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Government outsourcing at a crossroads, says PAC report

The government needs to change the market that supplies it with services through better contracting practices if it is to achieve anything beyond lowest price, according to a PAC report

The government needs to use its huge influence to shape the public sector services market if it is to get public, economic, social and environmental value from the billions of pounds of tax payers’ money it spends with outsourcing suppliers each year.

The Public Accounts Committee (PAC) has warned government to “heed” advice given in its latest report into government procurement of services.

“Outsourcing is at a significant crossroads. The collapse of Carillion has brought to a head concerns about the government’s approach – both from a policy and a practical perspective.”

The UK Government spends £251.5bn per year on outsourcing and contracting, but all too often, it fails to get value. At the same time, suppliers are putting themselves at risk through committing to contracts they can’t deliver in the pursuit of revenue growth.

Too often, suppliers win big contracts because they are experts at doing just that, but are not always the best qualified to deliver the certain services they win, which is having negative consequences for the sector. “The market created and sustained by public sector contracts is not working – for the companies involved, for those who rely on those contracts being effectively delivered, or for the government, which must ultimately pick up the tab,” said the PAC report.

The PAC advised the government to reengage and reshape the supplier community by focusing on the value contracts will deliver when contracting.

“We have identified a need for the government to be more assertive in shaping the markets in which it operates, with a renewed focus on driving value for taxpayers’ money.”

Read more about outsourcing industry woes

The PAC wants government to understand why suppliers are bidding for contracts and said contacting organisations should look beyond the cost of the contracts. “It must look with fresh eyes at the motivations of companies currently bidding for central government work, and develop a strategy that requires contract-awarding bodies to look beyond bottom-line costs,” it said.

Increasing the number of suppliers, which is currently limited, is a good start. But even in the IT outsourcing space, where the PAC said “expanding the market may be more achievable and will frequently mean engaging with SMEs”, the government is finding it difficult.

The National Audit Office has found government attempts to do this have not always been successful. “The Ministry of Justice adopted a new commercial approach intended to support SMEs for its new generation electronic monitoring programme. However, high process burdens, financial risk and complex requirements made SME involvement more challenging,” said the PAC.

“Despite Government attempts to diversify the providers of public services, we have repeatedly seen a narrowing of the private contractors bidding for – and running – services over time,” it said.

In fact, departments’ procurement spend with SMEs decreased to 22.5% in the 2016/17 financial year from 26.1% in 2013/14, 27% in 2014/15 and 24% in 2015/16.

Mixed markets of suppliers

The Cabinet Office has announced that departments will be provided with a “playbook” of guidelines, rules and principles that will encourage new entrants to the market and build mixed markets of suppliers.

But there are also challenges for government in retaining existing suppliers with some exiting parts of the market or not bidding for particular contracts. “Several of the government’s large suppliers operate internationally, and less onerous contract conditions and better margins overseas have led to some companies restricting their exposure to the UK public sector.”

Several of the existing Strategic Suppliers identified the cost and burden of the bidding process, and the level of financial guarantees required by the government, as disincentives to bid.”

It added that for new entrants, this is magnified by their small size and lack of experience. Contractors in certain sectors have also emphasised tight margins and the transfer of risk as disincentives to bid, said the PAC.

But achieving all the recommendations made by the PAC will be a challenge due to a lack of expertise in government. A recent report from the Public Administration and Constitutional Affairs Committee found there is a lack of commercial skills in government.

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