Wednesday, 16 May 2018 14:00

‘Mouths Stuffed With Gold’: But What Does the Future Hold for Public Sector Outsourcing?

The Parliamentary report into the collapse of disgraced outsourcing giant Carillion has certainly pulled no punches.

Amongst the tastiest soundbites, MPs have accused bosses of ‘stuffing their mouths with gold’ while the company’s finances floundered, summing up their behaviour as ‘recklessness, hubris and greed’.

The strong tone will be welcomed by beleaguered subcontractors and suppliers who stand to lose as much as 99 per cent of the value of unpaid invoices still outstanding. They probably have some choice words of their own for Carillion’s former bosses.

But the real question now is - what next? The fact that the country’s biggest public sector contractor could collapse in such ignominy has been a humiliating blow for the government, and has lifted the lid on how it manages its outsourcing in general.

The picture is not pretty. Economic sickness and unmanageable debt seem to be rife in the outsourcing sector. Capita, another giant, has announced losses of half a billion pounds, and has not secured any new government contracts since the Carillion crisis began to unfold.

Thousands of SMEs and small subcontractors rely on the public sector ecosystem. The fact that things are being mismanaged so badly right at the top of the tree puts an entire sector of the economy in danger.

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Government reform

The Parliamentary report was pretty stark in its assessment of the root cause of Carillion’s failure - unfettered corporate greed that prioritised boardroom bonuses over sound business management, egged on by reckless advisors and auditors who turned a blind eye to the worst excesses.

It even recommends that the ‘Big Four’ accountancy firms - PwC, KPMG, Deloitte and Ernst & Young - be broken up for their role in ‘waiving through’ accounts for a firm with £1.5bn worth of debts.

But for contractors across the country, the real issue is not reform of the financial services industry. It is whether the government will now reform its own approach to outsourcing to make it more transparent, equitable and sustainable.

The government must take its share of the blame. During the Parliamentary inquiry into Carillion’s collapse, bosses at the major outsourcing firms told MPs that public tenders were being judged on little more than price, creating an inevitable race to the bottom as bidders competed with each other to slash costs.

The government would claim its priority is trying to secure best value on how it spends taxpayers’ money. But value and price are two different things. For companies like Carillion whose entire business model depended on major public contracts, tenders become a matter of win at all costs, regardless of whether they can actually deliver projects at the prices they quote.

A few days before MPs published their findings on Carillion, they released evidence from Santander, the bank which ran Carillion’s early payment facility (EPF). What Santander said confirmed what many subcontractors already suspected - Carillion’s notorious payment terms stemmed from a desperate bid to cover its own financial mess.

Carillion insisted on 120-day payment terms, but offered an olive branch to suppliers and contractors - under the terms of the EPF, they could get paid sooner, as long as they accepted less money than they were owed. In other words, the UK government’s biggest outsourcing partner tried to strong arm contractors into taking a pay cut in return for getting paid within four months.

You have to wonder if that would have been necessary had the government itself not instigated a price war between its major suppliers, creating a world of fantasy economics that has endured for the past decade.

Public sector outsourcing must be reformed. There have been calls for a move to a more ‘social’ procurement process, where contracts are awarded on the basis of the values of the bidder and what they offer in a wider economic context, not just price. There is also a belief that smaller businesses should be helped and encouraged to bid for contracts directly.

Currently, the complexity of the tender process means it is only really viable for the biggest firms with the most resources. But this just concentrates power at the top, leading to an overly complex ecosystem as work is passed down the supply chain.

Ultimately, as is always the case with these things, the brunt of the fall out will be borne by the small businesses who will never get paid for work they have done. Reform of outsourcing must be focused on preventing that from happening.

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