Is short-termism holding back public sector outsourcing?

Public sector outsourcing may have doubled over the past 10 years to £80bn. But that apparently healthy growth masks some fundamental issues with procurement, says Martyn Hart.

Although the public sector has learnt a lot from previous engagements in the outsourcing market, breakdowns such as those in the NHS show that some aspects of public sector procurement still has a long way to go.

More on outsourcing…

♦ Gov't stung by 'rip-off' outsourcing deals

♦ Shell signs $4bn IT outsourcing contract

♦ Cloud computing – the data centre of the future?

♦ Tough bargaining forces outsourcing price cuts

♦  Profile: Nandan Nilekani, co-chairman, Infosys

♦  India losing status as offshore king?

♦ Productivity gains driving IT outsourcing

♦ Tax payer still owed millions by EDS

♦ Cheat Sheet: Offshoring

♦ Special Report: Inside India

Recent research from Compass Management Consulting found public sector outsourcing contracts are 75 per cent above the going market rate. Although the research found a few cases where government departments have improved their contract costs since 2007, most are still overpaying.

So why are public sector outsourcers getting such a bad deal? Could the main issue lie in the procurement process? Or is it that government outsourcing is done essentially to protect itself against failure or blame, rather than making sure the programme is a success?

The general view is that the public sector procurement process focuses solely on driving costs down rather than maximising the potential benefits the supplier can provide.

If outsourcing providers are pressured into lowering their bid to an unprofitable level, then it should come as no surprise that suppliers attempt to claw back their initial losses as time goes on. No supplier wants to sell like this but such a procurement process leaves them with no alternative other than to withdraw and write off massive bidding costs.

Often, a high number of procurement advisers are engaged to oversee the procurement process. Legal experts, procurement, technical, business and alike are also brought in from throughout the organisation but all with "real jobs" that they go back to.

This process opens public sector organisations up to the "bid it thin and get it in" strategy. The research conducted by Compass Management Consulting found many outsourcing suppliers price their contract up to 18 per cent below the market rate and from the first day of the contract increase the price, with many getting to 30 per cent above the market rate by the third year of the contract.

Even the threat of retendering is often meaningless as the power is embedded with the supplier. Instead, suppliers use constant change requests and other variations to extract extra revenues from the contract without the scrutiny of a procurement process or comparative pricing mechanism.

Organisations would do well to pay heed to a number of considerations:

Define requirements Many organisations, suppliers and end users have discovered once a contract starts the initial requirements change. It is imperative that needs analysis is conducted throughout the programme and certainly before project commencement so the project can be launched accordingly. It is also important the contract is structured in a flexible way, so if requirements do change, the contract can accommodate that.

Judge performance From SLAs and KPIs to benchmarks and regular performance assessment, it is imperative the process is regularly independently reviewed to judge progress. But it is important for end users to bear in mind they shouldn't be trying to nail suppliers to the wall with unrealistic SLAs. Promising too much can be a recipe for disaster. It is important objectives are agreed on both sides before embarking on the project.

Refer to guidelines Although it may seem that the public sector does not understand outsourcing, it has spent considerable sums producing guidelines that are often not followed. The Office of Government Commerce produces a fund of information, especially the Gateway Review process which can be particularly useful if used constructively and not just as a tick in the box.

Retain the team Finally, as the Compass research suggests, organisations must have a team that run and breathe the programme. Most government outsourced contracts are large enough to warrant a dedicated team. Not just procurement, legal or IT, but a team whose first-line responsibility is to make sure it delivers the benefits, works with the users and supplier to achieve the project's objectives.

There is evidence of maturing in certain aspects of public sector outsourcing but there must be an understanding of the need for a deal structure and commercial terms that avoid the 'bid low then increase' situation.

These measures can be achieved by looking beyond the procurement process and understanding the need for a sustainable and predictable deal that ensures the contract is signed, then managed and contained within agreed parameters.

If the public sector continues to undertake poor contract negotiations or rushed deals, ultimately taxpayers will foot the bill.

Martyn Hart is chairman of the National Outsourcing Association.