The UK experience: when contracting goes wrong, and how to prevent it

By David Donaldson

October 19, 2015

Public servants should beware the temptation to enter into “fire and forget” contracts to get rid of a problem, warned Tom Gash from the UK’s Institute For Government at the Institute of Public Administration Australia national conference last week.

A common reason contracting out to the private sector fails is departments forgetting the reasons outsourcing to the private sector is useful in the first place: the competition and choice that markets can introduce.

“I think the examples of failure show that you do have to remember the fundamentals about how you do make competitive systems work,” Gash said.

“You can’t forget about things like whether actually when push comes to shove you’re happy to let the hospital close, the service stop, and other provider to move on. You have to think out those questions really carefully.”

It’s important to ensure healthy competition actually exists and to ask the question of whether the public is going to have informed, motivated and engaged choice — a key feature of the design of Australia’s National Disability Insurance Scheme — he pointed out.

Contracting out requires the public service to monitor the services being provided, rather than assuming that once the paper is signed, good outcomes will automatically flow. “What hasn’t worked in the UK is fire and forget, thinking you can get rid of a problem,” he explained. “Outsourcing because you can get rid of a problem, that hasn’t worked.”

One example he gave was of the UK government purchasing court translation services — for police suspects or prisoners, for example, who don’t speak English — as one big national contract from a private provider. Traditionally, they would rely on local networks of translators, which led to problems getting people at the right time.

“The solution we thought would work for this in the UK — clearly entirely wrongly, as it turns out — was to do one big bulk contract with a new provider who would then subcontract the elements of the work to different translators,” he said.

“And we decided we’d really focus on cost here, we’d drive the cost down. That was really important. The model they used actually resulted in very few translators being able to be found by this company.

“One of the reasons for that was of course that they didn’t have enough money to tempt translators, who are often highly skilled people working part time who can take or leave work if it’s not at the right point.”

Inevitably, this had significant knock-on effects in the justice system, causing delayed trials and other problems. Eventually the contracted company started having financial difficulty and went under — though the owner of the company still “walked away a very wealthy man from it for various reasons to do with how the contracting was designed”.

The lesson here, he thinks, is that “when someone says ‘I can take all these problems off your hands, you don’t need to worry about it anymore’, and you say ‘let’s try and do that and make it cheaper at the same time’, lots of things can go wrong.”

While it’s important to ensure good value for the public by not spending too much, budgeting too little can cause private companies to collapse, leaving the government with one fewer provider to deal with in what are often already markets populated by only a few real competitors. Unlike private companies, the government cannot simply decide not to take responsibility for that service anymore, meaning that government may end up in the position where it’s already paid to contract out a failed service, but is still liable to pick up the cost of fixing the problem at the end.

Failing and still getting rich on public purse

Another example given by both Gash and former departmental secretary Lord Bob Kerslake was that of the tagging scandal, surrounding a contract to tag prisoners out on bail with G4S and Serco.

“This contract came up for renewal and when they were preparing for renewal of the contract they found that the two companies involved had actually substantially overcharged government for these contracts. Double charged, in effect,” explained Kerslake.

Not only did the government not have a central register outlining where other contracts with these companies lay within government which may have also been subject to poor performance — leading to “a very, very intensive exercise of reviewing our relationship” — a key problem was that once the contract had been set up “the senior people said that’s a job done, we’ll move onto the next interesting thing, and the capacity to manage that contract was moved down the hierarchy to quite junior levels,” he said.

“What value did the public sector get from that fall in technology costs? Very little … ”

Significant government cuts to oversight capacity and a preference for monitoring based on data in place of field observations led to a bad situation remaining undiscovered for longer. “What you can’t do is just rely on data,”  argued Gash.

“The Ministry of Justice was getting data feeds about how many people were on tags all the time and what was happening in that service for a very long time, it just happened the data wasn’t necessarily right. And who was going to the frontline and saying how does this feel? How does this look? Who was engaging with providers and talking to them about what was actually going on? The answer was not enough people, for various reasons — one of them was the constraints that were happening financially and the decision to make cuts in the oversight. Again, a false economy that I would really warn you in Australia against,” he warned.

Contracts are too often made without proper regard for the fact that things will change over time, thinks Gash. The tagging contract was for both the technology and the services surround the technology.

“What happened to the technology costs over the nine years that that contract ran before it was retendered, was obviously they fell very very dramatically. What value did the public sector get from that fall in technology costs? Very little,” he stated.

Change is a certainty,”and yet too often when it comes to public services we try to design systems and contracts as if the future will stay the same as it is today. So we do need to have much more flexibility in our contracting models.” Inflexible, long-term contracts often mean the private sector pockets the falling cost of technology while government continues to pay a high price. More flexibility is needed, while also respecting the needs of companies to be able to plan.

Kerslake — who has experience as both permanent secretary for the United Kingdom’s Department for Communities and Local Government and head of its Civil Service — offered six learnings from his experience with commissioning.

  • Absolute clarity about what you’re trying to achieve from the process.
  • Capacity and capability — it’s not just about the number of people you have, it’s the skills they have to do the job.
  • Ruthless, rigorous program or project management.
  • An open project that allows people within the system to say ‘this isn’t going right, we want to stop what we’re doing’.
  • Knowledge of the market.
  • Once you’ve let the contract, don’t take your eye off the ball, keep the contracting process in place.

“If you get the key elements right in those places, there’s every chance it’ll go well. If you don’t, if you fail on any one of those, something will seriously fail,” he said.

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