By Mohammed Hans, procurement advisor, CIPFA Procurement & Commissioning Network
According to recent data, the value of outsourcing contracts across local government rose by 84% in the first half of 2016, with deals signed worth nearly £700m (representing a 50% increase in the number of contracts signed) compared to the previous year. This trend (along with setting up alternative commercial models) is likely to continue over the next few years as authorities like other public bodies grapple with the expected fallout of Brexit and the need to innovate and commercialise services.
The recent findings from the National Audit Office in relation to the outsourcing contract involving the UK Trade and Investment and PA Consulting, should however be a wake-up call for public bodies, how outsourcing contracts can turn into a nightmare and end up costing a colossal amount of money, instead of bringing much needed savings and better service delivery. Key findings of the report claimed that UKTI were “commercially naive” in entering into a 596 pages contract and the relationship deteriorated ‘well below the standards in managing public money’.
PA consulting, like any other sharp operator were not transparent and ‘consistently made incorrect and misleading representations relating to £3.9 million of the overheads charged’, and UKTI for their part had shown poor governance of the procurement, lacking a clear commercial strategy and there was no effective handover to the contract management team. Without anyone on the UKTI team having a clear and robust understanding of the contract, it was inevitable that there would be problems.
‘It is clear that, on this contract, both UKTI and PA have fallen well below the standards expected in managing public money. UKTI should have been in control of the procurement and understood the pricing; PA should have been more transparent in its dealings with UKTI. There are serious lessons to be learned on both sides.’
Amyas Morse, head of the National Audit Office, 10 June 2016
Whilst supporters of outsourcing claim that it is a proven method of driving efficiencies in the public services. Others, however, question whether it is a worthwhile taking into account a litany of recent public sector contract failures: NHS IT, SATS testing, the rural payments agency, the child support agency and some, but not all, health service PFIs. In Cornwall a PFI for 28 schools collapsed, costing the council £10m whilst Somerset council and police outsourcing left losses of £31.5m.
Putting aside the pros and cons of outsourcing, what is definitely required is for organisations to move away from the ‘let and forget’ syndrome that has castigated so many contracts and relationships over the years. Public bodies need to rise their game when it comes to contract management and this requires significant investment in the right quality staff and internal procedures that prevent the same mistakes happening again and again.
Contract management is about resolving or easing tensions in contracts to build a relationship with the provider based on mutual understanding, trust, open communications and benefits to both customer and provider – a win/win relationship. To achieve that goal five steps can be considered to deliver successful contract management:-
1. Active, not passive, contract management
There needs to be an acknowledgement that organisations must invest in ‘active contract management’ that will set the path for a good contract and better services. This requires internal teams to fully understand service issues and get to know their service providers, leading to more constructive and workable relationships.
2. Preparation is critical
For effective contract management, it is important that this stage is considered at the initial identification of need (when developing the business case) and the contract caters for all foreseeable eventualities. The contract should include relevant terms and conditions as well as key performance standards (which can be measured), remedies, monitoring procedures and notice provisions. The contract terms should also be transparent and effectively negotiated. A growing development in a number of public bodies in the establishment of commercial teams that are taking control of all external relationships.
3. Contract champion
Organisations should consider appointing a contract champion who has a strategic role in keeping a commercial eye on all contracts and producing regular reports with key performance issues and ongoing risks. It is crucial to ensure that the right people, with the relevant commercial, interpersonal and management skills are involved in contract management. This also extends to ensuring you get the right external advisors as we seem to have too many contracts which wipe out a rainforest due to the number of pages, but is not understood and ends up retaining the risks with public body.
4. Driving performance
Generally, organisations make limited use of service credits and other financial incentives to drive supplier performance. Although many contracts include relevant terms, service credit deductions for underperformance are often not invoked by contract managers. The main reason cited is that this could damage the customer’s relationship with the supplier, or would not improve supplier performance.
A simple way to overcome this reluctance is to provide for automatic deductions - with the possibility of earn back over a period of time. This would however be subject to a comprehensive dispute resolution mechanism in the contract which is understood by both parties, and is also workable. The problem with too many contracts is that this is made too complex and it becomes impractical or impossible to put into practice. Like in the UKTI, too often public bodies are over-charged on their contract as there is no “intelligent client” at the centre to scrutinise what the service provider is invoicing. An example is the reported overcharge of up to £19M involving Birmingham City Council and its repairs and maintenance provider.
5. Supplier relationship management
Developing a proactive approach to meet with your suppliers and not wait until something goes wrong. Time and resources need to be invested into developing a relationship with the supplier that results in better service delivery. Whilst it is important to develop and maintain effective relationships, public sector organisations must not forget that they need to maintain commercial confidentiality to ensure taxpayer’s money is widely spent.
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