Communities and Local Government

• Local government
• CCT and Local Authority Blue Collar Services - March 1997

Local government

CCT and Local Authority Blue Collar Services - March 1997

Austin Mayhead and Company Limited

Key Findings

1. Annual cost savings under the second round of tendering (about 9%) are greater than those achieved at the first round (about 6.5%), although a third of contracts, in particular smaller contracts, record no savings. The costs of tendering, where recorded, are low and reduce annual savings by a small amount only. Average annual client side costs are below 5% of contract value and are, on average, 4% lower that at the first round of tendering.

2. Through second round tendering 85% of contracts have been awarded to the lowest bidder. This is less than the 91% awarded to the lowest bidder for the first round of tendering.

3. The amount of competition has increased significantly since the first round of tendering: an average of 16 organisations applied for a tender questionnaire, compared to less than 11 at the first round, and three and a half submitted a tender, compared to just less than three at the first round.

4. Most Authorities believe that the quality of CCT services has improved since the first round of tendering. Three-quarters said that CCT has resulted in clearer and more comprehensive service specifications and two-thirds thought it had resulted in a closer reflection of customer needs. Over 80% of DSOs expressed certainty that they were continuing to improve their operational efficiency and effectiveness. This view was confirmed by client officers - 71% agreeing with this assessment.

5. As part of the general improvement in standards, one in four Authorities indicated an increasing use of output-based specifications in contracts and all sample Authorities stated that they had performance measures in place that are actively monitored. Further, just over a third of Authorities have incorporated new monitoring mechanisms for the second round of contracts.

6. A majority of Authorities (58%) agree that consumer involvement can be improved by greater use of surveys, encouraging regular feedback on service delivery and increased participation by users in specifying and monitoring services. Further, nearly all Authorities agree that performance measures can be improved by reviewing local objectives for services, refining methods of monitoring and by adopting and tailoring measures used by other Authorities and the Audit Commission.

7. Although CCT appears to have, in most cases, helped to improve the quality of services and reduce the cost of provision, only a minority of Authorities (11%) are supportive of the compulsory element of the CCT regime. Almost a third of Authorities said they would not undertake competitive tendering of services should compulsion be removed.

1.1 Background, Methodology and Programme

Background

1.1.1 A major programme of research into local Authorities' experience of compulsory competitive tendering for blue-collar services commenced in Autumn 1995 and continued until the end of 1996. The work was conducted by Austin Mayhead and Company Limited, a private independent consultancy firm. The programme was funded and managed by the Local Government Research Branch at the Department of the Environment.

1.1.2 This research exercise updates and widens earlier work conducted by INLOGOV, the Institute of Local Government Studies at the University of Birmingham, into the effects of introducing competition into the provision of blue-collar services required by the Local Government Act 1988. The earlier research (published in 1993) covered initial experiences with compulsory competitive tendering (CCT) and assessed data relating to the first round of tendering. Most Authorities have now progressed through the second round of tendering and this research examines how Authorities tackle CCT issues now and how the relevant services are being affected. It also makes comparisons with the earlier INLOGOV research.

Methodology

1.1.3 The methodology for this research is consistent with that adopted by INLOGOV. The sample of Authorities consulted is similar, the use of interviews and structured questionnaires is the same and the collection of hard data about costs and the amount of competition is equivalent to the previous study. This has allowed a series of comparisons to be made between experience at the first round of competition and experience at the second round and relevant trends in findings have been identified.

1.1.4 The range of issues covered does, however, differ slightly from the earlier research. Several "one-off" developments occurred as part of the initial response to CCT (e.g. the creation of a client side and the use of various models for restructuring committee and officer structures). Detailed descriptions of these developments were provided in INLOGOV's report and have not been repeated in this work. On the other hand, several new issues have emerged. These include TUPE (Transfer of Undertakings (Protection of Employment) Regulations 1981), further DoE guidance, a more mature market and a greater focus on quality. This research and report addresses these new topics and, where appropriate, it identifies any relationships that exist between findings.

