It ain’t sexy, but the City loves outsourcing

Then rumours emerged that US heavyweight Lockheed Martin was sniffing around the business.

The reason is clear: the suitors know that the Whitehall pointy-heads who are looking for ways to cut the £178 billion budget deficit after the election are all zoning in on one solution: outsourcing. Support services — the least sexy sector in business — is having its moment.

Over the past few months, the major political parties have all called in industry experts from the likes of Capita, Serco and VT Group to talk about the future.

As Paul Lester, chief executive at VT, puts it: "It doesn't matter which government gets in at the next election, they've all got the fundamental problem of a deficit to address.

"They can increase taxes, which undoubtedly will happen, and sell off family jewels like the Met Office, which I'm sure we'll see too, but that's not sustainable.

"To get out of this mess, the government needs to cut the cost of running public services — so the outsourcing industry is expecting opportunities to bid for larger and larger contracts over the next year."

VT — the former shipbuilder Vosper Thornycroft — has been alert to the trend. It has shifted its focus from manufacturing to become one of the UK's biggest service providers to local authorities and public bodies such as the Ministry of Defence.

It already trains thousands of firemen every year, and looks after the Metropolitan Police's vehicle fleet.

But Lester says it is poised to pounce on UK Plc's sickness, with ambitions to snare more services that the public purse cannot afford to manage after the election: "We've talked to all three major parties about it, and a sizeable number of local authority chief executives too.

"Right now, it looks like the Tories will go for bigger cuts, and push harder for costs to come down, but whoever gets in will have to slash spending — and we'll be ready to pick up
the contracts."

City analysts are also expecting a big surge in public-sector business being put up for tender.

Analysts at stockbroker Numis predict: "At some point post-election there will be a notable increase in demand for outsourcing services
by the public sector, and investors will turn their attention to outsourcers."

They forecast a hiatus in the number of contracts put out for tender by the public sector ahead of the election, and tell clients to use any corresponding dip in share prices to buy into the sector.

Government expenditure now stands at around £680 billion a year, of which only around £80 billion is outsourced. Currently, much of that is at a local level, but the industry hopes that will spread.

As Capita's chief executive Paul Pindar says: "We already work extensively with local government, which has already been in a fiscally tight position for several years. Value for money has gone up, and there's no reason why we can't do the same for public services."

But one thing could throw the predicted burst of outsourcing opportunities off course: the possibility of a hung Parliament. Pindar admits: "We're worried about one party failing to win a clear majority. It will make it much tougher for decisions to be made."

But he adds that Capita's talks with senior politicians from both Labour and the Conservatives indicated "considerable determination" from both to cut costs through more outsourcing.

The industry bosses all point to a recent report commissioned by the Government that found services sent out to the private sector cost about 20% less to run.

But whilst outsourcing might win a popularity contest against some of the other options open to the Government — tax hikes and service cuts — it's still a political hot potato. Unions claim it leads to lower standards and job cuts as profit dominates decision-making.

Still, UK Plc's massive fiscal deficit means the outsourcing juggernaut is likely to become impossible to avoid. The only remaining question is which sectors will go up for sale first. At Capita, Pindar is sniffing around the benefits sector.

"The Government currently distributes around £120 billion on benefits, and spends another £7 billion a year administrating the process. We'd like to work on that to drive down cost," he says.

Other back-office divisions of interest include the prescription business — doctors issue more than 200 million of the lucrative slips of paper a year and support services firms want a piece of it — and defence.

"The UK spends roughly twice the amount on back office services than other European armies . Outsourcing that could free up money to go to front line services," Pindar claims.

At VT, Lester reckons swingeing cuts to local authority budgets will force councils to go for outsourcing "in an even bigger way".

He predicts school improvement schemes, vehicle fleets, and property and facility management deals will be just some of the public services taken on by private firms after the election.