Is insourcing the latest trend in public sector HR?

For years, HR teams in public services have been used to managing long-term contracts with outsourcing companies. But as citizens demand greater levels of transparency and fairness, a number of employers are bringing those services back in-house. Jo Faragher examines how "insourcing" might play out.

At the end of January 2023, Barnet Council announced the outcome of a decade-long campaign. Since 2012, more than 300 workers in areas such as trading standards, environmental health and highways had been working not for the local authority, but for Capita, the multinational private-sector business.

What is insourcing?

Insourcing is when a business decides to carry out work in-house, rather than using an external contractor. "Insourcing" is often used to refer to situations where outsourcing is the current arrangement and the business can identify advantages of having its own staff perform the work themselves.

From 1 April this year, they will be transferred back into the London borough under TUPE; a move that local Unison representative claims will be "good news for staff, good news for residents and good news for services".

The "insourcing" move follows Labour winning control of the council after 20 years of Conservative leadership. It was also a period marred by controversy, during which an individual who worked on the contract between Barnet and Capita was jailed for five years over a £2 million fraud.

Celebrating the insourcing decision, Unison branch secretary John Burgess said the move back in-house would not all be plain sailing.

"These include workplace inequalities such as staff being paid differently for the same role. Barnet Unison is already seeking discussions with the council about harmonisation of the terms and conditions of the TUPE'd workforce," he said.

Insourcing shift

Barnet is not the only public sector employer looking to reduce its use of outsourcing contracts. Earlier this month, Liverpool University Hospitals NHS Foundation said it would also bring around 670 staff back in-house from April.

Staff across two hospital sites - Royal Liverpool and Broadgreen - will be transferred to NHS terms and conditions once the outsourcing contracts come to an end at the end of this financial year. The workers include cleaners, porters, caterers and other domestic services, and again, the argument goes that this will be better for the community and for public health.

Elsewhere, Manchester Council has passed an "insourcing first" policy as a number of its own contracts expire, and Hackney Council in London has announced it will insource £12 million-worth of public services.

After years of arguments that outsourcing some public services is more cost-effective and saves taxpayers' money, are we seeing a shift to insourcing instead?

Public opinion

"In the UK the reversal is quite slow, but is driven by public opinion," says Peter Murphy, director of the Public Policy and Management Research Group within the Centre for Economics, Policy and Public Management at Nottingham Business School. "We're seeing early indicators of long-term trends."

Professor Murphy believes the rate of change in the past decade has led to a number of public and corporate realisations - Brexit, the pandemic and reduced access to overseas workers have seen local authorities place more emphasis on the value of the workforce they're employing than the price, he argues.

"They're interested in long-term outputs and outcomes rather than profitability, and seek inter-relationships and partnerships. There's an idea that we can't sign off on these huge long-term contracts unless we do so collaboratively."

Sustainability and purpose sit at the heart of this mindset shift, he believes, while the public is more aware than ever of increasing inequality, and look to their local service providers to address it rather than exacerbate it. In addition, public authorities are encouraged to embed purpose and inclusion into their objectives, and this can be a condition for obtaining grants.

"You must add up what the additional value is to the public of how you commission services - the social return on investment rather than the financial," adds Murphy.

Changing contracts

One thing several recent insourcing decisions have in common is that the flip has been made at the end of a long-standing contract, after which some due diligence would have been done either way.

Gordon McFarlane, assistant director at Leicestershire County Council and president of the Public Services People Managers Association (PPMA), says what we're seeing is "neither a surge in bringing things back in, nor divesting them".

"This is not universal. We're commissioning services out where we feel it is right to, and will deliver them directly where we feel that works," he says. He agrees that public sector HR and finance teams are looking at their contracts closely, but there are a host of interplaying factors that influence each individual decision.

"It can be driven by cost, but not always. Quality of service is important, as is the ability of the sector to recruit and retain the right staff. And if we do outsource, we have to invest in the infrastructure to contract manage it well," he adds.

The benefits of bringing services in-house, employers argue, is that they can have more control over the services and how they are structured, adjusting the cost-base if need be. McFarlane adds that insourcing can be beneficial from a workforce planning perspective:

"It means they are part of the wider local authority where we can develop talent, run learning and development, and control what happens to the workforce," he explains. "These are the intrinsic benefits of being part of a large employer."

"From the HR perspective, you can have the organisational development side and workforce planning element you might not get if you were paying for a contract. You can see that service develop, rather than relying on a provider to do those things you want to do."

Pick and mix

That said, not every service will be best delivered directly by a particular local authority, NHS trust or other public service body. Sweeping decisions to insource everything are rare.

"Perhaps it's not your core service - very few local authorities run their own school meals service, for example," he adds. "Residential care and children's homes are also often outsourced."

When the Labour-run Hackney Council announced it would favour in-house services over outsourcing aspects of its services, it said: "Residents want to see their council services run by local, committed public servants that understand their community and can respond quickly in a crisis - not unaccountable private companies."

The move would "rebuild a fairer local economy and recover from coronavirus, spending our money in the borough wherever possible and employing more local people".

But shifting services back in-house is not without its own financial and practical challenges, including the TUPE process itself.

"For example, think of a team of IT experts who all have similar roles and work as part of one team to serve X Housing Services Ltd. If Y Housing takes over X Housing Services, that organised group of IT experts will transfer across to Y Housing as a group," explains Jo Mackie, head of employment at law firm Lawrence Stephens.

Cost savings?

"TUPE dictates that all the rights, duties, powers and liabilities within each contract of employment transfer with those employees to the new employer. This is almost all-embracing, and even contains some provisions around pension liabilities and so due diligence will be key for those authorities seeking to bring services back in-house.

"It is often incorrect to say that bringing services in-house will save costs. The employee costs will inevitably stay the same because the terms and conditions cannot be changed, and any redundancies because of the transfer will be automatically deemed unfair dismissal."

Mackie advocates as much due diligence and transparency as the public sector employer can manage if the move is to be successful in the long term. She adds: "Employees will be more positive and engaged if an incoming employer acknowledges they have a responsibility to them, rather than by an employer who fails to engage at all."

As the new financial year draws near at the end of March, it's likely we'll see further transfers of services in the weeks to come. But with local authorities and other public services under pressure to deliver value to taxpayers and the community, and the prospect of a recession ahead, cost will continue to be a driving factor in this debate.