speri.comment: the political economy blog

‘It’s the constitution, stupid’: the rise of outsourcing and the new economic constitution in Britain

There is now a need to recognise, and then constitutionalise, the co-dependence of the outsourcing giants with the state

Professor Mick Moran, Member of SPERI's International Advisory Board & Professor of Government, Alliance Business School University of Manchester

Mick MoranWith my colleagues in CRESC at Manchester I have just published a study of the outsourcing revolution in Britain: the rise of outsourcing corporate giants like SERCO as contracted suppliers of a huge range of services for the state, both at central and local level – What a waste: outsourcing and how it goes wrong.

Much of that book, and the attention it has attracted, focuses on what might be called the public face of outsourcing – especially its problematic public face. The outsourcing giants have been dogged by failures and scandals: inability to fulfil basic contractual requirements (security at the London Olympics, supplying interpreters to the court system); illegal billing for services not actually delivered (tagging of offenders); and contracts that deliver unbelievable returns on capital employed, thanks to the inability of public servants to match the guile of corporate negotiators.

That part of the book resonates with widely-aired public concerns about what in the study we call the ‘franchise state’ – a political arrangement under which an increasingly wide range of state functions are contracted out to the private sector. And it is this phenomenon which lies behind another important theme in the argument, and one which has so far received hardly any attention in public debate.

The reality is that the outsourcing revolution is not only economic in character; it also involves a revolution in constitutional arrangements. Of course, governments have long contracted out, and the procurement function is an established specialism in any system of modern administration. But in the new ‘franchise state’ we are seeing something very different.  Not only are the contracts unimaginably larger and more complex than hitherto; they are stretching into core state domains, like the management of health, internal and external security, the management of the welfare state and the operation of immigration and asylum policy.

Moreover, in doing this, they have created a new kind of institutional actor in the form of the big specialised outsourcing giants, like SERCO and G4S; and they have also involved numerous other large corporations, like BT, that are not conventionally thought of as outsourcers.  In the case of the specialised outsourcers the state has created these corporate giants – none of them existed a generation ago in anything like their present form, and their growth and continued existence is dependent on state business. But, while the outsourcers depend on the state, the state also depends now on the outsourcers – and it is this system of co-dependence which lies at the heart of the quiet constitutional revolution entailed in the  outsourcing revolution.

In effect, the private corporate giants are now governing institutions. We borrow this language from a masterly work of an earlier generation, Politics in Industrial Society: the experience of the British system since 1911, authored by Keith Middlemas and published by André Deutsch in 1979. Middlemas identified non-statutory organisations, like the Trades Union Congress (TUC) and the Confederation of British Industry (CBI) as governing institutions in a system of quasi-corporatism.  That set of arrangements has long withered on the vine, but the essence of the relationship – franchising responsibility for public tasks to such bodies and the development of symbiotic and privileged relationships with the state – has now been recreated in the outsourcing sector.

In our study we have identified two common responses to the constitutional revolution thus created. Both are utopian.  One wants to push the logic of outsourcing to its extreme limits and reduce the state to the manager of a web of  commercial contracts; the other wants to roll back the revolution to create the kind of ‘command and control’ public sector that is imagined to have existed in the past.  The first is utopian because it chases what is a will- o’-the-wisp – an ideal model of a completely freely competitive market economy; the second because it is mired in nostalgia for a world which, if it ever existed fully as imagined, has passed away and can never be recreated.

The CRESC team has taken a different tack. There is no going back on outsourcing; we have to work with the new governing institutions.  But we do not have to accept the terms on which they presently operate.  The rise of outsourcing has created new economic domains where corporate giants enjoy huge privileges, notably in the case of negotiated franchises giving protection from competition for the duration of the franchise.  And since many of the franchised domains involve control of goods and services that are generally part of the foundation of civilised life – think of transport, energy and telecommunications – they allow outsources to have a lien on the domestic economy of households.

The solution to this state of affairs lies in recognising the privileged position of the outsourcing giants, and their relations of co-dependence with the state – and then formalising all of this by constitutionalising their position.  In integrating them into the constitution we proposed something quite traditional: that, in return for publicly conferred privileges, they must accept publicly imposed obligations.  Concretely, this involves a system of social licensing.

Here are the two core proposals we have made.

  • Licensing would be an explicit arrangement that gave contracting enterprises or sectors privileges and rights to trade whilst placing them under reciprocal obligationsto offer social returns: a formal licensing system would make the right to trade dependent on providing a service that meets negotiated criteria of community responsibility on issues such as sourcing, training and payment of living wages.
  • The scale and scope of licensing agreements would vary. They might be with whole sectors, including all the firms above a certain size threshold. In other cases, where firm size and market position varied greatly within a sector, it might be more appropriate to have separate firm agreements. The outsourcing giants are not being made an offer they can’t refuse.  As important partners with the state they would be invited to sit down to work out how they can deliver on their social obligations in return for their privileges.

What we now have to see is whether any political party in Britain, whether in government or opposition, shows any interest in taking up these ideas.

 

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