Why Economies of Scale Lead to Poor Service

As the government embarks on programmes of shared services, let me give an example of why this approach can be disastrous. At the local school where I am Chair of Governors we have just gone through BSF (Building Schools for the Future). We were promised the economies of scale would result in better service and lower prices. In fact they have led to the reverse.

Lessons of BSF
Let's take the example of IT support. Before BSF we had a team of four staff, who had taken the school to a leading position in the use of IT in education. They were directly managed by the school and any problems could be dealt with directly.

Now we have an external firm managing it. But we don't have a direct contract with them. They have a contract with the lead contractor. The lead contractor has a contract with the Local Education Partnership (LEP). The LEP has a contract with the local council. And the local council has a contract with the school.

In the first year the service was terrible, so bad that penalty payments sometimes exceeded 50% of contract value. Previously we could have dealt with this through performance management. If we had simply employed an IT support firm, with a sensible contract, we could have simply terminated and found another provider. But a distance of four complex contracts and a first contract break point of five years, there was very little we could do. Economies of scale had resulted not in better service but in a complex, costly service over which we had little power as customer.

Now BSF is well known for its costly, centralised legalistic approach. Anybody involved will tell you how it wasted billions of public money. But the shared services approach is set to follow a similar route.

Shared Services in Training
Take my business of training. In most of our contracts we have a direct relationship with clients. If they are not happy they can simply choose somebody else (though this rarely, if ever, happens). Under shared services, the client will have a contract with the service purchaser, who will have a contract with the main contractor, who will have a contract with the training provider. And it will be a long-term contract, to justify the complexity of the procurement.

Rather than getting economies of scale, we can expect to get complex contract relationships (which raise costs) and only indirect control over quality. Once again the lawyers will do very well, but the government clients probably won't.

Why Economies of Scale Can Lead to Higher Prices

Once again we have a government talking about saving money through shared services and combined procurement. It seems to make sense. If you buy 100, say, televisions you would expect to be able to negotiate a better price than if you only bought one. The same must be true for when the government buys services, mustn't it?

Actually the answer is often no. Let's look at my industry, training delivery. Parts of central government are now talking about combining all their training spend - for IT, management, health and safety and much more - across many departments. To bid you will have to be a truly massive company, the likes of Capita or Serco - and they certainly won't be as cheap as buying direct from a training provider. And control of quality will be fair more indirect.

For a government agency in, say Exeter, the best value training would probably be sourced from the local college or a small local provider. But neither of these will bid for a national contract. By making the contract so large, the competition is cut down to a small number of big companies who are rarely either best for value or best for quality.

Small Companies Can Provide Better Value and More Flexibility
One agency I know, after a full procurement some years ago, hired a one person company to provide their IT training. They provided the best value, most flexible, most responsive service I have come across anywhere outside of my company. (I know about it because Happy Computers was the back-up provider, for any courses he couldn't train.) But he certainly couldn't bid for any national contract and the large providers would have little reason to include him.

At the same time as going for larger procurement contracts, the government talks of including more small businesses - apparently unaware of the obvious contradiction. I've heard government representatives talk of how small businesses can be included as sub-contractors to the big bidders.

But this is a profoundly stupid approach. The benefit of contracting with small firms is better value and greater flexibility. You lose both by only contracting these companies as part of large contracts.

If the government goes ahead with its determination to centralise procurement you can expect some very complex legal contracts (yes, the one set of people who will definitely benefit are the lawyers), less direct contact with the providers and a far more bureaucratic approach. What you almost certainly won't get is lower cost.