Procurement in a nutshell – multi-source contracting
19th September 2016
Prime Minister Theresa May has revealed that getting an "ambitious and bold" deal for Britain means "not revealing our hand prematurely" and therefore there will be "no running commentary on every twist and turn of the negotiation".
Thus it transpires that as Brexit developments are made, we may be largely left in the dark. We are no closer to determining whether and in what form repeal/replacement or reform of the procurement regime might take place.
For now, the Public Contracts Regulations 2015 and other procurement regulations remain fully in force. The uncertainty regarding the post-Brexit situation will persist for some time yet and has the potential to bring with it faltering business confidence.
This update considers the adoption of multi-sourcing by contracting authorities (CAs) as a tool to assist the management of fluctuation in this pre-Brexit procurement phase.
What is multi-sourcing?
Multi-sourcing is an outsourcing approach in which services are contracted to a number of suppliers, usually in combination with some internally provided elements of service delivery.
It is distinct from both the preferred supplier model and, of course, the fully in-house model. The development of the multi-sourcing approach is said to have stemmed from dissatisfaction with the traditional model and the desire to take back some of the control lost through the reliance of a prime contractor to deliver an end to end service.
Benefits of multi-sourcing
Certain benefits are associated with this contracting approach, namely:
- Better service quality
The procurer has the ability to select suppliers and award work based on perceived strengths of the suppliers, and highly specialised providers can be matched to meet specific business requirements.
- Maintaining competitive leverage
In a single-source model, the chosen service provider might lose leverage once chosen and the contract has been signed. The multi-source model provides the opportunity to maintain genuine competition, for example where the service scope is being increased or additional work packages are being let. Such competition can also lead to increased innovation; the innovative supplier is awarded with the greater share of work.
The reduced level of dependency on any single supplier is linked to the benefit of being able to switch suppliers with, generally, more ease, less cost and less risk. The arrangement lessens the likelihood of “lock-in” in the contractual arrangements.
- Eliminating “margin stacking”
Direct contracting with the supplier in a multi-sourcing arrangement avoids the situation in which the CA pays for both the margin of the prime contractor as well as the subcontractor’s margin.
The increased popularity of multi-sourcing over the years has revealed potential challenges of adopting the practice:
- No “throat to choke”
The multi-sourcing arrangement can lack clarity as to who owns the end to end service responsibility in the event of a service failure. This can lead to accusations of blame between service providers and a need for the CA to perform the diagnostic and identification task of the point of failure. Where the service towers are co-dependent or highly integrated, this can be a difficult and time-consuming task.
- Management overhead costs
Responsibility for the integration of suppliers can lead to an increase in internal management costs. Such costs will depend on the complexity of the arrangements.
- Gaps in service delivery
There is a risk with multi-sourcing that certain services, tasks and responsibilities are not captured within the contracting model and therefore fall through the gaps.
- Supplier collaboration
As with integration, collaboration is a required element for multi-sourcing strategies. This, however, can be a difficult goal in the event that some or all of the suppliers are competitors.
There are options for minimising the transactional risks of multi-sourcing. One example is the use of a “service integrator” or “service integrator and management” (SIAM) agreement with a third party.
This is a contractual arrangement between the CA and the SIAM, under which the SIAM’s role relates specifically to the integration of services or the management of suppliers.
Responsibilities of the SIAM typically include:
- integration and management of the service contracts under the multi-sourced arrangement;
- operational and legal administration of service contract, for example exercising rights and performing obligations of the CA, such as the right of termination;
- ensuring the quality, timeliness and compatibility of the services delivered; and
- providing performance feedback and reporting any other issues arising under the service contracts.
Why is this important?
Over the years the Government has increasingly shown favour towards multi-sourcing. There is a conscious effort to shift away from the practice of “mega-contracting”.
Certain factors have driven this movement, such as the centralisation of public procurement steered in the main by the Crown Commercial Service, which has sought to enhance competitive and transparent procurement underpinned by a multi-sourcing strategy.
The Government is also strongly motivated by its will to improve access to local government tenders for small and medium sized enterprises. This commitment has recently been reiterated by the Government’s development of a new ‘Supplier Standard’ for digital and technology service providers.
Speaking at its launch, Cabinet Office Minister Ben Gummer stated that the Government wanted to do “everything it could” to help small and medium sized business win government contracts.
The procurement strategy of the public sector is three-fold: supporting economic growth; achieving departmental and organisational objectives; and delivering value for money for the benefit of taxpayers. Multi-sourcing may offer opportunities for CAs to develop innovative contracting models which can be aligned to their strategic objectives.
However, adoption of the practice requires consideration of the potential impacts on the organisation model holistically, encompassing all operating, service, technological, commercial and contractual elements.
As indicated above, in order to develop the optimum model – based on the specific needs of each CA – a thorough assessment must be made of the function of a service integrator or SIAM.
CAs should only embark on such a programme of organisational change with both appropriate external assistance and adequate in-house support to safeguard against the potential risks, and reap the benefits of innovation.
How can I find out more?
If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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