In my last blog I imagined what Tescos might be like if it was run by government procurement. Not as cheap as it is, was my main conclusion. However I was not arguing that the public sector is not as efficient as the private sector. My view is that much of the public sector is very well run. Like most people, I have had some very good experiences with the NHS, my children go to a great local school and my local council (Hackney), though once widely known for its incompetence and inefficiency, is now an example of well run services.
The figures released in the McNulty report on our rail industry backed this up. Operating costs (not prices but underlying costs) in the privatised British railways are 40% greater than the state-run services in France, Sweden ancient and response elsewhere. Remember that the very reason for privatising our rail industry was to make them more efficient. We all know that the service they provide us has not improved but it is interesting to discover that the whole exercise completely failed in terms of one of its main aims, creating a more efficiently run system.
There are some excellent private companies. But any of us who have ever phoned for help or support from the company who supplies our credit card, TV broadband or mobile phone is more likely to have been driven to distraction than delight. And that’s before we start talking about the performance of the financial services industry.
My flight to Denver – and how I got it far cheaper than a colleague from a multinational
My critique was not aimed at the public sector but at the branch of procurement that seeks to reduce costs through economies of scale and this approach blights private companies as much as government. I first became aware of it around a decade ago when I flew to a conference in Denver, with a colleague from one of the big four consultancies. He used the approved travel provider and, gaining the benefits of a company thought bought over £1 billion in flights a year, paid £1,100. I, booking my company’s first ever flight, paid £679.
His company had issued a big procurement and, as a result, employees were only allowed to fly with British Airways, the company selected. This eliminated the forces of competition but instead enabled what they saw as the more powerful factor, economies of scale. You can imagine the process. They set down criteria such as ‘must be able to fly from UK direct to every major destination in the world’, thus making it impossible for most airline companies to bid. And preventing employees from using lost cost airlines (such as Easyjet, then in its early days) even when they were far cheaper.
Using competition to reduce prices and using economies of scale are two very different approaches to procurement, and normally in contradiction with each other. More on this to come.