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Contract management: how to spend wisely
Mohamed Hans explains how an organisation can achieve value for money through effective contract management
A key objective of public sector entities in the UK is to deliver efficient procurement and ensure their objectives are achieved within the financial constraints. With the current budgetary pressures, organisations are considering a wide variety of options to deliver services, but for many years, contracts were outsourced to third party providers.
Supporters of outsourcing claim that it is a proven method of driving efficiencies in the public services. Others, however, question whether it is worthwhile, taking into account a litany of recent public sector contract failures. For example, G4S Olympic security contract, NHS contracts for patient services, which collapsed after only eight months because it proved financially unsustainable, as well as the Virgin Coast Main Line rail franchise, which had to be scrapped after major technical errors that resulted in multi-million-pound damages settlement to the aggrieved bidders.
Value for money (the optimal use of resources to achieve the intended outcomes) of government spending is one of the tenets of good public procurement. The three E’s readily come to mind:
• Economy: minimising the cost of resources used or required (inputs) – spending less.
• Efficiency: the relationship between the output from goods or services and the resources to produce them – spending well.
• Effectiveness: the relationship between the intended and actual results of public spending (outcomes) – spending wisely.
To be successful in delivering value for money, public sector entities must raise their game. Contract management, embedded with value for money behaviours and action, requires significant investment in the right quality staff and internal procedures that prevent the same mistakes happening again and again and to leverage opportunities to improve in service delivery.
Procurement and contract management professionals create value by eliminating or reducing inefficiencies and waste during the operational life of the contracts. The value captured during the pre-award phase can be realised throughout the life-cycle by ensuring that the contract is effectively managed. Contract management is also 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 value for money in contract management five steps should be considered. They are:
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 contracts 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, remedies, monitoring procedures and notice provisions. Contract terms should also be transparent and effectively negotiated. A growing development in a number of public bodies is the establishment of commercial teams that are taking control of all external supplier 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 advisers 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 contractual risks with the public body, instead of actually transferring this to the provider.
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 under-performance 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 recent UKTI example, 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. Another 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 is also key. Time and resources need to be invested into developing a relationship with the supplier that results in better service delivery. While 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 wisely spent.
Due to a series of high-profile governance failures, public scrutiny is running high. And so, ensuring that contracts are achieving outcomes must be of utmost importance to procurement and contract management professionals. By following these five steps, those working in the sector will be significantly more empowered to boost value for money and ensure that outsourcing benefits the communities that public sector organisations serve.
• Mohamed Hans, CIPFA Procurement Advisor
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