Rail 815: Outsourcing is source of money drain

Network Rail and the rail industry generally have so far escaped rather lightly over the Great Western electrification debacle – I am looking for a stronger word and perhaps ‘catastrophe’ would be better given that what was originally an £800m scheme has now become £5.6bn with costs still rising. Its cause go to the very heart of the way that modern capitalism functions and its roots stretch back almost half a century.

I’m sorry if this sounds overtly political and the language smacks of Marxism but it is impossible to understand the very fundamental nature of why this project has gone so, so badly wrong without delving into history. Rest assured, this is not going to be a polemic rehearsing all the hoary arguments about privatisation and nationalisation but, instead, will try to explain that without a thorough rethinking of the structure of Network Rail and of the Department for Transport, this episode is bound to be repeated time and again.

In the early 1970s, I worked for Marketing  magazine and observed first hand the beginnings of a trend that is responsible for many of the present day difficulties of government projects – outsourcing. In those days, most large organisations, whether in the public or the private sector, were far more integrated than they are today. In other words, they employed people in a wide variety of tasks, including some which had very little to do with their core business. R & D – an expression so rarely used these days that I will explain it means Research & Development – for example was seen as so important that many companies had large departments devoted to it. In the public sector, local authorities had, for example, large architects and planning departments that drew up schemes and implemented them, often with great success. Contrast, for example, the solid and simple interwar housing estates designed and built by the London County Council with their 1960s successors with their Le Corbusier style ramps and cheap looking prefabricated sections that deteriorated so fast many have subsequently been blown up.

At times, this phenomenon perhaps went a bit too far. London Transport not only provided all the catering to its many staff but even had its own brand of tea, although apparently it was very good. There were many to this system, however. One of them was that it was efficient and cheap. Employing your own expertise in house may have meant that, at times, people might be underemployed, but, on the other hand, they were available quickly to carry out urgent tasks. In terms of projects, for example, in slack times planners could work on schemes which would then be shovel-ready when a pot of money became available.

Much of this structure, however, was insulated from raw capitalism. There were, of course, abuses. Many of these employees, again in both private and public sectors, had very comfortable lives doing not very much. This gave the opportunity for a new type of firm to emerge which, again, I remember from my days on Marketing. They were the management consultants whose advice invariably would be to outsource and use external expertise. There was a vested interest, of course, as often their recommendations would include a healthy dose of further management consultancy. And without wishing to sound Marxist again, the profit motive was the driving force behind this phenomenon. These new companies, taking on tasks from big organisations, could see pound signs in their crosshairs.

Their arguments went something like this: get management consultants in to recommend hiving off various functions to external agencies, and then ensure that these are put out to tender. The bids will appear to be cheaper than the provision of existing services, but the key point is that the process is often irreversible. Once, for example, a refuse collection service is privatised by a local council under what at the time was called Compulsory Competitive Tendering, it no longer had the skills to bid for the service once the initial contract was outsourced. The few companies who by then controlled the market were able to increase prices far beyond what the service might originally have cost, but the organisations contracting out the service no longer had the ability to bid.

So gradually, the culture changed completely. Outsourcing of any task not deemed absolutely core to the main function of the organisation became the norm. It was argued that skills were best bought in from outside, rather than retained in-house. The first functions to go were obvious ones like catering or cleaning, but soon others such as research and even planning could be handed over to outsiders. The apogee of this in the rail industry was the creation of Railtrack as a kind of shell organisation that was led by people with little or no railway experience and which contracted out virtually all its functions. The result was the breakdown of the whole railway network following the Hatfield disaster (detailed in my book On the wrong line, still available online). The accident, caused by a broken rail, created a panic wave throughout the whole organisation because of the lack of engineering skills meant that no one knew the precise state of the assets or the likelihood of a repeat of the disaster. It was aptly described by the late and much missed Sir Alastair Morton, then chairman of the Strategic Rail Authority, as ‘a collective nervous breakdown’.

Some lessons were learnt in the industry as a result. The maintenance of the network, which had been handed on to a series of private engineering companies when British Rail was broken up, was taken back in house.  But it was not enough. Renewals remained with the private sector, with a rather arbitrary separation between the two and Network Rail, which by then had replaced Railtrack, retained the same ethos of contracting out as much as possible.

There was a good example in Phil Haigh’s column in the last issue which mentioned the shortage of signalling testing staff as one of the sources of delay and extra cost for the electrification of the great Western. Electrification schemes interfere with signalling and therefore result in a greatly increased demand for testers.

It need not be so. The problem is precisely an instance of my argument. In the days of British Rail, the signalling testing staff were in house, based in various regions. I was talking to one the other day who explained how, in those days, when there was a big job to be commissioned, he would be sent down to the area for a couple of weeks, along with colleagues from across the country, to carry out the testing. When there was no big job, he would be working on small schemes that may or may not eventually be funded and see the light of day, but nevertheless would always be available to start quickly once money became available.

Now, he said, everything was contracted out. That has several disadvantages. First, with a limited amount of testers available, the cost goes up particularly when several jobs are happening simultaneously. It is very difficult for Network Rail to ensure that testers are available when needed since there is an overall shortage of them which delays projects and adds enormous costs. Finally, there is the disadvantage that there is no flexibility in the system – Network Rail is at the mercy of the contractors.

Repeat this over the various tasks needed to carry out electrification. Add in the fact that the skills to electrify have been lost over the decades when none was carried out. But above all, note that Network Rail at times outsources project management. Private consultants draw up schemes and then other private companies build them, and there is very little control from Network Rail. The skills have been lost and are difficult to regain.

It is not only Network Rail. I recently received detailed information about the Northern Line Extension, the spur off the Northern Line that is costing a staggering £1bn for a two miles of track and a couple of stations. The project is being managed by external consultants, most of whom have little experience of railways and keep on getting changed. The project is way over budget and the scope has been cut back. For example, frequent changes by the project team and consultants have increased the cost of Battersea station from £100m to £250m, and resulted in cutbacks, with the possibility that one of the two entrances may not be built.

The plan to have overnight stabling of trains in Battersea has now been shelved which means that there will be a reduced service at the start of the day. Other changes have been made with little input from TfL as it has lost control of the scheme.  Again, this is a typical example of the way that outsourcing the commissioning and project management  of schemes is detrimental to the public sector.

Neither the Department for Transport, nor Network Rail – and indeed even Transport for London, though that does still retain some capability – consequently have the skill set required to see schemes through. That is the root cause of the Great Western electrification disaster and similar problems will inevitably arise in other projects unless the very culture is changed. Network Rail needs a far greater pool of skilled managers, working in the organisation’s interests, rather than relying on outside people who are only interested in making a good profit for their company. This too applies to train operating companies who outsource basic functions such as cleaning and catering, but that is for another column.

  • RapidAssistant

    Not just outsourcing in itself, but think of all the money that’s probably been spent on lawyers in making all these contracts legally water tight in case anything goes wrong, and of course the cost of litigation if/when the parties inevitably fall out. In a vertically integrated model you get practically none of that. Sometimes I wish I’d studied law instead of engineering, I’d be a millionaire by now.

  • Paul Holt

    p4: “…many to this system…”. Missing an adjective?

  • Paul Holt

    There is no need for the political adjectives above. Outsourcing is a bad idea for the reasons given above and from first principles. See also The Dilbert Principle by Scott Adams.

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