Special Issue: Elites and Power after Financialization

Theory, Culture & Society

2017, Vol. 34(5–6) 77–101
Outsourcing the State: ! The Author(s) 2017
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DOI: 10.1177/0263276417717791

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Julie Froud
University of Manchester

Sukhdev Johal
Queen Mary, University of London

Michael Moran
University of Manchester

Karel Williams
University of Manchester

Abstract
This article uses the example of public sector outsourcing to explore how elite
power can be fallible. A contract between the state and private companies repre-
sents a complex interweaving of different kinds of power with uncertain outcomes:
the experience of outsourcing in the UK and elsewhere is that it frequently goes
wrong, with fiascos creating political embarrassment for states and financial problems
for companies. Drawing on Deleuze and Guattari, the article explores how the
contract is a political device that can be both tool and weapon but which has uncer-
tain outcomes. In doing so, it makes a distinctive contribution by arguing that elite
work is often about repair and managing the political or financial consequences of
failure.

Keywords
contract, corporate welfare, elite power, elites, financialization, outsourcing

Atos, the controversial outsourcing company, is facing a govern-

ment review of all of its major Whitehall contracts, which amount
to more than £500m, following another serious IT failure.
The Cabinet Office told the Guardian it would undertake a full

Corresponding author: Julie Froud. Email: julie.froud@manchester.ac.uk

Extra material: http://theoryculturesociety.org/
78 Theory, Culture & Society 34(5–6)

re-examination of every contract worth more than £10m operated

by the French-based firm. Such a review of a single contractor is a
rarity in Whitehall and is a reflection of the levels of exasperation
both from civil servants and the public accounts committee at the
programmes overseen by Atos . . . The decision to launch the review
follows severe criticism by the National Audit Office of Atos’s
role in the development of an IT system designed to allow the
extraction of data from GP practice systems. MPs on the public
accounts committee examined the auditors’ report and found that
Atos, the supplier contracted for a key part of the system, ‘did not
show an appropriate duty of care to the taxpayer’ and ‘appears to
have acted solely with its own short-term best interests in mind’.
They suggested that although Atos may have complied with the
letter of its contractual obligations, it took advantage of a weak
client by taking the client’s money while knowing that the system
had not been properly tested. (The Guardian, 6 March 2016;
Syal, 2016)

Introduction: Outsourcing as Elite Opportunity

Public sector outsourcing extends private business into the sphere of state
ownership and de-commodified state production in ways that bind
together the state with private interests. In high income economies,
outsourcing has already created huge new opportunities for big business
and organized money as franchised providers of mundane services. It is
different from traditional procurement systems for providing standard
goods like army boots or computing equipment under ‘spot’ contracts
(Dunleavy et al., 2006: 115–16). Now, key state functions and service
delivery obligations are being contracted out to private interests,
typically giving (time limited) monopolies under contracts that are very
different from those governing procurement as historically practised.
Contracts increasingly cover complex bundles of services, are often nego-
tiated ad hoc between state agencies and powerful corporate interests,
and cover long time periods.
The scale and growth of this outsourcing of the state is remarkable.
In the US, the Brookings Institute has argued that an official federal
government workforce of two million in 1999 was supplemented by an
additional eight million in the ‘shadow government’ (Guttman, 2003:
281); and there have been longstanding concerns about the scope, cost
and particular role of private company involvement in defence and
domestic security (Verkuil, 2007; Chassy et al., 2011; Guttman, 2015).
In this article we will mainly use UK evidence to explore processes and
outcomes which are globally relevant. In the UK it is estimated that,
Froud et al. 79

‘£1 in every £3 spent by (central) government and local authorities on

delivering pubic services will go to outsourcing companies’ (Plimmer,
2015). Precise figures of total expenditure vary as there is no simple offi-
cial measurement, but the amounts are significant. The National Audit
Office (NAO) estimate that total government spending with third parties
in 2012–13 was £187 billion, of which £40 billion was accounted for by
central departments, £50 billion by the National Health Service and
£84 billion by local government (2013: 6). Most of this activity is mun-
dane, like catering or cleaning; but outsourcing has also penetrated what
historically have been core central state functions, like incarceration and
the administration of justice where, in the 2010–12 period, more than
£1.5 billion of UK services were outsourced (Centre for Crime and
Justice Studies, 2013: 25).
Outsourcing has attracted and built giant corporates as ‘privately-
owned public monopolies, which largely, or in some cases wholly, rely
on taxpayers’ money for their income’ (Public Accounts Committee,
2014b: 3). The new (for profit) ‘public services industry’ is dominated
by large corporates: in the UK, just 40 strategic suppliers presently
account for 25 per cent of the value of central government contracting
(National Audit Office, 2013: 5). Four giant conglomerates – G4S, Serco,
Capita and Atos – have grown rapidly in recent years, including through
merger and acquisition, to work across a variety of public and private
sectors. With the exception of Capita, a FTSE 100 company built
virtually entirely from British outsourcing contracts, the other large
companies operating in the UK market have multinational portfolios.
Sector specialists with international reach have risen to dominate par-
ticular sectors: the French multinational Veolia has 180,000 employees
worldwide and is the market leader in outsourced waste management in
the UK. A relative newcomer in the UK is Maximus, a very large US
contractor which took over contracts from the Department for Work
and Pensions, including for the Work Capability Assessment programme
in 2015.
On the face of it, the growth of outsourcing can seem inexorable,
providing opportunities for corporate business to capture fairly stable
revenue streams and to become de facto providers of basic state functions
like welfare or justice. In this sense, outsourcing could be described as a
consolidation of elite power through large contracts which exclude other
(smaller) providers, as well as preventing much opportunity for demo-
cratic accountability. Yet the recent experience of outsourcing in the UK
is also marked by recurrent crises. The front pages of the broadsheet
newspapers report fiascos when outsourcing contractors fail to deliver
services, while the business media reports profits crises in major outsour-
cing firms. For example, one UK-based company, Serco, experienced
tenfold revenue growth over 15 years to reach nearly £5 billion by
2012, with British central and local government contracts providing a
80 Theory, Culture & Society 34(5–6)

