Procurement Strategy

Public procurement and trends in outsourcing contracts

By 29th January 2019 No Comments
Outsourcing contracts

Across the developed world, there is an apparent crisis in high profile procurement contests like outsourcing contracts. From Berlin’s zombie airport to prisons contracts to capital works programmes in the health and other sectors, media coverage of procurement has rarely had a higher profile. From Grenfell tower in London to Ireland’s Children’s hospital new projects seem to hit the news every week. The problem projects obscure excellent projects that use the same rules and processes as “problem projects”.  The rules and processes often get the blame for this malaise. This said, the volume of issues on capital projects and major outsourcing contracts point to real problems. This post focuses on issues arising from the use of mega-contractors in the UK. We also outline considerations for the procurement of outsourcing contracts.

Outsourcing contracts: focus on Capita PLC

Few were surprised when Capita PLC won a sought-after contract from the UK Ministry of Defence to provide firefighting services on international military bases. The contract is worth £500m over 10 years and made the group responsible for 69 defence fire stations worldwide. Capita had grown consistently as a large contract services provider in the previous years.

In parallel with this, however, its newly appointed chief executive Jonathan Lewis had started restructuring programmes to address persistent system issues in the business (which were seen as nuisance factors rather than materially significant). Capita enjoyed a market share of 29% in 2016 making it the largest business process outsourcing and professional services company in the UK. It was also, on paper at least, the best-diversified BPO with operations in Asia and Africa as well as Europe and its profits deriving equally from the public and private sectors.

Buyers expect that companies like Capita are prepared and capable of taking work on when they win outsourcing contracts. Looking back, it appears as though the various parties did not take the necessary precautions or follow their internal risk assessment strategies adequately. They paid a price for this.

Legal action on outsourcing contracts

The underbidder took legal action challenging the award within a month of its award. This resulted in the award being suspended. In addition to the legal proceedings, the Ministry of Defence investigated the award process for evidence of non-conformance.

Capita was flagged as a potential danger to operations in documents discovered in a later review before they won the fire fighting contract in June 2018. According to reports in the Financial Times, Capita recorded a health score of just 3 out of 100. A company is “vulnerable” if they scored 25 or less on this scale. Additionally, Capita accumulated the highest possible risk assessment with a 10/10 rating. Competitors including Serco obtained much lower risk ratings.

Over an eight-year period, Capita won military contracts work over £1.8bn. The largest of these is a £582m deal to recruit soldiers for the British army. Capita had lost contracts as a result of poor contract performance before they won these contracts.  After a highly critical National Audit Office report in 2017, Capita’s contract to manage the MoD’s estates ended five years early due to poor performance levels. This raises questions as to why the same mistakes are occurring across the State on outsourcing contracts.

Lessons from Capita for outsourcing contracts

When studying the capita case, one can not help but draw comparisons to the Carillion scandal. Prior to its sudden collapse in January 2018, Carillion was one of the UK’s largest construction companies boasting over 450 public-sector contracts. A May 2018 report of a Parliamentary inquiry stated Carillion’s collapse was a story of “recklessness, hubris, and greed”. It further found its business model was a “relentless dash for cash”. Labour MPs and UNITE trade union asked why the government seemed to forget lessons from early 2018 by the end of the year. They blame the government for their focus on privatising public military services at the cheapest price.

Party politics aside, a clear lesson for businesses interested in winning contracts – both public and private alike – emerges from the Capita military outsourcing scenario. Well managed businesses that mitigate risk and that prioritise structural stability are recipes for longer-term sustainable success. Elevated risk and/or uneven performance levels put companies in danger, particularly where they have to navigate formal, competitive procurement processes. Capita’s share price fell dramatically both in the short and medium term following the revelation that the contract was in danger putting the company – which employees over 70,000 – in troubled waters.

Relying on sustainable business practices rather than overly ambitious promises is a more sensible procurement strategy.

 

Considerations for businesses examining outsourcing contracts

Companies should focus on strong core offerings first and foremost. It is also worth challenging the decision to aggregate to many services into too large a set/suite of contracts. The Carillion affair shows how over-reliance on key suppliers can lead to a negative multiplier effect for suppliers to such companies when they collapse. Public buyers are open to considering the breaking up of such contracts into smaller chunks. If they are aware of the relative benefits of a company, they are likely to be more open to this.

Undertake rigourous due diligence on contracts before taking them on. Companies should not bid if the specification is vague or insufficiently detailed. A vague scope results in suppliers having to provide more of a good or service than they understood to be the case. Contracts also fall short of the promised volumes and this can also cost businesses money.

Finally, it is important to focus on the right sized organisation and segment of the market. Collaboration is an effective way to move up the value chain without stretching capabilities or financial commitments on outsourcing contracts.

https://www.forces.net/news/capita-failing-bring-army-recruits

 

More ‘Top Tips’ on Procurement Strategy

We have lots of great advice on how to approach tender management.  So check out our Procurement Strategy services to see how we can help with tender and bids. You can also search for ‘Procurement Strategy‘ articles on our blog. We are also proud to be a part of the team that delivers InterTradeIreland’s award-winning Go-2-Tender training to SMEs across Ireland, and you find out more here.