Government contract renegotiations - what they mean

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This week, Cabinet Secretary Francis Maude summoned government suppliers including Serco, Capita, Compass and WPP to a meeting to discuss radical changes to their contracts.

Bosses are bracing themselves for news that they must be prepared to lower their prices and consequently their profits on public sector contracts, in light of the drastic spending cuts. Speculation hints strongly that the Cabinet Secretary’s team will target four key areas: construction, technology, professional services, and facilities management.

Though there is probably a lot of truth behind the speculation, scaremongering around public sector cut-backs is becoming somewhat of a national pastime in the UK.

The Government’s very public cost-cutting mission does not automatically mean outsourcing contracts will be axed altogether. Nor does it mean they will be re-negotiated on price alone for the sole benefit of public sector agencies, to the detriment of outsourcing suppliers.

What it certainly will mean is that all state contracts will be under rigorous scrutiny to deliver maximum value. As a result, many agreements may be in line for re-negotiation. Contract re-negotiation normally focuses on three main areas which include price, performance standards and the scope of services.

It’s not uncommon for a number of re-negotiations to take place throughout the lifespan of longer term outsourcing contracts, say those that are five years or longer. Whilst it’s no surprise, particularly in the current climate, that end users want more for less, pricing will of course be on the table for discussion.

However, during many contract re-negotiations, the scope of services can be expanded, which means that suppliers could in fact come away with bigger contracts.

Another possibility is extending the term of the contract, so suppliers have greater certainty of future revenue. Though these scenarios will likely mean lower pricing per process, overall, there can be a significant increase in volume and therefore in revenues. There is ultimately a trade off between volume and profit margins, nevertheless, we need to be mindful that contract re-negotiation is not simply about putting budgetary pressure on suppliers.

One of the current trends in outsourcing sees a move away from sole sourcing to multi-sourcing. Large contracts are being divided up and various processes are being awarded to a number of suppliers. Re-negotiation can mean new business opportunities for some outsourcing suppliers as a result of competitors’ contracts being re-negotiated, so, there will be winners and losers within the outsourcing market.

It’s worthwhile noting that re-negotiating outsourcing contracts is not unique to the public sector. Though private sector contracts tend to run for shorter periods of time compared to public sector ones, we can’t expect economic or technological conditions to remain static and unchanged throughout the life of any contract.

Regardless of sector, re-negotiations can benefit both end users and suppliers.