A lack of skills and the axing of key personnel through public sector cuts is the reason why almost 40 percent of public sector contracts were cancelled last year, according to research.

Research firm Step Ahead, in conjunction with jobs website Totaljobs.com, found that 38 percent of contracts were cancelled and warns of "future failures, should more effective processes not be quickly established".

Of the 100 public sector HR directors surveyed for the research, 62 percent saw service contracts as a route to cost savings in contrast to just a quarter (26 percent) who believed they delivered better quality services.

A failure to effectively manage past contracts saw a quarter of organisations bringing outsourced services back in-house in an effort to save cash and boost quality. In addition, two-fifths felt in-house consultancy skills needed to be improved, while 55 percent saw a need for improved project management skills.

The report says employment cuts in the public sector have affected output and sets out recommendations to remedy this, including calling on public sector organisations and suppliers to establish a "rightsourcing advisory group", a "public sector learning academy" and the development of outsourcing guidelines.

Mark Froud, chief executive of StepAhead, said: "It is clear that public service reform will mean a change in the skills that are needed amongst people involved in commissioning and delivering services."

Martyn Hart, chairman of the National Outsourcing Association, said: "The suggested ineffectual management of outsourcing could be due to over-prescriptive, inflexible contracts that are no longer fit for purpose.

"Yes, there is a need for upskilling, but there are pockets of excellence and best practice all over government."

Hart said such skills should be more widely shared across the public sector.

Despite investing large amounts, the government has failed in its attempts to make its departments share back office functions, according to a National Audit Office (NAO) report earlier this month.

Cutting costs through shared back offices was a key plank to the government's strategy of cutting IT and organisational costs when it took power 21 months ago. But the NAO report also covered the time of the previous Labour administration, which also looked to shared services to cut costs, and was critical of that government.