Selling to the state: G4S gets stung in Britain

The global security company G4S has been in the news yet again this week for overcharging the UK government to the tune of over £24million in work related to tagging of offenders. It is a miserable end to a tough year for the firm, after they failed to supply enough trained staff to man the London Olympics in 2012, forcing the army to step into the breach. If No. 10 was not exactly enamoured with G4S after that blunder, these fresh revelations of overcharging could curdle an already sour relationship.

The incident raises fresh questions about government outsourcing and value for money, a subject that has hit the headlines more than once in the last decade. The HS2 project for example is already nearly 20% over its initial £58.7million estimate and the project won’t be finished until 2026—how deep will the government’s pockets need to be to keep the wheels turning?

Too often outsourced costs are able to creep up to two or three times the original estimate. Projects can and do legitimately incur higher costs than anticipated, but it takes someone experienced in the field to spot a necessary cost and a duff one. Therein lies the rub—the very lack of experiences that necessitates outsourcing means that civil servants are ill equipped to properly manage these contracts—and to blow the whistle when foul play is afoot.

For larger contracts, where experienced project managers are hired, concerns and quibbles are often not properly dealt with from the outset, as civil servants are keen to rush political projects through. In Whitehall, bad news is bad company.

Whilst the bidding process is an important part of ensuring prices are competitive, it can lead to unscrupulous practices. There are tales of suppliers bidding deliberately low at a cost they know is unworkable, simply to secure the contract. They then increase costs at a later date to ensure they get their profit margin. Again, a lack of industry knowledge—of understanding what is possible at what price—is the state’s Achilles heel.

The structure of contracts themselves often works against the state. With large and complex projects, a degree of flexibility around costs needs to be built in, but that can open the door to ballooning budgets and little recourse when things go wrong. Practically, extricating yourself from a contract is difficult and sometimes impossible. There are heavy financial penalties for leaving a contract early, plus the money that is already been absorbed and then you need to find a new supplier to finish the job—with all the attendant complications and, yes, costs—that entails.

In most cases, it is better to plough on and take the hit than put up a fight, a galling notion when it is taxpayers’ money on the table.

Where does that leave us? Well, there are big benefits of contracting for both the state and the supplier. For many businesses, counting the government as a client is a tempting prospect; a reliable buyer who pays the bills and frequently buys in bulk, the prosperity of a business can rise or fall on the basis of state contracts alone.

For the government, outsourcing can bring in specialist skills and capabilities that would be impractical or unaffordable to supply in-house.

Without experienced project oversight however—a man or woman at the helm who knows the ropes and who will be listened to—contracts will be mismanaged and costs will spiral. Hiring an experienced industry consultant to manage smaller projects might seem like a costly precaution but it could be a small price to pay in the long run.

In the meantime, the SFO will be investigating whether G4S should face criminal charges for their actions. That is the problem with working for the UK’s biggest customer: if you mess up, there is nowhere to hide.