Whether you use procurement or grant, you will have to appoint a provider to deliver the good or service you are seeking. The set of potential providers is the ‘market’.
The market for the service you require may be highly competitive, with many potential providers with high levels of capacity. Or there may be no real market, with perhaps a single organisation with limited capacity (or even no potential provider).
All other things being equal, a commissioner normally prefers a competitive market. It gives the commissioner the ability to choose the best organisation to be the provider. The availability of choice may be desirable from a user perspective. For example, the NHS Constitution has at its centre the right of patients to choose. And the judicious use of competition is intended to increase quality of care for patients and efficiency within the health market as a whole. This is because providers are subject to ‘competitive tension’. This tension, in theory, suggests that providers will fear the consequences of letting quality fall (such as loss of revenue, prestige etc. as patients or Primary Care Trusts (PCTs) take their business elsewhere) and will have an incentive to increase quality. [Note 1]
Generally, the more competitive the market, the more likely it is public bodies will choose procurement – not grant – as the basis for providing a service. But the important factor is competition. In some cases, the ‘market’ may consist solely or largely of community or volunteer groups, for example bereavement support. In these cases, a competitive grant process may be appropriate rather than a procurement process.
Third sector organisations (TSOs) can be a significant element of the market. Research for the Department of Health in 2007 estimated that 35,000 TSOs provided health and/or social care in England and a further 1600 planned to do so over the next three to five years. The total funding for these services amounted to £12 billion a year. The sector was richly diverse in terms of size, scope, staffing and funding of organisations. The majority (62%) were local in focus and an even greater majority (84%) were small or medium in size with annual incomes below £1 million. [Note 2]
Note 1: ’Understanding health care markets: a PCT guide to market analysis and market management (pdf – 453KB)’ (Ernst and Young, April 2009)
Note 2: ‘Third Sector Market Mapping – research report for the Department of Health (pdf – 4178KB)’ (IFF Research Ltd, February 2007)