With public sector cutbacks now starting to bite and the bonfire of the quangos in full flow, business editor Liz Parks reports on the growing trend of public sector outsourcing and the opportunities – and challenges – for the private sector.

The dust has now settled on last year's Comprehensive Spending Review and the age of austerity is starting to bite with regular announcements of public sector redundancies and agencies that will soon cease to exist.

National bodies including the Audit Commission, the Standards Board and the UK Film Council are being disbanded, and the abolition of regional bodies such as the South West Regional Development Agency has had a knock-on effect that will see the closure of organisations like South West Tourism.

While these closures mean job losses and, arguably, concerns over the provision of services, there is an argument that they also create an opportunity for the private sector to secure contracts through outsourcing.

At a national level, the likes of Mitie are already predicting a wave of new contracts coming out of the public sector as it seeks to balance its books.

The Bristol-based company has said it is focusing "additional resources and expertise" on areas such as justice, health, education and local government in a drive to benefit from the current public sector cost cutting.

Jerry Davison, managing director of Exeter-based South West FD, which provides part-time finance directors, said: "In general, we are seeing more and more companies outsourcing various functions, including people in the public sector. This ranges from HR, design, PR and marketing.

"If companies do outsource then it means that they can focus on their core strengths – typically sales and operations – the reasons why companies were set up in the first place. They don't need to worry about the back office stuff," he said.

Mr Davison said that outsourcing could be a cost-effective way of securing top-class staff. "The good things about outsourcing design, PR, marketing and HR is that those sorts of companies have a great deal of experience across the board whereas someone internal might not have kept up to date with the latest developments," he said.

"Companies have to look at the costs involved because they are not paying for things like holidays and National Insurance."

Broadband was key to successful outsourcing, he said, enabling effective communications with outsourced staff at different locations. "Everyone is so connected now – they are effectively there all the time."

And Mr Davison predicted that as quangos continue to fall, South West businesses could win more work.

"When the Audit Commission goes, accountancy firms are going to benefit from that, whether it's the big four firms like KPMG or smaller firms like Francis Clark. I think regional firms will pick up some of that work because they have got a good professional name," he said.

The CBI set up the Public Services Strategy Board in 2002 to improve the performance of the public sector by promoting competition.

The CBI's senior public policy adviser Andrew Bell said it wanted to see a level playing field between the public, private and third sectors.

"So that the private sector is not disadvantaged – where there are inequalities present, we would like to see this levelled out," he said.

"We feel that delivers benefits to citizens and to government in terms of the cost savings that can be achieved. Local authorities assume that services should be delivered in house but we would like to see councils act as commissioners and we would like them to make decisions that will see services achieve high quality with good cost outcomes.

"We think that there's an optimistic outlook for the potential of outsourcing in the years ahead."

But, says Jerry Davison, not all SMEs are confident about working with the public sector in this way.

"I think it's dependent on how switched on the owner or managing director is. A lot of SMEs are scared of working for the public sector," he said. "I think the Government has still got some way to go, particularly in terms of online procurement. A lot of that has got to do with teaching SMEs how to do it – the public sector needs to provide a lot more help, particularly with Business Link going."

Despite the undoubted opportunities for the private sector there are those who remain concerned that outsourcing will see a return to the bad old days of Compulsive Competitive Tendering that led to an antagonistic relationship between the public and private sectors.

Stuart Fegan, senior organiser for the GMB in the South West, said: "It's quite clear that a lot of organisations are looking at outsourcing more closely than they once were. It's not a coincidence that outsourcing comes up when there is an environment of budget cutbacks – it leads you to ask the question 'is outsourcing best for the quality of service or is it just about being cheaper?'"

As well as resulting in public sector cutbacks, Mr Fegan said that moving services away from the public sector could lead to inequities in employees' conditions.

"For example, academies are effectively the same as outsourcing, where they are moving away from the local education authority. The Government is allowing schools to set their own terms and conditions, not for those who transfer over, but for new employees.

"Our concern is that you could have two people working alongside each other doing the same job but with different terms and conditions."