Magazine article Public Finance

In the Driving Seat

Magazine article Public Finance

In the Driving Seat

Article excerpt

The public sector is becoming one of the largest users of outsourcing in the UK, second only to financial services. But this burgeoning activity, expected to amount to some £67bn worth of services by next year, is set against the background of several large-scale disasters. Why is this?

One of the key reasons cited is the lack of competition in the outsourcing market. This is partly explained by the long time it takes the public sector to make decisions about supplier arrangements, particularly when an extended partnering relationship is involved, as in outsourcing. The tendering process tends to be lengthy for good reason - if a public sector organisation joins up with a commercial business, it has to ensure that it is making the right decision.

However, this protracted process narrows the choice of suppliers. Few smaller firms can afford to stay the distance. As a result, public sector organisations can be left with a choice of just one or two behemoth suppliers. This, in turn, can adversely affect the competitiveness of the pricing - if there is less competition, suppliers might be less willing to negotiate on cost.

But price is not the only issue when evaluating supplier bids. Culture is important, too. The success of the outsourcing agreement depends on a harmonious relationship with the supplier - so organisational cultures have to be compatible. Public sector organisations could be compromising this through narrowing the competition.

It is another given that once a supplier has won a contract and has an established relationship with the public sector organisation, it can start to increase prices. In the cut-throat business world where maximising revenue is often the aim, this is to be expected. However, if the customer has little choice of outsourcer, its price negotiating position can be seriously weakened.

Several public sector outsourcing projects have gone belly up. The Inland Revenue electronic tax returns system is a case in point - a deluge of tax returns filed via the Internet brought the system, very publicly, to its knees. The Child Support Agency (CSA) is another high-profile example - the government agency has endured innumerable problems with its systems, but, despite its problems, has recently renegotiated its contract with EDS.

And this problem isn't confined to central government organisations. Local government bodies and other decentralised public sector organisations have had similar experiences. A recent example is Bedfordshire County Council. Four years into an IT services contract, the relationship between the council and its supplier, HBS, broke down and Bedfordshire paid HBS £7.7m to terminate its contract.

Every outsourcing project is different and there are various reasons for failure. The sheer scale of some public sector projects is one of them. Outsourcing massive projects to a single supplier can be a recipe for disaster. Some companies have specialisms in particular areas, but no one company can claim to be expert in multiple fields.

Limited supplier choice could be another contributory factor. With public sector outsourcing problems creating such newsworthy stories, government organisations must start to think laterally about how they can maximise competition in their outsourcing supplier contracts and use their private sector partnerships to make outsourcing work.

So in the light of restricted supplier options, how can public sector organisations achieve effective and efficient partnering with private organisations? …

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