quarter of turnover and much of the rest coming from other national
governments. It was regarded as a well-managed company until, quite
unexpectedly in 2014, Serco’s profits collapsed, requiring a new share
issue to provide further capital to support the business. A new chief
executive officer (CEO), Rupert Soames, was hired to sort out a mess
of unprofitable contracts which were the legacy of poorly-controlled
organic growth and acquisitions in activities as diverse as air traffic con-
trol, leisure facilities, schools, public transport, healthcare, prisons and
deportation in many countries.
This article seeks to explore this duality of the outsourcing state, the
way it creates opportunities for the consolidation of elite power while
also prone to crisis. It addresses the question of how parties use out-
sourcing contracts for different purposes to strengthen elite power, while
also leaving them exposed to the danger of failure and the need for elite
repair work. This exploration of outsourcing has implications for how we
understand the distinctive work of political and economic elites in the
present conjuncture; here, elites are engaged by local contracts that
develop problems requiring repair and maintenance work, so their
effort is spent not on strategy and positive results, but on tactics to
keep things going. The working out of outsourcing contracts can thus
be understood as a complex interweaving of different kinds of elite
power: that of the state, used to make contracts that shift large amounts
of public service work into the realm of the for-profit sector; and that of
the contractor, who can generate profits from entering such contracts
with uncertain outcomes. The workings of such contracts can enhance
elite power but also challenge it. As the opening quote about contracting
company Atos suggests, the contract can be a source of elite tension as
Parliament criticizes the company for specific failings and government is
compelled to undertake a ‘review’ which threatens both Atos and (poten-
tially) the status of the outsourcing project.
The article develops this argument in four stages. The next section
explores how outsourcing contracts can be understood as contested
and uncontrolled objects; following Deleuze and Guattari, we introduce
the idea of outsourcing contracts as variably tool and weapon in the
hands of political and business elites. The following two sections explore
elite power and its limits, as government and outsourcing companies are
both unable to secure advantage through contract. First, the state seeks
to use the contract as a tool of legibility and control but is beset by
unexpected fiascos and subsequently reveals its weakness by not sanc-
tioning poor performance. Second, while the individual outsourcing con-
tract is a powerful weapon for extracting profit, outsourcing firms are
also prone to crisis because, under financialized pressure for growth, they
easily lose control of their weapons. The final section draws out the
implications of this fallible power for understanding the unaccountability
of elites and the nature of elite work.
Froud et al. 81

Outsourcing Contracts as Variable Devices

The activity of public services outsourcing relies on the device of con-
tract, which creates a space of contest within which various kinds of
power are exercised and find their limits. Outsourcing contracts set out
how the interests of the state as contractee and the company as contrac-
tor are to be reflected through payment and delivery systems and through
the management of standards and contingencies. Contracts have been an
important device in the so-called new public management, which has –
starting out from the UK, Australia and New Zealand particularly –
gained currency across many territories (Hood and Dixon, 2015; Lane,
2000). While some formerly state-provided services have been privatized
through asset sales (such as energy, water and telecoms), in other cases
the provision of the service has been outsourced for a definite period after
a tendering process which brings in a private operator with a contract.
This is how in the UK the repatriation of illegal immigrants, the assess-
ment of eligibility for welfare payments or the provision of out-of-hours
healthcare become territory for private sector organizations seeking new
sources of profit.
Public service contracts are conventionally discussed in a very narrow
way as economic devices for dealing in risk and reward (as economists
define them) in a world of unexpected events and states. Thus Deakin
and Michie consider the contract as a legal document that specifies the
obligations and rights of each party under ‘various future states of the
world’ (1997: 6): in principle both parties have an incentive for ‘efficient
sharing of risk and information’ so that risks are optimally distributed to
those best able to bear them (Lyons, 1996). The notion of the contract
here is imbued with all kinds of optimism about the ability to control the
future through a process of contingent specification; and a voluntarily
signed contract represents an alignment of perceived interests around an
expected pattern of risk and return. But the practical utility of any con-
tract is limited by inability to anticipate future states (and their financial
implications), as well as by inability to compel the other to take respon-
sibility for outcomes that might prove costly. For both reasons, it is
generally accepted that many contracts are ‘incomplete’ (Gietzmann,
1996) and will imply silences or at least ambiguities about some possible
states of the world.
The problem of incompleteness is, of course, well-known and, follow-
ing Williamson (1975), Deakin and Michie (1997) have argued that this
provides a strong case for vertical integration or in-house provision.
Outsourcing contracts can be considered as relational (MacNeil, 1974):
outcomes will depend upon the extent to which parties act according to
the spirit of the contract, building trust and co-operation so that
unanticipated problems do not result in expensive and damaging break-
down. There is a large literature on contract theory from law, economics
82 Theory, Culture & Society 34(5–6)

and sociology, seeking to understand the conditions under which rela-

tional contracts are more likely to be characterized by trust and
co-operation (for summaries see, for example, Hviid, 1999, and Lyons
and Mehta, 1997). Co-operation may be more common if there are
repeated interactions and/or where reputation is important and punish-
ment norms are understood (Hviid, 1999). However, this is a largely
theoretical debate (Lyons and Mehta, 1997): contracts are typically
private, hard to observe and often commercially sensitive.
There is another more radical literature which sees the contract as a
political device for the allocation of responsibility (not the allocation of
financial risk, or an attempt to ensure co-operation between contracting
parties). In the context of public-private partnerships, Froud (2003)
argued that outsourcing contracts rested on a fundamental failure to
draw Knight’s (1921) distinction between statistically calculable risk
and fundamental uncertainty, which is properly the domain of the
state. From this point of view, the state is politically disadvantaged by
contracts which create a fantasy of controllability over future costs that
appear to shield the state from risk, while leaving it less well placed to
deal with uncertainty. The sophistication of much of the theoretical argu-
ment about how contracting can work gets lost once contracting is part
of government policy on public services provision. A political framing
can equally be developed to show how elected politicians and civil ser-
vants can benefit reputationally from arrangements whose economic effi-
ciency is largely irrelevant. Bowman et al. (2015) have argued that
outsourcing is used for blame-shifting in ‘toxic’ policy areas like the
deportation of illegal immigrants or the administration of tests to exclude
welfare claimants. In such cases, the contract works for government
because it outsources blame so that (when things go wrong) it is the
contractor who should be culpable. In this sense, what is sometimes
termed a ‘shadow state’ emerges which is charged with implementing
government policy while lacking transparency and accountability
(Social Enterprise UK, 2012; White, 2016).
This kind of argument about the political advantages of outsourcing
begins to question the treatment of the contract in a reified way as a
discrete thing which can be discussed independent of the way in which it
is being used. In developing this approach, it is useful to recall Deleuze
and Guattari’s (1987: 460–5) argument that the difference between tool
and weapon is determined by the use of the object, not the nature of the
object. So, a hammer can be both a tool that drives nails and a weapon in
a violent attack. In this context, there will always be a struggle to appro-
priate or capture institutions and processes so that, for example, nascent
states seek to turn irregulars and militias into armed forces funded,
armed and directed by the state apparatus. Thus, behind the dual
usage of the object, Deleuze and Guattari (1987) counter-pose the state
and the war machine as two opposed functional apparatuses or principles
Froud et al. 83

