When faced with the task of sourcing a new provider for an important and complex project, there are many points that need to be seriously considered. However, in our experience, there is one key area in particular that is consistently under analysed when bidder submissions are reviewed – the commercial sustainability of service delivery contracts.
In challenging commercial times, both the private and public sectors find themselves under immense pressure to innovate so that they might do more with much less. No organisation is immune from this.
Having been in dialogue with many public and private sector organisations, we’re seeing the most successful relationships and contracts adopt a more collaborative approach to service delivery. Partnerships with suppliers and vendors based on behavioural action, as opposed to just merely intention, inevitably drive greater innovation and deliver new and more effective ways of working to help meet business objectives and outcomes.
This shift in approach deserves good merit according to the evidence that surrounds the performance of these relationships. However, our observations of what works best to ensure that your service delivery achieves a ‘what good looks like’ result has provided further evidence that the skills and capabilities necessary to facilitate partnerships of this nature, differ substantially from those needed when taking the traditional ‘contract management’ approach.
From the hundreds of relationships that we have reviewed and assured, one key common factor was clear. Where organisations adopt either an ad hoc or purely ‘contract management’ (clinical) approach to managing their end-user relationships, service delivery and contract KPIs in more ‘transformational’ or ‘innovation’ led contracts, often suffer from more tumultuous supplier relationships.
Naturally, the longer this type of strain is left to develop within a relationship, the less effective the relationship will become.
How does this affect commercial sustainability?
The commercial sustainability of service delivery is coming under increasing scrutiny. We have found that we are being called into more and more outsourced complex service delivery relationships where the key issue is perceived to be that the service requirements were too high for the price that was being charged.
In these situations, often the supplier is found to be complaining about losing too much money on the contract. This inevitably has a knock-on effect on key supplier resources which are commonly in shorter supply than they should be, and this usually results in service levels falling at pace.
From our experience of reviewing these relationships, there are two primary schools of practice. The first is that of traditional contract management which takes a very ‘supplier beware’ approach – ‘you can’t be your brother’s keeper’.
The premise being that the suppliers are ‘big boys’ and that if they’re willing to take a commercial risk to achieve the outcomes you need, at a lower price that works for you, then that’s their problem.
All you do is manage the contract, but the supplier bears the ongoing commercial risk, because that is, knowingly, what they signed up to. After all, you as the client did not force the supplier to take on the contract – they willingly took it on.
The second, the evidence of which seems to suggest it will result in significantly increased performance and lowered costs of service delivery over the medium to long term, is the ‘Intelligent Client’ approach.
In this field, a client would either have a domain expert or an ‘Intelligent Client Function’ (ICF) team in place, with sector specific experience, to help validate the financial and commercial risks from the supplier’s perspective to see if there is evidence that the pricing model is sustainable for the investment requested, for the length of the contract, and to deliver the outcomes required. Under new procurement rules, it would make sense to carry out this ‘due diligence’ for all shortlisted bids submitted to your organisation.
How to achieve the early benefits?
For some of our readers, the pain that a commercially unsustainable contract causes when it teeters on the brink of collapse will be all too familiar. Under these circumstances as a client, you’re faced with either increasing costs, reduced quality of service, or worse still you may end up propping up the failing supplier financially until the end of the contract, even though you are under no contractual obligation to do so.
When budgetary pressures make this an unpalatable nightmare, this early stage due diligence, done in the right way, can save significant service delivery risks once the contract goes live.
It’s important to note that it is not the responsibility of your own ICF team to ‘do the work’ for the supplier in validating and evidencing the commercial risks in their bids. It’s more about you gaining your own visibility and evidence that the bids you receive are truly fit for purpose and will in fact serve you properly throughout the life of the contract without any nasty surprises.
The hard-core contract managers amongst you often say that if you go to market having outlined business objectives that are fully quantified and detailed, the supplier should respond with something that is commercially viable. And they’d be right. At the same time, it would also be inappropriate for the client to tell the supplier how it should deliver its service, or what pricing structure they ought to be using.
What the ICF team should be doing is taking a balanced view of their organisation’s aims, ambitions and objectives, alongside considerations for the commercial sustainability of the supplier’s service delivery model and the societal impact that surrounds it.
So how can you ensure commercial sustainability during the tender receipt process?
If you really want to save your organisation this future pain, you’ll need to have an interest in putting in some upfront work initially. As part of this work, we find it very useful to build an assessment of service delivery commercial sustainability into your tendering and supplier bid assessment/weighting process at the outset. But note that this isn’t simply about looking at a supplier’s balance sheet or profit and loss statements for the last few years.
A successful mechanism to help in the determination of commercial sustainability (this is just one of many), is to:
1. properly define the different components of commercial sustainability and those key areas that are likely to adversely impact a supplier’s proposed delivery model, and
2. to give ‘commercial sustainability’ an appropriately high weighting in your assessment analysis of supplier bids. Assuming you have, or are able to get access to, sector-specific financial expertise, you should be able to weed out those bids that appear to be great value, but where you are likely to see the ‘begging bowl’ come out from the supplier once the contract has been in force after a year or so.
