Published by Alexander Hitchcock on 13 July 2016
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Government’s approach to outsourcing services has risen up the policy agenda in recent years. The Coalition Government saw high-quality competition between external suppliers as a key lever to deliver value for money for taxpayers and service users alike. In theory, dynamic public-service markets are well-placed to achieve this: at least half the productivity gains of private markets over 10 years can be attributed to the replacement of less-productive firms with more-productive ones.
For these gains to materialise, government must ensure a level playing field for bidders. The removal of barriers to market entry was a key aim of the Coalition Government’s flagship welfare-to-work programmes, the Work Programme and Work Choice. As then Minister for Employment Chris Grayling explained, the Government was agnostic about what type of organisation delivered the contracts, so long as the tendering process gave all types of providers an equal shot at delivering government aims.
With the Conservative Government beginning the procurement of the successor to these programmes, now is an opportune time to assess whether past competitions achieved government aims. To do so, this paper draws on the insights of government officials, industry representatives and third-party experts.
The paper identifies a range of barriers to market entry in previous competitions. Poor contract design – including onerous financial-health requirements – erected barriers for smaller organisations hoping to bid for ‘prime’ contracts in the Work Programme. The same programme’s heavy emphasis on payments by results also created cash-flow issues for smaller providers, which – if replicated in the Work and Health Programme – threatens to discourage bidders entering the market. A heavy focus on the price, rather than quality, of bids may have favoured large organisations capable of leveraging economies of scale to undercut competitors. Such a focus is indicative of a short-term approach to market creation by government, which encourages immediate gains over creating a healthy market, with a wide base of providers, to ensure value for money in subsequent programmes.
Solutions to these barriers to competition were also identified. A dynamic approach to risk management is needed to ensure that providers are not barred from entering the market through unnecessarily austere financial-health requirements. Commissioners should focus more on quality when assessing bids, including assessing past experience and local strategies. This does not mean that price should be ignored – it is an important factor in the value-for-money equation – but commissioners should take this into account by setting a range within which organisations can bid.
A critical facilitator of high-quality, open competition is a continuous dialogue between commissioners and bidders throughout the procurement. Commissioners should provide data and information in a timely fashion to enable bidders to prepare for market entry. Only then can government hope to create a long-term supplier base to maximise competition for this and future procurements of welfare-to-work services.
Local commissioners will also have a much greater role in the commissioning of the Work and Health Programme. Local authorities, and even health commissioning bodies, could help the Department for Work and Pensions (DWP) design services by providing forecasts on local labour market conditions, alongside advising central commissioners on outcomes assumptions. Co-commissioning regions, such as Manchester and London, could be involved in assessing the quality of bids in their areas.
All in all, these changes represent a strong evolution in government policy, with best practice from past approaches refined and built on. The design and procurement of services are key determinants of their later success. If DWP gets these right, it can provide a model for the rest of central and local government on how to improve competition in complex-service markets. More importantly, it will provide a big step towards helping some of the most vulnerable members of society into work.PDF DOWNLOAD