Programme

1.1.5 Pilot seminars were held during Autumn 1995 and detailed questionnaires were agreed. The 40 Authorities that had participated in the INLOGOV study were approached again for this research exercise. A few changes had to be made, but a representative sample of 38 Authorities agreed to participate in the research fieldwork, including 32 from the original (INLOGOV) sample.

1.1.6 Two series of visits were made by the research team to the sample Authorities. The first visit (in January and February 1996) covered all the main research topics within the questionnaires and approximately 150 senior Authority staff were interviewed about these topics. Requests for hard data were also discussed and proformas (covering information at both service level and contract level) were left for Authorities to complete. This hard data covered costs (Authorities were asked to provide a range of figures), numbers of bids, changes in specifications or monitoring arrangements, requirements for performance bonds, ownership of plant, details of defaults and penalties, and other factual information.

1.1.7 For the second round of visits (in July 1996), several topics were explored in greater depth through interviews mostly with CCT Co-ordinators or equivalents. Interviews with a sample of private contractors and head teachers were also conducted. The hard data that had been requested earlier was collected and analysed.

1.1.8 At key stages during the course of the research programme, progress was discussed with an Advisory Group comprising representatives of local authority Associations, the Audit Commission and the CBI. The Advisory Group provided valuable comments on provisional results, including suggestions on interpretations and ideas on follow-up work.

1.2 Quality and Service Development

Changes in Quality

1.2.1 The research aimed to assess the information on quality of services delivered available from sample Authorities. Authorities find it difficult to "measure" the quality of services actually delivered and most make judgements on the basis of raising standards in specifications (e.g. increased cleaning frequencies) and then monitoring against these standards.

1.2.2 For three-quarters of services (72%) changes in standards for second round tendering were regarded as insignificant. Where specifications had changed significantly, 53% had an-increase in standards, 9% had a decrease in standards and 38% had changes that did not alter overall standards. Where available, overall monitoring results indicate improved performance by both in-house and external contractors. 33% of second round contracts operated by external contractors have been subject to at least one default or penalty, compared to 46% under the first round. The equivalent percentage for DSO-operated contracts has fallen from 20% to 17%.

1.2.3 Authorities that carry out regular user surveys stated that satisfaction had generally increased since the first round of tendering. It was not possible to quantify this result due to the variability of coverage (of different services) and the lack of hard data about survey analyses. The views of a small sample of 15 head teachers were obtained as part of the research exercise and these views were mainly critical about the impact of the CCT regime.

1.2.4 Over three-quarters of Authorities said that CCT has resulted in clearer and more comprehensive service specifications. Additionally, about two-thirds said that CCT has resulted in a closer reflection of consumer needs. Authorities claim significant improvements in these features for the second round of tendering and there is broad agreement that these developments contribute to improvement of quality in service delivery.

1.2.5 Over 80% of DSOs expressed certainty that they were continuing to improve their operational efficiency and effectiveness. This view was confirmed by client Officers - 71% agreeing with this assessment. Additionally, over 70% of DSOs believe that they have increased their responsiveness to consumers (this view was shared by 75% of client officers) and overall quality standards (this view was shared by 69% of client officers).

Monitoring

1.2.6 Client-side monitoring arrangements are very variable in terms of methods and approaches. About half of the sample Authorities believe that they have achieved improvements in the effectiveness of their monitoring mechanisms and the other half believe they have maintained their standards in this activity. Just over a third of Authorities have incorporated new monitoring mechanisms for second round contracts and one in four indicated an increasing use of output-based specifications. While Authorities were unable to provide objective measures of their monitoring effectiveness, private contractors also acknowledged a significant increase in Authorities' client skills since the first round of tendering.

1.2.7 All sample Authorities said that they use performance indicators to some extent and over 40% make some use of benchmarking. However, Authorities have different interpretations of what constitutes a performance measure and different ways of applying benchmarking. Some Authorities have developed quite elaborate systems of converting monitoring check-lists into sets of indicators for different aspects of services, while others use only a small number of service-wide measures required for statutory returns. Overall, the interviews indicated that there is only limited use of performance indicators and Authorities acknowledge that there is scope for considerable development in this area.

