Strategic Suppliers Contents

Conclusions and recommendations

Government’s role in the market

1.The Government has allowed a culture to develop in which a small number of large companies believe that they are too big to fail pursued new business with little apparent consideration of their ability to deliver the right service at the right price. (Paragraph 22)

2.We welcome the Minister’s announcement that the government will be issuing a ‘playbook’ to encourage new entrants and look forward to seeing the details of the proposal. However, the language used in the announcement suggests that the Cabinet Office does not intend to take the opportunity to equip itself with powers to enforce its ‘playbook’. (Paragraph 31)

3.Recommendation: We recommend that the Cabinet Office upgrade its ‘playbook’ and other guidance to the status of mandatory requirements. (Paragraph 31)

4.The Government has created a merry-go-round procurement culture that encouraged a small number of companies to bid for contracts that they knew they would be unable to deliver for the agreed price. (Paragraph 35)

5.The Government’s procurement process incentivised both Government and companies to focus more on the process of tendering and winning bids than on ensuring the right supplier could provide the right service at the right price. (Paragraph 36)

6.The Government has failed to use its unique position in the market to encourage competition in the market; and appears to have no plan or targets for the development of the markets in which it operates; nor does it have the underlying data necessary to develop such a plan. (Paragraph 37)

7.The Government is a uniquely powerful player in these markets but has failed to understand or manage the market. Public sector contracts cover a wide range of activities and are provided by a wide range of companies. Government has little understanding about how it influences the market and displays little strategic thinking into how it could, or should, be examining or influencing those markets. (Paragraph 38)

8.Recommendation: We recommend that the Cabinet Office develop an approach to examining the market to provide it with better intelligence on the motivations and intentions of companies currently bidding for central government work. (Paragraph 39)

9.Parliament and the public do not have access to straight forward, comprehensive and comprehensible information about government contracting. (Paragraph 42)

10.Transparency is key but still too many contracts are secretive or opaque. Quite frankly the taxpayer deserves better. A standard set of contract information should be made publicly available after a contract has been agreed. That information must include the contract value, length and KPIs, together with a list of other public sector contracts won by the successful company. The Government should consider more “open book” methods of running contracts. (Paragraph 43)

11.The Government has committed to greater use of SMEs as direct contractors and announced measures to improve treatment of SMEs in the supply chain. We have, however, seen little evidence of action. We recommend that when the Government publishes details of its proposals to support SMEs it includes an assessment of the wider benefits of increasing the pool of potential suppliers to Government. (Paragraph 49)

12.Recommendation: There is no excuse for small and medium supplier businesses not being paid on time. We recommend that the Government considers a project bank account approach and reviews the impact on small business. We expect the Government’s proposals for supporting SMEs to include measures to address:

i)Delays in payment

ii)Retention payments

iii)Preferred supplier discounts

iv)Increasing the use of Project Bank Accounts

v)Reducing the barriers to the direct bidding to Government

vi)Supporting consortia bidding.

We recommend that the Government consult with SMEs on the most appropriate way to incorporate these measures into contracts. (Paragraph 50)

7.Our evidence has highlighted a concern that contracting bodies do not always have a sufficiently clear understanding of the service that they are outsourcing. (Paragraph 57)

8.Public bodies can consider outsourcing to be an opportunity to transfer problems to a private company. Transferring risk is illusory in most cases as the government retains the ultimate risk of failure to deliver certain services. (Paragraph 58)

9.Poor contract specification leads to uncertainty, which can cause cost increases, delay and failures to deliver. Imprecise scoping and poor information at the tendering phase can also lead to an adversarial environment that makes it more difficult to reach resolution. The Government needs to ensure that contracting bodies balance front line understanding of a service, project management skills and commercial and financial considerations when designing contracts. The Cabinet Office has a role in ensuring that this balance is achieved. (Paragraph 64)

10.Poor-quality Government data is a perennial concern for the Committee—Government needs to be clearer about the problem it is outsourcing and clear when its own data is flawed or incomplete. (Paragraph 67)

11.Recommendation: We recommend that Government set out how it will improve the reciprocal due diligence between the Government and its suppliers. Government has a right to assure itself that a company is competent and capable of delivering the contracted service. The company also has a right to expect the Government to specify accurately what service it is contracting. (Paragraph 68)