of social organization which use power differently. The war machine is

what ‘escapes from states or stands against them’ (Deleuze and Guattari,
1987: 420), not as an absence of rational, administrative state power but
a different kind of presence through creativity and free movement.
When Deleuze and Guattari conceived their schemas, writing and
codification was supposedly the prerogative of a state that lived in a
domain of work through tools and signs: ‘for there to be work there
must be capture of activity by the state apparatus and semiotization of
activity’ (1987: 467). The Deleuzian concept of the war machine was
shadowed by images of the Vikings or the Mongol hordes whose mode
of inscription was decorative through jewellery and ornamentation. As
Ertürk et al. (2010) have subsequently argued in relation to hedge funds,
the nomadic war machine of finance has learnt to use contracts to create
opportunities for organized money. Indeed, in many kinds of financial
innovation the new product is an asset class which is defined by its con-
tractual status: for example, as Hildyard (2016) points out, finance sees
infrastructure not as the physical pipe and cable basis of civilization but
as enforceable contractual claims on income.
A contract might then be an ambiguous device for elites, offering to
both extend their power and possibly threatening their effectiveness.
However, one clear theme that emerges from the experience of public
services contracting is the tendency towards failure, whereby the expected
services are not delivered at all or in a form that is reduced in quantity or
quality. This suggests that there may be limits to power because the deci-
sion by the state to offer a contract, or by business to tender for it, may
lead to a shift in activity from the public to private sector, but this does
not necessarily mean that the contract parties can control events suffi-
ciently to meet their respective needs, raising questions about what power
means in this context. Political science literature has tried to discriminate
between different kinds of power, and the result has been a gradual widen-
ing of the concept which recognizes heterogeneity and accommodates
different varieties of domination. The process is classically summarized
in the trinity of power concepts: power as decision, associated with Dahl’s
classic studies of community power (1961); power as non-decision, as first
developed by Bachrach and Baratz (1962); and power as a form of ideo-
logical domination, as elaborated by Lukes (1974).
The long influence of Lukes’ ‘three faces’ account has resulted in a
kind of wary convergence between how academic political science thinks
of power and how it is conceived in Foucault’s account of capillary
power and the techniques which produce objects and truth, including
‘the individual and the knowledge that may be gained of him’
(Foucault, 1991: 194). But it is only a wary convergence, because from
Foucault we get a second contemporary approach which tends to dis-
sociate power and agency, understood as the purposive intervention of
actors to produce a definite effect. Agency has been increasingly
84 Theory, Culture & Society 34(5–6)

associated with outmoded external concepts of sovereign power which

do not understand that power is positive, inherent and intrinsic (not
negative, external and controlling).
While these two tendencies have produced a more sophisticated under-
standing, they leave other issues unresolved. Two such related issues are
the intersection between different kinds of power and the limits and fal-
libility of these forms of power. We have well-developed accounts of the
internal workings and effects of the new kinds of power, as in the work of
Miller and Rose (2008). But we have very little on how the different kinds
of power intersect as they contest, combine or slide past each other in
ways which might produce important secondary effects. Relatedly, we
have relatively little attention paid to the limits of power and fallibility.
Of course, this issue cannot be avoided in accounts of the new knowl-
edge-based kinds of power, as in Mitchell’s (2002) account of the rule of
experts where knowledge formats the economy and produces unintended
consequences. But we have very little on the self-denying ordnances and
external limits which direct and constrain the exercise of power.
It is possible to write about power while ignoring these issues, but they
are hard to avoid when utilizing a more-or-less orthodox political science
concept of a modern state which uses centrally-controlled and coercive
institutions as instruments – such as outsourcing contracts – to control
behaviour and redistribute resources. The exercise of sovereign power in
this sense must in some minimal way be practically framed by discourse
and available techniques, so that different kinds of power are intertwined.
But, in such cases, it is not at all clear that these supports of knowledge
or technique are adequate to the task of power; think of Scott’s (1998)
argument about how 20th-century states rely on thin knowledge so that
their grand projects end in debacle. And the issues of intersection, limits
and fallibility are relevant if we are concerned with the role and activity
of elites. Mid-20th century ideas about elites were frequently connected
with ideas of apparatus and machinery; it was, after all, the quasi-
Weberian hierarchy which created the command posts at the top of the
Millsian triangle of power (Mills, 1956). But this depends on a narrow
and old-fashioned idea about the apparatus of power, and that must
raise questions about what elites do if the mechanisms and exercise of
power are such that the command posts no longer have effective control
functions.
So the question arising is whether and how the contracting process
between state and corporate business can be understood using the meta-
phors of tool and weapon representing different principles of social
organization. In that way we can understand something about the
limits of power and the role of elites. The next two sections of the article
explore contracts as ineffectual tools and uncontrolled weapon. The con-
tract allows the intersection of different kinds of limited and fallible
powers: there are no straightforward command positions because neither
Froud et al. 85

government nor outsourcing company has a clear view from the bridge,
and the contract is a contested and uncontrolled object rather than a
device with a clear field of action. Consequently, things frequently go
wrong: politicians are recurrently embarrassed by fiascos when outsour-
cing companies do not deliver; and the companies are fragile because
they are pressured to grow by taking on new contracts without fully
understanding their future profitability and risk.

