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Business Comment

Mark Leftly: Serco's woes show how anyone can struggle to benefit from outsourcing

Westminster Outlook Outsourcing is a dreadfully prosaic word for a process that is fundamentally realigning the balance between commerce and state.

Concerned critics argue that handing over vast swathes of services traditionally run by the public sector, from schools inspections to street cleaning, is effectively privatisation. The only difference is that the taxpayer doesn't get any money up front as it is handing management of services or institutions to well-paid private sector players rather than selling any assets.

Though not a new phenomenon, outsourcing has gathered pace under the Coalition. Ministers believe that the private sector can use its competitive instincts to make services more efficient, meaning that they will ultimately be cheaper to run and more productive.

Paul Lester predicted the outsourcing boom several years ago when the credit crunch was turning into a financial crisis. Then chief executive at VT Group – which was later gobbled up by rival Babcock International – he said that public services would be contracted to the private sector "with a vengeance" after the 2010 election.

By 2012, the UK was the world's second biggest outsourcing market, while £1.5bn of public sector deals were signed in the first quarter of this year alone, according to recent figures from Arvato and NelsonHall.

In theory, this should be a nice little earner for the big outsourcing firms and help curb public spending.

But theory is poor substitute for practice, as Rupert Soames is fast discovering. Serco's new chief executive must have thought he knew a thing or two about the state given that he is, depending on which Conservative politician you more greatly admire, the grandson of Sir Winston Churchill or the brother of Sir Nicholas Soames.

Plain Mr Soames, of course, had an idea what he was getting himself into when he took on the Serco top job earlier in May, given that what was once the biggest company no one had ever heard of was all over the headlines last year. Most notoriously, Serco charged the taxpayer for electronically tagging non-existent prisoners.

But he can only be shocked as to the issues his root-and-branch review of the business has discovered. Yesterday, he warned that there will be extra write-downs on big contracts in asylum seekers' detention centres, known as Compass, and clinical healthcare of as much as £15m.

In a statement, Serco said of Compass: "The cost of meeting our obligations to the customer is now expected to exceed revenues from the contract over its five-year life."

That's the problem with the very word outsourcing: it underplays the gravity of change happening and the complicated, non-commercial nature of traditionally state-run work.

The private sector cannot just come in and transform a service immediately, if it can change it at all. Those aforementioned critics fear that the private sector win bumper contracts to the detriment of public services, though Serco's woes show that outsourcing is often to neither side's benefit.

There is an important lesson here: never trust a verb masquerading as a noun.