Government outsourcing contracts – who’s to blame for the failures?

13 Nov

Government outsourcing contracts – who’s to blame for the failures?

Posted by: James Hunt
2 Comment

In the last few years several companies have suffered (G4S and Serco to name the most recent who have made the headlines) through poor delivery of public sector contracts. These contracts have covered the whole breadth of the public sector from transport to health to the Olympics security debacle. 

These organisations have been blamed for cutting corners and not meeting their obligations and therefore “wasting” public money. However, realistically are they completely culpable?

The current Government has been adamant in their desire to cut costs so much so that the influence of overzealous procurement departments have ‘driven down’ bidders costs (who are keen to win the contracts) to such an extent that suppliers aren’t able to make a profit and deliver a decent service with what they are being paid!  Therefore these companies are falling short of government expectations and unfortunately this is not a rare occurrence.

When will Government wake up to the fact that if they want a decent service they are going to have to pay for it?  Of course, there are budgets to adhere to and no-one wants to pay through the nose for a service, but they must realise that in order for these suppliers to do the job they have been engaged to do they must dig a little deeper to ensure that a service which is of quality and ultimately, benefit to the Government can be implemented properly.  After all, these business are commercial organisations and need to find ways to cover their costs and make a profit like any other commercial operation.  

Equally, on the other side, the outsourcers also have to learn to walk away when they realise they cannot deliver the service profitably!

I have heard of many instances when over-keen sales teams have promised great service for a low cost, only for their delivery counterparts to then have to work out how to make money out of the contract!

There are only a handful of companies that can take on these big contracts and if they fail, Government will lose the ability to run competitive tendering exercises as the number of suppliers able to provide the service at a reduced cost will diminish – something has to give!

I’d be grateful to hear your thoughts on this.  Please post your comments below.


2 Responses to Government outsourcing contracts – who’s to blame for the failures?

November 20, 2014 at 11:30
James, I think that there are four interesting topics raised in your blog: (a) is the government driving costs down at the expense of quality; (b) what is the level of overbidding in the outsourcing industry; (c) is it acceptable to hand back the keys; and (d) are sales and delivery teams internally disconnected? I’d like to make a comment on each: (a) Is the government driving costs down at the expense of quality? This is a failure of procurement. We have all come across procurement managers who are fixated on headline rate and ignorant of service quality. My response is that you should expect to get what you pay for; and that if the balance between price, time and quality is uneven then that is a failure in the Business Case process. On the contractor’s side, their opportunity is to inform and explain to their customers what the range of outcomes are for a given service before the ITN/ITT is issued, and to be more explicit in their mark-up of what can be offered. Open ended acceptance criteria attached to a fixed price is the road to calamity, as Metronet found out. (b) Overbidding Overbidding (the ‘winner’s curse’) is an endemic issue, as Balfour Beatty, Laing, Jarvis, Ballast, National Express, GNER, HP, and hundreds of others have found out. In brief, the bidder’s assessment of the value of the contract or M&A target is overestimated, and that overvaluation is sufficient to deliver a loss. The risk is increased where the number of bidders for a given contract is high (the contract is awarded to the company who is most wrong), where the service is misunderstood, and where the bid assessment process is flawed; and is reduced where good governance is in place. I believe that a good adviser or interim (ideally from a top tier firm like KPMG) can genuinely address this risk. (c) Walking away In 2009, when National Express found themselves unable to honour their commitments on the East Coast rail franchise, the company offered DfT with an ‘honourable settlement’ in exchange for changing the franchise into a management contract. This settlement was actually more than the ‘walk-away’ loss that they would have suffered. So why did DfT refuse the offer of free cash and instead took back the franchise? One reason was what can be termed ‘signalling’: providing a message that any bidder for a rail franchise should be prepared to stand behind their commitments. I believe that, as a contractor, walking away from an onerous contract is a signal that they are not a serious public partner, and I believe that this is a red flag. Alongside private sector commitment must be public sector maturity. I have seen a public sector contract for staff (‘body shopping’) where a FTSE30 company was knocked out due to failing an arbitrary gearing ratio. If the commercial terms are so onerous that they could destroy the contractor, then there has to be a genuine reason why. Contract design should be such that you create incentive without displaying wrath. (d) Contractor disconnect The asset management team of one support services company used to call the bid team, ‘The BAFO Boys’: Bid and F… off. Sales and delivery team disconnect is certainly not unheard of, and the ICT industry is infamous for this failing. Now this is a problem for private sector operators and plenty of financial management approaches exist to ensure that over promising is picked up on. Again, something that a good financial adviser or interim can help you with.

November 26, 2014 at 11:39
Dear James, I think you have raised a very interesting point here and it is absolutely right that the discussion is taken out into the open. David has provided an excellent summary of many of the pitfalls of bidding for large government contracts. I particularly admire those companies who have the courage to walk away from an unfavourable contract. In addition to the examples that David supplies, I remember the headline-making news that Accenture had pulled out of the connecting for health contracts about eight years ago. They sensibly held onto the profitable PACS work but walked away from all the difficult patient record system installations, which was of course later to undermine the reputation of Fujitsu. I also agree with David's comment about the separation that often exists between the sales and delivery teams in many organisations. This is one of the factors that killed KPMG consulting back in 2001, when they hired a load of expensive sales professionals who promised the earth to clients, took the commission and then retired quickly to Florida leaving bewildered delivery teams to try to make sense of what had been promised. Another danger that can happen in IT companies is when they become too sales-focused or pay annual bonuses based on sales made. This often leads to otherwise sensible consultants being forced to chase sales at any cost in order to meet their annual performance targets. I remember the jubilant scenes at KPMG consulting when they landed their first £100 million contract. Of course, they simply did not have the capability to deliver any of this work and probably never saw any of the money, so the celebrations were decidedly premature! To me, the sensible process seems to be a simple quality gate to review any sales bid and to check that the organisation's delivery capability can meet the promised contractual terms in the time available and with the skills available in house. If this sounds a bit like total quality management from the early 90s then perhaps it is! Looking forward to hearing others' views.

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