The pros and cons of selling to the public sector.
A4e, a training company based in the UK, is in the news after the resignation of founder and chairwoman Emma Harrison on the back of a series of disclosures about fraud investigations. Harrison has also resigned from her role as the prime minister’s Family Champion. What is going on?
During the last 20 years A4e (Action for Employment) has relied heavily on government contracts, particularly those supporting the Welfare to Work agenda. The company’s work started in 1991, in Sheffield, famously providing redundant steel workers with training so they could find alternative jobs. It now operates in 10 countries, but retains a significant presence in the UK where it works with organisations in the public sector, such as the Department for Work and Pensions. When Labour came to power in 1997 it introduced the New Deal, in which various training schemes and incentives helped different groups of people back to work. A4e has been a leading light in delivering these services ever since.
There was controversy when it came to light recently that Harrison, who owns 85 per cent of the business, paid herself a £8.6 million share dividend in 2011. On top of that her firm pays for the lease of her substantial home and a salary of £365k a year. The apparent disparity between these financial transactions and the role of this “social purpose” company has led Labour MP Margaret Hodge, chairwoman of the cross-party Public Accounts Committee, to say that A4e was “ripping off the state”. Conservative MP Richard Bacon, a fellow committee member, expressed surprise that A4e had been awarded further work after “abysmal performance” on previous contracts.
What has happened here is that governments of various flavours have wanted to get more people into work, or, failing that, give the impression that more people are in work, or at least be seen to be doing something about the problem. The unemployment figures have always been a minefield of reinvention and obfuscation; and something of a political football. The New Deal was a great political solution, particularly as it was funded by a one-off £5 billion windfall tax on newly privatised utilities. Politicians were taking clear action and we expected results.
A4e and other similar providers took up the challenge. They were in the wonderful position that their customers, the government, needed them to be successful. The political benefit of success far outweighs the cost involved to the Treasury who, lets face it, are spending other people’s money – ours. In such circumstances, it must be very easy to be tempted to make sure that your client gets the results it wants, particularly if you are financially incentivised to achieve it. It must be as easy to accept less too from your supplier, if you are in the government’s shoes. Some of the ongoing investigations concern whether employment milestones, that both triggered payments and bolstered the employment statistics, were actually achieved.
If you can find a client whose objectives are so aligned with yours and build a dominant relationship with them, you are likely to make a lot of money. This is why government contracts are so valued, so highly competed for and generally so lucrative. The political dimension makes governments very poor buyers of services. They value other things apart from value for money and this creates an opportunity for exploitation. But, as A4e are finding out, the downside is that there will be more scrutiny and publicity if things go wrong too.
The fact that A4e has been so successful at exploiting this niche is not its, or even Emma Harrison’s, fault. I’m not even sure it’s the politicians’ fault. It is more likely ours, indirectly at least, as we have condoned this sort of behaviour from politicians for decades.