The Big Fish gobble up contracts for local services

By John Clancy on Jan 30, 13 05:16 PM in

This is the blog version of my Birmingham Post print column earlier this month.

It sticks in the craw this New Year, I know, for struggling West Midlands small and medium sized businesses (SMEs) to watch the big quasi-private sector fish like Capita, Serco, Amey, G4S and VT come from outside an area and gobble up services in their local economies which could have been provided by local SMEs.

Quite rightly, they don't see these big fish (sharks, perhaps?) as 'real' private sector enterprises. Their existence pretty much relies wholly on taxpayer handouts. The SMEs believe they could better provide those services. But these massive para-public companies' size, promises and sales pitches make them difficult to compete with. Indeed they can often be the only ones that can afford practically to bid in the first place, or they spring up unannounced as an offshoot simply to exist for the bid: pop-up shops for public largesse.

It is estimated that Capita alone wins 29 per cent of the public sector money available for these things. Tens of billions of pounds of public sector money annually goes to these mainly big fish.

As they are quasi-public sector companies, not really true private sector enterprises, absorbing taxpayer money, the SMEs are right to ask why these companies were simply not subject to direct spending cuts. Direct top-slicing of contractual amounts payable by any public body to them could surely have been applied as part of the Government's spending cuts.

Had the same cuts to private sector contracts been required then the minnows might have stood a better chance at competing with them on bids in the past or in the future. It's the 17 per cent that can make the difference.

Far from it: the big fish have ended up protected, hiding behind a private sector shield of contractual certainty of payment, even though the contractual terms would never have been in the contemplation of the parties, had they known what was coming in terms of their revenue.

In the real private sector these contracts would have failed through market forces and come to an end. Instead these quasi-companies get jam yesterday, today and tomorrow, while the real recession hits the SMEs hard. Pre-austerity, long-term contracts are a really nice cushion available to only a select few posteriors. Especially if astronomical exit fees for the contract are readily enforceable at considerable public cost in the courts. Statutory intervention is required to level the playing field and allow a market to work.

The reality also is that the failure to reign in and top-slice the pre-severe-austerity private sector contracts signed with the Big Fish means, for example, that Birmingham City council is spending money on things through outsourced contracts it would not (under any colour of political control) have chosen to spend on had it known, at the time of signing, that its resources were to be squeezed so drastically.

The Big Fish carry on as if nothing has happened. Residents find they are being provided with services which now seem extravagant, in the face of other cuts, but they are contractually inevitable at unacceptable cost. Had a number of smaller contracts over shorter terms, with smaller enterprises been involved contraction would have been much easier to handle.

The added unfairness is that while the SMEs struggle with the effects on the local economy of austerity policies which depress both consumer spending, local and central government spending, and thence business-to-business spending, they are effectively locked out of negotiations for contracts which could provide much needed vitality and activity in local economies.

Indeed some public sector outsourcing companies are doing even better as councils and other public sector bodies, desperate for a quick fix on spending, swallow whole frankly dodgy sales pitches about likely 'savings' from them. The Audit Commission is also frank about how lousy the public sector and local government are at assessing these pitches objectively. The Capita contract (Service Birmingham) is a case in point with very recent claim and counterclaim about whether this has saved money or cost more money. I believe it is a flat-lining partnership which will cost even more money in future and would best be open to hundreds of other SME providers.

I have written frequently here about the importance in any economy (local or national) of econodiversity. A range of businesses models, variegated in size, structure and purpose can enliven local economies and end the dead hand of economic and business monoculture.

This applies especially in a recession. If services, supplies and products required from a local public sector entity are simply replaced by a few nationally-based, big, public-spending-reliant businesses, then one has to ask what the point is.

Capita's contract with Birmingham City Council could be worth well over £1billion over the next decade. Surely the contract would have added to economic vitality in the city and the region had it been available (or is made available) to the variegated, diverse ICT, media and other SMEs across the city and region. I think they should be asked. I think they should be treated better in the process.

I would suggest that, especially in the teeth of a triple-dip recession, such SMEs would be able to deliver massively better than publicly-listed, London-based, mega-international businesses like Capita; possibly together as a conglomerate of SMEs, franchises and co-operatives, and, yes, possibly some pop-ups.

Service Birmingham exists as a duopoly: Capita and Birmingham City Council. It should expand to incorporate vastly more local SME businesses and enterprises instead. Capita should accept that, and without charge.

I believe the same applies to Amey's roads, pavements and parks contract, and others.

It's high time that the SME lock-out came to an end. Local economies and their SMEs are suffering and are in real need of an economic boost. It must be to local SMEs that local councils turn first to provide.

Assessment of contracts must be able to consider the impact of keeping the services being provided by local SMEs. Such provision, especially by local, existing SMEs should be quantifiable as part of the assessment.

Since one of our biggest, most successful UK companies (about to land in a spaceship on New Street Station), John Lewis, is a employee partnership, we should also be looking at econodiversity in terms of what kinds of local enterprises can be part of local provision of public bodies' needs, along with our co-operatives and bog-standard SME limited companies and partnerships.

Our public and private economy needs to be rooted in its local enterprises, not in London-based, international capital, whether private or semi-private. And where such a big economic player as a Birmingham City Council has taxpayers' and other money to inject into the local economy, it should stay in that local economy and not be spirited away into the economic pathways and streams of the Big Fishes, to God-knows-where. Such real diverse partnerships with local enterprises can be part of the solution to finding local, sustainable economic growth and jobs, especially in such straitened economic times.

Business authors

David Bailey

David Bailey - Professor of Industrial Strategy at the Aston Business School, Birmingham
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Stuart Pemble

Stuart Pemble - Construction Lawyer, Mills & Reeve
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John Clancy

John Clancy - Birmingham City Councillor and director of and
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John Samuels

John Samuels - Professor of Business Finance, Birmingham Business School
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Keith Gabriel

Keith Gabriel - A Birmingham-based PR Account Manager
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Beverley Nielsen

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Mike Loftus

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Richard Halstead

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Karl Edge

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Peter Owen

Peter Owen - Managing director for construction firm Willmott Dixon Midlands.
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Dr Steven McCabe

Dr Steven McCabe - director of research degrees for Birmingham City Business School.
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Francis Greene

Francis Greene - Professor of Small Business and Entrepreneurship, at the University of Birmingham.
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Alan Gilmour

Alan Gilmour - Director at Cogent Elliott, experienced in marketing, brand development and customer relationship management.
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Paul Noon

Paul Noon - Paul Noon, OBE, West Midlands International Trade Director at UK Trade & Investment.
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