Public sector pays up to 75% over market rate for outsourced services, analyst says

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

Compass, which helps users of outsourcing to check whether they are paying market prices, is warning the government that public sector outsourcing is costing up to 75% more than 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 on how to make the £40bn-a-year market in outsourced government services work better. The deadline for submissions is 4 April 2008.

Compass says changes during the life of contracts "often eliminate 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.

"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 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, suppliers use "constant change requests and other variations are used 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."

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