12.The introduction of a standard contract is welcome and appropriate for the majority of typical procurements. When the Government procurements are more complex, a more flexible and intelligent approach to contracting is required. (Paragraph 70)

13.Recommendation: Standard contracts, which are beginning to be used by Government, should be used widely. Standard contracts should be designed to make it easier for SMEs to bid and make it clearer where variance occurs. (Paragraph 71)

14.Recommendation: The Government must ensure that the procurement process for more complicated projects includes a comprehensive sensitivity analysis and scenario planning. (Paragraph 72)

15.Recommendation: Government should look at the lifetime cost and value of a contract, not just the bottom line at the point the contract is commissioned. Government needs to get better at managing contracts through their life. To do this it needs to facilitate significant uplift in skills (Paragraph 73)

16.Recommendation: Government should consider using a partnering model, as used in construction to create co-dependent relationships, for major, risky contracts to incentivise suppliers to deliver effectively alongside Government, and to ensure Government has proper oversight and skin in the game on vital public services (Paragraph 75)

17.Recommendation: There is an attitude that money can be made from contract variance–so that when data is wrong at the outset this can be a way to boost income on a low margin contract. In the middle of this game, the user of the service too often loses out. (Paragraph 78)

18.In certain sectors technical, social or legislative change may lead to contracts containing perverse incentives or illogical performance measures. The speed of technological change means that IT contracts are susceptible to changes in the external environment. (Paragraph 79)

19.Recommendation: Departments should provide the Cabinet Office with a request to enable extensions for contracts. That request should set out the reasons for requiring the extension, the analysis of the benefits of extending rather than rebidding, and an analysis of the performance over the course of the contract and record of performance across all of the company’s public-sector contracts. (Paragraph 80)

20.The current procurement environment encourages Government and suppliers to place too much emphasis on price at the expense of quality. Tendering exercises must have an appropriate quality threshold and contracting bodies need to have sufficient understanding of the market to identify bids that are too low to enable the supplier to sustainably deliver to the required standard. (Paragraph 83)

21.Our evidence suggests that some companies have bid at a price that provides little or no margin with the expectation that subsequent variations will enable them to make a reasonable return. (Paragraph 84)

22.We have real concerns about a race to the bottom in pricing. A number of suppliers are now going through corporate cleansing and refusing to bid for contracts where the profit margins are low. Such cleansing has not stopped them doing this in the past. Too often suppliers will also pass cost-cutting down the supplier chain without due regard for long-term implications. Government has to be an intelligent customer and be clearer about the impact of pricing models on the long-term delivery of a project. A saving today can simply shunt costs into the future. (Paragraph 85)

23.Cabinet Office is obliged to consider wider social benefits of procurements under Section 3 of the Public Services (Social Value) Act. The underuse of the Act could be taken as further evidence that cost overrides any other consideration Government makes in awarding contracts. The enthusiasm of suppliers to see the Act better used gives Government an open goal to achieve more social value. (Paragraph 88)

24.Recommendation: We recommend that there be an expectation of including a social value evaluation in Government procurements and that contracting bodies provide the Cabinet Office with an explanation if they wish to remove the provisions. (Paragraph 89)

25.Recommendation: Government should, as part of every procurement tender, require plans to add social value and ensure social value is a weighted criterion for contract awards (Paragraph 90)

26.Recommendation: Government should enshrine winning bidders’ social value commitments into contracts and agree appropriate KPIs for monitoring delivery. (Paragraph 91)

27.Recommendation: We recommend the Government include terms in their standard contracts that provide assurance that the company has appropriate corporate governance and corporate social responsibility policies in place. (Paragraph 92)

Cabinet Office’s role

28.Recommendation: Government needs to step up its skill development within departments so that contracts are specified better from the outset (Paragraph 95)

29.Recommendation: We concur with their recommendation that the Cabinet Office establish a contracting centre of excellence that can collect best practice and learning and disseminate it across the wider public sector including the NHS and local government. (Paragraph 100)

30.The Government needs to develop more robust challenge and scrutiny of contracts before they are let. We recognise there is progress here, but there are still too many contracts which do not collapse but still deliver poor services to the user. (Paragraph 101)

