Pasty munchers scoff at £300m council deal with comms kingpins Cornwall Council says it remains committed to a £300m strategic partnership proposal with either BT or CSC that it insists will help it protect frontline services and reduce costs by at least £5m a year. It follows a council debate earlier this week at which the partnership plans were criticised by elected councillors. Now, …
Typical council.... Spend £300m to save £5m, right yeah I see the value for money in that proposal
"Cornwall Council says it remains committed to a £300m strategic partnership proposal with either BT or CSC that it insists will help it protect frontline services and reduce costs by at least £5m a year."
I'm sure they are not spending an incremental £300m up front - that's more like the total contract cost at constant prices. So over the mooted ten years, the starting price will be £30m a year, with a claimed £5m saving each year (implying Cornwall currently spend £35m a year on this work). The reality will be different, because most services contracts are "backloaded", meaning that the start price is bid purely at a level to win the business, typically "current cost less 20%", but the intended return for the services vendor will only be achieved by dramatically increasing the charges towards the later years of the contract. They'll also have baked in RPI increases, and if they're lucky provisions for the provider costs going higher, eg for exchange rate reasons (ie the buyer takes offshore delivery risks).
But you're right that the can't do maths, or they can't spot cobblers. So there's the claim that they will save £5m a year, but create 500 new jobs. Total lies. More likely 500 unlucky staff will be TUPE'd into BT/CSC, (and probably then see their role offshored in a few months). Now, average salary in shared services is around £35k including overheads, making for easy maths, that if Cornwall spend £35m a year at present, then there's around 1,000 people employed here. So I'd guess that with the "500 new jobs" this deal will in net terms reduce employment in Cornwall by 500 people in the first instance. And the "new jobs" will probably migrate to service centres in Glasgow and Bangalore, so that in the medium term Cornwall will be paying as much as they were before, but having almost a thousand fewer jobs.
Meanwhile, even with offshoring, the cost to the vendor of doing the work will be broadly the same as the buyer's original cost base, because any inefficiencies in the current set up and wage arbitrage in the new set up will be more than matched by the 10% gross margin that BT Global Services want, plus BT's bidding and account management costs, marketing and internal overheads (probably a further 10-15% of the base contract value).
So to make money, the vendor invariably depends on the buyer not seeing the wedgy coming; sometimes the cost increases are baked into the contract (if the buyer is particularly daft) but otherwise the bills will be inflated by the buyer falling for the "variation to contract" trick, having natually failed to allow for all possible contingencies over the next N years in the original contract. And no matter how smart the buyer's purchasing department (and how smart will Cornwall CC's be?), they outsource back office services once in a flood. Meanwhile, BT's salesmen, commercial managers, and lawyers do this day in, day out.
And the evidence for this talent assymetry is the ten year contract length. Few smart buyers in the commercial BPO world now buy services on ten or even seven year contracts; the industry trend is towards three and five year deals with renewal options, and with a lot of thought into making the re-source of the deal easy. If you're planning on a decade long deal, chances are that the re-source provision is minimal.
Citizens of Cornwall, open your wallets!
Mind you 1,000 less jobs in the public sector is also £35M less tax burden on the Council/State with public sector wages being a tax revenue burden rather than a tax revenue source.
Someone somewhere does know, though, that they're giving the bullet to a lot of people in an area that's not blessed with shitloads of technical jobs, all the same, while painting it as positive to people who don't know how this stuff works under the PR veneer :o/
"Mind you 1,000 less jobs in the public sector is also £35M less tax burden on the Council/State with public sector wages being a tax revenue burden rather than a tax revenue source."
The "reduced tax burden" is only the £5m a year claimed saving. As another commentard has noted, the SouthWest One debacle shows what happens when local government hillbillies try to mix it with the sharp suits of the BPO sector.
"Mind you 1,000 less jobs in the public sector is also £35M less tax burden on the Council/State with public sector wages being a tax revenue burden rather than a tax revenue source."
Er, not really. Because the private contractor is being paid to deliver the service on behalf of the public. The staff might work for a private company but they are effectively still publicly-funded, so, if you want to look at it that way they are still a drain on the tax coffers.
And of course public services don't contribute to the economy in any way whatsoever, naturally. They don't underpin the infrastructure of society on which the rest of the "productive" economy depends, don't contribute to local economies where those workers are employed, don't improve social conditions for the people who contribute to the economy...etc etc.
Seeing public workers as a drain on society is a very simplistic viewpoint. Without them the country would be a much harder place to "do business".
AC because I'm at work (in the private sector) and my boss reads this.
Ledswinger & g e are close, but have forgotten a few factors.
"Now, average salary in shared services is around £35k including overheads, making for easy maths, that if Cornwall spend £35m a year at present, then there's around 1,000 people employed here." There's just a few other costs associated with running these services - how about hardware, software, buildings rent & maintenance for starters. I think you'll find that less than half the costs are salary related. Glad to see however that you did include overheads in the typical shared services staffing costs - most people seem to think that salary = cost to the employer!
