Local authorities review outsourcing arrangements

02 March 2018

Local authorities had already started to assess their options following Carillion’s dramatic descent into liquidation, when a profits warning from Capita Plc stunned the financial markets and wiped nearly 50% off the company’s value in a matter of hours. Shortly after that, Galliford Try announced its intention to raise £150 million equity and cut its dividend in order to offset costs related to Carillion’s collapse.

Capita’s announcement prompted some commentators to ask whether the company was destined to become ‘Carillion 2’. Others countered by suggesting that whilst a £700 million rights issue will dilute shareholder value, it will provide additional investment which, coupled with other efficiencies and the divestment of non-core assets, will help bolster the company’s balance sheet and allow it to focus on its core activities.

The situation at Carillion had already forced many authorities to consider the future of services outsourced to that company. Those same authorities may now also have to consider whether any retrenchment by Capita, could mean that they also have to consider alternative arrangements for services currently provided by that company.

In the short-term, however, the immediate problem centres around contracts currently outsourced to Carillion. At the time of writing, the liquidators have confirmed that Carillion continues to trade. The question, however, is how long will that continue and will some contracts have to be shed as the liquidators work towards achieving a workable solution.

Consequently, many authorities will have already reviewed their partnership and outsourcing risk registers, identified relevant contracts with Carillion and, if necessary, ensured the implementation of any appropriate business continuity measures.

Longer-term, however, authorities will also need to consider whether they should continue to outsource those services, or whether they should be brought back ‘in-house’. Ultimately, some may decide that bringing previously outsourced services back ‘in-house’ represents the most cost effective solution available to them.

That is a decision that each authority will have to make on a service-by-service basis but, if an authority decides that that is the way forward, then it’s important to remember that the reabsorption of these services will impact and change the authority’s risk profile. Insurers need to be informed of any services coming back in-house and the information that they will require includes:

  • The nature of the service contract and a brief description of its scope or content
  • The date of transfer back into the authority’s risk profile
  • The insurance policies that are likely to be affected by the contract
  • The number of staff to be Transfer of Undertakings (Protection of Employment) (TUPE) back into the insured and the wages and salaries pertaining to those employees
  • Details of any assets i.e. buildings, contents, vehicles, plant (including any engineering plant requiring inspection) that needs including under the authority’s policies
  • Details of the claims experience for the period the service was outsourced, on a policy by policy basis.

Services outsourced to other suppliers

The developments at Carillion and Capita have raised concerns over the viability of mass outsourcing in general. As a consequence, many authorities have started to review their partnership and outsourcing risk registers, identifying all outsourced services in the event that problems emerge in any other areas. Key tools in managing the risks associated with any provider of outsourced services include:

  • Maintaining a regular review of each supplier’s financial status and well-being
  • Ensuring the robustness of contingency planning arrangements in the event of a supplier failure.

We are of course on-hand to advise and support on the risk and insurance issues arising from these issues.

For further information, please contact Julia Reffell, Head of Public Sector on +44 20 7558 3253 or email julia_reffell@jltgroup.com

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