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A broken market? Government outsourcing is failing to deliver

Tracy Worrall for The House

7 min read

Research by The House has found a significant minority of private firms are failing to hit minimum targets for government contracts, prompting experts to raise concerns. Andrew Kersley reports.

Public service experts have raised concerns about the government’s use of outsourcing after analysis by The House has found nearly one in four private firms working on government contracts is failing to hit minimum targets. On average across 2022, this magazine found that 78 per cent of government contractors were hitting the key target set for them by government. Around £300bn, or roughly a third of all public sector spending, is spent on contracts with private firms in any given year, though during Covid that figure skyrocketed. Experts say they are concerned the market has removed incentives for companies to perform, leading some to suggest huge chunks of that money are being wasted on subpar services.

“The principle mechanism by which outsourcing is meant to, in theory, save money and deliver better services is by competition; that new suppliers with more innovative approaches are able to enter the market and to replace old suppliers who are no longer able to offer the best services,” says Nick Davies, an expert on public services and outsourcing at the Institute for Government (IfG). “It means that very often, there just isn’t an actually competitive market for these services,” he added.

Time and again, companies that repeatedly underperform or do shoddy work are being rewarded with yet more public contracts

Our research was based on the government’s quarterly release of key performance indicators (KPIs) on government contracts. In each release, it lists an array of contracts and whether they have hit their minimum primary target. The targets may not always reflect the contractor’s total overall performance. But a huge swathe of contracts are nonetheless failing to achieve a “good” rating (meaning the contractors were hitting their target) according to the government data.

In January-March 2022, just 75 per cent of contracts were “good”, in April-June that rose to 76 per cent, before falling to 72 per cent in July-September. By October-December it had risen to 82 per cent – different contracts are assessed at different times, which may in part explain the changes in each quarter. 

One concern is that in an effort to cut back on spending, private outsourcing – which often sells itself on being less costly than in-house equivalents – has been used as a route to offer a more limited service through stealth. 

Think tanks like the Institute for Government, for example, have expressed doubt over whether there is actual evidence to support claims that outsourcing can deliver savings of 20-30 per cent, without just equally cutting back the service being offered.

“Since 2010 the government has made so-called efficiency savings, it was just by paying people less or in many cases by… making a large number of people redundant and delivering services with fewer staff,” says the IfG’s Davies.

“So a real problem across a lot of services will be workforce issues. That certainly is in the public sector, though, it’s also happened in outsourced services.”

One of the biggest, but less-noticed, impacts of the cuts is how they have affected the process of bidding itself. Impacted by nearly a decade of slashed budgets, under-staffed and underfunded commercial teams both locally and nationally have begun to rely on offering fewer bigger contracts to an increasingly concentrated group of suppliers to reduce their own workload.

“’The ‘stat of shame’,” says Tory MP John Penrose, who is bringing an amendment to the Procurement Bill for better data evaluation, “is they’re supposed to evaluate government contracts, but at the moment just 8 per cent of government contracts go through this process. I call it the ‘stat of shame’ because it’s what officials inside government call it.”

“They started focusing on the lowest price at the expense of almost everything else,” says Davies. “And if you are getting ginormous contracts and generally going to the cheapest suppliers, then you know, more often than not, it’s going to be the largest international suppliers who are best placed to do that.”

According to one report by data firm Tussell, strategic suppliers not only receive roughly 11 per cent of public sector spending, but their income from government contracts rose by 24 per cent between 2019-2020 and 2021-2022 alone.

The concern for many is the system has become a natural monopoly for certain firms in all but name. Take private prisons. The capital and labour-intensive nature of building and running a private prison means very few firms have the skillset and size to actually take on such a contract from the government – in fact just three firms run the United Kingdom’s network of private prisons: Sodexo, G4S and Serco. 

Each has been mired in scandals – for example, in 2019 G4S-run HMP Birmingham was the first private prison in the UK to be re-nationalised after the chief inspector of prisons labelled it one of the worst prisons he had ever inspected. However, all three have continued to play a role in running the UK’s private prison network – including in G4S’ case, being given a £300m contract to open the new “mega-prison” HMP Five Wells.

The government is supposed to award contracts to the company offering the best value for money (known as the “Most Economically Advantageous Tender”), but both locally and nationally there is an obligation to exclude any firms convicted of bribery and corruption.
It also has the choice to exclude firms with prior environmental, social or labour law violations in the last three years, though this is less frequently enforced. These terms are quite narrow and can involve a lot of judgment on the part of the government – if a firm was accused of a serious breach and settled out of court, for example, it’s less certain that it would qualify for exclusion.

Several of those we spoke to suggested the ability of private providers to sue the government if they feel they have been unfairly excluded or not chosen for a contract left many in the public sector afraid to exclude firms even with a worrying track record. Combined with the limited number of private sector giants able to take on a lot of contracts it becomes hard for even the worst-performing firms to be removed from the bidding process.

Even after G4S and Serco were fined for defrauding the government by charging the Ministry of Justice for the electronic monitoring of thousands of offenders, who had returned to prison or even died, they continued to win work. As another example, audit firm KPMG promised to temporarily withdraw from bidding on contracts after a series of corporate scandals, but the firm still managed to win £10m in government contracts in everything from advising the Ministry of Defence to supporting the NHS and energy regulator Ofcom.

Penrose hopes his amendment will make a difference: “My proposal is actually really simple. It’s saying government contracts should say upfront before they’re given, what’s the outcome that they’re trying to achieve – a one or two sentence statement about what it is that they’re trying to do specifically. Say for a back to work programme, it would be something like ‘the aim is to have an increase of X per cent in the number of people who are currently unemployed back to work in this group’.

And then after it’s finished it gets individually evaluated with the equivalent of an Ofsted report that says did this meet its targets and should it then be re-let on this basis – yes, no or maybe with changes.

Nobody even knows which bits of it could be done better, because it’s not evaluated, if you do the evaluation that will be laid there for all to see.”

A Cabinet Office spokesperson told The House: “The vast majority of suppliers are performing well against their targets.

“Where areas for improvement are identified, we are working with suppliers to make sure any issues are tackled quickly so people get the top quality public services they deserve.”
The spokesperson highlighted the government’s Procurement Bill, which it claims will make excluding poor performing suppliers easier, among other things.   

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