Contracts as Ineffectual Tool: Fiascos with Limited

Consequences for Contractors
The Rt Hon Margaret Hodge MP, Chair of the Committee of
Public Accounts, today said:
‘Private provision of public services has become big business, with half
of all public spending on goods and services going to private providers
of contracted-out services . . . An absence of real competition has led to
the evolution of privately-owned public monopolies which have
become too big to fail. Some public service markets, such as for private
prisons, asylum accommodation or disability benefit assessments, are
now controlled by just one or two major contractors.’
(House of Commons press release, 14 March 2014)

For the central state, the outsourcing contract is a tool of legibility and
control through knowledge. Paradoxically, this is manifest in the dis-
course of public inquiry into recurrent fiascos where this attempt at con-
trol has failed and services have not been delivered. Less publicly, the
absence of serious consequences for delinquent contractors tells us some-
thing about the limits of state power when the state is observed to be
primarily concerned with keeping the outsourcing game going, even
when there may be future political costs from fiascos, or where the eco-
nomic benefits are not proven (Gash et al., 2013; Chassy et al., 2011).
This suggests that the sovereign power of the outsourcing state can
become co-dependent on the giant corporates that dominate outsourcing
in much the same way as the corporatist state was previously dependent
on organized labour and employers.
Outsourcing companies market their services with a promise of better,
cheaper service delivery, but the reports of the national institutions
charged with inquiry and oversight – in the UK, the National Audit
Office (NAO) and the House of Commons’ Public Accounts
Committee – are largely about failure in the form of fiasco. The public
focus is on a small subset of the contracts where things go wrong and the
contractor fails to deliver the contracted service; this is echoed in the
mainstream political science literature, where the focus, since the pion-
eering work of Pressman and Wildavsky (1984), has been on the highly
86 Theory, Culture & Society 34(5–6)

visible ‘blunders’ of government (King and Crewe, 2013). Closer reading

of the official reports is instructive because it shows government has the
ambition to use contracts as a tool of legibility and control in the rational
exercise of state power; and the fiasco is then about publicly acknowl-
edging that the state has failed to acquire the knowledge to write and
monitor the outsourcing contract. Here, for instance, is a summing up
from the House of Commons’ Public Accounts Committee, drawing on
fiasco evidence supplied to it by the National Audit Office (for a grisly
summary of smaller scale fiascos in local government see White, 2013):

Government is clearly failing to manage performance across the

board, and to achieve the best for citizens out of the contracts
into which they have entered. Government needs a far more pro-
fessional and skilled approach to managing contracts and contrac-
tors, and contractors need to demonstrate the high standards of
ethics expected in the conduct of public business, and be more
transparent about their performance and costs. The public’s trust
in outsourcing has been undermined recently by the poor perform-
ance of G4S in supplying security guards for the Olympics, Capita’s
failure to deliver court translation services, issues with Atos’s work
capability assessments, misreporting of out of hours GP services by
Serco, and most recently, the astonishing news that G4S and Serco
had overcharged for years on electronic tagging contracts: these
high profile failures illustrate contractors’ failure to live up to stand-
ards expected and have exposed serious weaknesses in
Government’s capability in negotiating and managing private con-
tracts on behalf of the taxpayer. (Public Accounts Committee,
2014b: 3)

Nevertheless, the Committee insists, outsourcing can still bring benefits,

and the lesson of repeated failures is that government must learn to
manage outsourcing better. By implication, the problem is with the
administrators in the bureaucracy, which has repeatedly failed in its
duty to protect the taxpayer and citizen interests. If the civil service
was more capable, there would be no cause for concern:

Contracting-out can bring benefits to both citizens and to the tax-

payer. For example, the Department for Work and Pensions has
been able to make use of the economies of scale provided by
Capita’s established private sector customer contact centres,
which previously serviced a number of other organisations.
However, the benefits depend crucially on the government’s ability
to manage contracts well. There have been a number of
Froud et al. 87

fundamental weaknesses in how some government bodies have con-

tracted for public services from private contractors. Some depart-
ments do not adequately protect the taxpayer and citizens’ interest
in the writing of contracts. This was the case in the contract on GPs’
out of hours services in Cornwall that this Committee examined.
Some departments are not always sufficiently vigilant of contrac-
tors’ operations and delivery of services to users. For example, while
it is scandalous that G4S and Serco overcharged the taxpayer tens
of millions of pounds for electronic tagging, it is shocking that the
Ministry of Justice did not spot the overcharging for eight years.
(Public Accounts Committee, 2014b: 6–7)

This alibi for knowledge failure on mundane contracts is in itself inter-

esting because it offers a curious 21st-century reprise and variation on
Scott’s (1998) argument about 20th-century grand projects. Like Scott’s
elites engaged in utopian schemes of societal reconstruction, the state’s
managers of the outsourcing system are faced with thin knowledge about
how activities work and contracts are written – but the problem is now
deemed fixable with a mixture of better data about markets and better
training of the relatively junior bureaucrats who negotiate the detail of
the contracts. More broadly, government’s public mea culpa covers the
undisclosed kindness of government towards delinquent outsourcing
companies who might expect some kind of sanction but instead benefit
from a ritualistic way of managing affairs. The NAO produces a critical
report which recommends more competition; well-publicized hearings
take place, usually before the Public Accounts Committee, which then
publishes a report enjoining strengthened state capacity to understand
and police contracts; very occasionally the offending outsourcer offers a
sacrificial head in the form of the resignation of a senior executive. As in
the film Groundhog Day, everything happens all over again in the next
fiasco.
The state has sovereign power to punish delinquent contractors in
many ways, including exclusion from bidding for future contracts, but
by a self-denying ordnance its powers are not used. The fines levied on
delinquents are only a minor cost of doing business for a large company
with an extensive portfolio of contracts. For instance, failures by Capita
to deliver on the contract to provide UK court interpreters attracted a
fine of only £46,000 for significant contract failures in 2012–13 (BBC
News, 2014). In this case, the government had the power to terminate
the contract with Capita on the grounds of non-performance, but chose
not to do so (Public Accounts Committee, 2014d: 20–1). Even dishonest
behaviour on contracts has limited consequences. For example, after
G4S and Serco admitted that they had overcharged government on
their electronic tagging contracts, the companies were fined and required
88 Theory, Culture & Society 34(5–6)

