Greater Manchester Centre for Voluntary Organisation

Toxic Opportunities

After a period of stagnation in public sector contracting we are starting to see some movement with public sector tendering processes starting to increase as a number of councils commit to outsourcing more services. However some of these opportunities are not exactly as they might first appear and winning such a contract might even put an organisation at risk.

A recent article from Ben Crouch at Strong Roots highlights this issue. It’s worth reading the entire article as it’s a comprehensive overview of some of the changes we’re seeing in commissioning but this section in particular struck me:

Commissioners are demanding everything but the kitchen sink and I have heard of a number of organisations “win” a loss-making contract that could completely destabilise an organisation if they aren’t quick enough to plug the income gap. I have also advised two clients that, after careful review, the contract that they were considering submitting a tender for is too toxic and lack of margin means it is too high risk. By toxic I mean that the level of risk being passed on from commissioner to provider is too high and that there is a high potential of either contract breach or possible insolvency.

As commissioners see demand increasing but resources shrink they are increasingly demanding services priced at levels that create significant liabilities. In addition we’re seeing contracts advertised where TUPE would apply in such a way that liabilities and risks transferred are greater than the contract value itself.

It’s important not to approach a tender negotiation by just looking at the contract value and your organisation’s costs. Some contracts may guarantee your organisation income in the short term but create a liability that puts it at risk.

We’re also seeing many contracts let that do not extend beyond 2015. It’s clear that the spending settlement in 2015 will see the biggest squeeze on public spending in the post-war period and the challenge of meeting that will be much more significant than that of the last two years. It’s worth assuming any contract let at that point will be smaller in value than the current contract or will require higher levels of performance. In that case, organisations may be required to lose staff and if they haven’t made provision for redundancies or made enough of a surplus on the contract during its operation to cover those costs, then a significant loss could present itself to the organisation. With many contracts let over so short a period and with margins being squeezed many contracts simply do not pay for themselves.

In many senses those contracts that have high TUPE liabilities are not an opportunity outsourced but a liability outsourced. To take on some of these contracts an organisation would need significant reserves it was willing to use to underwrite the risk or be extremely confident that it was able to grow as a business in a very competitive market. These are reasonable positions to take if you believe your organisation is strong but it’s important that trustees are involved in developing such a position and informed of the risks inherent in such contracts.

Inevitably though such contracts will only exist if bidders compete for them. If voluntary organisations vote with our feet and leave such toxic opportunities alone whilst continuing to compete for the more realistic contracts then commissioners will have to rethink their approach.