Science: With no strings attached?: Lynne Curry looks at the benefits and problems for contract agencies in the information technology market arising from the role of 'preferred supplier'

When Systems Resources, one of the major agencies supplying contract staff, was awarded a fourth successive quality award this summer by IBM(UK), their publicity machine went into overdrive. 6,000 announcements were sent out, trumpeting the achievement.

Margins in the contracting market have been cruelly squeezed in the recession, and IBM and Digital Equipment patronage, in the form of their annual ratings, is welcomed. If a company can lay claim to being a preferred supplier, especially if the client can be named, that is useful. So is the epithet of strategic partner.

Many agencies have spent considerable sums achieving the British quality standard BS5750 and the international standard 9001, which are certifications of good internal procedure. But are these symbolic industry medals really achievements, or do they encourage a meaningless quest for prizes? There is no consensus on which - if any - of these accompanying credits carries any significance. Some commentators even say that preferred supplier deals can be poisoned chalices for the agencies, encouraging them to undercut themselves out of business.

Quality in the computing field is a thorny issue, although contract agencies who only supply staff are distanced from the sort of high-profile maelstrom whipped up by computer system failures at the London Ambulance Service and the Wessex Regional Health Authority. Nevertheless, several agencies now insist on references from their contractors. These may speak for the capability of the individuals, but there is no agreement on what speaks for the calibre of the agency. Tony Coombes, director of professional services for Systems Resources, says awards such as that from IBM and the company's 'excellent' rating from Digital are its best warranties.

Systems Resources, which has a preferred supplier arrangement with IBM, under which IBM deals with only a handful of agencies in exchange for a level of service and cheaper rates, is the only supplier of IT contract staff to have achieved this status for four consecutive years.

'We have BS5750, but the really important things are the ratings from IBM and Digital, and the quality questionnaires we send out on a regular basis to ask our customers what they think of us,' Mr Coombes says. 'We have to have the BS standard because some of the large customers insist on it, but to my mind it's much more important to have proof of delivery and of quality service, rather than proof that your procedures are correctly documented. The status of preferred supplier to a large organisation is a keenly sought-after sign of approval, so the Inland Revenue and British Gas's decisions to publish their lists were gratefully received. In the case of the Inland Revenue, the prize to be shared out among the six final winners, whittled down from 46 interested agencies, amounted to 18m a year.

The Revenue's processes for choosing its preferred suppliers were described as lengthy and rigorous, with visits to their offices and interviews by the Information Technology Office, the Revenue's IT division. But finding good agencies who would deliver six suitable candidates within 24 hours, with no more effort than one telephone call from the Revenue, was only part of the quest. Another part was to get them to agree to lower rates.

John Bennett, chairman of an expanding computer services company, Executor -which has no preferred supplier deals - views these arrangements as a way to pay the agencies less, rather than an endorsement. 'I was once put in a difficult position where I was told to give a major client a discount and I would be viewed very favourably for inclusion on the preferred supplier list,' he says.

'I said I would rather be known as a quality company and declined. In some cases, the customers get a year out of it at very cheap rates, and if the agency doesn't perform, they're out. Some very large companies don't have a major agency on their preferred supplier list because they won't agree to their margins; instead, they recruit lots of small, thrusting companies with margins of nine to 10 per cent, and that's why I won't do it.'

Mr Bennett, whose company has a turnover of around 5m, has a strategic partnership with software manufacturers Gupta to provide the staff to work on their software, for which Executor was head-hunted. He has also sought accreditation under Investors in People, which he says indicates the determination of Executor to remember it is dealing with a human resource.

There is a delicate balance to be struck between seeking inclusion on a preferred list, and paying in blood for the privilege. These schemes have helped to drive rates down to the point where the chairman of the Federation of Recruitment and Employment Services called them 'cretinous'.

Geoff Hutt, director of quality leadership for AT&T Istel, which uses contractors and has preferred suppliers, admits that would-be suppliers are expected to understand his business as part of doing their own, but maintains the benefit is mutual.

'We want a deeper and better relationship with all our suppliers. We are not in business to rip them off, and if they're in business to rip us off it will be goodbye. Business between a supplier and customer isn't like a boxing match where we're trying to score points off each other.'

Mr Coombes, who invests much energy in presentations throughout the country with the aim of his company's selection as a preferred supplier, says the arrangement is worth pursuing, but there are limits. 'Companies have a margin of between 18 and 40percent, but with a preferred supplier agreement the margin would be less than 18percent and some are as low as 13percent, which is too low. At the end of the day, they either have to be subsidised by higher margins somewhere else, or a cut-price level of service.'

Another agency head says: 'To me, a preferred suppliership isn't an endorsement, but a sign that the price is right. I think quality awards are very good things and would be delighted if one was invested on us by a major client.' Agencies, who swanned through the boom years in opulence, are starting to feel the pendulum has swung too far the other way - and that no endorsement comes without strings.

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