to undertake ‘corporate renewal’ (Du Preez, 2014; Public Accounts

Committee, 2014c). The British government did give the impression
that an embargo on bidding for future contracts was in place, but in
2014 the Public Accounts Committee revealed that G4S and Serco had
continued to submit bids on new work while under investigation – so
that, once investigations had been concluded, contracts could be
awarded. For example, within weeks of the Cabinet Office declaring
that G4S had been ‘cleared’ (Maude, 2014), it was awarded a £300
million ‘Help to Work’ contract as part of the suite of welfare reform
contracts (Plimmer, 2014a).
Furthermore, many outsourcing contracts are structured so that a
company which encounters unexpected difficulties can choose to walk
away from contracts, with modest penalties and without risk of being
denied future contract awards. That has been a common feature of UK
train operating franchises (Bowman et al., 2013); and it also allowed Atos
to walk away from the £500 million Work Capability Assessment con-
tract after its performance was subjected to intense criticism (Siddique,
2014). This has not prevented Atos winning new contracts (Jee, 2014) or
retaining others, such as that to administer Personal Independence
Payments, which has also garnered considerable public criticism
(Public Accounts Committee, 2014a). Likewise, Capita was also subse-
quently awarded electronic tagging contracts by the Ministry of Justice
after Serco and G4S were disgraced, so that incompetence on one con-
tract (e.g. court interpreters) has no wider implications for winning new
ones in related areas. The state thus awards new contracts to those who
have a track record of significant failure.
If the British state sees and acts in a way that protects outsourcing
companies from blame and consequences, what does this tell us about
the location, nature and limits of state power in the present conjunc-
ture? Here, it is useful to recall that, in the generation before the
election of Margaret Thatcher as Prime Minister, the UK had high
level governing institutions outside the formal state apparatus. In
Middlemas’s classic description of the pre-1979 system, he characterized
the associations speaking for labour and capital as ‘governing
institutions’ (Middlemas, 1979: 20–1). The nationally-organized,
quasi-public voices of labour and capital, the Trades Union Congress
(TUC), and employers’ group, the Confederation of British Industry
(CBI), were bound in what we would call a relation of co-dependence
with a central state that could neither do without them nor act against
them. More than three decades of privatization and outsourcing
have transformed the privatized utility operators and the giant outsour-
cers into public institutions essential for the delivery of basic public
services. And the question is whether we have discarded corporatist
governing institutions only to reinvent them as corporations like
Serco and G4S.
Froud et al. 89

The decisive indicator of co-dependence is the official insistence, after

every failure, that the governing institution should not be excluded or
abolished but can be reformed so that the relationship can deliver what
both parties expect; fiascos are thereby construed as disappointing lapses
in behaviour. The basic assumptions are set out in UK policy documents
like the Open Public Services White Paper, which positions the creation
or opening up of ‘markets’ as part of a concern to provide ‘progressive’
public services which promote citizens’ needs over ‘producer interest’
(Cabinet Office, 2011: 5). When fiascos occur, the working assumption
of both the NAO and the Parliamentary Select Committees is that a
market-based system of franchising is desirable, failures are a departure
from that principle and markets could and should be made to ‘work’.
The NAO reports which expose in grisly detail the many fiascos have also
produced a set of recommendations aimed at making markets in the
franchising system work better. Likewise, after the string of fiascos, a
more extensive review was carried out by the Cabinet Office under
Francis Maude, the responsible minister. The office has now taken a
lead on trying to improve process and outcomes around outsourcing.
Following a review of Serco and G4S, the head of procurement affirmed
the commitment to the principle of outsourcing (Murray, 2013).
The outcome is thus a complex double limitation of state power. The
outsourcing state is disorganized by the failure of state knowledge
because outsourcing contracts do not reliably serve as tools of control
through legibility; but it is also organized through the co-dependent exer-
cise of power by the state and large outsourcing companies for whom
there are limited consequences other than reputational damage from
fiascos which they can hope to shrug off. Serco’s new CEO, Rupert
Soames, takes an optimistic line on that issue: ‘Look at Capita; they
had an appalling reputation a few years ago but they are thriving. I
don’t think this reputational issue is a long-time business concern’
(Plimmer, 2014b).

Contracts as Uncontrolled Weapon: Profitable Contracts

and Fragile Companies
2014 has been an extremely difficult year for Serco, and the magni-
tude of the provisions, impairments and other charges reflects the
scale of the challenges we have had to face. However . . . having
confessed our sins, and in taking the punishment, we are now
ready to start on the path to recovery. (Rupert Soames, CEO,
announcing the 2014 results: Serco, 2015)
Serco is in a mess and only Rupert Soames can save it. (Telegraph
headline: Heath, 2014)
90 Theory, Culture & Society 34(5–6)

