Government cuts could make contracts unviable

15 July 2010
Government cuts could make contracts unviable

Catering professionals have warned that public service contracts may become "unviable" if the Government pushes through its plans to squeeze £3b from its public sector suppliers.

As Britain moves into the age of austerity and the Government seeks to reduce its massive cash deficit, operators of its main contracts are being asked to find savings of 3.75% of the public service market, estimated to be worth around £80b.

But with operators already running best value operations, some are asking whether there is room left for more cost cutting and what effect it will have on the sustainability and viability of contracts.

Amanda Frost, head of catering services at Hampshire Country Council, blamed the legacy of compulsive competitive tendering from the last Tory government for contracts that are already as lean as possible. She said that most are down to the bare essentials already and to strip any of those out will result in an inadequate service.

"Best value has ruled for many years so they have got to have been at the best price for what is required already," she added.

Frost suggested that commercial contractors may not be better equipped than their in-house counterparts to cope with the stringent demands either. "If there's no money in it, I think they'll just pack up and not bother," she said.

Peter Backman, managing director of foodservice consultant Horizon, shared Frost's concern. He said that although contracts are likely to come up for re-tender more regularly as clients seek to cut costs, the pressure on margins will be increased and the customer base will be reduced as staff cutbacks kick in.

Sodexo's chief executive Aidan Connolly told Caterer that prior to the spending review in October the larger, complex contracts, such as PFIs, will be targeted as they would be easier to rework than medium-sized and smaller scale contracts.

"The longer term a contract is, the more viable it is as the impact can be spread over a longer period of time and there might be the possibility of an extension which would further lessen the effect. But most contracts have little room for manoeuvre as existing margins are already tight," he said.

The challenge for the caterer will be to strip out costs without the client experiencing a decline in the service provided.

Ian Sarson, group managing director of Compass Group, questioned whether expensive re-tendering would always be worthwhile and urged the Government to consider the cash that could be saved by outsourcing contracts that are currently in-house.

"The costs of the re-tendering process may well exceed the values to be gained," he explained. "But large parts of the NHS for example, have never been outsourced and these represent a potential cost saving opportunity."

Simon James, managing director of education caterer Eden Foodservice, said that there was no room to rework school meals contracts because they are already working to the tightest margins possible, particularly in light of the threat to the School Lunch Grant that is currently scheduled to cease next year.

He suggested that while a move by local authorities to work more collaboratively could present significant savings, it could put smaller operators at risk.

"There are already discussions going on about joining up and having one department to run several authorities, but only the bigger companies will be able to operate on that scale," he said. "Smaller, innovative companies may be put off coming into the market for that type of contract."

The point was echoed by Vic Laws of AVL Consultancy, who said that if public sector catering contracts became any bigger they would appeal only to the big five.

"The smaller businesses will be squeezed out and there is a lot of very good entrepreneurial skill that could be lost," he said.

However, Laws added that 4% could be saved across the public foodservice sector through better buying citing individual schools that are able to benefit from the collaborative purchasing power of the Office of Government Commerce.

But any amalgamation of buying power will likely come at a cost to the farmer and any local sourcing or sustainability objectives.

"You can't save money from amalgamating all the public sector's buying needs and at the same time source locally and support local businesses," Laws warned.

He added that past attempts to implement collaborative purchasing have not always proved successful.

"The Ministry of Defence has done it for years, where it is prescribed what can be bought. But the NHS tried it once and it didn't work because chefs are very difficult people. They all think they're the best buyer in the country."

Percentage of public sector catering operated in house

â- Healthcare 60%
â- Defence 75%

Number of outlets in the public sector and the percentage of the public sector market

- 2009 2008 2007 2006
Healthcare (no of outlets) percentage of market 810 12.7% 653 10% 636 9% 799 12.5%
- State education (no of outlets)Â percentage of market 4,781 75.2% 5,136 79% 5,836 82.8% 4,898 77%
- Local authorities (no of outlets) percentage of market 200 3.14% 282 4.4% 242 3.4% 257 4%
- Ministry of Defence (no of outlets) percentage of market 566 8.9% 421 6.6% 352 5% 421 6.5%

Source: British Hospitality Association Food and Service Management Survey

Sodexo boss wants the Govermnent to use private-sector skills >>

Liberal MPs want Goverment to protect school meals from cuts >>

Austerity measures depress confidence of catering sector >>

By Janie Stamford

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