Councils and contractors should be forbidden from bidding for contracts in certain circumstances, Business Services Association director general Norman Rose said.
The BSA represents eight major companies with international interests which employ 300,000 staff between them. Their annual turnover is£4 billion, and 40% of their work is in the public sector.
The services provided by in-house teams and private companies should be measured against the services provided by other councils in a given area, said Mr Rose.
'If the authority department is providing a service above that norm our view is it should stay in-house,' said Mr Rose.
'When the service does not match that acceptable level there should be compulsory tendering excluding the in-house bidder to get the service back up to the normal level.
'Equally, where a contractor is providing a below-level service the same process should apply.'
He said councils should put more resources into ensuring private contractors fulfil their obligations, by retaining or taking back sufficient staff to monitor the contract.
The BSA opposes the current regime because it says compulsion does not work. According to the association, only 25% of contracts by value are won by the private sector.
Wayne Felton, BSA deputy chairman and managing director of facilities management company Jonson Controls, outlined cases where councils hostile to external bids put contractors at a disadvantage.
Mr Felton said such councils often provided confusing and incomplete information about staffing costs.
'For a quality piece of business you have to have a willing buyer and a willing seller,' said Mr Felton.