When new public service markets are first emerging, particularly those for services which have no private sector equivalent, suppliers are on a steep learning curve - they are obliged to innovate in order to deliver better value-for-money. There is no common understanding about how to improve these services and each contract is, in many ways, unique.
Some of the early entrants in the UK public service economy developed a business model that was based on a deep understanding of the customer and being responsive to their particular needs. Rather than having a standard product which was sold repeatedly to different customers, providers prided themselves on being 'customer- facing' and delivering bespoke services that addressed the separate requirements of each individual department or agency.
In this respect, they were similar to consulting houses. Professor Clayton M. Christiansen has described these kinds of firms as 'solution shops' - 'structured to diagnose and solve unstructured problems'.
Solution shops deliver value primarily through the people they employ - experts who draw upon their intuition and analytical and problem-solving skills to diagnose the cause of complicated problems. After diagnosis, these experts recommend solutions. Because diagnosing the cause of complex problems and devising workable solutions has such high subsequent leverage, customers typically pay very high prices for the services of professionals in solution shops.34
Christiansen contrasts 'solution shops' with 'value-adding process businesses', such as automobile manufacturing and petroleum refining, where firms 'take in incomplete or broken things and then transform them into more complete outputs of higher value'.
Over time, as the goods or services in question are better understood, these value-adding processes are separated from the solution shop, causing costs to fall dramatically. Christiansen has closely studied the health sector, where certain medical procedures (such as eye surgery and heart surgery), once delivered by highly-paid specialists under a 'solution shop' model, are being routinized, with the result that high-quality procedures can be delivered today at a much lower cost.35
Unlike consulting firms, which are only responsible for analysis and design, public service companies underwrite their proposed solutions by accepting the responsibility for delivery, and their business model enables them to adjust their solution over time. They have always stood partway between 'solution shops' and 'value-adding process businesses', and for them, the process of standardisation, commoditisation and systemisation has involved a change of emphasis rather than an abrupt transition to a radically different model.
It is inevitable that markets will become commoditised over time, with systems and processes becoming standardised, routinised and imitated by competitors. As this happens, risks are better understood and better managed, prices fall, new suppliers enter the market and companies are obliged to accept narrower profit margins.
Providers would like to be paid 'solution shop' prices for services that are essentially process-based. 'Step and repeat', a term now widely used among the private providers of UK public services, points to a process of commoditisation, and company executives see this as a way of reducing prices and, for a time at least, growing profit margins. This transition may have been accelerated by the entry of firms and senior executives familiar with more commoditised markets.
The chief executive of a medium-sized provider thought that commoditisation has largely been driven by industry: 'There has been a race to commoditise services over the past five years. Contracts are bigger and companies believe they can offer lower prices through economies of scale'.
For government, the standardisation of services and the commoditisation of markets means that they can conduct price-based procurements with less risk of inducing a winner's curse. The Government Purchasing Service was established in 2011 as an agency of the Cabinet Office, with the self-declared mission of demonstrating 'that significant and substantial savings can be achieved through centralisation, aggregation and standardisation'.36
The growing use of e-auctions and the preference for off-the-shelf solutions in the procurement of public services provide clear evidence of the shift that occurred around that time in UK government. Indeed, government has deliberately recruited executives from the private sector whose experience lay in tenders and auctions for highly commoditised products.
The danger is that if government treats complex public services as commodities when they are not capable of being standardised, this will encourage a focus on price and an unintended decline in service standards. There are examples of e-auctions being used for complex public services, with providers being caught up in bid fever as a result. One experienced bid director, who has worked for three different public service companies over the years, said that they had recently no-bid a major contract precisely because it was being tendered through an e-auction. He had asked his team why they thought that tendering a complex public service through an e-auction was likely to end happily.
A senior civil servant with a long background in commissioning offered the view that very few government services are commoditised. This is certainly true of front-line services - the complex nature of 'public purpose', the untidy interface with policy and politics, and the vulnerability of many of government's clients ensures that this is so.
Standardisation also has the effect of suppressing service innovation, so before moving down this path, departments and agencies must feel confident that the services in question have little to gain from further experimentation (beyond process-based innovation).