With the government set to become a major purchaser of public services far more attention must be paid to the procurement process, warns Ann Rossiter of the Social Market Foundation

With the government set to become a major purchaser of public services far more attention must be paid to the procurement process, warns Ann Rossiter of the Social Market Foundation

It is over 10 years since David Osborne and Ted Gaebler exhorted government to 'steer rather than row' in their landmark book Re-inventing Government. Today, a clear trend towards less direct provision of public services and more procurement from external suppliers is well established, with central government moving inexorably away from being a provider to a purchaser of services.

Starting with the outsourcing of much professional activity in the 1990s, this trend developed through the privatisation of non-core operations such as catering in schools and hospitals, and continues with the increasingly complex commissioning of, for example, waste and transport services by local authorities. Serious first steps towards a strong purchaser-provider split in the delivery of health and education services signal continued change in this direction.

Withdrawing from the direct provision and management of core public services creates challenges for government. Even where private sector companies operate the entire process of public service provision - say, waste disposal from collection to incineration - a public body retains key functions of co-ordination and responsibility.

Where a public body co-ordinates individuals' resources through taxation, it must always be ultimately responsible for the quality of the services provided in return. The outsourcing of public service contracts leaves the government with responsibility for services it does not directly manage.

Managing and operating the public services has long been the core responsibility of the civil service. The skills, organisation and operating protocols of its staff have long been geared to serve in-house provision. Much of the civil service is a command and control bureaucracy, designed to achieve results through the exchange of information from below for orders from above. Risk is typically managed by aversion and protocol - the aim is to deliver exactly what is described in the brief; there is no real incentive to take on the risk of innovation, as improvements in service operation do not accrue to the civil service.

In privatisation the government could sell assets and step out of the way. In procurement, the government must influence outcomes without controlling management; this is a far more radical transformation of the role of government than straightforward privatisation ever was.

Command and control

The information and decision-making flows of command and control bureaucracies work reasonably well at providing services, but they do not naturally tend to efficiency.

We know the competitive pursuit of profit provides ever cheaper goods and services. The outsourcing of processes and whole services, however, does not merely shift us from the a bureaucratic situation to a competitive one.

In fact, we demand that the former controlling institution (the civil service) now manages another organisation's pursuit of profit (the contractor) for the sake of a third group's quality and price interests (the taxpayer).

The information flows required to carry this out are quite different from those required for day-day delivery. The levers and time frames by which contractors' performance can be influenced are quite different from those used to guarantee delivery within a single organisation. With so much of the civil service dedicated to command and control, the skills and the administrative structures appropriate for handling complex contracting are inevitably underdeveloped. This could negate all the benefits central government hopes to realise from the introduction of competitive pressure to frontline service provision and internal infrastructure development.

Incentive structures in the civil service are well aligned for delivery on administrative priorities, though not always for delivery on customer priorities. Introducing profit-seeking third parties introduces a new set of incentives.

These may not be aligned with either the administrator or the customer. The private sector is heralded for its efficiency and for its customer focus. The private sector often focuses on the customer as an entity to be subjected to the maximum amount of asymmetric [unequal] information and product lock-in that the market and the regulator will tolerate.

Varying markets

Competition limits lock-in and the abuse of information, but the markets in which the government negotiates with contractors are often underdeveloped. Some markets, such as the private finance initiative, are pure government constructs which would not exist without the political will to finance them; some markets such as IT are competitive, but the vastness and complexity of government projects limits the number of potential bidders.

Other markets, such as construction, can work well, but are easily distorted by patterns of public spending, introducing risks of time and cost slippage that the civil service has not traditionally been set up to manage.

Without protection from either a competitive market or a regulator, government procurement can be exploited for excess profit.

A policy for improving efficiency through increased procurement therefore requires strong action to develop markets and gather information, actions which together can prevent abuse.

The extent to which benefiting from private sector efficiency depends on positive action in reshaping the functions and skills of the civil service has often been underestimated.

