase the use of outsourcing to handle the data burden of the public sector.

“The proposed cuts across the board for the UK public sector," says Ovum’s Jessica Hawkins, "will mean little money for new IT programs and will also see resource levels drop due to redundancies -- as a result many departments will be left with no option but to outsource despite the political and legal barriers that still need to be overcome."

The political barriers could be significant, though. After all, says Hawkins, even as cutting spends and tightening belt by the government will tend to appeal to most of UK’s electorate, few will relish public-sector jobs going offshore in the face of rising unemployment.

The International Labor Organization reported at the end of January that the UK unemployment rate stands at 7.9 percent for quarter ending December 2010 -- up 0.2 percent over the quarter.

But ILO added that overall, the figures show a labor market, if anything, is even weaker than the headline numbers suggest.

UK’s powerful Transfer of Undertakings (Protection of Employment) Regulations from 2006 ensures benefits -- such as generous public-sector pensions -- are considered in prices as part of the transfer of services and staff to outsourcing companies, which could pose the other major hurdle.

Then there are other problems. For instance the central government is largely already outsourced. According to McCluggage of the £6.5 billion that the central government spends on IT, as much as 70 percent is outsourced. Further, security-related aspects like Ministry of Defense IT jobs offer little possibility of outsourcing.

“So what the government needs to do then, is to go for standardization and simplification drives so that government departments could look at collaborating and sharing services across departments,” says Scarrott.

Nevertheless, the question is who would be the biggest gainer in the UK government’s latest cost cutting drive; would it be the onshore outsourcing service providers or the offshore ones?

So far though, even as onshore outsourcing vendors rubbed their hands in glee following the budget cut announcements soon after the coalition government was formed in May last year, the public-sector outsourcing initiative has gone in just one direction; downhill.

One of the new government’s first tasks after formation was to announce an across-the-board moratorium on any new outsourcing project and a review on every existing public-sector ICT and outsourcing project.

That review effectively shut down a number of large outsourcing projects as well as started a call for reduction of the margins of the top 19 ICT service providers by as much as 20 percent.

Consequently, a significant sector of the UK’s outsourcing market effectively remained shut for most of 2010.

But according to global consultancy firm Morrison & Foerster, one of the less well publicized aspects of the UK government policy is that IT is thought to be its greatest savior in its pursuit to cut the public-sector deficit. Therefore, in theory at least, UK’s outsourcing market should bounce back in 2011,

Moreover, as says Hawkins, since “there is an intense pressure on suppliers to deliver the same for less, it is likely that offshoring will get a boost in the search for the cheapest option for service delivery.”

That apart, “the only way to save money in IT is either to buy less or buy cheaper; so the governments will need fewer people or cheaper people: they would also need less hardware or cheaper hardware,” says Scarrot.

“So, in order to be liberated from working with people in the UK who are relatively expensive and give those jobs on equitable productivity to somebody cheaper, the government will have to go offshore where the same job could be done for much less money.”

And that should be music for outsourcing service providers in India, China and even in nearshore Eastern European countries, added Scarrott.

Indrajit Basu is the international correspondent for Government Technology's Digital Communities.