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Competitive tendering

As indicated, the principles used in the make or buy decision can also be applied to an evaluation of services, to answer the question, ‘Do we provide service using our own resources or do we invite outside suppliers to compete to provide the service?’

There are many examples of organisations using competitive tendering in an attempt to obtain savings in the services they provide. These include, local authorities with refuse collection; health authorities with domestic, catering and building maintenance services; and the Royal Navy with ship repair.

What is the basis used to determine whether an organisation should provide a service in-house or accept an offer from an outside supplier? The financial criteria are exactly the same as the make or buy decision, such that an organisation should provide an in-house service when the relevant costs associated with its provision are less than the price quoted by outside suppliers. These relevant costs are once again those costs which would be avoided if the provision of the service were to cease, and would tend to include materials consumed and wages. However, you must be constantly aware of irrelevant costs like historical as opposed to future values of stocks and other assets, and allocated costs which can often cloud a decision. A thorough review of all costs associated with such a service must be undertaken.

Once again please note that our discussion has been concerned with financial criteria only. As we have emphasised on a number of occasions, there will always be non-financial issues, often of equal importance, to take into consideration before a decision can realistically be taken.

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