Not too big to fail: not too small to notice

“The liquidation of Carillion has raised fundamental questions about the [outsourcing] industry”. Those are not our words, but Phil Bentley’s, the CEO of Mitie, on 16 March. You might have thought Mitie would have quietly cheered the demise of a competitor in the outsourcing game, but Mitie’s boss is worried.

There are threatening structural forces at work in this sector, ones that menace the biggest companies. Let’s not forget that Bentley’s predecessor as CEO announced in November 2016 that Mitie was withdrawing from the provision of home care for the elderly, because public spending cuts and rising employment costs had made this service unviable. The Mitie share price shrank to 147.9 pence the same day – the lowest point for 13 years. Meanwhile, Capita lost 47% of its share value on 31 January after a newly-arrived CEO announced a profits warning, a £700 million rights issue and a cost-cutting and disposals programme.

While some of the big companies are struggling it’s notable that one – Interserve, which works hard to utilise third sector organisations in its supply chain – managed to reach agreement in March with its creditors to ensure the survival of its business. Debbie White, Interserve’s chief executive, said: “This is a significant milestone for Interserve and a major step in securing a firm financial platform to underpin the group’s future. We are encouraged by the support from our lenders in respect of these new facilities…”

There are many problems with some of these companies: they are arguably too beholden to short-termist shareholders; and the government contracts they manage are almost entirely dependent on personnel who too frequently have little or no experience of the third sector.

The consequence, particularly at times when government spending is tight and margins ever-squeezed, is that companies serving public sector interests can run into trouble and become zombies, existing solely because they have managed to eat their opposition, rather than spreading the load among smaller entities that are more in touch with local needs.

It’s always difficult to change, but when change is necessary it’s best to get on with it as soon as possible. We have got into a position where big contracts are awarded to those who are big, partly because the bigger the player the tighter the margins they can operate with and, to an extent, the less the perceived risk of the contract failing. Yet the evidence is now clear that big does not mean no risk – in fact it could just as easily mean greater risk, because the distance (physical and managerial) between the contracted and the contractor is much greater than with a smaller player.

Of course there is an agenda to this.  3SC doesn’t build roads or rails or hospitals – it’s not that kind of service provider. Instead it has a network of members, often highly focused on a particular geographical area and who provide a myriad of other services, in healthcare, training, employment and other ‘people-focused’ needs. Large outsourcing providers will perhaps always be necessary, to build infrastructure.

But when it comes to dealing with the needs of sub-sets of individuals, where the quality of outcome is just as important as any return to shareholders, government needs to overcome its resistance to trying new ways of delivering services, trust the smaller supplier – and if the big outsourcer is considered vital, to ensure that it in turn uses organisations that are really embedded in their local communities.