Guidance has concentrated on the key role of information. Procurers must know what the market is capable of delivering; they need to know how much time the market needs. Procurers need some idea about the costs of projects they are tendering; at renegotiation they need to know something about the running costs and profits; the procurer needs to know how far economies of scale suggest competition can be sacrificed to bundling, and whether subcontracting will provide best value; procurers need to know how

far the project may become dependent on future winning contractors, and how this may affect costs.

Most of this information must be gained without a competitive market from which to infer it. Routinely incorporating this into civil service decision-making requires cross-governmental collaboration to gather and share information; it requires procurement functions to become the most prestigious in the civil service. Procurement and commissioning decisions will have the greatest impact on user experience of any civil service decisions.

While the Office of Government Commerce is leading efforts to make the whole of government more entrepreneurial, and the Office of Fair Trading and former Office of the Deputy Prime Minister have taken an interest in government supply markets, the Department of Health and the NHS offer the most encouraging examples of improved procurement.

The NHS supply chain excellence programme and the NHS Purchasing and Supply Agency have established a network of procurement hubs capable of communicating with suppliers as well as pooling information on contracts and behaviour, which improves the negotiation process in future procurements. Through such co-ordination, the NHS can realise its market power, releasing resources for frontline care.

This approach has also been taken in OGC-led initiatives, notably the 'Kelly markets' where the OGC co-ordinates demand from across the public sector and communicates this to suppliers. A similar initiative is planned for the procurement of waste management services. Unfortunately, such a co-ordinated approach remains lacking in most government procurement.

The NHS national IT programme and ProCure21 can also be held up as examples of best practice. The IT programme's insistence that all contractors ensure technical compatibility with one another and potential future contractors has ensured the contract features multiple sourcing and does not rely exclusively on satisfying one firm's special interests. All intellectual property rights generated on the contract are transferable between contractors, so always reside with the institution best able to exploit them. We must hope these features will be emulated in future government IT procurements.

ProCure21 is a programme for improving NHS relations with the construction industry. This was a forerunner of the Kelly programme and provides an information hub and a set of standardised framework contracts. This helps to co-ordinate demand to potential supply and reduce the cost of contracting. These successes respectively reduce risk and increase supplier interest in bidding, reducing completion costs and improving the terms offered to the NHS.

In their commissioning role, primary care trusts are leading efforts to develop the monitoring and feedback processes necessary to support commissioning. The Your Health, Your Care, Your Say white paper included a user satisfaction survey in the oversight and monitoring processes by which PCTs ensure a potentially wide range of providers all deliver a high standard of care.

As commissioning roles develop across government, such surveys will have to become much broader and more influential. The information transmitted from users to commissioners in the above example is extremely limited.

Minor adjunct

Unfortunately, the ability of the OGC to transmit successful DoH practice throughout government is severely limited. As its budget demonstrates, the OGC remains a minor adjunct of the Treasury rather than a powerful centre of excellence.

In 2004, central government spent£1bn on consultants; the OGC received a£35m administration budget, or 3.5 per cent of spending on consultants, to drive forward entrepreneurial behaviour in the civil service.

Though this is set to increase to£43m by 2007-08, it remains dwarfed by likely spending on consultants, and by the Cabinet Office's planned administration expenditure of£265m, which will produce plans relying on the development of effective procurement across government.

There is a strong case for a shift in resources from consultancy to the OGC. Procurement is becoming a core function of government.

The private sector, collectively, uses consultants a lot, and used rightly they do add value. Crucially, the private sector does not employ consultants to carry out core business processes. Consultancies provide skills that firms cannot afford in-house.

Once a process becomes part of routine business it should be brought in-house rather than contracted at great expense. The government procurement service, established in 1999 at the OGC, is nowhere near accomplishing this task. The GPS merely holds an annual conference, distributes information and issues a 'certificate of competence'.

A better model would be the government economics service or, increasingly, the government IT profession. The latter is interesting as it has been resurgent under the leadership of former Accenture managing director Ian Watmore, whose recruitment made the government's determination to bring IT competency back in-house a practical possibility.

This determination is slowly starting to pay off and offers a model for the development of procurement as a particularly prestigious branch of the civil service. Such a move is essential if the government is going to succeed in steering us towards better, more user-centred public services.