CLOSE-UP: NEWSMAKERS - ALAN BISHOP AND CHARLES SKINNER. Why COI and the DoT decided to kiss and make up

Charles Skinner and Alan Bishop both claim victory after the peace agreement.

The war between COI Communications and the Department of Transport may be over, but the peace agreement struck by Alan Bishop and Charles Skinner will have big ramifications for the advertising and media industries.

Bishop has agreed to overhaul COI's procedures to improve the service it gives its clients in Whitehall departments and COI will drive a much harder bargain on media buying in future. In return, Skinner, whose department set up its own creative and media rosters last year, will bring its £12 million-a-year advertising budget back into the COI fold when its contracts expire in 18 months.

When Bishop took over as COI chief executive in January, his top priority was to make peace with Skinner, the DoT's director of communications, a veteran of several Whitehall departments and the driving force behind the breakaway.

It was a wise move: COI could carry on without one major government department but if others followed suit, the rationale for its existence - maximising the Government's media buying power - would collapse.

Relations between Skinner and Carol Fisher, COI's outspoken previous chief, were strained. At their first meeting, Bishop and Skinner agreed to call off the war of words about whether the DoT may get a better deal going it alone.

The peacemaker was the Government's Advisory Committee on Advertising, which monitors COI and was alarmed by the DoT's decision to opt out. It launched a value-for-money study of the DoT experiment. The results have been kept secret to protect the Government's negotiating position with the media industry. The ACA is believed to have found that the DoT saved money overall by cutting out COI's commission of about 1.5 per cent, but that such savings could not necessarily be achieved by all Whitehall departments.

The ACA probe is still not finished and its chairman, Dick Emery, the boss of UK TV, increasingly took on the role of conciliator between COI and the DoT to preserve the media clout of a central ad department for Whitehall.

Emery says: "After meetings with Skinner and Bishop, I was struck by the degree of consensus and commonality in their points." He said both sides did not want to turn the inquiry into "a debate about percentage points on a media buying scorecard". He says the DoT had achieved "a good result" but added: "You can't replicate one relatively small part of government expenditure and say that applies to everyone else. It doesn't."

A three-page peace deal, signed by COI, the DoT, the Cabinet Office and heads of publicity in all departments, says: "All parties agree that further fragmentation of the government advertising market is not the best way forward."

It promises "a new era for government advertising". In the next year, COI will review its contracts with departments, but not its agency roster.

COI will set up a Client Council to better meet the needs of departments, which will be invited to sign new "framework documents". A new COI-Whitehall working group will establish common standards for setting clear, precise, achievable campaign objectives and briefs. COI will give a "sharper focus" to spreading best practice across departments - some of whom resent its interference in their campaigns.

At one level, the "statement of intent" could be seen as a classic Whitehall compromise worthy of Yes Minister: everybody wins and nobody loses. But the deal is more than just a fudge.

Although the DoT will scrap its own rosters, Skinner is adamant that his experiment did not fail. And he is very happy with the media deals his department secured: "This has been a catalyst for change and a new way of working.

It is not a question of us being pleased on behalf of ourselves, we are very pleased on behalf of the wider government machine." Dismissing the idea that personality clashes were behind the breakaway, Skinner insisted the motive was "purely to test the market".

The peace deal is both a coup and a relief for Bishop, who said he would be "extremely upset" if other departments went down the same route as the DoT. Departments are now signed up to a strategy to raise the Government's overall game, with COI in a pivotal position.

That should please Douglas Alexander, the Cabinet Office minister responsible for COI, who hopes its role will be entrenched by a review of government communications this autumn. He says: "The DoT initiative has shown that the market can respond innovatively to new demands and arrangements. The challenge now is to harness this success for the benefit of all departments."

So everyone is happy. "Sweetness and light is breaking out all over the place," Mike Granatt, the head of the Government Information and Communications Service, says. But perhaps not in the media world.

"The industry is going to find we are a tougher nut to crack," Granatt adds. "We are going to get the best bang for our bucks. The challenge now passes to the industry to show it can deliver the most competitive pricing and quality outcomes."