Government must make clear at the highest level that the procurement and contract management tools that are appropriate for buying highly commoditised, easily specified goods and services are not appropriate for commissioning complex support services and front-line human services.
It is now evident that there were significant savings to be made from greater standardisation and centralisation in the procurement of basic goods and services. There was a need for a more commercial approach to contract management. And, in the wake of the global financial crisis and the focus on repairing the budget, it was inevitable that there would be a more intense focus on price. But insufficient attention was given to the impact that these reforms would have on the delivery of complex public services and ultimately on the sustainability of the market if these settings are maintained.
The tension between price and quality in government contracting is not new. There has been a debate over contracting models going back to the 18th century at least. On one side, there were those at the centre of government who were primarily concerned about economy; on the other, those in the field who were focused on quality and reliability.
But there has also been a difference of world view between those, like Jeremy Bentham, who believed in primacy of contract design and the motivating effects of financial incentives, and those, like David Hume and Edmund Burke, who argued that in the delivery of public services, internal motivation mattered.102
These differences are evident in the debate over public service contracting today. Those close to the front line are much more sensitive to the impact that benchmarking and low-price bidding have on staff numbers and service quality. Those who deliver human services to vulnerable members of the community are more aware of the need for a 'public service ethos' in working with these individuals.
Research by the European economist, Bruno S. Frey and his colleagues, suggests that there may not be a balance between these two approaches to contracting: highly contractual performance regimes, with intensive monitoring and strict enforcement seem to work well for some services, while more relational models, with a considerable reliance on trust, work with others. There may be no middle way.
Frey and his colleagues concluded that performance is enhanced when enforcement is strong or weak, but not in between. Their explanation is that trustworthiness (which does very little work under a strong enforcement regime) may be crowded-in with weak enforcement because of the heavy reliance on trust, and crowded-out with medium enforcement. Low-intensity enforcement may encourage the entry of principled providers, while medium-intensity enforcement may open the market to less trustworthy players without mitigating the associated risks. Frey has also argued that strong financial incentives may be counter-productive where intrinsic motivation is important to successful delivery of a service.103
This suggests that government needs to develop a more sophisticated understanding of the characteristics of different services, the extent to which outcomes and outputs can currently be specified and performance measured, the ability of providers, in-house and out-of-house, to deliver improvement and the range of contractual tools that are likely to work best given the current state of the market. It must be able to take an informed view on contract size and duration, the relative importance of price and quality, the intensity of the performance regime and the associated rewards and penalties, and so on. At present, it does not have these capabilities. As one survey participant commented:
Government is increasingly short-term. The forms of contract being used don't justify the investment in partnership and skills.
Some markets are low-maintenance, with commissioners having little more to do once the procurement has been completed and the contract signed. In other cases, the market is more like a corporate supply chain, and public officials will be actively engaged in developing suppliers in the early stages of system development and managing them throughout the life of the contracts. Government must be able to distinguish between these different kinds of delivery systems, and adapt its market stewardship activities accordingly. At present, it does not have these capabilities either.
This is in spite of reports by the Office of Government Commerce from as early as 2003, arguing the need for 'a much more intensive and open dialogue with suppliers at all stages of the procurement', in part so that industry has a clearer understanding of government's future intentions, and in part so that government has a better appreciation of market capability.104 A number of executives interviewed for this survey observed that civil servants don't get out and speak to providers enough, with the result that they don't know the market. The large suppliers acknowledged the Crown Commercial Representatives were engaging with them in a more strategic way, but it is clear that this has not gone far enough, and it is still not commonplace in line departments and agencies.
Industry is strongly of the view that government should reconsider the contractual and procurement models which have emerged in the public service economy over the past five or six years, in particular the way in which those tools are being used in commissioning complex public services. If government persists in using models that are only suitable for buying 'paperclips', then over time, government will cease procuring complex services.
Government must learn to distinguish between those markets that have matured to the point where they are capable of commoditisation, and those where the complexity of or uncertainty about the services in question and/or a general lack of understanding or expertise on the supply side requires a less transactional approach. The need for such a distinction was recognised by Sir Ian Byatt as long ago as 2001, in his report on local government procurement:
Well-established competitive markets exist for many of the routine goods currently bought by local authorities. There is scope for improvements in procurement, particularly by reducing transaction costs. E-procurement has an important part to play. . .
Where there are new markets for large and complex services, local authorities will need new capabilities of contract design and contract management.105
Sixteen years later, government does not currently possess the ability to distinguish between those services which can operate reasonably well under a highly transactional and aggressively price-based model, and those that require a more relational and trust-based approach.
It takes years for a large organisation to develop the skills required for the deployment of effective relational contracts across its supply chain, so it will take time for any such change to take effect. It has been argued that this was one of the reasons why in the 1980s, General Motors had difficulty in imitating the production techniques that had been developed and so successfully deployed by Toyota:
GM's history of adversarial relations with its blue collar workers and suppliers, its reliance on an operating model that assumed there was very little need to exchange knowledge across either firm or functional overlap and its muddled and unaccountable internal processes made it difficult to build the credibility fundamental to effective long-term relationships. Moreover even after the firm had recognized the importance of adopting techniques like continuous improvement and cross-functional communication, it took some years to understand the nature of relational contracts that would be needed to diffuse them within the organization. Managers accustomed to governing by fiat appear to have found it difficult to understand the potential benefits of discussion and collaboration.106
As suggested in section 2.3.3, if it is interested in rebuilding industry's trust in the market, government might also consider a separation of its responsibilities for market regulation from its role as customer.
Guidance documents insist that government expects suppliers to speak up when a project is unlikely to succeed because of poor behaviour on the part of civil servants or a lack of good governance. In practice, that does not generally happen.
While there is growing respect for the professionalism of the staff employed by the Crown Commercial Organisation, the legacy of a highly adversarial approach to procurement and contract management, pursued by the Cabinet Office and the Crown Commercial Service in recent years, remains. Some companies have gone to their Crown Representative or to the Chief Crown Commercial Officer when they encountered difficult customers, but this was not regarded by some survey participants as an ideal solution.
The suggestion was made of some kind of 'ombudsman' to whom companies could complain when they encounter such behaviour. Unfortunately, this might encourage more gaming behaviour on the part of suppliers in the form of unjustified complaints. However, if government wishes to address this conflict of interest between its role as market player and market regulator, then serious consideration needs to be given to this question.