Interserve is the latest outsourcing crisis

The interaction of Government, Government bodies and private sector outsourcing is one of the most interesting conundrums of recent years.


In the scheme of Brexit, this is merely a small tick. However, in another world, the near collapsed of Interserve, following on from Carillion a few months ago and Melrose of a couple of years ago would be bigger news.


The are two main interesting bits to see, one is the cause and the second is the cure.


The cause in the main is public sector procurement being led by strict rules on pricing. Only the lowest bids will win and it is not in the interest of Local or National Government officials to change this. So what we get is the new entrant cost-price game. Experienced companies are forced to compete with crazy new entrants for another classic of this case, take the Ministry of Transport offering a contract to a Ferry company for Brexit that had no Ferries. New entrants without experience will often hugely underestimate costs and are financed to survive this, or at least think they can.


In the short term, this has held Government procurement costs down, however in the long-term it has really undermined the outsourcing businesses that play in this space. Many, in a desperate bid to survive, have bid too low for contracts. As a result, we are seeing a string of re-financings and lender taking hold of the businesses. The Government, if it wants to avoid constant crisis, needs to change its procurement guidance such that it assures providers will survive and can indeed thrive.


The second interesting piece is what Government lawyers have done to mitigate this unfolding disaster. They have implemented 'Living Wills' so that services and contracts (read sub-contractors) will continue even as the parent goes bust above in the corporate structure. This is great for the much needed services, but another huge red flag for the Listed Entities, as now there is even less incentive for the Government to help and debt holders can seize the company in what is effectively a Government backed Pre-Pack administration. So much for shareholders, Management will do just fine in the circumstances. So whilst this is clever for the Government, it will actually undermine the sector further. Interserve will no doubt follow this path come the decision day on Friday of this week.


My own take is there is no way the Public Sector can deliver on the huge range of services the Government needs at a reasonable cost, so Outsourcing can be a good strategy and deliver economies of scale not possible in the Local Government sector. Increasingly though what we are starting to see is 'Public-Private' vehicles where Public contracts are run on private lines by Public sector companies that try to achieve the balance between public ownership risk levels and private endeavour and enterprise. This will be a solution Lefty (read all) Governments will jump on and will work just fine until they discover the ease for which corruption and graft can be embedded within these hybrid vehicles.

Is Belfast the new Bombay?

Shocking news in the sedate world of the legal sector yesterday. Magic Circle firm A&O has decided to open a big office in Belfast that will do some work for clients as well as moving up to 180 jobs from London to Belfast (read that as London redundancies).

Now A&o call this'onshoring' rather than off-shoring. But for a beast like A&O that only has an office in London, and technically there is a sea between Northern Ireland and Britain; so I am not so sure.

What it does show is finally (although Herbert Smith opened a Northern Ireland office) the Legal sector is being affected by cost drivers that have long driven Finance, HR, IT and other support departments. This is perhaps not so good for those £1 million plus partners who work at these top firms and manage to avoid the brickbats of being bankers despite earning more than your average banker by some distance.

The reason is that their clients have caught on to the fact that law firms aim to have 30% margins and nice swanky offices in the major cities around the world, whilst their clients move their head offices to Newbury, Cheshunt, or even Dublin. Given the UK legal sector is something of an oligopoly at the high end, the Magic Circle firms reality has been avoided for some time.

Also, Magic Circle firms are worried about 'brand' issues. They have the best people so sell on quality. Employing Northern Irish staff on lower wages and getting them to offer lower level services is a big brand extension and whether this will work is unknown. Also there are a multiple of UK City and Regional firms that already do this work, so A&O is not exactly creating a new market here, but trying to defend its position from the non-Magic Circle firms that are challenging it.

Interesting too is that the move is alot about moving back office staff and so reducing A&O overheads; the bit about saving clients money is kind of secondary and for the future. The initial savings are to be for the Partnership and I guess clients if they can manage to negotiate well on fees.

The wider background is interesting too, the Legal Marketing Act comes into force this year and it is expected that Accountants, Consultants, Private Equity and Large outsources are going to try and move on the UK legal market; this is one of the first steps taken to try and pre-empt this move. Hopefully one of two law firms will go down the route of listing on the FTSE so that we can have a play with their stock too.

Belfast must be a happy place though, all these high value services moving to the Province can only be a good thing for its local economy.

Outsourcing; a thing of the past?

Just time for a snippet today. I noted this article trumpeted by the BBC. Apparently companies are no longer outsourcing quite so much to India et al and are instead bringing work back on shore. The number one reason is failure of outsourcing to deliver the benefits promised; the curse of the indian snake-oil salesman?

What intrigued me though was the lack of a mention for the good old Pound Sterling. Beaten into submission by profilgate government money printing, our currency is devalued and set to fall further in 2010. This makes UK wages and costs look a little better compared to foreign opposition.

It is small reason to be cheerful if you are a manufacturer; excepting that the cost of all your raw materials is goingt o sky-rocket.