Why the G4S Olympics screw-up proves that outsourcing is good

Everyone seems very upset about the fact that private security firm G4S has not delivered as many guards as contracted to police the white elephant that is Sports Day 2012, with many people suggesting it’s an example of why outsourced contracts are terrible . I’m not sure they should. Let’s rewind on what’s happened here…

G4S was contracted by the London Organising Committee of the Olympic and Paralympic Games (LOCOG) to deliver 2,000 security guards, as part of total security staffing of 10,000 people. The requirement for private security was increased to 10,400 out of 23,700 in December 2011 for reasons that were left obscure at the time, but can be presumed to be down to some combination of fear of imaginary terrorists and the desperate need to prevent people bringing in off-brand merchandise.

The company agreed to the increase, having its existing GBP86m contract value increased to GBP284m. It then carried out 100,000 job interviews over the following six months for staff, but failed to find enough people available at the right time and willing to take the work. Eventually, it had to admit that it had massively screwed up by taking on a near-impossible task, was not able to meet the 10,400 requirement, and LOCOG (presumably with government help) has instead brought an unspecified number of police and 3,500 soldiers  in to make up the shortfall.

While detailed contractual arrangements for the G4S deal haven’t been published, people familiar with LOCOG say that its Olympics contracts generally contain two separate contractual penalty elements: 1) payment by results, so if you don’t deliver, your pay is scaled back; 2) reimbursement for the costs of getting someone else to finish the job if you can’t.

So we can reasonably assume, in the absence of evidence to the contrary, that G4S is getting its pay scaled back and paying for the police and soldiers to step in. There’s a standard rate of GBP55 per hour at which cops are billed out to festival organisers; while I’m not sure the Army makes itself available for hire on quite the same basis [*], the soldiers presumably should command something similar.

This double hit – less pay and much higher costs, offset by much smaller savings on wages for the staff that haven’t been hired – is reflected by G4S’s statement to the London Stock Exchange last Friday, in which the company said it expected to make an overall net loss of GBP35-50 million on the Olympics contract. According to FT Alphaville, the total profit for G4S if everything had gone according to plan would only have been in the region of GBP10m, or 4% of the revenue from the deal. In the best-case scenario for G4S, 96% of the GBP284 million paid by LOCOG to the company would have have been paid out in costs [**].

Net result:

1) Sports Day will still be going ahead with a full security contingent;

2) the net cost to LOCOG of the deal will be lower than if G4S had delivered, because of the impact of the penalty clauses;

3) the police and the army will also get decent reimbursement from G4S, so the taxpayer will win out to an even greater degree;

4) G4S will make a significant outright loss on the LOCOG contract, which is at least four times the size of the profit it would have made had everything gone well.

Had security staffing been carried out directly by LOCOG, there’s little reason to assume it would have gone appreciably better. G4S is probably the organisation in the UK with the most experience in recruiting security people for events, and this is one hell of an event; if the task were easy, they wouldn’t have stuffed it up so badly. Unlike G4S, LOCOG has a million other tasks to focus on to the same deadline, and no direct experience of recruiting security people.

LOCOG perhaps could have made the cops and the army part of the original plan – but then the taxpayer would be paying the full billing rate, rather than having G4S picking up the tab. Or it could have massively raised wages for everyone (including the people already hired, not just the extra people at the margin – I’m fairly certain this is why LOCOG and G4S didn’t go down that route once problems arose) – but again, the taxpayer would then be paying the full rate for everything.

In other words, the risk of failing to deliver on the contract was successfully transferred from the taxpayer to the private sector, without being significantly elevated. For just 4% margin, G4S was willing to assume the entire financial responsibility for the staffing project. The consequences of the epic failure fell entirely on their shareholders, and not on the taxpayers.

Conclusion:

The outsourcing model [***] has won the day, and the wicked private capitalists are the only ones to lose out. Hurrah!

[*] although I suppose this could be one way to offset the impact of military cuts in future.

[**] the only reason to take such a low margin on such a high-risk contract is as a loss-leader, with the whole world watching G4S’s performance as a contractor. Which has admittedly happened, although not quite as planned.

[***] when combined with tough contracts that have decent enforceable penalty clauses. Without them *cough*Metronet*cough*, it’s a terrible model and people who use it should be horsewhipped.

