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Outsourcing UK public sector services - the moral hazards

Providers should not have full ownership of intellectual property

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Comment Recent estimates by Kable, an organisation which provides technology research and analysis on the UK government and public services sector, suggest that almost one fifth of public sector services (£60bn) could be delivered through outsourcing to private and voluntary bodies. Principle sectors targeted for this treatment appear to be the health and education sectors, which are subject to frequent reforms with very uncertain success to date.

Much of the health sector outsourcing and a growing element of the education outsourcing will be IT services, and those business processes delivered and supported by IT.

Most outsourcing in the public sector has been conducted under the so-called Private Finance Initiatives (PFI), where revenues - but not profits - have been guaranteed to the supplier in return for investment in the provision of outsourced public sector services. In return for this private funding, the private sector may gain very substantial rewards over a prolonged period - and own the assets created. PFI appears to be the perfect solution for governments committed to low public spending - it does not show up as public borrowing, (a dubious piece of accounting very unlikely be tolerated in private sector financial accounting and reporting).

The issue of moral hazard, present in all outsourcing contracts, is a familiar issue faced in the private sector where businesses have outsourced their corporate IT but the outsourcing supplier fundamentally fails to deliver. So much is at stake for the core business that removing the supplier is counterproductive. In consequence, there exists a whole layer of senior IT decision-makers devoted to the skills of managing the relationship. But at least with private sector outsourcing disputes there remains the possibility that the customer may still call a halt after a series of failures.

Moral hazard is exemplified in outsourcing of public sector IT services. In outsourced public sector services, the supplier owns the intellectual property before the system is even delivered. Removing the supplier means, in effect, a total restart of the project. This is a significant, if not the major, risk (and moral hazard) in public sector outsourcing. Where private sector funding is providing the majority (normally 90 per cent) of the investment, it makes no sense in PFI contracts to call a halt to the projects. The most that government or public sector authorities may do is to extract compensation for failures to deliver, but this is normally capped in the outsourcing contract.

PFI contracts make no sense, where the supplier provides the investment, unless the public sector secures a charge over the intellectual property until it is satisfied with the delivery. Indeed, it would make more sense for the public sector to be an equal investor in the intellectual property. Providers would then no longer have the power of ownership over the intellectual property.

Copyright © 2005, IT-Director.com

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