1.2.8 A majority of Authorities (58%) agree that consumer involvement can be improved by greater use of surveys, encouraging regular feedback on service delivery and increased participation by users in specifying and monitoring services. While 84% of Authorities carry out some form of consumer survey regularly, only 22% said that they use them to a significant and comprehensive extent. Several Authorities referred to a recent trend towards greater use of such surveys and to increased consumer involvement in monitoring.

1.2.9 A specific view offered by several large private contractors was that many Authorities are poor at specifying quality and that their own quality codes are superior. However, as noted above (see 1.2.2), external contractors are almost twice as likely as in-house providers to attract contract defaults and penalties.

1.3 Tendering Results

Bidding Activity

1.3.1 The second round of competition attracted significantly more bids than the first round. On average, each contract received between 16 and 17 expressions of interest (between 10 and 11 for the first round) and there were over 12 questionnaires returned (less than 7 for the first round). Six bidders were invited to tender (4.9 for the first round) and 3.5 tendered (2.9 for the first round).

1.3.2 During the first round of competition 29% of contracts attracted only one tender, but this fell to just 12% for the second round. There was only limited correlation between the size of contracts and the amount of competition. Contracts with a value of over £1m attracted most expressions of interest and most actual tenders while contracts below £0.5m in value attracted least expressions of interest and least completed questionnaires.

1.3.3. Building cleaning attracted the most bids, and there was also a lot of interest in refuse collection and ground maintenance contracts. Fleet management attracted the least and there was also limited competition for catering and leisure management.

1.3.4 London Boroughs attracted most competition and Metropolitan Districts attracted least. The drop out rate between invitation to tender and actual tender was high in all cases, although highest among Metropolitan Districts. A reason given by large contractors was that they often express interest for many contracts but they are highly selective when deciding whether to bid. This is usually due to the costs involved in bidding and is linked to their views about the chances of success.

1.3.5 There was a significantly greater amount of competition - about one-third more at all stages - in the South of England than in the North (taking a line from the Bristol Channel to the Wash as a divider). This applied not only at an overall level, but per service and for all sizes of contract. The reasons for this difference may relate to the perceived chances of success or to more large private contractors being based in the South.

DSO Successes

1.3.6 DSOs still won a majority of contracts but their rate of success has fallen since the first round (from 78% of contracts to 71%). The greatest reduction in DSO successes was among London Boroughs (from 84% to 72%) and the smallest reduction was among Shire Districts (from 75% to 74%). The DSO success rate continued to be highest in Metropolitan Districts (83%) and lowest in Shire Counties (65%). DSO successes were greatest for schools catering but smallest for refuse collection. Overall, DSOs were less successful where there was a greater quantity of competition. Further analysis revealed that the contract size had no significant bearing on these results.

Award to Lowest Bidder

1.3.7 Through second round tendering 85% of contracts have been awarded to the lowest bidder. This is less than the 91% awarded to the lowest bidder for the first round of tendering. This result applied across all services except refuse collection. The reduction may be due to greater sophistication in the evaluation process (e.g. more focus on quality). London Boroughs were the least likely to accept the lowest tender (76%) and Metropolitan Boroughs were the most likely to do so (93%). This difference may be linked to the greater amount of competition in London and a possibly greater variety of bids for consideration.

1.4 Financial Effects

Overall Results

1.4.1 For the second round of competition, over 80% of the sample Authorities said that they made cost savings for blue-collar services. Many qualified this comment by saying that CCT was just one of several influences upon costs. The factors identified as prime contributors to cost savings were mostly related to the workforce (i.e. productivity, work methods, pay and conditions) but also included central establishment charges. Authorities acknowledged that these changes were primarily driven by the CCT regime.

1.4.2 There was an overall cost saving of about 9% at the second round, compared with the INLOGOV finding of a 6. 5% saving at the first round. These figures are based on an analysis of comparative costs from 28 of the 38 sample Authorities (where the data was available).

