A steady decline in local government contracting to big multi-national companies revealed by the latest figures reflects growing nervousness in an unstable market place. The collapse of Carillion early last year followed by scares involving the likes of Capita, Interserve, Allied Healthcare and Kier appear to have confirmed the already apparent dangers of huge outsourcing deals.
The volume of total local government spend handed over to the biggest companies has fallen from 30% in 2015 to 25% last year, according to market analysts Tussell, while smaller companies and social enterprises are enjoying a new prominence among the top suppliers.
The view that councils should look for the best deal in the interests of their communities seems to be winning the long-running battle against the idea that they must always go for the lowest-cost contract offered by the big multi-nationals. 'Best value', taking into account the benefits a deal offers for the community and the local economy as a whole, is increasingly accepted as the touchstone in local government procurement rather than simple 'best price'.
Despite the formidable pressures on councils to save money, they seem to be focusing on quality as well as monetary cost alone. With Capita declaring last year that it was no longer interested in 'flagship' projects and would in future concentrate on lower-level 'transactional' business, the scene is set for a radical change of culture.
At the same time, the Tussell annual report reflects a somewhat volatile market place. The almost overnight rise of Places for People from the ranks of the smaller suppliers to its placing as the biggest local government contractor, following a 15-year joint venture deal with Surrey County Council worth a staggering £1.5bn, may suggest a risky policy of putting rather a lot of eggs in one basket. With no let-up in budgetary pressure the executives at Kingston upon Thames will no doubt have analysed the risks, costs and benefits of the package very carefully.
Overall, the report notes that the total lifetime value of procurement contracts issued by the wider public sector in 2018, not including framework deals, amounted to £49.5bn – a £5bn or 10% decrease on the previous year.
It must be borne in mind that these figures reflect only the value of deals signed within a given year, not the total volume of business contracted out at any one time. So a year in which a large number of deals are signed may mean the following year has a low total – because the business has already been done. Having said that, it is hard not to conclude that the decline may at least in part reflect the impact of Government-imposed austerity on spending.
Nevertheless, while the value of contract signings fell, the overall number of awards by central and local government increased by 21% last year – a welcome sign, says Tussell, that the drive to unbundle large contracts into smaller and less risky schemes of work ('contract disaggregation') is having an impact.
It suggests the Government has learnt lessons from over-reliance on a small number of large suppliers such as Carillion and is successfully moving towards 'smart' procurement aimed at balancing costs and benefits more effectively.
At the same time the proportion of central Government spend accounted for by its top 20 suppliers has gone up fractionally in the last four years, in contrast with the trend in local government. Evidence from other sources suggests the official target to increase Whitehall's spending with SMEs to 33% by 2020 may not be met.
The encouraging signs of increasing diversification in the local government sector may reflect the fact that concerns about regional economic regeneration and people's general wellbeing are felt more keenly in town halls and council chambers because they are geographically and democratically closer to the communities they represent.
In the business of making sure public sector procurement plays a full role in stimulating local economies and rewarding entrepreneurship, councils are well placed to show how it can be done. If they can make their buying of goods and services through smaller companies and social enterprises work to the benefit of their communities, as they appear to be doing, it will indeed be a smart way to go.
