We have previously expressed concern about government's over-reliance on a small number of providers in certain markets, with the effect that these providers are treated as if they were too important to fail. We see a growing recognition of government's market stewardship role in commissioning, not only across central government, but also in local government, health, police and social care.
Government has aimed to reform its procurement practices and make procurements easier to access. It has also tried to reform the ICT markets to move away from long-term contracting with a prime provider for delivery of a range of integrated services, to disaggregated and smaller contracts. These initiatives aim to open up the supplier base and allow SMEs to participate, thereby providing greater access to innovation and competition.
Government has also made attempts to stimulate new markets, such as in the recent Transforming Rehabilitation competition, and to bring in new providers to existing markets, such as in DWP's medical services contracts. Government also needs to guard against the consolidation of markets, using its powers to prevent changes of control where appropriate.
Our recent work has highlighted that government needs to understand the risks of provider failure and how it can be managed effectively. The failure of a provider can be the necessary price of innovation or come from effective competition, keenly priced contracts and robust contract management. However, the failure of a provider can have serious consequences and departments must manage failure effectively, in order to ensure continuity of services, and to protect the interests of people who use them.
It is also important that government understands its markets and providers, including their business model and their strengths and weaknesses, so that it can shape its contracts to attract the right providers to the market and then manage them appropriately. Providers that have grown too quickly, or that have made a poorly judged entry into a new part of the market, present particular risks as they may not have adapted their existing control culture to meet the demands of the new service.
Managing provider failure: Our principles | |
Strategy and Planning | Understand the appetite for failure: departments should consider the potential impact of a provider failure and decide their appetite for it. They may wish to consider a range of factors including the impact of failure on users and the reliance of their delivery mechanism on individual providers. The appetite for failure may be high, for example where they are using market mechanisms where users choose providers and there are many alternative providers. It may be low, such as where the department co-produces with a provider and shares the financial or reputational risks. Plan a delivery model which aligns to the appetite for failure: departments should select a delivery model that aligns with their appetite for failure. Plan for how to respond in the event of a provider failure: departments should have a sufficiently detailed plan for how they would respond if a provider should fail. |
Measurement and Implementation | Put in place appropriate oversight to monitor providers, proportionate to risk appetite: departments should establish and use appropriate arrangements to detect failure and early warnings of it. Agree with providers and service users what constitutes failure and its consequences: departments should establish a shared understanding with providers (and service users) about what constitutes failure, to make it easier to identify. Departments should also consider how far transparency about what will happen in the event of a failure will encourage positive behaviour, and how far it will enable providers to 'game' the system. Balance the need to be consistent with the need to respond to individual circumstances: when a provider fails, departments should weigh the risks of the 'moral hazard' arising from a rescue of a failing provider, against the risks that that failure involves. Departments should consider how far their risk appetite has changed since they planned for failure: for example as user vulnerability changes. |
Evaluation and Feedback | Assess the ways in which the response to a failure has affected the perception of the appetite for failure and therefore the incentives operating upon providers. When a department acts it will reveal some of its appetite for failure. If the response has created moral hazard, then the department will need to take steps to ensure that it manages that risk in the future. Reconsider the health of their providers: after a failure, departments should try to identify whether the failure of a provider is an individual instance or a pervasive issue. Share lessons about failure within and outside the department: government as a whole needs to learn from each major instance of provider failure. |
Source: Principles paper: Managing provider failure, National Audit Office, July 2015 | |