NAO report on the challenges of implementing digital change: Flexible contracting

By Allan Watton on

implementing digital changeIn July the NAO published a cross-governmental lessons-learned report dedicated to the question of how to ensure that when implementing digital change, major projects have a greater opportunity to achieve a positive outcome. It’s a vital document, seeing as the statistics of these projects indicate very low success rates.

It is a rather hefty 44-page report. To summarise, it highlights six fundamental lesson headings relating to implementing digital change – areas in the planning and execution of a project which require greater consideration, namely:

    1. Understanding aims, ambition and risk
    2. Engaging commercial partners
    3. Approach to legacy systems and data
    4. Using the right mix of capability
    5. Choice of delivery method
    6. Effective funding mechanisms.

This article will focus on the second of these lessons, ‘engaging commercial partners’. More specifically, we will review the importance of creating, promoting and delivering on a more flexible contracting process and the reasons why this is vital to the success of any significant project, whether in the public or private sector.

Implementing Digital Change – Why are this report’s findings important?

Well over fifty percent of major digital projects fail. While the statistics vary depending on their source, all agree that more than half of all multi-million-pound digital change projects fail to achieve their stated outcomes. That’s millions of pounds of taxpayers’ money, to all intents and purposes, poured down the digital drain.

‘Digital transformation’ has been at the core of many of the UK’s most significant projects over the last few years. So, whether it’s transferring to cloud, the creation of new more efficient systems for managing an ever-increasing amount of data, evolution from legacy systems, or technological solutions to everyday challenges, the volume of these projects will continue to increase.

While many of the six lessons highlighted in this report can be applicable to any major project, the significant – and often less well understood– complexity of digital change programmes, makes it all the more important to have a tried-and-tested structure to follow when approaching and managing critical supplier relationships that support and deliver digital change programmes.

NAO report’s findings on contract flexibility

The report’s focus on the question of engaging commercial partners concentrates on three main areas:

    1. Build strong collaborative relationships with your suppliers
    2. Take the time to develop the right plan of action with them from the start
    3. Create contracts that will adapt to the ‘real-world’ changes and challenges your project/relationship is likely to face throughout its term.

The cost and scope of a digital transformation programme is often more difficult to define than that of other major projects. Progress in the digital environment moves at such pace that what is true today may well be surpassed tomorrow. So, while everyone craves a degree of ‘certainty’, locking partnerships into rigid schedules and detailed specifications early on – in order to have clear and simple KPIs to perform to and outcomes to aim at – is likely to lead to unnecessary and ongoing friction.

Digital change projects must be more agile in their contractual make-up than most other strategic supplier relationships. But this doesn’t mean a lack of accountability and open-ended chequebooks.

Such agility can be allowed for through the acceptance of ‘assumptions’ and ‘estimations’ in an initial draft of the agreement. It should cover an ‘exploratory period’ to account for areas where, during that initial period, the analysis should determine a reasonable scope of solution, and cost precision within an agreed spectrum (again, based on the assumptions thought to be applicable at that time).

Such contracts should have a regular (six-monthly) review and refinement process incorporated into them so that the contract – which nevertheless needs a strong framework for the relationship to be guided by – can adapt to the changing realities of the relationship and environment. But, most importantly, the operating governance built into the relationship should provide for ongoing due diligence by the supplier and result in greater certainty over outcomes and costs.

This biannual refocusing and evolution of the agreement will allow for greater commercial trust to be built and collaborative relationships to form as all parties are obliged to work together, continuously refining and redefining the direction of the project.

NAO case study on implementing digital change – how not to do it

The example the NAO report refers to is that of the British Army’s 10-year partnership with Capita to recruit new soldiers to its ranks, which started in 2012.

A new centralised recruitment system was required, but an over-specified contract, and a level of complexity that Capita were not expecting, meant extra time was needed to develop a bespoke system when the adaptation of an ‘off-the-shelf’ option was no longer considered viable. In addition, delays from the army’s side resulted in targets being missed.

It was reported at one point that candidates were being delayed by up to 10 months in the recruitment process, which meant that many subsequently dropped out of the process.

The title of this example in the NAO report: ‘Inflexible contracts can result in poor outcomes for both departments and suppliers’ is very true. The army eventually realised that Capita were being disincentivised through the deductions that were being applied for missed targets, so they agreed to adapt the contract to realign it with more realistic real-world goals.

Fit-for-purpose flexible contracts that underpin strategic supplier relationships

Much of what is represented in the latest NAO report mirrors our own experiences over the last 20 years, supporting our clients within their complex strategic relationships.

In order to create a flexible fit-for-purpose contract which truly underpins your supplier relationship and drives the right kind of collaborative and trust-based behaviours, we have seen that a number of common factors need to be present:

    1. Outcome-based expectations

An agreement that has flexibility built in will need to focus more on the outcomes expected from the project than on the variable routes to them. Ensure that as much due diligence by the supplier (to an agreed terms of reference) as is practical is implemented at the outset, in order to identify the true benefits expected from the relationship.

The quantifiable difference between current and future states should be calculated, and it is important to resist the temptation to lock down too much of the ‘how’ side of service delivery. Given that the supplier is the ‘expert’, this should be left to them to determine, although it is perfectly reasonable to critical-friend challenge their approach.

As the term of your agreement passes, you must expect your contract to evolve to contain more information on this front.

    1. Reverse-engineered contract terms

Once you know the aspirational outcomes of your project and relationship, you can identify those areas of the contract which can be quantified and which should remain agile in order to drive the behaviours and innovations that will improve your chances of a successful outcome.

    1. Governance sharing

A more agile contract requires more collaborative management – everyone not only knowing what their roles and responsibilities are, but also taking greater accountability for ensuring that they are executed as they should be. Provisions for this can be built into the agreement.

    1. Six-monthly contractual review and refinement

The linchpin of any agile contract is the ‘reshaping’ process, with supplier and client both agreeing that as the world around them changes so must the agreement that binds and guides them. To these ends, every 6 months (at least) representatives from both sides must meet to discuss how the agreement is working, what may need to change, and what must be adapted in order to give the project its best chance of success.

    1. Rescoping exercise

When changes to the delivery approach are recommended, it’s important for your supplier to conduct a thorough scoping exercise. This will determine what changes to risks and outcomes might result, as well as identifying how the processes they had been following in order to deliver may need to be adapted according to the new reality.

    1. Adequate recourse

The development of more collaborative strategic relationships that allow for periodic changes to the contractual agreement will still require contractual mechanisms for escalation should issues arise and recourse be required to ‘persuade’ a party to change direction in order to realign to pre-agreed objectives.


In a world of ever-shifting sands we all need to adapt the way we work. The digital landscape changes at a much-accelerated pace and, therefore, the only logical route to an agreement that is both robust and flexible, is to build it right and to commit to its ongoing evolution throughout its term.

The NAO report highlights many of the failings of the ‘standard’ contractual relationships in use on digital change projects. This is an important document and one certain to be worthy of your time, so here is a link to it.

Should you require any assistance developing, adapting or realigning to an agreement that best suits your strategic supplier relationships, feel free to get in touch on 0845 345 0130 or at