Thursday, 9 May 2013

Reducing crime doesn't pay if you're paid by on the basis of demand

Not everyone gains from reduced crime. When you've contracted to deliver a service, and the service is linked to prison 'heads on the beds' you're in trouble if crime reduces.

That's the painful lesson G4S have learnt in The Netherlands, which has seen a reduction in prison occupancy rates from 14,100 in 2005 to an anticipated, below 9,000 in 2015. 30 prisons close so there is less demand for the contracted G4S prison officers. Reduced demand for contracted prison officers, for G4S, leads to the need to issue a warning over profit margins. Anticipated deduced profit margins led to a 15% fall in share price. Reduced profits and share price leads to a potential change in financial stability. Reduced financial stability of a key contractor should lead to a reassessment of procurement risk.

This should serve as a reminder to those involved in procuring services of the need to be conscious of:
  • The need to align contractor incentives with those of the procuring organisation;
  • The need to recognise that demand goes up and down;
  • The need to design contracts which can flex for demand;
  • The need to carry out market scanning and understand the potential impact of external changes.

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