For the outsourcing company, the contract should be a weapon for

extracting profit. Contract profits are not explicitly disclosed but can
be inferred using follow-the-money research; our results, detailed
below, show high profits from routine contracts where the outsourcer
has not invested capital nor taken revenue risk. The opacity and techni-
cality of the contract give the outsourcer the advantage in generating
high returns, but the paradox is that the giant companies which consoli-
date multiple outsourcing contracts are often not hugely profitable and
are prone to profits collapse, as was the case for Serco in 2014. The
problem is that the companies lose control of their weapons as capital
market pressures for growth push outsourcing companies into acquisi-
tion and/or aggressive contract bidding (often in new areas).
Public inquiries have suggested that bargaining conditions are
weighted in favour of large outsourcing contractors (Public Accounts
Committee, 2014b: 3). The bias comes from size of contract, expense
and expertise-related barriers to bidding and the requirement for a bal-
ance sheet which could fund penalties for under-performance. The
former director of public reporting at the Audit Commission has com-
plained about ‘contracts constructed so that only a handful of companies
can bid’ (Walker, 2014), which excludes social enterprises as well as
smaller business (Social Enterprise UK, 2012). But this is hard to analyse
in any systematic way because most contracts are also shielded from
public scrutiny: the standard practice is not to reveal outsourcing con-
tract details on grounds of commercial confidentiality (Public Accounts
Committee, 2014b: 5). As for giant outsourcing companies, they do not
disclose profits on individual contracts because their accounts typically
report results for divisions which hold a large portfolio of contracts; and
divisional results hide much because they give an average across many
contracts in different activities but not the distribution of profitability.
To explore contract-level returns, we have examined the return on
sales (profit margin) and return on capital employed for three outsour-
cing firm subsidiaries: these were chosen because here we can identify a
subsidiary company that consolidates returns from a limited number of
contracts in mundane, stable and predictable activities:
1. Forensic and Medical Services is a G4S subsidiary with a growing collection
of contracts with police forces and primary healthcare trusts to supply med-
ical and forensic services.
2. NPL Management Ltd is a Serco subsidiary with a 10 year contract (with
some profit sharing) from 2004–14 to manage the National Physical
Laboratory, which develops and maintains primary national measurement
standards.
3. Capita Service Birmingham is a joint venture between Capita and
Birmingham City Council for 15 years, covering a bundle of services like
IT systems, call centres, council tax billing and payment services.
Froud et al. 91

We have benchmarked the financial performance of these three sub-

sidiaries against two comparators: stock market listed supermarket
chains, which dominate food retailing, and franchised train operators
where we have previously analysed the accounts of all the operators
since privatization (Bowman et al., 2013). The contrast between the com-
parators illustrates the mechanics of how return on sales (also known as
the profit margin) relates to return on capital. Supermarkets use their
power to ensure suppliers provide their working capital, but their busi-
ness is capital intensive, requiring land and buildings, so that an average
profit margin of 3 per cent on sales produces a moderate return on capital
employed of 10 per cent (or 10p profit for every £1 invested) (Bowman
et al., 2014). By way of contrast, negligible investment is required in train
franchising, because trains are leased and track access is rented from a
quasi-state infrastructure company (Bowman et al., 2013). Here, a simi-
larly modest operating profit margin of 3 per cent turns into a starry
return on capital employed (ROCE) of more than 100 per cent, as shown
in Exhibit 1.
The three outsourcing subsidiary cases are like train operating com-
panies because they have strikingly high levels of profit. They have low
capital investment, like rail, but their profit margins are consistently
higher so that the return on capital from outsourcing exceeds even that

140.0%
120.5% 121.6%
120.0%

100.0%

80.0%
64.7%
60.0%

40.0% 33.1%

20.0% 12.7%
6.7% 4.8% 8.5%
2.8% 3.4%
0.0%
Capita Service G4S Forensic and Serco NPL Train operating Supermarkets
Birmingham Medical Services Management companies (2011–12)
(2006–12) (2008–13) (2005–13) 2011–12
Pre-tax return on sales (ROS) Pre-tax return on capital employed (ROCE)

Exhibit 1. Mundane outsourcing contracts: Modest return on sales and virtually risk-free
return on capital.
Source: Company Annual Report and Accounts.
Note: ROS is return on sales; calculated as the pre-tax profit for the year, divided by the values
of the sales revenue (turnover) for the year. ROS is also referred to as the profit margin.
The ROCE (return on capital employed) is the pre-tax profit for the year, divided by the value
of the long-term capital (debt and equity) in the business at the end of the year.
92 Theory, Culture & Society 34(5–6)

in high return industries like pharmaceuticals or software where margins

are protected by intellectual property rights. Forensic and Medical
Services produces an average 12.7 per cent profit margin, with the pre-
tax ROCE around 60 per cent. National Physical Laboratory margins
are stable at 3.6–5.5 per cent, but the pre-tax ROCE averages 33 per cent.
Service Birmingham margins jump from 4–5 per cent in 2006–10 to 11–17
per cent on sales in 2011–12 as contracts build; the average ROCE is
120 per cent and the range is from 34–500 per cent.
By implication, the contract is here acting as a powerful weapon
which suspends the ordinary principles of market capitalism where
profit is the reward for risk after investing capital which requires a
return and/or taking product market risk on an uncertain revenue
line. Return on capital is high in these three subsidiaries because (like
most outsourcing contracts) these contracts cover labour-intensive ser-
vices with a limited fixed investment requirement. Better still, in newly
outsourced activities, profit margins on service delivery can often be
raised because the main expense is labour cost which can be reduced,
typically by hiring new workers on worse pay and conditions than
those enjoyed by their public sector predecessors.
The accounts of our three subsidiaries disclose numbers employed and
wage costs from which we can calculate the average wage over time. In
two of the three cases (National Physical Laboratory and Service
Birmingham) the average wage is falling in a way which suggests employ-
ment of cheaper replacement labour. It could be argued that return on
capital is also high in many private sector business services, like account-
ing or advertising, because the activity requires little capital, but in the
case of the outsourcing firms the absence of significant market risk (given
that revenues are effectively guaranteed by the state) also makes it diffi-
cult to justify high returns. In two of the subsidiary cases we considered,
the revenue line is stable and predictable, while in the third case of
Forensic and Medical Services, there is the opportunity to grow the busi-
ness by adding new contracts so that turnover is up 50 per cent in five
years.
Competition for the market at the point of bidding is clearly no sub-
stitute for competition in the market: the contract allows the outsourcing
company to become monopoly supplier of a service on terms that can
guarantee handsome profits. All this is ‘below the radar’ of conventional
accountability as operated in the UK by the National Audit Office and
the Parliamentary Select Committees, which are preoccupied with ana-
lysing fiascos when contracts go wrong. And if subsidiary disclosure
requirements were increased, that would not be a problem for the giant
outsourcing companies because subsidiary profitability can be reduced
and apparent losses can be produced by intra-group transactions, like
loans at high rates of interest which siphon profits upwards within a
group of companies. If the contract is a powerful weapon which can
Froud et al. 93

