The Madness of Government Procurement
I am quoted this morning in an article in the Independent: “Capita accused of using major government contract to short-change small companies, driving some out of business.”
I actually think the headline is unfair. For me, the problem is not Capita but the way the Cabinet Office has gone about this contract. It used to be the case that there was a government training framework, with dozens of small training firms approved to provide their services – having to compete for contracts as they arose.
Instead this government decided that every training contract, for every central government department and in every training subject, had to be provided in a single contract. This was duly won by a large company, Capita – who, inevitably, shared most of it with their partner organisations and cut out most of the existing providers that had been successfully providing that training.
It is as though Tesco were to sign a five year contract to source all its dairy products from one supplier, and to take no account of which products their customers currently liked and bought. It might save Tescos in staff costs, reducing its dairy buyers from – say – twenty to one. But it would restrict choice and, without doubt, increase costs overall.
Within months of the government training contract coming into operation Happy Computers had lost 25% of our revenue. Happy used, for instance, to be the sole providers of IT training to the Department of Work and Pensions, having twice won a national tender for that service. In the DWP national supplier awards, Happy Computers was rated one of top two suppliers, across all its services, for customer service.
However neither the quality of our service nor the prices we provided were to be considered in who DWP should get their training from. Under Cabinet Office orders, they were now only allowed to take that training from Capita.
I have no evidence that Capita is making huge profits from this contract. They have had to invest huge amounts in a centralised administration system and added, for every piece of work, an extra layer between the client and the provider. It is because of these extra costs that the claimed economies of scale, from a contract like this, rarely materialise. It is quite possible – due to the extra complexity – for government to end up paying more, while the providers all make less profit.
Economies of Scale or Competition: Rival Approaches
Government regularly trundles down the path of big centralised contracts in the belief that they will provide economies of scale, but they rarely do. A friend of mine was involved in agreeing the electricity contract for a government department, surely the most generic of products. Yet even here, he found that the central government contract – which he was asked to use – would have cost tens of thousands of pounds more than the single contract he could arrange directly with an electricity supplier.
Economies of scale make sense if you believe in the benefit of centrally planned economies, like the old Soviet Union. If economies of scale worked, that would surely have been the most efficient of societies. They make no sense if you believe, as this government claims to, that it is competition that results in the best value and the best service.
This is not just a problem in the public sector. A friend of mine works for a major oil multinational. Whenever she books a flight she has to go through the procured travel agent. This almost always results in a price that is higher than the one that she could get by booking directly over the internet.
It is the most basic of economics: Create a monopoly, as this contract has done and as the oil company example had also done, and you remove the competition that drives best value. And you probably add in layers of administration that actually increase the cost.
It has been claimed that this contract has led to extraordinary savings, of up to 60%. However the fact that the Cabinet Office has refused to release the report on which this claim is based, despite repeated Freedom of Information requests, leads me to believe that there is little basis to this claim.
No government for small business
The Conservatives claim to be the party of small business. This has not been my experience. First, in apprenticeship delivery, they introduced Minimum Value Contracts – preventing small businesses from having direct contracts and forcing us instead to work through others. This increased the cost and complexity, as well as resulting in major delays in payment.
Then the above contract cut 25% of our business at a stroke, not because of our service or our prices, but simply because we were not partnered with the right big contractor. I find it hard to see a government that has had such a devastating effect on my business as any friend of enterprise. And I also note that while they have been keen to cut corporation tax for large companies, there has been no change at all for small business.
So, Mr Cameron, please do not pretend to be on the side of small business. You may be friends with the banks, the hedge funds and the tax dodgers. But you are no friend of hard working small enterprises like mine.
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