By Nick Heath
Monday, April 07 2008 10:40 AM
URL: http://www.zdnetasia.com/news/business/0,39044229,62039873,00.htm

British taxpayers' money is being squandered on public sector outsourcing deals where costs are ballooning up to 75 percent more than the going market rate.

Lackluster controls on spending over the full lifetime of government outsourcing contracts are leading to "poor value for money" because public sector organisations are lured by low upfront costs, claims Compass Management Consulting.

The consulting group made its claims in a submission to the government's Public Services Industry Review (PSIR) that is looking at how to improve efficiency in the £40 billion (US$80.1 billion)-a-year public outsourcing market.

Nigel Hughes, consultant at Compass, said: "There is more focus in the public sector on the initial tender price and not the long-term price of the contract."

The submission says: "This leads to the "bid it thin and get it in" strategy of many outsourcing providers who price contracts at up to 18 percent below market rate on day one rising to 30 percent above market rate by year three of the contract.

There is "no accountability and no way of calibrating value for money as the contract runs" it says.

It claims that providers are forced to "claw back" their losses after being pressured to lower their bid to win the tender.

Hughes called on the government to lay down a blueprint for best practice.

Compass said that managers and systems need to be put in place to work with supplier to monitor performance and control spending once the contract gets underway, similar to the setting up of a vendor management office.

The submission refers to a government agency paying 65 percent above market rate for servers and storage and a major government department paying 20 percent more for outsourced desktop, servers and infrastructure despite its scale.

The PSIR finished taking submissions on Friday 4 April, including from major outsourcing providers like Accenture and LogicaCMG, and is being headed by DeAnne Julius after being commissioned by the Department for Business, Enterprise and Regulatory Reform.

Nick Heath of Silicon.com reported from London.