Again, traditional contract management opinion might say that the supplier has a duty to warn you if any elements of their bid might be unsustainable. And they would be correct. Yet, if the supplier does not warn you and you choose their bid, then you become faced with either having to pay them more, or allowing them to go bust: neither are great outcomes.
Yes – from a legal and contract management perspective, ultimately, you may well have good grounds to litigate against them for breach of contract, but how will this help improve your service delivery? Wouldn’t it just be simpler to walk the hard miles at the beginning, do the appropriate diligence, and avoid the problem in the first instance? Buyer beware.
The ICF approach is more value-partnership-orientated – where a collaborative approach helps to head off these issues early. You might find that after careful scrutiny a bid is indeed completely commercially unsustainable. When raising it with the supplier, you might then learn that they’ve built the bid this way on purpose as a strategic move to increase market share.
Armed with this new information, you can enter the relationship knowing that despite financial evidence to the contrary it is a ‘win-win’ situation because: (a) you have (in theory and principle) the promise of much lower service costs and a chance to reshape services through collaborative innovation, and (b) the supplier’s visibly supported market gains will aid their credibility for future bids in the open market (backed by a reference from you), and of course with your organisation (should you be satisfied with their performance).
In order to reduce the commercial risk of accepting their bid it would be normal that their parent company guarantees (i.e. contractually warrants) the level of service delivery and costs in the event that the contract does go pear-shaped, and that they will underwrite financial assistance without delay. Alternatively, the supplier could put in place insurance that can also underwrite these costs.
In this case, you can still take advantage of great offers, while insuring yourself against the commercial risks that may manifest themselves.
Six lessons on the subject of ensuring commercial sustainability
1. Financial domain expertise of your team. To review bids for their commercial sustainability, it’s imperative that you bring in the right sector specific financial expertise, whether in the form of an individual or a team. They will help to unearth potential commercial (practical service delivery) pitfalls before they become a real headache after the contract has been awarded.
2. Have financial cover guaranteed. Where seemingly unsustainable bids come to the table, work with the supplier to ensure the appropriate guarantees are in place to protect your organisation in the event that their ‘strategic’ moves become problematic for your service delivery. Obtain guarantees (contractual warrants supported by a parent company, financial bond or insurance policy) to sustain any losses. Note that if the supplier is sold to an acquiring organisation, it’s important that any transfer of material liability passes to the acquirer – and that in breach of this happening, a parent company guarantee or an appropriate insurance policy is already in place pre-acquisition) to ensure that the purchaser remains liable for the maintenance of the contract’s quality of delivery.
3. Ensure skilled resources are maintained. Watch out for movement behind the curtain. As finances get tight a supplier may begin to move skilled (and, therefore, more costly) resources off of your project and involve less skilled and more junior personnel to reduce costs. You need to ensure (by a supplier contractual warrant) that the skills and resources the supplier puts onto your service delivery initiative will always be of the same or higher level in order to at least achieve the business outcomes agreed.
4. Weighting assessment process. As you send out the tender documentation, ensure that the assessment and weighting process is structured in such a way as to be clear, fair and equitable to the bidders that respond. Clarity over what you are looking for when you assess their commercial sustainability in relation, and relative to, the business outcomes required from the service delivery process, is vital. Next, operate the assessment and selection process without ambiguity or subjectivity (hence the requirement for financial domain expertise) so that you don’t fall foul of new EU procurement rules. You don’t want to inadvertently be seen to appear as though you’re offering some suppliers preferential treatment, because you weren’t clear on the assessment process yourself.
5. Contract Management vs Intelligent Client Function: Contract management is designed to manage suppliers to achieve particular outcomes, relying substantially on the supplier to ‘get it right’. Depending upon the importance and complexity of the project, contract management may be all that’s needed. Where your organisation’s success hinges on a more innovative or transformational business outcome, your risk tolerance will determine whether you opt for a more collaborative, ICF team guided approach to safeguard your outcome delivery, or whether you trust your supplier to warn you of all the inherent risks and pitfalls that might come back to bite you. Pre-procurement, be sure to identify the criticality of your project and assess which of these approaches is best suited to the outcomes you wish to achieve.
6. Maintain financial cover. It’s important that as a minimum you get evidence each year (as a contractual obligation) that the overall financial position of your supplier and its parent means it can still sustain the commercial model it is operating for your service delivery. Likewise, if the commercial model has been independently insured by the supplier, then make sure you receive a copy (as a contractual obligation) of the renewed insurance certificate each year.
Your tolerance for risk, the importance and complexity of your service delivery, and your familiarity with partnership-led projects will ultimately determine your approach to procurement and the lifecycle management of the relationship you build. From our own experience, austerity measures and market forces are subduing the desire for creative thinking; those who are driving innovation through client/supplier partnerships are the ones pioneering new ways of working and reducing their ongoing costs of service delivery, either through shared services or new business models.
Our own experience is that innovation is the key to maintaining service delivery despite significant cuts to key resources. Where lasting and successful relationships have already been established, contract management may be all that you need. But if you’re looking to lead something transformational and complex, you might wish to consider the implementation of a properly resourced Intelligent Client Function to support your procurement and programme delivery activities.
To find out more on pre-contractual due-diligence, scoping and forming ICF teams, download our Improving Outsourcing Relationships white paper.