1.4.3 These averages hide a wide range of results at contract level (including both large savings and large increases) but the most common result for second round tendering was a saving of between 0% and 10%. Despite the overall result, about one third of contracts show an increase in cost. The largest savings within the sample were made by Shire Counties (14.9%) and the smallest by Shire Districts (2.3%). Savings in London Boroughs were an average of 8.4%, compared to an average of 4.5% in Metropolitan Districts. However, savings among Authorities in the North averaged 9.9% while those for Authorities in the South averaged 8.4%. A possible explanation is that the relative lack of competition in the North attracts selective and highly competitive bids from large external contractors but there is no hard data to validate this explanation.

Internal v. External Win

1.4.4 Second round savings were significantly higher (almost double) where the work was awarded to an external bidder than where it was awarded to an internal bidder. This applied to all types of Authority. The research work did not establish any clear reason for this result, but it may be due to DSO bids being closer to historical costs than the bids of external organisations.

Contract Size

1.4.5 On average, small contracts below £0.5 million show a marginal increase in costs, although about half of these still achieved savings. Large contracts over £1 million show a larger-than-average cost saving. The variations in results among the sample make interpretation difficult, but many Authorities thought that it had been easier to achieve first round savings with smaller contracts. In addition, as compared to the first round, there are now more large contractors bidding for major contracts.

Amount of Competition

1.4.6 On the basis of available data, there is little apparent correlation between the quantity of competition and the cost savings obtained at the second round of tendering. This finding does not reflect any differences in the quality (or perceived quality) of competition and the comparison relates solely to costs before and after second round tendering. It should also be noted that the available sample size did not allow any finer grained analysis by size of contract or type of Authority which may have revealed a more direct relationship between competition and cost savings.

Preparation Costs

1.4.7 "One-off" preparation costs are not normally recorded and several Authorities said that most of these types of costs occurred at the first round stage. Where they are recorded, these preparation costs are below 2% of the annual contract cost and do not therefore undermine cost savings.

Client Costs

1.4.8 Most Authorities were unable to provide details of client side costs linked to individual CCT services. Within a limited sample of available figures (30 services and a total contract value of about £64m) annual client costs were found, on average, to be 4.8% of annual contract value. They were also found to be, on average, 4% lower than at the first round of tendering.

Out-turn Costs

1.4.9 The research results indicate that the out-sum costs of most first round contracts were, on average, only 6% above original cost estimates and, therefore, below the level of inflation. Thus, the 6.5% savings achieved (as identified by INLOGOV) at the first round of tendering have been more than preserved in real terms.

Costs and Standards

1.4.10 Authorities are very concerned with budgetary constraints but there is little evidence of revising down standards to match budgets. Indeed, as noted above, many Authorities believe that they have increased standards while achieving cost reductions.

1.5 Staffing and Management Effects in DSOs

Impacts of CCT

1.5.1 Over half of DSO managers (58%) found that their workforces have been reduced since the first round of competition, either through the loss of some contracts or through general budgetary pressures. Many found that CCT has imposed new pressures on staff because of reduced job security and the need for higher productivity. While TUPE would be expected to ease concerns for the workforce (see 1.7.2), no evidence of this was obtained.

1.5.2 As noted earlier (see 1.2.5), over 80% of DSOs said that they have become more efficient and effective since the first round. This often results in large savings for the Authority but it was also stated that problems had been caused for the workforce, e.g. less bonus, fewer breaks, longer hours and reduced conditions of employment.

1.5.3 A large majority of DSOs (31 out of 36 or 86%) said that they have had to reduce management numbers. At the same time, DSO managers have had to undertake broader responsibilities and several put forward the comment that they found this stressful.

1.5.4 Authorities found that the prime effects of CCT on DSOs are strongly increased cost consciousness (89% supported this view), much higher productivity (86%), more responsiveness (75%) and better overall quality of service (69%).

1.5.5 Since the first round of tendering, most DSOs have had only minor reorganisations (refining operational arrangements) but many are much more autonomous with their own systems for management and financial information.

