

G4S is just the latest in a long line of outsourcing disasters - irv
http://www.newstatesman.com/blogs/voices/2012/07/g4s-just-latest-long-line-outsourcing-disasters

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andyjohnson0
Here in the UK, a lot of activities that were traditionally the responsibility
of the state (health, education, policing) are increasingly being outsourced.
Conventional wisdom is that the private sector is just much more efficient
than the state can ever be, but I have never been able to find evidence-based
studies for or against this. It always seems to taken as axiomatic. Can anyone
point me to unbiased work that has been done on outcomes in outsourcing of
state functions?

As someone who works in the private sector, I find the idea that it is just
intrinsically more efficient than _modern_ state organisations to be pretty
hard to believe. But thats just anecdotal, and I'd like to know more and maybe
have my opinion modified.

~~~
lstroud
I think people often confuse the axiom...

Stated more correctly, smaller, more focused, organizations outperform larger,
more bureaucratic(more management) organizations for particular tasks.

It's not that governments are outperformed by the private sector every time
for everything (some things require size and longevity). Conceptually, it has
nothing to do with whether an organization is private vs public. It's about
incentive, regulation, and consequence horizons.

Incentives Generally, private organization's incentives (if tied appropriately
to the desired outcome) are more aligned and offer higher rewards. Government
organizations, if completely transparent, have a hard time justifying high
rewards to their constituents. All other things being equals, people prefer
higher rewards. So, the talent tends to accumulate in the private
organizations. There are some exceptions to this (political influence), but
I'm generalizing. :)

Regulation The smaller the organization, the fewer rules. Not only do laws
tend to work this way, but internal organizational rules work this way as
well.

As organizations grow, managers try to scale their ability to influence
direction by legislating organizational rules. As more and more of these rules
come into play, the overhead and unintended consequences of these rules grow.
Since these managers are unable to directly participate in the execution of
the tasks (the reason they created the rules at the start), they are slow in
detecting changes that should require rule changes.

The overhead and lack of agility created by both size and expanded
regulation(rules), makes large organizations far less efficient than smaller
organizations. Unfortunately, governments have disproportionally larger sets
of rules. Not only is their ruleset larger, and their employment not aligned
to performance, but they also have unionization that has a differing set of
goals. This creates even more operational friction making it very difficult to
allow people to do what they do best. Tragically, this makes efficiency and
productivity in large government organizations nearly impossible.

Consequence Horizons Smaller organizations tend to have better alignment
between their existence and their ability to execute. This is because they are
paid for execution and are typically unable to structure longer term
contracts. As a result, if the people paying the bills are not happy, they
cease to exist quite quickly.

As organizations grow in size, they start to manage for risk avoidance and not
for execution. The larger they get, the more they are able to influence the
market to avoid direct competition, to change the criteria by which they are
judged, and to structure contracts such that they are far more stable over
longer periods. This 'cushion' allows these organization to ignore or tolerate
consequences to a higher degree. As a result, they are less sensitive to
market judgements about their efficiency, productivity, or ability to execute.
They loose sight of that as a goal and start to engage in higher order goals
(happiness, employee well being, brand, reputation, influence, etc). These are
not bad necessarily, it just makes them less efficient at particular tasks.

In particular, large government organizations are disproportionally
disassociated from consequence. This is directly related to election cycles,
politics (spinning the message to create success out of failures), and
constantly getting inexperienced leadership. The first two are points are
obvious, but let me explain the last. New politicians are elected and they
appoint the people that they feel are best to run these large organizations.
Typically, neither the politician or the person appointed has never spent a
day working in that organization or executing the tasks for which they are
responsible. With large organizations, it takes truly special managers to make
an organization efficient at something you have never done yourself. This is
even more difficult when you are not answering to your boss for your ability
to execute, but instead are answering based on the ebb and flow of the
political landscape.

In general, my point is, that you are right. Large private organizations do
not have a significant advantage over large public organizations. That
advantage can be widened based on political systems. However, the real
advantage that people reference when making this argument is the enormous
advantage small to medium private organizations "enjoy".

Understand that I am only talking about efficiency and execution and not
societal value (differing goals). I also recognize that there are many
tasks/goals that require larger organizations and more longevity.

~~~
andyjohnson0
Very informative post. Thank you!

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aes256
Sometimes outsourcing works, sometimes it doesn't. Highlighting a few examples
in which it has failed does not lead to the conclusion that it never works.

So the author seeks to bridge the gap by identifying a fundamental flaw in the
concept of outsourcing, in this case by noting the divergence of objectives
between the two parties. Although true, this isn't the fundamental flaw the
author is looking for. It simply identifies the importance, for outsourcers,
of making their suppliers' objectives coincide with their own.

