The Serco smoke screen

We must be careful that the corporate failures of the big outsourcers in the UK, such as Serco and G4S, do not become a smoke screen behind which failures of the commissioners are forgotten. Media coverage this week of Serco’s failure to hold on to their £600m Docklands Light Railway (DLR) contract has focused on the loss to Serco, “the troubled outsourcing group”, missing significant questions we should be asking the commissioner, Transport for London (TFL).

(http://www.telegraph.co.uk/finance/newsbysector/transport/10945368/Docklands-Light-Railway-awarded-to-Keolis-in-blow-to-Serco.html;

http://www.ft.com/cms/s/0/4adf2a26-0342-11e4-817f-00144feab7de.html#axzz36hBvNnyp;

http://www.theguardian.com/uk-news/2014/jul/04/serco-loses-dlr-franchise-docklands-light-railway)

Earlier this week, the new CEO of Serco announced that the company is unlikely to hit its financial targets this year, writing down the value of various contracts. So perhaps the commissioner decided that due diligence revealed the company was no longer a good bet. However, last month Serco was awarded a 15-year contract, worth £800m to run the Caledonian Sleeper. Admittedly it was a different commissioner to TFL, but this is a clear indicator that there is nothing inherent in the Serco brand or the performance of its share price that inhibits its ability to secure bids as a transport provider – these things are simply not considered in the procurement process.

Cynicism regarding the big outsourcers is nothing new. Capita is one of the recurring jokes of the satirical magazine, Private Eye, who refer to it with a most unfortunate nick name (http://en.wikipedia.org/wiki/Recurring_in-jokes_in_Private_Eye). Then there was the infamous G4S trouble over security for the Olympics. The current loss of love for Serco can be traced back to Chris Grayling’s (the Justice Secretary) challenge of the electronic tagging contracts held by G4S and Serco.

It was said that Serco and G4S had been overcharging since 2005 for tagging offenders under court orders. Serco repaid £70m and G4S £105m, in an apparent admission of guilt (http://www.theguardian.com/business/2014/mar/12/g4s-repay-overcharging-tagging-contracts). However, neither company was accused of breach of contract. In fact, industry insiders suggest that both companies were simply following the terms of their contracts to the letter. They were entitled, if not expected, to link payment claims to court orders for tags being fitted and tags being removed. In obviously a large number of cases, the court orders failed to keep up with reality, so offenders were returned to jail, deported or even died (and therefore detagged) without court orders being issued. All claims during this period would have been closely audited. The Ministry of Justice’s contract managers would have been fully aware of the discrepancy. Neither Serco nor G4S argued this publicly with Mr Grayling, because it is unwise to bite the hand that feeds you. And, of course, they had been taking full commercial advantage of the loophole.

There are loud echoes of the tagging story in the recent National Audit Office report on the Work Programme (http://www.supplymanagement.com/news/2014/work-programme-could-overpay-contractors-by-ps25-million-says-nao). The way performance is measured on the Work Programme is, according to the NAO, flawed, resulting in undeserved incentive payments to contractors. These payments are meant to reward over-performance, when actually the programme is failing all the ‘harder-to-help’ groups of job seekers (such as people with disabilities, over the age of 50 and women). Contractors are also able to claim sustainment payments for people in work, which are not validated by the Department for Work and Pensions (DWP). Just as the tag may or may not have been removed, and the payments continued, the job seeker may or may not still be in work – and DWP will pay regardless. This is a loop hole in the contract and a weakness in the contract management, which DWP created and are fully aware of, but choose not to act on.

This blog is agnostic about whether or not Serco should continue to run the DLR trains in East London. However, since it is public money, we are not agnostic about the best deal being secured and the best service being delivered. Since it is public money, there can be no justification on the grounds of ‘commercial confidentiality’ for not publishing in full: the evaluation criteria used in the award of the contract; the scores given to each bid; the price offered by the winning bid; and changes in service delivery associated with that price. Similarly, there can be no reason for not publishing an annual report on: the contractor’s performance against the bid commitments and contractual agreement; any steps taken by the commissioner’s contract managers in relation to performance improvement; a full financial account of the cost of the service in this period and the earnings of the contractor.

Key considerations in the delivery of this vital transport service, crisscrossing some of the city’s most deprived neighborhoods, should include:

  • Employment of local people, particularly from the most disadvantaged communities and reflecting the diversity of the area;
  • Training opportunities, such as apprenticeships, for local young people;
  • The quality of the terms and conditions of staff, such as payment of the London ‘living wage’ and decent pension arrangements;
  • Long term investment in infrastructure and service improvements/extensions.

The DLR bids (like the Work Progamme, like the current outsourcing of probation, like the Caledonian Railway), will have been evaluated on the basis of both quality and price. Under the Work Programme, most bidders scored roughly the same on quality, so that price, though in theory playing a small part, become the determiner. The contracts were, by virtue of the evaluation process, awarded to the organisation offering to deliver the cheapest service.

The difference with the DLR is that it is likely to have been a highly specified service – down to the number of seats, on the number of trains, by the hour, by the day, overseen by the number of staff in which roles. If that is the case, and price becomes the determiner, then where are the savings to be made?

It is almost always the case that the incumbent provider of a service can deliver it more cheaply than a new incoming provider. The incumbent has existing infrastructure, staff in post, mature technology, established supply chains etc. The incoming provider has to start from scratch and carry all that cost. This can be one of the challenges of procurement, in developing a healthy market which allows new entrants. But if that is the case, where does the incoming provider find the additional savings, over and above the savings offered simply to compete?

 

 

 

 

 

 

 

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