1.6 General Views about CCT

Compulsion

1.6.1 Authorities generally accept competition but strongly dislike compulsion. Most would like to see compulsion dropped. Ten out of 36 Authorities had a neutral view about the CCT regime, 22 (61%) were unsupportive and only four (11%) were supportive. One-third of Authorities expressed resentment about the detailed CCT "rules" as they consider that these cause unnecessary difficulties. On the other hand, a similar proportion stated that they would want greater prescription. The latter view reflected a concern about having "too much rope" and the (resulting) risk of acting in a way that may later be deemed anti-competitive.

Contributors to Improvements

1.6.2 During interview discussions, nearly all Authorities pointed out that they could not afford to go back to the higher prices and lower quality standards that many had experienced before CCT. Although most Authorities acknowledged that CCT had resulted in major improvements in DSOs (see 1.5.4) and some important quality improvements (see 1.2.4), most also expressed the view that CCT was not the only contributor to overall improvements in blue-collar service provision. Examples of other contributors to improvements suggested by the Authorities included better management and financial information systems and more sophisticated mechanisms for monitoring service delivery.

Alternatives to Compulsion

1.6.3 When asked about their likely reactions to the abolition of compulsion, ten Authorities stated that they would probably re-constitute in-house DSOs. All Authorities said they would give a high priority to preserving value for money through controlling costs while maintaining or raising quality standards.

1.6.4 Authorities made few suggestions about alternatives to CCT but, of the responses made, the majority favour VCT linked to the use of national performance measures. This is despite an acknowledgment that there is only very limited use of performance measures at the moment. Under the preferred option, CCT would only be used where performance standards were not attained. However, the practicalities and difficulties of monitoring the actual quality of service delivery appear to have been given little thought so far.

1.6.5 Three-quarters of the large private contractors interviewed also generally favoured dropping the compulsory element and making far greater use of quality measures. A similar proportion of these contractors believe that they will win more work under such arrangements as some Authorities are currently antagonistic towards them, primarily because of compulsion.

Member Involvement

1.6.6 Authorities stated that many elected members now take a less active role in CCT matters. Members are generally much happier to leave things to officers than at the first round tendering of service contracts. This finding could not be quantified (due to the variability of arrangements), but only 20% of Authorities said that members are involved at all stages of the CCT process.

1.6.7 There is a common view that CCT potentially takes certain powers away from members, but Authorities did not record any undue difficulties with the member role. In all Authorities service committees, whether or not they are "CCT" committees, still enable member involvement in all key operational matters. The annex to DoE circular 5/96 lists six key stages at which members should be kept informed, but the research results show that client side reporting to committee is already very comprehensive with a large majority including at least 14 significant aspects of the process in their reports.

1.6.8 Most Authorities' CCT co-ordinators (or equivalent officers) believe that members are now more pragmatic in their views about the CCT regime and concern themselves principally with value for money. While often wanting work to be done in-house rather than by external contractors, many members would insist on at least retaining current standards at current costs. Again, this finding cannot be quantified but it reflects a subjective overall view based on recent experience.

Contract Relationships

1.6.9 The research was aimed at gathering Authority-wide views but it was clear that the personal attitudes of senior officers towards CCT vary widely. This may be reflected in the relationships with contractors, either DSO or private sector, which were also found to be very variable.

1.6.10 About 80% of Authorities and nearly two-thirds of private contractors that were interviewed agreed that most contract relationships are successful. Nevertheless, nearly half of the private contractors alleged that a small minority of Authorities is totally committed to excluding them from contracts. There was no research evidence to either support or refute this allegation. Several private contractors said that they would welcome the public opening of tenders.

1.7 Processes

Compliance

1.7.1 All Authorities said that they comply with legislation and guidance, but many made it clear that they do so reluctantly.

TUPE

1.7.2 Interviews conducted during the research suggested that, while TUPE has been a significant issue in the process of CCT (e.g. lengthening tendering timescales, requiring more information to be gathered and legal advice obtained), it has had less impact on the amount of competition, pay and conditions of the workforce, contract packaging and contract costs. Nonetheless, in those cases where a general view was offered, most Authorities and most large contractors have welcomed TUPE. 66% of Authorities took the view that TUPE would have no effect on the amount of competition and the research did not reveal any impact. Although TUPE could be expected to have some effect on preserving pay and conditions, none of the DSO managers or client side officers interviewed said that they had yet seen any effect. The research work did not, however, include any attempt to directly investigate TUPE and these findings are, therefore, based wholly on the views expressed by interviewees.

