Public sector outsourcing users paying up to 75% over market rates

Compass, which helps users of outsourcing check whether they are paying market prices, is warning the government that public sector outsourcing is costing up to 75% over the market rate.

The company has public sector clients among its customers and so has an “insider’s” view of outsourcing pricing.


It has submitted a paper to the Government’s Public Services Industry Review, which was commissioned by John Hutton, Secretary of State for Business Enterprise and Regulatory Reform.

The review, which is headed by DeAnne Julius – a founder member of the Monetary Policy Committee of the Bank of England – is taking evidence how to make the £40bn-a-year market in outsourced government services work better. The deadline for submissions is 4 April 2008.

Compass says the cost of changes during the life of contracts “often eliminates any original savings and leads to poor value for money and poor governance over the longer term…”

It argues that there is excessive use of procurement advisers rather than managers who will work with suppliers once the contract is in place. “This leads to ‘bid it thin and get it in’ strategy of many outsourcing providers who price contracts at up to 18% below market rate on day one rising to 30% above market rate by year three of the contract”.

It adds:

“When outsourcing providers are pressured into lowering their bid to uneconomic levels in the early stages of a contract, it should come as no surprise that there is clawback of losses as time goes on.

“No provider wants to sell like this but the procurement process forces them to do so or withdraw and write off massive bidding costs.”

There is “no accountability and no way of calibrating value for money as the contract runs”.

Compass says the threat of re-tendering is meaningless as the power of the embedded supplier and the complexity of the procurement process exclude its use. Instead, suppliers use “constant change requests and other variations to extract extra revenues from the contract without the scrutiny of a procurement process or comparative pricing mechanism”.

There are some emerging areas of good practice where metrics are used to track performance and costs. “In these cases, demonstrating value to the treasury and public accounts committees starts to have a basis in fact rather than spin – but these examples remain rare.”  

Compass’ submission in full:

Submission text for Public Services Industry Review

Department for Business Enterprise and Regulatory Reform

From Compass Management Consulting

31 March 2008

1. Public sector outsourcing is costing up to 75% above the market rate over the lifetime of as a result of a contract as a result of a short term focus on pricing at the outset of the contract rather than long term value for money, according to a new study by Compass Management Consulting.

2. Public sector procurement processes are focussed on irrelevant headline measures such as the tendered price at the outset rather than value throughout the contract period. Costs can appear low in the early years with this approach but it ignores the impact of policy adjustments, changing departmental needs and transformational projects over the life of outsourcing deals. The cost impact of these changes often eliminates any original savings and leads to poor value for money and poor governance over the longer term.

3. Public sector procurement routines are failing to get the governance structures in place that will deliver long term value. We are seeing a failure to differentiate between commodity items and high value citizen-centred services that can create savings to the public purse.

4. The same procurement processes that are used to buy paperclips are being used to enter into long term, multi-million pound contracts for complex services. As a result, the public sector is over paying for failed IT projects and badly performing outsourcing contracts.

Compass has seen specific examples of overpayment caused by this approach:

– A government agency paying 65% above market rate for servers and storage

– A major government department paying 20% more for outsourced desktop, servers and infrastructure despite its scale

– A government body paying 34% above the average market rate for end-to-end IT outsourcing

– An executive agency paying 17% above the industry average for standard professional services

5. Compass points to public sector purchasing processes and excessive use of procurement advisers – rather than managers who will work with suppliers once the contract is in place – as one driver of the short term approach. This leads to the “bid it thin and get it in” strategy of many outsourcing providers who price contracts at up to 18% below market rate on day one rising to 30% above market rate by year three of the contract.

When outsourcing providers are pressured into lowering their bid to uneconomic levels in the early stages of a contract, it should come as no surprise that there is clawback of losses as time goes on. No provider wants to sell like this but the procurement process forces them to do so or withdraw and write off massive bidding costs.

6. Compass reports the results of this short term procurement focus include poor governance, no accountability and no way of calibrating value for money as the contract runs. Compass claims that the threat of re-tendering is meaningless as the power of the embedded supplier and the complexity of the procurement process exclude its use. Instead, vendors use constant change requests and other variations to extract extra revenues from the contract without the scrutiny of a procurement process or comparative pricing mechanism.

True value for money is achieved by ongoing governance throughout the life of the contract. That means a clear view on what you are outsourcing at the beginning of the process and identification of the high risk and high value elements – that are priced accordingly. This should be backed up by a fair contract that provides for regular benchmarking and market comparison over the contract term.

7. Compass has identified good practice in some government departments and agencies where annual measurement of performance and price is becoming the basis for automatic adjustments to pricing. This enables public sector buyers to take advantage of falls in IT costs and increased efficiencies to achieve savings while still delivering high quality public services.

All is not doom and gloom in the public sector. There are some emerging areas of good practice where a long term view is being taken in the procurement process and where metrics are used to track performance and costs. In these cases, demonstrating value to the treasury and public accounts committees starts to have a basis in fact rather than spin – but these examples remain rare.

Links:

Announcement of DeAnne Julius’s review

FT article on the Public Services Industry review

Businesses negotiate outsourcing price cuts amid recession fears

Public Services Industry review – in more detail

Compass’ customers

Join the conversation

2 comments

Send me notifications when other members comment.

Please create a username to comment.

Outsourcing has so many benefits:

1) Cost Savings

2) Time Zone Benefits

3) Quick Turn Around Time

4) Standardizing Business Processes

and many more....

http://www.outsourcewebsite.com

Cancel
I certainly agree with point 5 and the excessive use of advisors. I have come across situations where that advisor knows far less about the services being purchased than his public sector client but dominates the procurement process. Having a slick procurement process has become an end in itself with the qualities of the product being purchased coming second.

Cancel

-ADS BY GOOGLE

SearchCIO

SearchSecurity

SearchNetworking

SearchDataCenter

SearchDataManagement

Close