Thursday, November 20, 2008


Someone's being taken for ride

Another day, another government subcontractor fiasco. Yesterday it was Liberata cocking up big time on their £80m contract to pay Educational Maintenance Awards. The government has sacked them and appointed Crapita – the very people they’d sacked to appoint Liberata. It’s a go-round all right, but not a merry one.

On Newsnight, the £1m pa tax-funded Pantomime Paxman blamed the Tories – it’s their fault for introducing government to the idea of subcontracting in the first place. We agree with him – the Tories should have been thinking far more radically. Instead of subcontracting hospital cleaning, they should have been breaking up the NHS and instituting competing social insurers directly accountable to customers – a point for the future.

We’ve lost count of the subcontracting fiascos we’ve recorded on BOM. And there are some common features:

  • Government departments and quangos are terminally hopeless at appointing and managing subcontractors. They are incapable of specifying their requirements upfront, incapable of negotiating robust, properly priced, contracts, and incapable of monitoring satisfactory delivery. Anyone who is any good at such work leaves for the private sector, where they both earn more, and escape the life-sapping clutches of the Commissars.
  • Government subcontractors routinely over-promise and under-deliver. In this case, Liberata reportedly never had the IT capability essential to delivery: they presumably reckoned the Simple Shopper would never insist on kicking the tyres before buying.
  • Subcontracting can undermine frontline delivery. The contractors’ customer is generally at the centre, not at the level of the hospital ward or GPs’ surgery, which means frontline public sector staff no longer have direct day-to-day control. The devastating results with, say, ward cleaning are all too clear.

So should we abandon subcontracting altogether?

No. Some subcontracting has worked. In Tyler’s hood, rubbish collection has been subcontracted, seems to work well, and is generally believed to be much cheaper than the old in-house arrangements.

But there are two key points to highlight. First, the contract for Tyler’s rubbish collection is a local one. The collectors are directly accountable to Tyler’s local councillors, and they in turn are directly accountable to him. It only takes a handful of votes to change his councillor, and the councillor is fully seized of that fact. In other words, the end-customers have some real traction.

Second, rubbish collection is a pretty self-contained business, and it’s fairly easy to hold the contractor accountable for the results. Contrast with say hospital cleaning, where responsibility for superbugs may be down to poor cleaning, or poor nursing, or some unfathomable combination of the two, or neither.

Both nurses and cleaners are involved in a joint effort, and it’s very difficult to correctly identify and specify their precise responsibilities. Indeed, if you try too hard, you end up with a 5,000 page contract which requires permanent onsite lawyers to interpret before anyone can do anything: the costs of implementing a fully specced contract end up outweighing the purported benefits of outsourcing.

(Economics has yet another branch devoted to this issue – the transactions costs theory of the firm – which explains how there is a balance to be struck between the benefits of market-based specialisation – outsourcing, say - and the costs involved in formalising every single transaction).

What these contracting fiascos are really telling us is some all-too familiar truths: Big Government is hopeless at organisation, and hopeless at shopping. By intermediating its blundering self between us and our end-suppliers it ensures we get the worst possible deal.

PS Talking of the tax-funded pantomime Paxman, Sir Philip Arcadia Green had a good shot at Humphrys this morning. Noting that the state broadcaster takes great delight in talking down the market economy and willing its collapse, he asked how the BBC would behave if it had to support itself from advertising revenue rather than £3bn pa of our taxes? Humphrys drew himself up to his full moral height, and said they’d continue to report The Truth. Right. And also, if it had been Sir Trevor instead of John Sergeant, would the BBC have still thought it OK for a judge to refer to him as a pig in Cuban heels?

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