generate high profits, the contract plus intra-group transactions is then

doubly attractive because it can make profits disappear in ways which
make the contractors look hard done by and cannot easily be tracked
from public available financial accounts.
Thus far, the contract appears to be a hugely effective device for the
outsourcing company because it can deliver high profits from mundane
activities (with little investment or revenue risk); and, if it is politically
expedient for the activity to appear less profitable, cash can be siphoned
from an operating subsidiary by intra-group transactions without any-
body registering the adjustment. Under cover of opacity and technicality,
outsourcing company management has a weapon which allows free
movement in the extraction of cash from subsidiaries. The immediate
puzzle then is why some giant outsourcing companies consolidating the
results from many contracts are prone to profits collapse and crisis. The
short answer is that they lose control of their weapons when they have
large and growing portfolios of contracts which are the result of capital
market pressure for growth of earnings as well as high returns. This is
one manifestation of a financialized corporate environment (Froud et al.,
2006) and can be illustrated with the cases of G4S and Serco, both of
which experienced major corporate crisis.
Organized money – whether stock market institutional investors or
private equity houses – seeks capital growth as well as high margins.
For the outsourcing companies, growth has been relatively easy to
deliver as governments have expanded the realm of contracting; and
companies have entered new areas by bidding for contracts or by
acquiring smaller specialists which already have them. Outsourcing
companies are therefore generally valued as super-utilities which com-
bine steady earnings with realizable growth: this puts company man-
agement under financial pressure to over-reach. A large outsourcing
company has to be a bidding machine because contracts usually have
a limited duration and the company must win new contracts just to
maintain existing turnover. Revenue growth can be delivered organic-
ally by winning large new contracts and that can be turbo-charged with
bolt-on acquisitions of smaller specialists. Although in general the
financial markets discount the value of conglomerates and prefer
‘pure plays’ where the company has one intelligible core business
(Golding, 2002), this judgement is suspended in the case of outsourcing
where giant conglomerates appear accepted as a necessary means to
sales and earnings growth.
Success then depends on fine management judgements about bidding
across a range of activities where specifics are difficult to understand; and
the danger is always that – intentionally or not – the growing company
bids low on several big contracts which make no profit or even incur
large unavoidable losses. Against this background, we can understand
why two of the giant conglomerates – G4S and Serco – hit crises after
94 Theory, Culture & Society 34(5–6)

2012–13, even though they were making high profits from subsidiaries
like Forensic and Medical Services or Service Birmingham.
Both companies had grown rapidly and profitably since 2004 and more
or less doubled turnover to nearly £7.5 and £5 billion respectively, with
profit margins reaching 6 per cent (Bowman et al., 2015: 62). But for
outsiders they were both black boxes which had delivered pleasant sur-
prises. For example, G4S had 879 subsidiaries and limited business seg-
ment disclosure, making it impossible to figure out where the profit was
being made, or even how many contracts were indeed producing a profit;
this allows management to cross-subsidize unprofitable contracts or
cover misjudged acquisitions (Bowman et al., 2015: 67–8).
Both conglomerates had by 2012 ended up holding a complex port-
folio of contracts across a range of sectors and countries. This kind of
portfolio was difficult to manage centrally and vulnerable to ex ante
misjudgement of costs and events on a few large contracts which
would drag profits down. This is indeed what happened to Serco on
the Australian patrol boats and immigrant detention contracts, when a
change of government policy deprived Serco of the £450 million profit it
had been making on detention and added the large costs of repairing
patrol boats (Knight, 2015; Plimmer, 2016; Tovey, 2015). A further com-
plication was that both G4S and Serco had made acquisitions using debt
which had to be serviced. When problems with the contracts emerged, the
value of the goodwill arising from the acquisitions, as well as the capi-
talized contract costs, had to be written down against profits. In the
extreme case of Serco, the write-downs of around £1 billion were so
large that they wiped out the value of shareholder equity in the company,
reflecting the extent to which the company had failed to manage its
contracts.
As the opening quotes in this section suggest, this created a corporate
crisis that cost several senior figures their jobs and brought in a new
CEO, Rupert Soames, who, despite his reassurances about having
taken the punishment, has had considerable work to do to stabilize the
company. The new CEO is an interesting elite figure by background,
education and career. Soames is the grandson of Winston Churchill,
educated at Eton and Oxford, where he was a member of the
Bullingdon Club and President of the Union; he then had a successful
business career in blue chip firms, initially at British GEC before becom-
ing CEO of Aggreko, the world’s largest supplier of temporary power
generation equipment. At Serco, Rupert Soames was explicitly brought
in to sort a mess of mundane contracts – a task he describes as a ‘bring
out your dead’ review of all contracts held by the company Serco (Tovey,
2014) – and to reset the relation between the outsourcing conglomerate
and the state agencies that will deliver future contracts. This opens out
broader issues about the work of elites, which is explored in the final
section of the article.
Froud et al. 95

