by Richard Harrison, Managing Director
There will be an inevitable post mortem following the very publicised implosion of Carillion this week. No doubt this will inform the political narrative moving forward. The private sector delivers many of our public services and Carillion offers many lessons for our policy makers and public sector commissioners to reflect upon.
Thousands of UK employees are now worrying about their jobs causing real distress to many families; equally thousands of businesses are owed money by Carillion which could cause further bankruptcies, whilst vital public services still need to be delivered through a period of uncertainty.
It’s easy to take a binary view that all private sector provision is bad, with profiteering on a huge scale, and all publicly delivered services are good. As ever the truth is more nuanced than that. I’ve seen very good examples and poor examples of both private and public sector provision.
Competition is a double-edged sword. It’s good if taxpayers get a better price from a diverse array of bids, but bad if overly aggressive bidding to secure contracts leads to delays in completing projects; or worse, contract or provider failure. It is important to note that there is always a cost to failure, both a financial cost but, even more importantly, a human cost.
The private sector often operates on thin margins and significant debt levels in fiercely competitive markets. It’s incumbent on providers to ensure that they have sustainable business models, which don’t over reach when bidding for contracts and growing their businesses. Robust governance processes should mean they understand the risks of the contract they are bidding on and have clarity on historical and future contractual commitments. It is important providers fully understand their aggregate position and a sustainable strategy is adopted.
Likewise, in times of austerity, it can be tempting for commissioners to focus overly on price causing a race to the bottom. That way of thinking can lead to very poor outcomes for the public if it turns out that providers who win the tender process bid below the cost of delivering those contracts or made unrealistic assumptions around risk. It’s an economic reality that costs need to be covered by the contract price or one of two things will happen; the costs will pop up elsewhere through mechanisms such as contract variations, or the contract (and maybe the provider) will fail. In both scenarios, this leads to higher avoidable cost and unnecessary pain.
Public Sector Commissioners need to ensure that contracts are constructed in a way, which shapes healthy, sustainable markets. That means actively shaping markets so that the right number of providers are operating in the markets with due consideration for local employment, SME’s and the local economy, what the likely delivery costs are and thorough due diligence is undertaken on providers and their bid proposals.
Once contracts are awarded, it then becomes important that the client side processes are in place to actively manage the contract so that it delivers the outcomes being sought. This includes ensuring that appropriate democratic oversight is included on public service contracts. This is an area where we’re seeing lots of progress since the Olympics and tagging debacles, but where there’s still a lot more work which can be done.
The team at CIPFA C.Co continue to work with public bodies and providers across the UK to support them to improve capabilities. Whether its supporting organisations to understand what is a fair cost of care, benchmarking, supporting due diligence exercises, improving contract management capabilities, or supporting the insourcing/outsourcing process, the same lessons are apparent; there is a cost of failure, and quite often that failure is entirely avoidable.
Do you agree with my reflections? Please feel free to comment.
Get in touch with me at email@example.com if you would like any further information on how CIPFA C.Co can support your organisation in any of the areas mentioned.