I wouldn't say the G4S case is one in which the government has failed in
making objectives coincide. G4S will, in all probability, be found in breach
of contract for failure to fulfil their obligations, and the government have
already stated they will be seeking to recover costs from G4S, such that there
will be no additional cost to the taxpayer for this debacle.

~~~
epo
Outsourcing is seen as a panacea because it is believed you can offload
worrying about the details. All too often this means the outsourcing process
itself is handed over to people who don't (or don't want to) know the details.
Hence we get fiascos like this.

The result is we are likely to have an Olympics with an overt military
presence. Still this should make a lot of overseas visitors feel at home.

Oh, and the New Statesman is explicitly left wing in its politics, I guess for
many Americans this may be the first time they have been exposed to left wing
opinions as distinct from the Republican Party definition of left wing which
seems to be "less right wing than I am".

~~~
aes256
> Outsourcing is seen as a panacea because it is believed you can offload
> worrying about the details. All too often this means the outsourcing process
> itself is handed over to people who don't (or don't want to) know the
> details. Hence we get fiascos like this.

You're absolutely correct, but it does not follow from instances such as this
that outsourcing is itself the root of all evil, as this author would have us
believe.

Furthermore, the case in question is hardly an example of poorly managed
outsourcing. G4S were, by all accounts, the most suitable firm for the
Olympics security contract. That said, it is a largely unprecedented event,
and not unsurprisingly they underestimated the task, and couldn't get enough
staff trained in time.

Taxpayers don't stand to lose out as a result of this. G4S are to blame, and
G4S will have to eat the cost of sorting the matter out; taking a loss of up
to £50m on the contract, it has been reported.

> The result is we are likely to have an Olympics with an overt military
> presence. Still this should make a lot of overseas visitors feel at home.

13,500 military personnel were already scheduled to provide security for the
Olympics, and the government has only committed an additional 3,500 in
response to the G4S revelations.

~~~
irv
> Furthermore, the case in question is hardly an example of poorly managed
> outsourcing. G4S were, by all accounts, the most suitable firm for the
> Olympics security contract. That said, it is a largely unprecedented event,
> and not unsurprisingly they underestimated the task, and couldn't get enough
> staff trained in time.

Yes, it's not as though this event happens every 4 years...

In fact, G4S managed to spectacularly mess up the security of the recent
Jubilee celebrations, as was widely reported. When you add that to the utter
mismanagement or the (despicable) asylum detention centres, and on and on...
they're as qualified to provide services in the same way Capita are qualified
to provide IT consultancy.

But on the poorly managed part, Teresa May claimed the contract was routinely
monitored. and yet this is still a surprise to her, 3 weeks from the start of
the event!

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rwmj
While I'm no fan of G4S or PFI projects, this article is just empty wind.

Where is the _evidence_ that "cash [...] is redirected into shareholders'
pockets"? This would be an ideal topic for a scientific study: do outsourced
projects cost less for the buyer, or do they cost the same/more and does that
extra money go to shareholders? Unfortunately reading this article will not
tell you the answer to this or other interesting questions.

~~~
danmaz74
The article is too one-sided for sure, but the fact that the cash that doesn't
go to the workers goes to the shareholders' pockets is practically a truism:
That cash is called profit, and shareholders (rightfully) expect it from their
investment.

~~~
pbhjpbhj
The problem is that usually the people doing all the work get very little
whilst the people who're just being rich get made richer. Yes within the
current system a small return on investment should be expected but a
commensurably larger wage should be paid before a large return is given to
investors.

It's by no means a universal truth that an investor deserves profit.

~~~
danmaz74
I didn't say that an investor deserves (which is a moral judgement) a profit,
I said that she rightfully expects to make one - otherwise she simply wouldn't
invest.

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lstroud
The problem is not outsourcing, it's thinking that you can outsource (or
delegate) and important task and not pay attention to it's execution.

Good management breaks outsourced projects down into replaceable, manageable
chunks. This is important for oversight and for competition. If you size an
outsourced chunk of work correctly, then you should be able to increase
competition for that contract. If you structure the contract correctly, your
oversight should be able to identify and replace problemed contractors.

These guys are all smart enough to know that. It's just that they are also all
smart to know that it is easier to avoid political responsibility for failures
when it can be blamed on an outside contractor.

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edoloughlin
I completely agree with the thesis of the article; that outsourcing leads to
inflexibility is performed by a staff that is not necessarily invested in the
goals of the organisation. However, how does this apply to providing security
for the Olympics, a once-off event that may not return to London for another
50 years? A city can't be expected to constantly maintain a police force
capable of covering an event of this size.

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kiba
I can name SpaceX as a successful example of outsourcing.

The real reason is probably more akin to "incentive matters".

~~~
alan_cx
Yeah, unlike policing and health, SpaceX's activities are not necessary. Don't
get me wrong, what SpaceX is doing is fantastic, even inspirational, but not
an essential service. So, if it goes wrong, even badly wrong, it really does
not matter.

~~~
kiba
I don't see how "unnecessary" or "necessary" matters, as long as we're talking
excellence.

