Third party suppliers to government are now part of the critical national infrastructure

No more them and us a new report from Deloitte, the business advisory firm, concludes that third party suppliers to government should now be considered part of the UK’s critical national infrastructure and that public bodies need to improve their ability to manage them more effectively. It warns of the potential for supplier failure as public sector budgets contract.

The report demonstrates that the way the government delivers public services has changed significantly over the last 20 years from delivering services directly to commissioning and managing a large number of third parties.

The report identifies the scale of third party delivery of public services from a range of public sources:

• A quarter of all UK government expenditure, £175 billion, is spent on goods and services(1). It is the second largest market for government suppliers in the world after the United States.(2)
• Suppliers to government now employ around 1.2 million people and collectively produce around 6 percent of GDP. Despite a nationalised UK healthcare system, spending on suppliers is largest in health (£24.2 billion), followed by social welfare (£17.9 billion), defence (£10.1 billion) and education (£7.3 billion).(3)
• In total, central and local government bodies issue up to 600 contracts each week.(4)
• Councils spend around £42 billion on external contracts (over 40 percent of all expenditure), not including national programmes such as Building Schools for the Future. (5)

Mike Turley, head of Deloitte’s public sector practice, said: “There has been a profound change in public service delivery, driven by political consensus, which means that some suppliers now act as the principal agent of delivery for some public services.

“The notion that government must improve its management of contracts and suppliers is not new; yet the prospect of a prolonged and dramatic period of austerity for public spending will worsen the impact of ineffective supplier management. As budgets and supplier profitability contract during 2010 and beyond, the margin for error on both sides will shrink, and thus intelligent supplier management will be critical.”

The report argues that public bodies have not always adequately adapted their capabilities, cultures and processes to reflect their new role in that:

• Around 40% of central government managers fail to apply financial penalties stipulated in contracts when services fall below standard.
• 56 per cent of all central government contracts did not have a contingency plan in case of supplier failure. The situation was worse for high value contracts, with 61 per cent having no contingency. (6)
  Independent reports have identified a number of systemic problems with mismanagement of suppliers attracting high levels of media and political interest.

No more them and us recommends a series of measures that public bodies can take to improve the management of third parties delivering critical services:

Improving contracting and compliance – increasing focus on outcomes, improving controls around supplier behaviour, and using accurate and independent information to improve transparency and inform decision-making. Specifically, the report recommends independent compliance testing and assurance and where appropriate, enforcing contractual penalties.

Improving risk management – public bodies need to retain high quality data on the vulnerability of suppliers and their business models to changes in operational costs and other risk factors. Importantly, risk management needs to be applied effectively through the life cycle of contracts not just at the start.

Strengthening contingency measures – including a monitoring regime to provide early warning of supplier stress, establishing processes and procedures in the event of the need to intervene in a supplier emergency.

Mike Turley added: “To protect their own balance sheets, some suppliers may seek to pass a greater share of risks and liabilities for delivery to the client side. A full understanding of commercial motives and intentions of suppliers is therefore fundamental to success.”

Ends

A copy of the report is available from www.deloitte.co.uk/nomorethemandus.

Notes

(1) Office of Government Commerce
(2) Public Services Industry Review, Department for Business, Enterprise and Regulatory Reform, July 2008.
(3) Public Services Industry Review, Department for Business Enterprise and Regulatory Reform, July 2008.
(4) http://www.supply2.gov.uk/government_opportunities.shtml
(5) Roots Review: Review of arrangements for efficiencies from smarter procurement in local government, Department for Communities and Local government, February 2009.
(6) NAO December 2008

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk\about for a detailed description of the legal structure of DTT and its member firms.

The information contained in this press release is correct at the time of going to press.

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