Local authorities are looking at their contracts and asking: "can we get a lower price and better value for money?"
They have tight budgets and want suppliers to reduce price. However, unless there is a contractual obligation on the supplier to do so why would he? Many suppliers will want to see what they can do to assist their clients to maintain a good long term relationship. This will usually require a mutual negotiation not a unilateral imposition by the client to change the contract. There is evidence that some local authorities are seeking to impose contract changes. This will only succeed where the contractor is weak or agrees to compromise performance standards or service.
If a local authority's goal is simply to pay lower contract prices, it may not be too worried about how these are achieved. However, most local authorities are committed to decent workforce standards. Many are rightly concerned about how supply chains are treated, especially when these include local SME companies and third sector organisations.
If any authority wishes to lower profit margins and not just prices, it needs to understand the implications. Lower margins may prove a disincentive to investment in new systems; people development and service redesign with the outcome that government fails to achieve sustainable productivity improvements.
Lower margins may also lead to more reliable and experienced companies withdrawing from the public sector markets to be replaced by less reliable and inexperienced providers. In some circumstances, the long term costs may be higher.
Lower prices and fees will often require agreement to one of the following or a combination of these: relaxed performance standards; a widening the scope of the contract; an extension to the life of the contract; or the ability to re-profile a less profitable element of the contract. These all require detailed and difficult negotiations. Local authorities have to be confident that they have the skills and capacity to undertake such negotiations. That they do not turn expediently to "negotiate" third sector contracts and treat them unfairly, and not on the same basis as the private sector. The same applies to SMEs. It would be wrong if only the major providers had the ability to resist pressure to reduce prices and fees.
Local authorities will wish to consider how they can use their collective market power to secure better deals without compromising competition laws and protocols.
Increasingly they are introducing "open book" accounting and "profit share" arrangements for outsourcing or strategic service delivery partnerships with the private sector.
A local authority should seek to agree with its major suppliers on what will be included in "open book" accounts and how; the criteria for confidentiality conditions (for example as a re-bid period approached); external independent audit and access for client's internal auditors; disclosure of contract terms, operational performance and any consequential contractual penalties and/or bonuses; and profit-sharing arrangements in such contracts.
Each contract should agree on expected profit margin for a given set of outcomes or outputs. If the supplier's profit exceed this, the additional profits should be shared equally or as agreed. Local government scrutiny committees should have access to these arrangements and monitor them. Some of these arrangements are for the long-term and new contracts.
Local authorities will be concerned to find that long-term contracts are expensive. They'll want to find terms for new contracts which allows profit and a greater flexibility on price, volume, outcomes and activities.
Consequently local authorities will need to consider how they can agree with their providers on budget reductions. Good partners need to understand each other, their businesses and the wider market conditions. There has to be honest and full dialogue – this is not the time for unilateral power play.
John Tizard is the director for the Centre for Public Service Partnerships
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