Business models follow fashions as much as those on the catwalk. The prevailing business model adopted over the past two decades in transport, as in many other fields ranging from hospital cleaning to local authority leisure centres, is based on the notion of outsourcing as many functions as possible.
The principal driver behind this idea is the assumption that the private sector is more efficient at providing services than public bodies, but the other aim, though far less discussed publicly, was that outsourcing would end restrictive practices and break union power. Indeed, some of the industrial relations legacy that the transport industries had to cope with were deeply damaging to their future. Peter Hendy, the new transport commissioner for London, told me recently about how, when he first worked on the buses in the 1970s, the drivers were paid an extra hour’s wages if a bus had to be taken out of service in mid route and they had to drive it to the depot. In negotiations it was impossible to buy out this concession, which of course encouraged all kinds of shenanigans.
He also recalled how if a particular garage were on strike, drivers would turn their buses round when they reached the area covered by that particular depot, which meant that half the route would get three times the normal frequency of service while the rest got none. ‘We’re still doing the right mileage’, the drivers would say.
No wonder, therefore, that the Tories broke up the London bus drivers monopoly by splitting the capital into 11 groups and selling them off to the newly established private bus companies, and, in a couple of instances, management buy out teams. For its part, British Rail was broken up into 25 train operating companies with the same notion of weakening union power and encouraging modern management practices.
The trouble with this process is that it represents a one-off gain and there is, over time, an increasing downside as the number of competitors bidding for contracts reduces as consolidation proceeds. We are reaching this point in several areas of transport. For example, the price of highway maintenance, for example, is widely reckoned among local authorities to be kept high as a result of the lack of real competition. On the railways, two companies, First and National Express, are beginning to establish such a dominant position in the market that there presence may well deter new entrants to the market next time round. Stagecoach, for example, which has bid recently for several franchises, may have its role as an independent franchisee in the railways ended if it fails to win the South West Trains franchise later this year.
While Hendy still has six big bus companies to choose from in London, there is a danger that takeovers or withdrawals from the market will lead to prices gradually rising. Indeed, some analysts reckon that this has already been the case, although the big bus companies deny this strenuously.
What can be done, therefore, to mitigate the effects of capitalism’s natural tendency to a monopoly without returning to the bad old days of excessive union power. In the case of Network Rail, the company simply took its maintenance contracts back in house as it realised it was paying over the odds for work that was best carried out by its own workforce. The company now reckons this move has saved around £100m per year, about 10 per cent of the cost, with further savings still in the offing and so far, despite taking in 18,000 new workers, there has been little industrial unrest. Hospital cleaning is another area where taking back the work in house has been widely considered but the practical difficulties of recruiting and training managers and staff is a formidable barrier to entering that market.
So far, this reversal of the long term trend has not been taken up widely, but there is general acceptance that with the failure of various PFI tram schemes and the difficulties with the London Underground PPP, the limits of outsourcing have been reached. However, working out a business model that encompasses the advantages of both in-house and outsourcing contracts has proved beyond even the most innovative business thinkers, but there is a clear need for such a genuine third way.