FRAMINGHAM, 24 JANUARY 2011 - Four out of five government departments are trapped in their outsourcing deals, stifling efforts to slash budgets.
That is the damning verdict of an advanced analysis of government contracts, conducted by deal price measurement firm ProBenchmark.
Most of the contracts cannot be realistically re-let, with up to 80 percent of buyers having no preference for changing supplier. The main problems are the complexity of the arrangements and the costs of cancelling deals.
The issue, a major obstacle to government cost cutting, leaves Whitehall with "no leverage" to push for reduced costs, ProBenchmark said in its report. Central government needed a "new approach" to improve contract value, it said.
For government deals costing over £50 million a year, reprocurement work by staff and external advisers costs on average £1.5 million, ProBenchmark calculated. The total cost of re-tendering in the current round of public sector cuts could be over £200 million, it said.
"Market-testing sounds right in principle but has huge costs in practice because of the types of services being delivered by outsourcers," said Simon Scarrott at ProBenchmark. "We are seeing re-bid processes take 18 months or more to complete and costs to both parties of up to £8m - even before transition and redundancy costs are accounted for."
He added: "The tendering process in its current form costs more than the savings it delivers - and that is not sustainable."
It was also difficult to retender large contracts because of the complexity of service arrangements, as well as the "extent to which the outsourcing service provider is embedded in the client organisation delivering functions which are mission-critical", he said.
"In those cases, a re-tendering process is a waste of time and money as the procurement team's hands are completely tied. They have no levers with which to get better value."
"The unpalatable truth is that the size of many deals, the dependence of the client on the services delivered and competitors' unwillingness to enter a complex bid process means that for many tender exercises, only the incumbent can reasonably re-bid."
But the government also often lacked a knowledge of market prices, he said. Procurement teams needed "real time market intelligence on the costs of the services they are buying and the power to negotiate aggressively".
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