Contracts, Fallible Power and Elite Work

An obvious question raised by the case of outsourcing in the UK exam-
ined in this article is what it can tell us about power and elite work. Single
cases can and do illuminate theoretical issues; the critical matter is how
the case is understood. Analytically, the case has at its core the account
of the contract as a distinctive device which allows the intersection of
different powers in outsourcing. The wider significance of this analysis is
that the configuration of specifics is repeated across the high-income
countries of the capitalist world. The illustrative empirical material in
this article is drawn from the UK, but the argument is about fields of the
publicly visible and the invisible, which are very much the same in other
countries where fast-growing outsourcing sectors attract the same multi-
nationals.
UK public service delivery has been reshaped fundamentally: in taking
something of a pioneering role, it has led a large pack of countries that
have embraced outsourcing (see Hood and Dixon, 2015: 128–53).
Similarly, forms of public investigation vary from one country to
another, but the dynamics of democratic scrutiny are strikingly similar:
for instance, the attention to the news cycle which leads UK parliamen-
tarians to focus on high-profile fiascos to the neglect of deeper, less news-
worthy features is part of a well-documented difficulty faced by
democratic accountability systems in learning from experience (Bovens
et al., 2006). The high margins on routine contracts that do not go wrong
are undisclosed; the international spread of conglomerates like Serco and
Maximus, or sector specialists like Veolia, indicates how they can find
widespread financial opportunity in contracting for the state. That
spread of international and multi-sectoral activities is, of course, one of
the reasons why giant companies like Serco are prone to collapse,
because the risks of mis-pricing or of failing to understand the services
required is likely to increase with a move into unfamiliar activities or
territories.
On this basis, it is possible to turn to the nature of elite work in the
present conjuncture, which is partly at least conditioned by this fallibility.
The scale, growth and ubiquity of outsourcing opens an extensive new
domain of elite activity: the activities outsourced are almost always mun-
dane, but in many countries the management of outsourcing is now an
important part of elite activity for government ministers and senior civil
servants, corporate CEOs, fund managers and private equity partners.
The outsourcing state takes us further away from agency understood as
the intentionality of actors. This is because the contest over the contract
is about what a device cannot be made to deliver when control is incom-
plete: the contract opens a new world of unintended consequences and
unanticipated events for the state and the outsourcing companies. If we
consider individual routine contracts, the struggle is unequal because the
96 Theory, Culture & Society 34(5–6)

advantage of the weapon over the tool cannot be consolidated if a com-

pany loses control of its portfolio. Thus even though the bundling of
state functions into large contracts should provide opportunities for cor-
porate elites to capture profits and influence, any such power appears
fallible, as business opportunity can also turn into corporate crisis. The
contract does not reliably deliver for the partners who sign it and then
wish to use it rather differently as tool and weapon.
The state has sovereign power but it cannot necessarily use that power
because it lacks the knowledge and will to write and monitor contracts
that deliver robust and functional service outcomes with modest margins
for producers; if the state cannot (or will not) take back the activities
when things go wrong, it then becomes (partly by choice) a weakened co-
dependent as it keeps the outsourcing game going by renouncing the use
of power against delinquent companies. The work of political response is
ritualized and can be managed by division within the political classes.
Within the British system, elected politicians without career prospects are
put in charge of parliamentary inquisitions and report writing which
broadly changes nothing: there is a presumption towards outsourcing,
even in the face of repeated contract failures. This co-dependence
becomes more intense where new outsourcing contracts are bound up
with policy change: some of the most problematic contracts in the last ten
years have been in the area of welfare ‘reform’ where entitlements to
various benefits have been subject to new forms of testing and eligibility.
Thus, incompetence in the administration of a new system partly reflects
the limited knowledge of how such systems will operate, as well as a
political presumption that eligibility tests will reduce entitlements and
hence the welfare bill.
At the same time, the individual contract is a powerful device which
can extract cash from corporate subsidiaries in a range of mundane ser-
vices previously delivered by the state. But the problem at the corporate
level is that, under external pressure for growth, it is very difficult to
control a diverse and changing portfolios of such contracts (especially
in conglomerates which span many activities); operating misjudgements
and the legacy of acquisition create intermittent crisis and collapse. The
day-to-day work of the corporate elites can therefore include both the
acquisition and management of contracts which extend power into new
realms of public services, and work of repair and resetting as companies
have to manage their financial reputations with their investors (and also
sometimes their political reputations with the state). Corporate reset is
demanding work, which in this case of Serco and Rupert Soames
involved reviewing 700 contracts, taking management action where pos-
sible to staunch losses and exiting some business areas. This kind of elite
work is very different from the world of Rupert Soames’ grandfather as
British war leader from 1939–45, or indeed that of his father as cabinet
minister, British ambassador to France and European Commissioner.
Froud et al. 97

And, although outsourcing is different, in other circumstances – like the

post-2008 response to financial crisis – we can find the same pattern of
political elites and senior banking management fire-fighting on changed
markets and new regulations as they struggle to deliver shareholder
value.
These observations provide a context for the finding from elite stu-
dies research that elites are increasingly fragmented and lack a broad
vision. The studies of top personnel suggest that tight clubs of those
with similar backgrounds and formal interlocks have become much less
important in the business and political life of high-income countries
over the last 50 years. Whether we look at the political sphere or the
corporate, the picture is similar: previously tightly integrated elite for-
mations have mutated into much looser networks where the formal
bonds of connection are weak (Carroll, 2004; Savage and Williams,
2008; Mizruchi, 2013). Others contend that elites also now lack the
breadth of view of their predecessors: for example, Mizruchi (2013)
argues that American business elites in the classical period of the
1950s and 1960s were organized so that they had a broad view of the
public interest, which has been lost as top executives are now engaged
in the single firm.
Our study of outsourcing sets the narrow concerns of our elites in a
different context. At least in this one domain of outsourcing, the
fallibility of all the different powers creates endless new work for
political and economic elites in clearing up local messes through
repair and reset. Rupert Soames, the CEO of Serco, finds his vocation
not in articulating a vision but in managing a turnaround or at least
staunching the flow of bad news stories; in a less demanding way,
something similar would apply to the senior civil servants in charge
of rail franchising or the government ministers trying to avoid blame.
No doubt these elite groups use, and are used by, various forms of
power; but much of the time they are narrowly engaged in cleaning up
the local messes created by the fallibility of many different forms of
power.

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Julie Froud, Michael Moran and Karel Williams are all Professors at
Alliance Manchester Business School, University of Manchester.
Sukhdev Johal is a Professor at the Management School, Queen Mary,
University of London. The authors were previously members of the
ESRC-funded Centre for Research in Socio-Cultural Change (CRESC)
Froud et al. 101

and are now involved in various activities including the Manchester

Capitalism book series for Manchester University Press, and the devel-
opment of an international network of researchers with an interest in the
foundational economy.

This article is part of the Theory, Culture & Society special issue on ‘Elites
and Power after Financialization’, edited by Aeron Davis and Karel
Williams.