In-house and outsourced services: the pros and cons
A
recent Royal Society of Medicine seminar on outsourcing is reported by
The UK market for external occupational health services is expected to grow by more than 15% in the next five to10 years (by 35% within the public sector), according to a recent estimate1. In many cases, such services will replace or subsume existing internal services and posts.
This reflects the global trend for businesses to outsource non-core functions, reduced headcounts being seen as a shortcut to increased productivity. But there have been other factors driving the growth of external occupational health services.
One factor is the increasingly wide range of functions and activities that now fall under the umbrella term "occupational health". While risk management remains an essential core function, even in the low-risk services sector, employers also expect a wide range of other services that lend themselves, for better or worse, to provision by external contractors. These include health promotion schemes and advice on, or involvement in, the handling of psychosocial health issues through sickness absence management procedures, employee assistance programmes, counselling, etc.
Most importantly, however, external suppliers have been far more effective in making "the business case" for their services.
These were among the conclusions of a recent Royal Society of Medicine seminar2 that considered the growth of external services and how different combinations of in-house and external services may be appropriate for different employers in different sectors.
The advantages of the in-house service operated by British Airways (BA) were discussed by Dr Nigel Dowdall, head of health services at BA, while the view of a provider of external services was given by Dr Chris Sharp, director of the WorkFit Occupational Health Consultancy and consultant occupational physician to Sainsbury's.
A third presentation, by Dr Paul Litchfield, chief medical officer at BT, proposed the ideal arrangement for large employers that choose to outsource: a "hybrid" arrangement, whereby policymaking and management are retained in-house while routine functions and clinical procedures are outsourced to one or more external service providers.
Internal performance indicators
A principal conclusion of all three speakers was that all providers of occupational health services - whether in-house or external - have to deliver a "business offer" that employers/clients can understand and respond to.
Dowdall, for example, described how BA's occupational health service had adapted to a changing corporate-political environment and rationalised its activities (eliminating, for example, some duplicated services, such as a staff ambulance service at Heathrow). Dowdall had come to terms with having to make the business case internally and "understanding internal customers and their needs". The airline's management systems required meaningful measures of performance because, "if you can't measure it, you can't manage it", Dowdall said - quoting BA's former chief executive, Rod Eddington - the implication being that, "if you can't manage it, it may be best to [outsource it]."
Emergence of new providers
It has not only been the need to cut costs, and the perceived cost-effectiveness of external services, that has been behind the growth of outsourcing.
In recent years, the emergence of large specialist providers that offer comprehensive nationwide and international services has been a significant factor, giving employers an option that was not previously available. Large service providers, such as Atos Origin, Capita and Grosvenor Health, have become experts at selling their services, and many in-house occupational health departments have been vulnerable to outsourcing after cost-cutting programmes have identified them as representing a non-core function.
Yet initial monetary savings arising from outsourcing might be short-lived, Dowdall told the meeting. Outsourcing was "a one-way street. It has become clear that when you outsource, you may get a specialist provider, but you also lose control. And once you've outsourced a service and lost your internal expertise, it's hard to get it back again. You might start off with an apparently very good contract offering cost savings, but when you come round to renegotiating that contract and the supplier knows there is no longer an in-house option, sometimes the value disappears. Losing control and losing the ability to do things in-house can mean that you're getting a worse service and paying more for it."
There has also been an element of "fad" or "fashion" associated with outsourcing, Dowdall said, which is encouraged by the illusion that externalising the function inevitably leads to better value for money.
Traditional in-house services were still likely to be the best option for companies where a large number of staff are located at a single site, but they were harder to justify for geographically fragmented businesses where occupational health professionals might spend a disproportionate amount of time travelling rather than delivering the service. The traditional solution of employing non-specialist local part-time GPs in such situations was no longer acceptable, Dowdall noted.
The external option
In general, fully external providers were better able to adapt to contemporary occupational health challenges, according to Sharp.
