October 12, 2010

Philip Green: not as big as he thinks?

It's been one of the week's hot topics: how much can be saved by the public sector, by rationalising procurement of everything from the mythical paperclips to hotel rooms and consultancy. Deriving from the report of one of retail's biggest names, this would seem like a suggestion everyone can agree with - buy into, if you will. Every business owner knows that negotiating a good deal with suppliers - exclusivity in return for a discount - is the way to keep overheads down.

Philip Green's 'report' is actually a brief powerpoint presentation, and makes many sensible points - it is clear to anybody that government has been far from efficient to date.. It suggests better controls over spending - setting limits on the costs of basic items such as stationery, avoiding duplication where multiple contracts exist with a single supplier, and driving a harder bargain.  But the underlying point is that government should use its huge scale to negotiate single, central contracts - by necessity with very big firms.

In our work, we constantly argue for the value of smaller firms - such as ourselves - over bigger; and in our projects, we search out ways to stimulate entrepreneurship, diversity in local economies, and specificity rather than the blandness of the big corporation. This would seem, also, at the heart of the vaunted-yet-nebulous Big Society ideal: encouraging local, community-oriented, businesses and social enterprises to take on the functions of the state, arguing that they better understand local and niche needs.

So what is going on here? Is big really better? Perhaps not, even for paperclips.

Firstly: the too big to fail issue. A phrase that has become symptomatic with the failure of big banks, it could also apply to big businesses on which the public sector becomes dependent, and which are in turn, dependent on the public sector. Take Metronet - the firm charged with maintaining and running part of London Underground - one of only two firms to whom all this field of work was outsourced. Metronet became a massive case of failure - mismanagement, cost overruns, industrial disputes, collapse. But opting out of this contract was not an option. There were simply not other firms out there with the capacity to take on the work, because there wasn't a market for them to exist - no small contracts on which they could be tested and build up skills. Also, the 30-year contract - to save costs - was negotiated so that to opt out would have come with a massive financial penalty. Result: like the banks, Metronet had to be nationalised. If the government - or even one large department such as the Inland Revenue, across all its national offices - bought all its paper from one stationery company, it would then be in a position to hold the government over the proverbial barrel. Too big to fail, on the level of the incapacity of any other business to suddenly start supplying billions of reams of paper overnight, on the level of jobs potentially lost, and likely on the legal costs of getting out of a long-term, tightly negotiated contract.

Secondly: specialism. Big companies do not necessarily have specialism across all fields or geographic areas. The issues with framework contracts within our industry are a salient example. Big multi-disciplinary firms often do not have the detailed expertise to design or build the best or most efficient buildings for particular uses - such as sport, or listed building works, or projects depending on detailed local knowledge. Too often the existence of a framework agreement means public sector clients look first to the firms on that list, rather than who might actually deliver the best and most cost-efficient solution. We have seen big firms frequently perform so poorly that clients end up digging deep into contingencies and co-opting extra funds to correct mistakes that could easily have been avoided, had a firm been employed that actually cared about getting things right.

Thirdly: business ethos. Most big businesses are run primarily for the profit motive. Many - if not most - smaller businesses are run for a multitude of reasons: passion for creating the best product or service; social entrepreneurship linked to caring about the local economy, the needs of their workers, the ethics of their supply chain; profit too, of course, but not the single-track mind of the stock exchange. These are fundamentally Big Society values, but also carry financial value too. Not an easy thing to measure, but the longer-term benefits of a happier workforce (through flexible working policies, training opportunities, and sense of personal responsibility for the business success), less environmentally damaging processes, greater stability and diversity in local economies, are measurable and are real. The latter is one of the critical issues now faced by towns where there was a big increase in public sector employment during the last goverment, and are now facing cuts - in the same way that single-employer manufacturing towns - or WalMart towns in the US - face destruction when that employer or contract is lost.

Encompassing all of the above is money. Big does not mean cheaper. Monopolies - or near monopolies, such as Metronet - mean prices rise, rather than fall - this is Economics 101. When you are Topshop, this doesn't really come into play. However large you are, you are not as big as the NHS when it comes to negotiating with suppliers - there will always be someone offering you the same product or service for less - and if not in this country, then you look overseas. Big does not mean cheaper when things go wrong, as Metronet shows. Big does not mean cheaper when the service you procure is not good enough, meaning wasted costs. And big does not mean cheaper when it comes at costs to communities or the environment. And because we still have the semblance of a welfare state, the government is the one who has to pay for the fallout. Again, not a problem Topshop faces: if they bankrupt a supplier by squeezing too hard or cancelling a contract, they do not then have to pay for the unemployment benefits to laid-off workers.

So what does the government hope to attain in the long-term, in return for a short-term cut in costs? The bankruptcy of a multitude of small, local suppliers for whom public sector contracts form an important part of their income? The loss of the expertise, passion and value for money represented by thousands of niche firms who do a few things very well?

The lessons of the private sector do not always transfer seamlessly to the public sector, much though the government 'wishes to learn' from them.  If nothing else, the last government's insistence on outsourcing everything possible - PFI a classic - should demonstrate how badly private sector values can scale up to the size of the state. The irony is that Philip Green's report is actually very critical of the large contracts that government has procured to date, finding the contracts badly negotiated in exactly the Metronet way. Rationalisation may not be as simple as it seems.

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Anonymous Anonymous said...

Superb analysis, I think. Thank you for thrashing it out on screen.

They tried with Thatcher and had to bring the 'people' back when business failed to 'work it out'

I admire their will to make the world smooth but its an illusion and their delusion.

October 13, 2010 at 12:58 AM  
Anonymous Anonymous said...

Fair points. PG2 is essentially a less thoughtful and more in yer face version of PG1, who emerged from the wreckage of GE/Marconi to achieve I cant quite recall what for the taxpayer (OGC I think). PG2 comes from this dubious outfit Topshop which isnt much fun to work for and doesnt have clothes the right size. Their collective PGtips arent even worth making a cup of tea with really.

October 13, 2010 at 12:24 PM  

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