"Mind you 1,000 less jobs in the public sector is also £35M less tax burden on the Council/State with public sector wages being a tax revenue burden rather than a tax revenue source." Remember that these public sector workers ALSO pay tax & NI. From a revenue point of view it doesn't make any difference who employs the workers, they still pay the same tax & NI - assuming they get the same salary that is. The difference is that the council either pays salary directly to the staff, or via the service company.
Whichever way you look at it, roughly the same people will be doing the same jobs, on initially the same salary (due to TUPE rules), but with the management and profits of the services company needing to be made. The only way of saving that £5m a year is through either job/salary cuts, or economies of scale - neither of which tells me how an additional 500 jobs can be created. IMO the 500 "new" jobs they are talking about are probably new to the private sector, but will be lost from the public sector
Some good points there, but I can't let you get away with "less than half the costs are salary related" (or the assertion that I've forgotten a few factors).
Working for a company with a reasonably efficienct SSC, I can assure you that non-salary costs of a shared service centre should be well less than a quarter of the total, although in the grander scheme of things the actual on-costs should be much of a muchness between Cornwall Council and the outsource vendor anyway. Marginal cost of IT per head for back office shared services should be no more than £3k per head per annum (being generous), and the facilities costs about £2k. The biggest single on-cost for this type of operation is employer's national insurance, Britain's favourite tax on jobs at around 13%. Employee average salary should be around £25k for a decent scale back office SSC, and the £35k I quoted is based on the NI, IT, Facilities, and a few hundred for "own account" support.
Regarding your point about NI and tax, it does make a difference between public and private sector, because as soon as the BPO players get control they are looking at moving the work offshore. Indian workers in Bangalore don't pay British NI or income tax, and the BPO vendor then doesn't pay employer's NI on those Indian workers. If only half the total work involved in this deal goes offshore, then the "gain" to Cornwall Council will be a £5m saving, against which the Council and UK Treasury will lose around around £5m of tax and NI contributions, plus the further costs of any of the implicit 500 redundancies making a claim on welfare. Then you've got the loss of the locally/nationally spent salaries, for which you might assume of the order of £5-10m even before the multiplier effect. So well done Cornwall Council, for making Cornwall and the UK an even poorer, more seasonal economy (even before the vendor starts cranking the money making handle).
The pity is that there is undoubtedly waste in public administration, and real and effective savings could be achieved. But they won't be through this route.
I will bow to your greater knowledge on the SSC costs Ledswinger, that's never been something I've been involved deeply in (at least not for the costings). However I wouldn't assume that either of these 2 companies would be paying a decent market rate for many of the staff - many will be on the lowest salary the suppliers can get away with and as you say, around 50% will be off-shored as soon as they can get away with it. Going by my experiences working for a BPO, any specific roles charged on a day rate for the staff will be approximately double the salary of that staff member.
My comment about tax & NI was aimed at g e who seems to think that local government employees don't themselves pay either of these, so in a like for like basis (same people on same salary employed by public or private sector) the tax & NI will be the same. You have correctly taken things to the next logical step and noted that in the long run there will definitely be a very significant loss to tax/NI revenue in the long run.
until they ask for something outside the tightly one-sided contract, like replace a mouse £200, update 3 copies of Visio software £1.2 million etc etc. The authorities still think these large corporations got there by being ultra nice to local authorities, get real, they got there by having their nose in the UK.Gov pork barrel.
Find out how many BT and CSC "jollies" the decision makers have attended.
Because that's going well:
http://www.thisisthewestcountry.co.uk/news/somerset_news/9912056.Somerset_County_Council_statement_on_legal_dispute_with_Southwest_One/
(And El Reg's take on the whole sorry matter: http://www.theregister.co.uk/2012/09/03/ibm_somerset_council_dispute/)
Paul
Two comments:
1) Not "an amazing example", but normal. According to the likes of Hackett Group, or PWC, fully 60% of outsource projects don't deliver their projected benefits. And that's according to the cheerleaders for outsourcing.
2) I think IT-led is a bit unfair. Most BPO is conceived by senior management listening to the siren whispers of external consultants, promising untold and risk free riches from outsourcing business activity to the back of beyond. IT merely have to deliver the infrastructure. Unless of course by "IT-led" you meant the vendors original core businesses (HP, Dell, IBM etc).
It would certainly be innovative for any public-private partnership to have anything at all that might be described as 'best' in an impartial, honest and positive fashion.
Sadly, I suspect what we'll actually get is a demonstration of how big business and small government can perfectly synergise their core incompetencies to maximise waste and inefficiency going forwards with significant short term cost savings compared to buying the same service from an organisation competent to run it.
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