31.The Cabinet Office lacks sufficient leverage with other Departments. Departments continue to act in separate silos, failing to share information or adopt the appropriate multidisciplinary teams that combine frontline knowledge, commercial skills and project management. (Paragraph 102)

32.Recommendation: Cabinet Office should ensure Departments adhere to Cabinet Office guidance and are required to respond to Cabinet Office challenge for large procurements. Where Departments want to deviate from Cabinet Office guidance, they should write to Cabinet Office ahead of opening a tender, setting out their justifications for that deviation. (Paragraph 103)

Crown Representatives and Risk Assessments

33.The Government’s RAG rating system is not working, either as a carrot, or as a stick. The RAG rating system is a management tool that provides civil servants with a shorthand assessment of a supplier’s performance. A decline in a company’s RAG status appears to have no material impact, other than to trigger closer scrutiny from the Cabinet Office as set out in the Strategic Supplier Risk Management Policy. (Paragraph 107)

34.We do not accept Cabinet Office’s rationale for failing to give Carillion a High-Risk rating. Given the caution with which Government treats risk assessments we believe it is highly improbable that a High Risk rating would become public. The Cabinet Office’s decision not to do this undermines its own Strategic Supplier Risk Management policy. (Paragraph 108)

35.Recommendation: We recommend that the Cabinet Office review the Strategic Supplier Management Policy and its application. If RAG ratings are to be of use they need to be applied consistently and based on objective assessment. The Cabinet Office should consider whether it is appropriate that a supplier can appeal against a rating. (Paragraph 109)

36.We consider that the Cabinet Office overstated the potential impact of publishing the past risk assessments relating to the Government’s remaining Strategic Suppliers. However, we accept that some material risk of damage exists and particularly to smaller supply chain businesses and their employees, and have therefore decided not to publish the documents in full at this time. (Paragraph 110)

37.Recommendation: The Crown Representative system is at risk of under-resource and high staff turnover. The Cabinet Office should consider how to make the role sufficiently attractive to attract and keep individuals of an appropriate calibre. (Paragraph 112)

38.The circle of civil servants working closely with Strategic Suppliers is small. It is important that in the cut and thrust of commercial discussions, undertaken on behalf of taxpayers, Crown Representatives do not get too close to suppliers. Without effective oversight of these relationships there is a risk that Strategic Suppliers become secretive ‘sub departments’ of Whitehall. (Paragraph 113)

39.Recommendation: The Government should consider appointing an independent commissioner to provide independent assurance that suppliers are being held to the same standards across government. (Paragraph 114)

The Collapse of Carillion

40.The Joint Report from the Business, Enterprise and Industrial Strategy and Work and Pensions select committees sets out the key facts about Carillion’s business approach, corporate governance and financial performance and reporting. The Committees’ conclusions and recommendations are a damning litany of incompetence and self-delusion at the top of the company. Several aspects of the company’s, and its advisers’, activities continue to be investigated by outside regulators, including The Pensions Regulator and the Financial Reporting Council. (Paragraph 118)

41.The net loss to Government of carrying out the liquidation is currently estimated at £148m, but the final sum is uncertain. The wider costs to former Carillion workers, pensioners, investors, the supply chain, and other creditors remain unclear. Carillion’s shareholders and lenders bore the brunt of much of financial penalty for the company’s failure. Many of Carillion’s subcontractors and suppliers took a very large penalty as Carillion had accrued significant credit through late payments which, even if the contract had been taken over, were unlikely to be paid. (Paragraph 119)

42.We welcome the Government’s intention to introduce a requirement for suppliers to produce ‘Living Will’ contingency documents. (Paragraph 121)

43.Recommendation: In response to this report, we expect the Government to provide more detail about how the policy will be implemented; what the documents would contain; and how their contents would be scrutinised, assured and kept up to date. (Paragraph 122)

44.Recommendation: More complex contracts are more likely to go wrong. We would expect the Cabinet Office to consider the burden of creating and maintaining the living wills and balancing that burden with the complexity of the project and the risk and impact of contract failure. (Paragraph 123)

Published: 24 July 2018