Several interviewees discussed the benchmarking process, which is now being implemented for the first time in projects which have been operational for 5 or more years. Benchmarking relies on independent experts to establish a comparator price for each service, as opposed to market testing in which alternative service providers can bid to replace the incumbent. Interviewees commented that there had been issues around interpreting the provisions of the contract and in identifying suitable comparators. One contractor noted that the private sector was starting to organise benchmarking clubs.
Interviewees reported that the outcome of benchmarking exercises to date has been to increase the price paid by authorities. Labour costs, in particular, have increased more quickly than many contractors anticipated in their bids; in the health sector this has been driven by the NHS Scottish Low Pay Agreement. A similar outcome would be expected with conventional short-term outsourcing contracts, where the price would adjust to the market rate at each re-tendering. However, some authorities expressed concern that the benchmarking process could erode value for money by allowing contractors to make up for any deliberate under-pricing at the bid stage.
Recommendation: The Scottish Executive should monitor the process and outcome of benchmarking exercises in order to inform other projects and future contracts. It should consider how best to support authorities in collating benchmarking data, for example by holding information centrally or by promoting informal networks.