Solace blog

The problems of contracts where the private sector run public services are not new. Over 200 years ago, Jeremy Bentham said of such contracts: “the savings are quickly forgotten and the profits exaggerated!” Britain moved early to become the “Contract State” but, even in the more recent past, there has been only lukewarm Government support for the private sector running public services,(even among many Conservative politicians). The case for their advantages has not been well put and the media have often been hostile.

Even though this is an area of significant employment, and the UK Public Service sector is the most developed in the world, the private sector is not organised to defend its market, nor does it take a longer term view. The approach by commissioners of these services is characterised by a lack of clear performance objectives, within a complex environment of competing expectations about outcomes and a diverse group of stakeholders to satisfy.

More importantly, politicians and the media do not understand the risks involved in demanding more innovative approaches or the need for reasonable profit for the provider, over time, to justify the risks involved in such contracts.

Indeed, the current Government seems to have a preference for not-for-profit providers and are hostile to large companies.

The issue of accountability is sharper also in this area than in other forms of provision. Such public services contractors are unpopular with the public and suspicion about their activities makes them more accountable in practice than others. The Government imposes higher standards in this context than it does on itself as a provider of such services, (given Crown Immunity), and providers themselves have had to lead the way on service standards and legal liability.

However, such contractors have been reluctant to speak out publicly about the lack of a level playing field, in terms of public scrutiny and its consequences, because they fear the reputational damage for their Brand from doing so. Their treatment shows a lack of respect by Government, in a difficult and under-resourced market environment. The effect
of the relentless focus in such contracts on the “quotidian essentials” is not understood or appreciated by Policymakers.

This is true, even though Public Services contractors have a number of advantages over in-house providers, because they operate under fixed terms, have the freedom to appoint their own management teams, and have a clearer framework of rewards and sanctions. The private sector advantage is largely in their ability to negotiate the terms of the contract. By comparison, uncertainties for in-house providers can add 20% to their costs, with obvious impacts on service quality and the ability to innovate.

However, it has become increasingly difficult for the private sector to ensure added value. Public value is not to be found in simply seeking the cheapest tender, and Government cannot simply contract out their responsibilities. Morality and social responsibility cannot be outsourced, even though contract terms often imply a tendency by the commissioner to deny their responsibility and any inherent risk!

The term “the Public Service Market” is not a helpful one, in that it implies a laissez-faire approach. The responsibility for Stewardship still remains, in creating and shaping the Supply Side. In practice, this is more like managing supply chains, where you cannot simply blame your suppliers for failure to deliver. Such contracting is now “part of the cultural coding in Western societies”, but it needs to take place within a complex, integrated system.

Government officials should not put too much emphasis on price over quality. This was the big failing of Compulsory Competitive Tendering. Companies should not be induced to bid for contracts where it is impossible for them to make money! This is the “Winner’s Curse” and they should simply walk away from such offers.

There is not a mature debate about risk in this market. It is not tackled simply by moving to a system of payment by results. The problem is one of “distributed authority with concentrated liability”. Companies cannot be made to take risks for things they cannot control, and the contract system needs to reward or incentivise investment in service improvement. Such contracts are not the same as the procurement of pencils. They need sustained institutional learning on what constitutes good practice, but there is no research literature on this and no training programme for
civil servants.

There is the need for a new forum for strategic engagement with the Government on these issues, based on a new, more honest literature about the lessons learned. The Public Services sector needs to organise itself to have a greater influence on Government policy in this way. It needs to be recognised that there is a tension to be resolved between the Government’s desire to do “super” innovation quickly on a grand scale and the private sector’s preference to make improvements in services more incrementally.

At present, most of the “hand-off” from policy to delivery is based on “bullshit and arse-covering”, and the deliverers are not allowed to challenge this! Contracting involves a set of technical skills and is not the same thing as outsourcing, which is currently a mindset of seeking to lose responsibility for others. (This can be seen in the Government’s deep dishonesty over the state of Children’s Services, where the caseloads of social workers are, in practice, an impossible burden). Many Politicians seem nervous or insecure about their lack of capacity to control the quality of public services and to provide public value, whilst others think they know best about how to do such things and intervene too often to impose their own pet ideas about the best approach/solution.

After more than 200 years of such thinking, it is time to challenge an approach that does not work well for commissioners, deliverers or the public.

By Kim Ryley, Chair, Solace in Business, Solace Group