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.

7 responses to “The Madness of Government Procurement”

  1. A fellow CSL trainer

    As a freelancer trainer now working under the CSL contract I’ve been put under considerable financial strain by late and incorrect payments for services rendered. Well said on all the points above and for making a stand. I thought I was a lone complaining voice in the wilderness until I saw today’s headlines!

  2. Procurement Specialist

    Sorry Henry, but I think you need to get all the facts before you make statements about economies of scale. The CSL contract was put in place to centralise a large number of procurement activity across all of central government. Localised procurement practice takes a lot of time and money not to mention procurement staff to facilitate the tenders and bids. Because departments needs where not joined up there was multiple duplication when it came to procuring externally. A massive cost and time constraint for Government and suppliers! The CSL contract centralised this function to ensure that duplication of needs are monitored. Why procure the same thing 30 times when you can do it once and meet the needs of many instead of just one department? The completely inaccurate article published by the Independent can only be classed as cheap journalism. It does not take into consideration the number of new SME’s that are now delivering to Government via this contract that previously never had the opportunity. It also does not take into consideration the large number of trainers and sole traders now delivering. And this was all achieved through fair and transparent open market bids. It also does not take into consideration the centralised training system that gives government staff the ability to select training (required by government) and for them to have that need fulfilled immediately instead of waiting months for someone in their department to source and facilitate a tender. The CSL contract is about ensuring public money is being spent in the best way and the savings achieved have been huge. The other point I would like to make is you mention that you lost 25% of the business when the CSL contract came into effect. Tell me what right do you have to claim that business? No one has the right to claim business as theirs especially not in the Public domain where contracts are put out to tender regularly as per the rules. The CSL contract is about ensuring that all requirements are put through a monitored tender process and that there is a full audit trail to show that the supplier who has won the business did so fair and square. If you are not winning business then perhaps you should review your products and pricing?

  3. Dear “procurement specialist”

    Many thanks for your contribution, all views are welcome here. But I must ask, if this contract has resulted in such great savings, why won’t CSL make public the report on those supposed savings?

    We have no right to claim that business. We won every piece of it in open public tenders. And delivered great service. As I say in the article, the DWP rated Happy Computers one of its 2 best suppliers (out of thousands) for customer service.

    If we lost out in a fair tender process or because we had provided poor service, that would be absolutely fair. The reason we don’t have those contracts now is because, under the new contract, we have not been able to even bid for them. (Even where the departments wanted to continue using Happy.)

    I think you may have a rose-coloured picture of this contract. As I say above, a huge contract that puts in place a monopoly is not the way to get best value.

  4. The answer to the withholding of the ‘facts’ about the ‘huge savings’ quoted by Procurement Specialist, in his/her response (notably omitting all ‘facts’ and giving only opinion), is that he/she can’t. It would be a nightmare to calculate.

    What is clear is that the centralising nature of the procurement process is, by definition, remote from the customer, who needs the service, and the provider. All centralised procurement becomes reduced to lowest common denominators, one size fits all, at the lowest cost. Quality, reliability, responsiveness, adaptability to local conditions, and, if it dare be mentioned, ‘care,’ are immeasurable (try though they might with ‘targets’ and ‘KPI’s’) and don’t count.

    The assumption that massive cost and time constraint is imposed by localised procurement also assumes that each local need will be the same as the centrally identified need. Ask the locals. They will tell you it isn’t.

    This assumption also ignores the costs and time imposed by centralised procurement – can we have the ‘facts’ for these too? Or are the huge salaries paid to centralised procurment specialists, in contrast to their local cousins, a bit too embarrassing to mention? When a centrally procured provider is chosen, and something goes wrong, the damage is huge – it’s all in one contract. And you can bet there is a huge cover-up before the news finally gets out. When many local providers are used, the damage is limited, quickly spotted, and fixed locally. Simples.

    Any of us who run small businesses who have dealt with these alleged procurement specialists will tell you that their greatest specialisation is in jargon and cliche, arrogantly masquerading as ‘expertise’.

  5. Fight the good fight with all thy might…

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