10 thoughts on “Why the G4S Olympics screw-up proves that outsourcing is good”

  1. Hmmm, this has given me an idea for a blog piece. I think I shall call it "Why murder is a very good thing indeed"

  2. predictably, I think this is a great post and the gap between this and the reporting of supposed quality newspapers just goes to show how they are not as far removed from The Daily Express as they like to imagine, same hysterical thoughtless method, different subject matter is all.

  3. That analysis assumes that G4S are being honest about how much money they're making or losing on the deal. Big assumption, I would have thought. If they're paying their people £8.50 an hour for a few weeks' work and getting £284 million, I find it hard to believe they weren't expecting to make a damn sight more than £10 million on the deal.

  4. What if G4S had planned to use Workfare people for this but got frightened off after the sleeping-under-the-bridge debacle during the Jubilee? They would have been paid handsomely by the taxpayer in that case, the same taxpayer who're losing out right left and center during these games as the event's been turned into a tax haven for foreign companies. This was a raid on the public purse that went wrong, that's all. Most government outsourcing appears to be none other than just that.

  5. "G4S is probably the organisation in the UK with the most experience in recruiting security people for events"

    I agree with the article except this bit. There are more qualified companies than G4S which is primarily a prison guard on the cheap company. The more appropiate company would be one that specialises in stewarding large scale events such as football matches, music festivals etc, which is essentially what the main job is here – you could even have subcontracted a substantial amount of the stewarding to charities using volunteers operating on a 'few shifts for free entry' basis.

    The police and secuity forces were always going to be given a hands on role in the actual policing and shooting brazilians type of anti-terrorist work that is the important stuff. Now this cock up means they'll be drafting in officers from elsewhere in the country (and stupidly telling the nation's criminals that this is happening via the media) to perform the 'stand around and look cheerful' role as well.

  6. In this specific case, there’s no real harm done, not only because, as you point out, the penalties for non-delivery are enforceable, but also because there’s redundancy in the system (and not just for Nick Buckles). G4S fails to provide what it’s contracted to provide, but the state has ready substitutes on tap, in the form of the police and armed services. It complicates the wider case for privatisation, though.

    In cases where you don’t have duplicate army of public employees (in this case, literally), who can step in and quickly take over the role that’s been privatised, the consequences of failure could be more serious. But duplicating roles kind of defeats the purpose of privatisation.

    As a counter-example, take the thriving private prison industry in the US, which seems to be lobbying the government hard in support of policies that support its own income stream but don't necessarily provide taxpayers with value for money in the shape of an effective (as opposed to merely punative) criminal justice system. According to the Prison Reform Trust:

    ‘In America, private prison contractors have been major contributors to public policy organisations that have successfully advanced tough-on-crime legislation and promoted free-market principles. Private companies in the US have on occasions sought to manipulate the legal system directly. In the kids for cash scandal, Mid-Atlantic Youth Services Corp, a private prison company, was reported to have been found guilty of paying two judges $2.6m to send 2,000 children to their prisons. Less vivid as an example – but still a matter of concern – in the UK was the resistance voiced by some private contractors, on grounds of cost, to the inclusion of prisons within the ambit of the Corporate Manslaughter Act’.

    And the mention of corporate manslaughter is a reminder that there are some failings that can’t be put right by reimbursing the taxpayer.

  7. John,

    The problem with your claim that "the outsourcing model has won the day" is that the outsourcing model didn't actually provide the service which it was contracted to provide. OK, in this case there was a fall-back option and the outcome is probably a "win" in that the (public sector) people best qualified to provide security are going to do it but the private sector will pick up a chunk of the cost, but I don't think that's really the rationale behind outsourcing.

  8. G4S deals with work slavery paying low wages, must as well sell the company to China since they have mastered this already.

  9. You don’t really need a complicated contract. Eg “I agree to supply you with one hundred apples for £10 (total) next Tuesday.” That contains no penalty clause, but if you only supply me with 50 apples, you’re only entitled to £5. And if it costs me £7 to buy the remaining 50 apples, you have to pay me £2. Substitute apples for
    guards and it still works. No extra clauses necessary.

    A true penalty clause, ie one that imposes a penalty rather than attempts to put me in the position I would be in if you performed your part of the bargain properly, is unenforceable. So I can’t impose a penalty of £1000 for your failure to deliver those appples/guards. If your failure costs me £1000, then it’s not a penalty. So anyone bleating about outsource contracts not containing penalty clauses is probably unaware of the technical meaning.

    Not to be taken as legal advice blah blah

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