Competition killed the cat

Rearranging the deckchairs on the Titanic

On Friday 25th October, Serco announced that its Chief Executive, Chris Hyman, had fallen on his sword. Earlier that week, the CEO of G4S in the UK departed. A few weeks earlier, the CEO of Serco UK mysteriously disappeared. This is in order to provide the government (and particularly Chris Grayling, Secretary of State for Justice), with “substantive evidence of corporate renewal”, in response to alleged fraud or other irregularities on government contracts. These senior heads falling will not, however, deliver any fundamental change in the operations of these businesses – what this highlights is a much wider malaise in the purchasing of outsourced services driven by an emphasis on price over value. There are serious issues with government procurement – far more is needed than the rearranging of deckchairs.

Serco is certainly guilty of a lack of imagination. It has grown to where it is on the back of years of outsourcing, with successive governments of every colour looking to use contracting in order to cut the perceived waste in public sector delivery. After the Tory decades of privatisation, Serco continued to benefit comfortably under New Labour and ‘contestability’. Perhaps this is why Serco failed to anticipate the change of government, reacting too slowly to the need to build relationships with the new powerbase. It, significantly, failed to articulate any vision for outsourcing as the response to austerity – outsourcing offering the potential, if managed cleverly, to deliver both savings and improved service impact. But then this has been a failings across much of its sector, and of government too. As a result, the validity of outsourcing itself is now being questioned. (http://www.theguardian.com/commentisfree/2013/oct/30/privatising-probation-reoffending-rise-costs).

One of the first acts of Francis Maude following the election was to summon all the large outsourcers to his office and demand cost savings from them (http://www.ft.com/intl/cms/s/0/73e76164-e5f4-11df-af15-00144feabdc0.html#axzz2j2FXwdv7). This was done without consideration of where these savings would be found. Serco passed on the demand for a rebate to its suppliers – where did Maude imagine this being clawed from, if not the frontline?

It’s the share price stupid

It is a common misconception that big FTSE companies, like Serco and G4S, are driven by profit. In fact, it is the small owner-managed private businesses which are marked by their profit seeking. The big companies have bottom line commitments to meet but they (and the City) are relatively happy to target around an 8% margin (less than many charities endeavor to generate as ‘surplus’). Their driver is not profit but share price. And the way to increase share price is to grow. It is the constant need for growth which drives Serco and its kind.

For Serco, this growth comes largely from securing new government contracts. Until recently governments were virtually Serco’s only customers. Serco’s contracts with the UK government (worth c.£1bn per annum) still represent around 25% of the company’s total turnover. In order to secure more and more of these contracts, Serco will compete on whatever terms the government dictate.

Serco is a product of how services are outsourced, of contract design, of procurement practice and contract management. When the over-riding objective is short-term savings, and contracts are competed and managed on that basis, Serco becomes an organisation focused on cost reduction. Performance is measured in terms of savings not service quality or social impact.

From a toxic combination to competition on impact

The Ministry of Justice have indicated (see https://buyingqp.com/2013/06/17/spend-to-offend-the-outsourcing-of-probation/) that in outsourcing probation services, they are looking for a minimum saving of around 25%. Many people I have spoken to in the sector believe this is a realistic objective. However, having established this as the baseline, the contracts will then be competed on price, with the potential for a further reduction of 20% or more to be offered by would-be contractors. The Ministry are looking for the greatest possible saving. The big outsourcers will be looking for the greatest possible number of contract wins. It is a toxic combination.

Corner cutting, fraud or other irregularities result when contractors are attempting to squeeze performance and profit (however small) out of contracts secured in toxic competitions. Outsourcing has an important role to play in delivering effective, efficient public services but gaming is inevitable when the government outsources a service and:

  • does not consider/scrutinize in any way the operational model that is being offered to them;
  • ignores the fact that there is a relationship between expenditure and quality; and
  • competes the contract on price.

As long as this is the predominant approach of their government customer, the large outsourced service providers like Serco and G4S will not deliver changes in service quality as a result of changes in even senior personnel. The changes must come in the thinking and systems that they respond to. It demands, at the very least, outsourcing which:

  • starts with an understanding, and a costing, of the operational model being procured;
  • scrutinises the models, and the costs, being proposed by bidders;
  • considers the extended and immediate value of the service, factoring in financial impact over years and across sectors;
  • moves away from competition on price to competition on impact.
Comments
4 Responses to “Competition killed the cat”
  1. Ian Mulheirn says:

    Richard – Absolutely agree with your central point that governments get the contractors they wish for, implicit in the competitions they run.

    On the broader point about commissioning for quality, that’s surely preferable in principle. But in practice commissioners find it hard to assess quality, which risks turning outsourcing into a creative writing competition, with the contract going to the offer that sounds like a good quality service but isn’t. Is there any way around that problem?

    The alternatives are presumably a price competition with measurable minimum requirements – which is what we usually get – or a payment by results mechanism (if you can make it work).

    • Richard Johnson says:

      Ian,

      Many thanks for your comment.

      I think the answer to your question depends on what it is you are procuring.

      If it is a fixed set of service inputs, then compete on price BUT rigorously test what is being proposed. You must get inside their operational model and all their costings. You have to understand what it is you are buying – this is not about creative writing but presentation and scrutiny of a technical proposal. And you must consider whether there are certain minimum requirements, including a consideration of wider impact such as whether you want to see local people being employed or a living wage being paid. (You say this is what we usually get, but the Work Programme was not procured on this basis and this continues to be described in government as a very successful model.) Your tender or bid evaluation process must be clever enough not simply to pick the cheapest one every time. Then it is down to good contract/supply-chain management.

      The best contracts I ever delivered were the first round of Employment Zones. As you know, contractors were paid with a mixture of smaller payments for defined inputs along with larger payments tied to outcomes (in this case, sustained employment). These contracts were not competed on price. There was a fixed price for each element, with bidders saying how many outcomes they could achieve at this price, and setting out a clear operational model for how it would be delivered. The payments were high enough to incentivise investment and risk taking. The risk-reward balance was right. The total that could be earned was not capped – as long as we could keep delivering outcomes, we would continue to be paid.

      The outsourcing of probation looks like it is going to be a mix of both of these types of procurement. But it also looks like it will over-emphasise price competition. If you actually wanted a rehabilitation revolution, you have to accept that this should (if it is achieved) cost you more than current services – paid for from the savings this creates. So, current plans suggest they will take what costs c.800m per annum to deliver right now, and outsource it for c.500m, with a small potential slice of payments linked to reduced recidivism on top of that possibly amounting to c.200m. What we should actually be offering is: a core service, with clearly defined minimum requirements/standards and with payments tied to inputs, costing c.500m, and; further payments tied to reduced reoffending, with the potential to earn an additional c.700m or more. We should be seeking cost efficiency in the core service, without a loss of effectiveness, along with incentives to drive signifiant investment and innovation in shifting the impact of the service to another level.

      Richard

  2. You have made some really good points there.
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