Following yesterday’s Public Administration and Constitutional Affairs Committee hearing into the collapse of Carillion, Phil Bentley (CEO of Mitie plc) has expounded a clear reminder that not all outsourcers are the same, and that private sector contractors provide a valuable and important role in the provision of public sector services.
During the Committee hearing, Bentley highlighted six key lessons learned from the collapse of Carillion. The key recommendations he made to improve public sector outsourcing, generate better value for the taxpayer and promote innovation and the use of technology across the outsourcing sector include a greater role for the Crown Commercial Service, a new Code of Conduct for the industry and the need to consider value, not just cost, when it comes to public sector procurement.
Set out below are the full observations and recommendations made by Bentley.
Analysis of lessons learned from the collapse of Carillion and Mitie’s recommendations
(1) There’s an important and valuable role for private sector outsourcing in the provision of public sector services
The private sector outsourcing industry plays a valuable role in the provision of public sector services, bringing many benefits including savings for Government departments, innovation and leading-edge technology, the transfer of risk and, critically, clear accountability to deliver improved performance.
Recommendation/observation: The sector and the principle of outsourcing isn’t flawed, but there are tangible improvements that can be made to the way in which the public sector procures.
(2) Not all outsourcers are the same
There is as much diversity in the outsourcing sector as there is in financial services. As has been widely documented, the collapse of Carillion was principally as a result of failings within its construction business, coupled with excessive leverage and governance failures. By way of contrast, Mitie isn’t overly leveraged, has a very broad client base with no reliance on one single customer, delivers a broad range of services and sources two-thirds of its revenue from the private sector. All of this reduces risk.
Recommendation/observation: Government needs to fully understand the business model – and financial position – of its supply chain partners, and recognise that not all employ the same model or rely on the same financial levers. In Mitie’s view, this can be done at any point in time, but is further strengthened by a commitment to partnership and regular dialogue. Mitie further suggests that complex public contracts are awarded so as to permit comparability of performance delivery.
(3) Data is critical… Contract ‘equalisation’ is detrimental
There must be sufficient, accurate and timely data made available to Government, and from Government, to ensure that contracts are procured and awarded based on the most informed information. The quality of data across Government departments varies widely, as does ‘pre-market engagement’.
Recommendation/observation: Contracts should be awarded on value, not just on cost. Data that supports the wider value on a contract (eg value to community, jobs, innovation, technology, care and sustainability) needs to be included in the way that contracts are assessed. Judgement is required to pick the best solution. ‘Equalising’ all bids and then choosing on price is both easy and wrong.
(4) Beware the legal challenge
While all public sector contracting needs to be held to account, the prevalence of ‘legal challenges’ by private sector under-bidders presents, in Mitie’s view, a significant obstacle to efficient public procurement, fuelling defensiveness and stifling innovation.
Recommendation/observation: Right to challenge should be restricted and based on evidence-backed material challenges to either the process of award or the terms of the award. An independent arbitrator should by appointed to decide on whether a right of challenge should be awarded.
(5) ‘Fairer’ contracting is welcome
Historically, unwarranted data, termination for convenience, onerous or disproportionate penalty clauses have left outsourcers nursing loss-making contracts.
Recommendation/observation: Mitie believes that a growing collaborative approach towards managing change, the provision of accurate data and fairer termination notices with appropriate compensation will help to rebuild confidence. The company also believes that this partnership approach will yield Government departments better solutions and greater value.
(6) Build a ‘Win-Win’ culture
Public sector procurement can end up as a box-ticking exercise that fails to yield the taxpayer and the end user the ‘best’ solution. With awards made solely on the basis of the cheapest solution, and little strategic judgement, there’s scant regard for creating a ‘Win-Win’ solution for both Government and contractor.
Recommendation/observation: Cost should not be confused with value. Mitie recommends greater oversight from the Crown Commercial Service to provide a ‘non-executive’ overview of Government contracting departments. For practical purposes, there would need to be a materiality threshold forging enhanced levels of transparency and accountability on which decisions are actually made.
Bentley concluded: “We believe that public procurement in the UK is relatively sophisticated. The fall-out from Carillion has seen the FM industry absorb critical contracts with negligible impact on services, and with the majority of Carillion employees taken on by new contract providers. However, the failure of Carillion, and the sector’s structural challenges such as low margins, the pricing of risk and the long-term nature of the contracts that are procured has aired an important and timely debate on outsourcing. We would support a Code of Conduct, drawn up and agreed with outsourcing partners, that promotes transparency, partnership, value and sustainability.”