Bureaucracy

1.7.3 72% of Authorities believe that CCT has increased bureaucracy (introducing formality, rigidity and delay). Authorities also said there are as many positive effects of this bureaucracy as negative ones. Several Authorities said that the increase in bureaucracy has worked to their advantage as it has resulted in clearer guidelines, more explicit documentation and a definite understanding of what they are trying to achieve.

1.7.4 Where Authorities have a negative view of the bureaucracy introduced by CCT, it often relates to the tendering requirement, monitoring and anti-competitive behaviour. Over 40% of Authorities said that they avoid bureaucracy in a variety of ways including having a clear corporate framework within the Authority, active barter and negotiation, Revolution the service areas and keeping compliance with the CCT regime to a necessary minimum.

Client/Contractor sum

1.7.5 Just over 80% of Authorities said that CCT has resulted in greater divisions among staff. Several Authorities are now softening the client/contractor split in order to increase corporate benefits (or remove serious problems). Divisions between staff have affected the client/contractor split, and have often resulted in a general loss of team work or organisational loyalty within the Authorities and confusion for end users. These divisions affect personal relationships, but there are indications that personal relationships have on occasions caused, or at least encouraged, divisiveness.

Documentation

1.7.6 The research did not directly examine tender documentation but interviews indicated that about one third of Authorities appear to take a disjointed approach to developing documents, particularly where several departments are involved. This can result in overlaps and contradictions. Several DSOs and private contractors commented on the problems caused by poorly constructed documents.

Contract Management

1.7.7 Authorities often admit to lacking contract management expertise. Both Authorities and private contractors commented on difficulties due to cultural differences, lack of experience by the client, the client's fear of being seen to be anticompetitive and the client's reliance on written guidance. They added, however, that these difficulties are usually overcome in practice.

1.7.8 About half of Authorities stated that they have improved their contract management skills since the first round of tendering and this view is shared by private contractors. About 80% of Authorities have invested in training their client side teams in a variety of relevant skills in this period. On average, 56% of client side staff have had training in contract management.

1.7.9 Authorities, DSOs and private contractors commented on the different priorities shown by "core" officers and service-level client officers at various stages in the CCT process. These differences were said to complicate the development of documentation, the tendering process and, in particular, evaluation.

1.8 Conclusions

1.8.1 Overall, Authorities have taken major steps forward in delivering blue-collar CCT services since the first round of competition. Most have achieved significant cost savings in addition to those previously obtained. At the same time, most Authorities believe that the quality of service provision has improved, that clearer and more comprehensive service specifications are being produced and that these specifications now reflect consumer needs better. These factors, taken together, represent a success story for local government.

1.8.2 To set alongside these successes there are, as ever, areas for further development and improvement. There is considerable scope for producing improved and more comprehensive performance measures, greater adoption of benchmarking and more regular use of consumer surveys. In some cases, there is still scope for better corporate teamwork in producing contract documentation and evaluating bids.

1.8.3 While most Authorities readily acknowledge that many benefits have arisen from competition, many resent compulsion. Only a small minority support the CCT regime fully and some intend to discontinue competitive tendering of services should compulsion be removed. Having said that, CCT has had a significant effect on Authorities' approach to blue-collar service delivery, their cultural environment and organisational structure.

Further Information

'CCT and Local Authority Blue-Collar Services' by Austin Mayhead & Co Ltd, priced at £28, is available from:

Department of the Environment, Transport and the Regions, Publications Sales Centre, Unit 8, Goldthorpe Industrial Estate, Goldthorpe, Rotherham S63 9BL

Telephone: 01709 891318. Fax: 01709 881673.

For further information on the research contact:

Paul McCafferty, Local Government Research Unit, Department of the Environment, Transport and the Regions, Eland House, Bressenden Place, London SW1E 5DU

Telephone: 0171 890 4103. Fax: 0171 890 4099. E-mail: lg3.doe@dial.pipex.com