Real estate, alternative real assets and other diversions

In defence of outsourcing

The Analyst

The outsourcing firm Capita doesn’t seem to have done very well in its Army recruitment contract, according to a scathing report from MPs.

This is actually one of the advantages of outsourcing to a private sector organisation, being able to find out whether they are fulfilling their part of the bargain. That cock-ups are visible and accounted for is really the aim of the system.

The important question is rather how do we minimise failure, which means being able to recognise it and then act. It is the same with the importance of bankruptcy to an economy. There are always going to be economic adventures that don’t work out. A society that never tries anything new is going to be stagnant and thus relatively poorer over the decades. What matters is how we recognise those mistakes and then clean them up.

A market society does this by the organisation running out of money – going bankrupt – and then we clean it all up through the bankruptcy process. The productive assets formerly being badly used are then available for the next experiment, the one that might work this time.

Not reinforce failure is what governments are so bad at. They routinely end up subsidising failing operations, as the littering of the industrial landscape with redundant car manufacturers, ship builders and coal mines showed us.

So, what we need is some system of putting each method, each activity, into a separate silo. We can then observe the performance and make our decisions to cull or not.

Much of life is done in exactly that manner, simply leaving private economic actors to get on with it. But there are parts of life that are not so simple to deal with. There are some functions that government is there for – fewer than many think but some nonetheless. An Army is a good example, as defence of the realm is certainly a public good — plus we tried the idea of competing private armies once and found we didn’t really like the Wars of the Roses.

This is where we get to a major point about outsourcing. Yes, indeed, there are times when we get greater efficiency from either this process or privatisation. Dependent upon who you believe the privatised utilities stripped out three, five or seven entire levels of middle management, with huge cost reductions as a result.

It’s not quite that private sector profit grubbing will make us better off, often enough as that does happen. Rather, it’s that using private companies gives us a way to see who is doing what and how. More specifically, we can see the output we’re getting for the resources poured in.

There are specifics in a number of the recent contracts being complained about. The probation service entirely changed who it monitored and how at the same time as who was doing the monitoring altered. As with the old advice about computer installations, never stop the old paper based system until you’re absolutely sure that the electronic one really works. Changing two things at the same time, the basic system, plus who does it, can and often will lead to disaster.






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