This week, New Philanthropy Capital (NPC) will warn that charities believe their relationship with the state is increasingly dysfunctional, with many of those charities most dependent on public service contracts now seriously struggling.
In a report to be published on Wednesday, NPC will report the alarming news that “nearly two-thirds of charities say they have used money from public donations to prop up key health and social services they have been hired to provide.”
In addition, NPC reports that years of austerity have led local authorities and the NHS to procure services through contracts at ‘the cheapest possible price’, driving down the quality of services and thus leaving many providers in a financially unsustainable position.
I have written previously for Government Opportunities about public sector procurement being under pressure given the Government’s austerity policy, which has cut the budgets of some local authorities by over forty per cent. Within the public sector, it is now clear that politicians and senior executives are putting undue pressure and expectations on their procurement officials to deliver ‘more for less’, and that strategic/intelligent commissioning and procurement are being steadily abandoned in favour of ‘bargain basement shopping.’
Inevitably and in turn, procurement officials are putting service providers in the charity, social and business sectors under-pressure to submit bids with unrealistic and unsustainable charges and prices. Major corporates are able to push back – and for the most part, the wise ones do, refusing to bid on terms that are commercially unsound, whilst some others will bid in the expectation and hope that that they can subsequently negotiate higher prices. In contrast – and like many charities, especially smaller ones – small businesses and social enterprises are much more vulnerable to pressure from procurers, which, whilst unfair, is also ultimately self-defeating for the public sector. This is a zero-sum ‘game’ that will end in tears for all. There will be no long-term winners.
Charities will be torn between a desire and burning imperative to support their beneficiaries and bidding only for sustainable contracts. They will want to maintain decent employment terms for staff too. And for many they may only have one local authority or NHS client/funder so choices will be limited. Yet they must make choices – however hard and painful.
Charities have to decide how they will respond to these pressures and this bullying approach from the public sector. Many may sensibly decide not to bid – and instead rethink their entire business and operating model, merge or cease operating altogether. Others may, individually and/or collectively, challenge these procurement practices.
And what of public procurement officials? My view is that they must ensure that their organisations sustain good constructive relationships with charities and the wider voluntary and community sector. In doing this I recognise that many of them will be ‘under instruction’ from senior executives and even politicians but this is no excuse for poor professional behaviour.
Charities and the VCS play an increasingly important role in the delivery of public services, and some are geared up to doing this on a contractual basis with the public sector. Many such providers innovate and set the pace and direction for other providers, including the public sector; others are able to take risks and reach marginalised groups in ways that the public sector finds difficult; and many provide specialist services which no single public body is equipped to do. Still others will be involved in campaigning and advocacy, as well as service provision. All of this variety is fine and to be encouraged butut it also has to be facilitated by good and professional public procurement practice.
If under-priced contracting continues, the public sector will inevitably find itself without providers. Or charity providers will find themselves fundraising to subsidise the public sector, which is not in itself a charitable objective, and cannot be sustained beyond the short term if a charity is to survive.
My advice note to public sector procurement officials, especially those in local government and the NHS, is short but critical:
establish meaningful and constructive relationships with charity and VCS providers and other potential providers, so as to understand their service offers and their operational and financial imperatives
understand their cost base and never expect to buy services for less than the real cost of provision plus a reasonable margin, so as to enable the provider to be sustainable and to invest, innovate and grow
accept that no charity or VCS provider should be expected, whether involuntarily or through feeling they have no choice, to subsidise public services or a public sector procuring body
always consider grant aid ahead of competitive tendering and contracting – it is cheaper, leads to partnership rather than conflict and is more appropriate, especially for small charities and VCS organisations
when there is a competitive procurement, ensure that the process is open, allows for client-bidder dialogue and above all, is ‘proportionate’ to the contract being procured
always place quality above price in procurement evaluation
tender and contract in ways that allow providers to innovate, to respond to user and community needs and choices, and to be sustainable in line with a charity’s mission and values
never threaten or imply a threat that campaigning or advocacy activity will disadvantage a bidder and/or provider; and build such guarantees into contracts or funding agreements
always apply the same approach to supply chains so that if, for example, business sector providers are to sub-contract to charities, then they should be expected to treat their supply chain fairly
encourage and support investment in capacity building in the voluntary and community sector
make sure that the senior decision makers in your organisation understand the implications of low-cost procurement, especially if the payments do not meet full costs, and push back if pressurised to procure on such terms, so that they understand the consequences of failing to behave appropriately
Politicians and public sector executive leaders are good at mouthing warm words about charities, social enterprises and the voluntary and community sector. However, more is needed in order to ‘walk the talk’. They have to demonstrate their understanding and appreciation of the sector through being more enlightened and realistic when they procure public services. Failure to do so will harm and even close many charities – and, inevitably, the real losers will be service users and communities.
I urge public procurement leaders to read the NPC report, reflect carefully, and act accordingly.