David Murray, an associate with Oxford law firm Morgan Cole, looks at the steps private sector businesses can take to reduce the burden of public sector cuts

The collapse of a major property maintenance company with thousands of employees starkly illustrates the pain spreading from public sector cuts to hit the private sector.

Connaught, the national firm responsible for maintaining many council and housing association homes, called in administrators, KPMG, last week. It has blamed, in part, public sector spending cuts following the Coalition Government’s Emergency Budget in June.

Nationwide, it is estimated thousands of jobs could be lost not only at Connaught, but at sub-contractor firms who are likely to be left unpaid.

Unfortunately, Connaught is not the first supplier to the public sector facing insolvency and nor is it likely to be the last in the current climate.

The Government has made reducing the budget deficit one of its primary objectives. Public sector spending is the area over which it can exert most control, and consequently the area where the fastest and most draconian measures are to be implemented.

The Emergency Budget delivered in June made the Government’s position entirely apparent when the Chancellor, George Osborne, stated he expected to make public sector spending savings of £83bn by 2014 – 2015, equating to almost all Government departments slashing their budgets by an average of 25 per cent.

It is clear that not only will the public sector feel the pain but those supplying goods and services to it will be hit equally hard.

If further evidence was required, research by accountancy firm, Wilkins Kennedy, has shown that while there was an overall five per cent decrease in insolvencies over the last 12 months, insolvencies amonge public sector suppliers went up by a staggering 47 per cent.

In the first six months of this year alone, 106 businesses in the health and social care sector have been placed into insolvency, and the October Spending Review is only likely to increase this number.

So what should you look out for if you are a business supplying the public sector?

n Expect to share the pain. Be prepared to be contacted by the contract procurement department at the public body asking that costs be cut under the contract.

What will you say if asked to cut your costs? Can you cut your costs? Will the contract remain commercially viable?

Undoubtedly, you should know the extent of your available margins under the contract and you should consider a review of all your existing public sector contracts, in particular what scope the public body has got for enforcing a reduction in terms.

n Expect more red tape, not less. As the Government looks to control spending, contract procurement decisions will come under greater scrutiny and be made on a stricter basis.

Anticipate having to submit tenders for smaller contracts as discretionary spend levels are reduced. In addition, public sector bodies are likely to take much longer to arrive at spending decisions.

n Expect slower payment by the public sector. Not only will you be asked to cut your costs, but those reduced costs will be paid later. Consider whether to incentivise early payment by offering an affordable discount.

n Think laterally. Consider what value you can add to the contract and the public sector. Do you really understand your client — could you work more efficiently and in greater tandem with them? Do you have a compatible corporate social responsibility programme to evidence your mutual commitment to the public good?

Further, are you dealing with the right person at the public body? It is important to remain in contact with the real decision makers, particularly if a competitor supplier suffers insolvency and profitable work can be obtained.

n Finally. Whichever Government is in place cuts are here to stay, so in the long-term it is important to consider the options for diversification of your client profile.

Do not have all your eggs in the public sector basket.

Whereas once supplying to the public sector was regarded as insulation against the vagaries of the economic cycle, it is now apparent that too many companies have become over-reliant on public sector contracts, to their detriment.

Without doubt, it is likely to be a long and bumpy ride for suppliers to the public sector, but those companies who are best prepared, and who act quickly and decisively, will be well placed to survive the public sector spending cuts.

o Contact: David Murray, Morgan Cole, 0870 366 4644.

Web: www.morgan-cole.com