WorkFit's business was still primarily concerned with risk management: legislative compliance, litigation, "occupational health legacy issues" and the costs of ill health. The renewed importance of pre-employment audiometric testing, for example, following the introduction of new regulations in April this year on occupational noise exposure, would be one such legacy issue. But there were new challenges: on the one hand, changed industry structures (more service businesses, smaller employers, etc); on the other, the increasing importance of mental health, psychological risks and organisational health issues. Government measures that are aimed at reducing the size of the "economically inactive" population and encouraging the adoption of more progressive attitudes to recruitment and rehabilitation would also affect the occupational health activities of large employers such as Sainsbury's.
In this context, is was often easier for external providers to demonstrate that they can add value to a business, Sharp said. "They sell themselves better and are more inclined to speak the same language of senior management." He made no apology for referring to "the business offer" that his company can make to prospective clients, offering a mix of services that can be changed as the client's priorities change. "Short-term flexibility afforded by external services is likely to dominate business thinking and practice unless primary legislation, as in France and Germany, requires an alternative model, which is unlikely to be the case."
Pros and cons of outsourcing
When an existing internal service is outsourced, with a transfer of staff to the external provider, as happened at Royal Mail, the principal attractions are reductions in headcount and related management and pensions costs. "Corporate memory" was retained in this process, Sharp said, despite the possible loss of trust of the workforce that is associated with this type of externalisation. However, echoing Dowdall's comment that, when externalising an existing service, there was a risk of paying more for the same level of service, Sharp conceded that it was rare for externalisation to result in significant cost savings.
Nevertheless, employers can gain access to a far wider range of resources through a fee-for-service arrangement than what is usually available through an in-house service. An external provider is also flexible and responsive to the client's "wants", Sharp said, even though these were sometimes driven by "unintelligent influences" and did not always coincide with what the client really needed.
All three speakers noted the importance of being able to measure the value to a business that does not have core functions. External providers score well by this criterion. Outsourcing contracts provide for performance to be monitored and, in general, the client-contractor relationship makes this easier. In addition, they are easier to control and manage - "Human resources managers do not like dealing [directly] with doctors and nurses," one speaker said.
When an external contractor establishes a new service, inevitably, a considerable time is required before an understanding of the workforce and its activities can be gained and trust can be developed. Dowdall suggested that two to three years were necessary before the effectiveness of a new service could be judged and for the client-contractor relationship to develop into a partnership.
Moving up the value chain
Having discussed the factors driving the growth of outsourcing, the RSM meeting did not explicitly address the issue of whether the "commoditisation" of OH functions associated with large outsourcing contracts was a good thing. But for large organisations such as Royal Mail, which on any particular day has 10,000 postmen absent on sick leave, and BT, which operates from 6,500 sites across the UK, the attractions have been irresistible.
BT's chief medical officer, Litchfield, concluded the meeting by explaining the philosophy behind BT's three-tier structure of occupational health service provision and management3.
At the lowest level of the value chain - where value-for-money, speed of service and customer satisfaction were the key performance indicators (KPIs) - services were most likely to be outsourced (in BT's case, to Capita). Routine medical procedures, such as for drivers, and other functions amenable to economies of scale fell into this category, Litchfield said.
At the top of the value chain, important policy decisions and strategy were clearly best managed internally, not least because "commercial distractions" might otherwise influence decisions. (Litchfield used the example of policy on the supply of antiviral drugs in anticipation of a flu pandemic as being the kind of decision that was not appropriate for an external adviser to take.) This category included the identification of key health issues for the organisation and securing investment in health promotion activities.
In the middle of the value chain, there were non-routine OH functions for which the value added was the KPI, and for which familiarity with the company's business and the sector were important. Here, in general, the pros and cons of outsourcing were evenly balanced, Litchfield said. This category covered, for example, applying best practice in risk management and identifying new programmes of activity.
In conclusion, Litchfield noted that occupational health was, in effect, "a concept" covering different activities in different contexts. What was important was that internal services, in order to survive, needed to "move up the value chain and take on the role of trusted adviser", outsourcing particular functions to external providers as and when required.
References
1. The
2. "In-house or outsource - the business case
for occupational health", RSM occupational medicine section, seminar,
3. See "Delivering OH services: in-house provision and contracted services", OHR 106, Nov/Dec 2003, pp.12-15.
