How much do you know about what’s really going on with your strategic supplier relationship? Do you trust your supplier implicitly when they report on progress against your business outcomes, send through requests for payments and inform you of costs? How far would or should that commercial trust go?
We’ll look at a series of specific steps you can undertake to assure commercial trust in your strategic supplier relationships. This will help you prevent having to deal with accusations of fraud and false accounting, as recently laid at the door of former Serco directors, Nicholas Wood and Simon Marshall.
The Balance of Commercial Trust
While it’s vitally important to build trusting relationships with our strategic partners, it makes sense to recognise that there are rare occasions where honesty is not an absolute. Competing interests can skew what people tell one another. This goes for both internal and external partners – so ‘the truth’ can be a nuanced view.
We must be neither naive nor hawkish in our dealings with strategic suppliers. The balance we strike depends very much on the nature of the relationship, but sensible measures need to be employed in any major project relationship to evidence commercial trust while maintaining oversight.
Serco’s Costly Brush with the Law
A little while ago, the Serious Fraud Office (SFO) launched an investigation into Serco (and G4S) for their conduct on their prisoner tagging contract with the Ministry of Justice (MoJ). It was accused of overcharging by tens of millions of pounds for tagged prisoners who were no longer prisoners, charging for those who were no longer tagged, or in some cases, even no longer still alive.
A BBC article at the time said that an audit by accountancy firm PricewaterhouseCoopers, suggested that charging discrepancies could have started some fourteen years earlier. Serco settled the civil aspects of the case by paying out £68.5m.
Chris Grayling, the lord chancellor at that time, announced in the commons that, “The permanent secretary is also instituting disciplinary investigations to consider whether failings on the part of individual members of staff constitute misconduct.”
Last year, as a result of the Serious Fraud Office investigation’s conclusions, Serco agreed to pay the MoJ £19.2m (plus £3.7m in costs) under a deferred prosecution agreement (DPA).
However, this was not the end, as the SFO’s investigation has also resulted in charges against two former Serco directors.
Former Serco Directors Charged with Fraud and False Representation
Serco’s former operations director, Nicholas Woods and its director of field services, Simon Marshall, have reportedly been charged with three offences of fraud by false representation and two offences of false accounting.
It is reported that both men were part of a scheme to mislead the MoJ on the true profit figures the company was earning from its contract for electronic monitoring services over a three year period. Neither gentleman has worked for Serco since.
The SFO is reported to have stated “The scheme was designed to prevent the MoJ from obtaining information to which it was entitled and from using this to decrease SL’s revenues under that contract.”
Three Due Diligence Points on how Open Book Accounting can Rebalance Commercial Trust
The concerns raised between Serco, G4S and the MoJ have inevitably had an impact on the amount of inherent commercial trust clients have in their strategic suppliers.
In many ways, these concerns inform the more sensible ways in which both clients and specialist suppliers now should interact to evidence that they are worthy of this trust. It helps to monitor that they are living up to obligations and expectations.
This can be summed up in three points of due diligence:
1. Build clarity of open book accounting into your contract (or put it into the contract later as part of a legitimate re-shaping process)
Many strategic supplier and major project agreements contain a requirement for open book accounting. However, it’s important to provide a clear understanding of just how ‘open’ your open book accounting will be in your relationship.
‘Real’ transparency is the key to building the levels of commercial trust needed for a successful relationship, but the details of just how transparent it is going to be, is something that should be determined from the outset and included with clarity in the agreement between you all.
It is also up to strategic suppliers to evidence a convincing level of honesty and integrity by highlighting areas of concern with regard to the client’s project along the way (their Duty to Warn). In this way, the client observes supplier behaviours that are also in the client’s interests, rather than simply be self-serving. In collaboration therefore, issues can be raised without fear of recrimination, knowing that both client and supplier are all working towards common goals and objectives.
2. Use of transparency clauses in your agreement and governance
Prevention is the best cure, so the inclusion of transparency clauses in both the contract, but also ensuring these are operated as part of your governance, is really important. These clauses and operating governance should require your supplier to provide detailed breakdowns of direct and sub-contract costs. They need to enable the ability to drill down to all levels of the sub-contract supply chain. In turn, this helps to provide confidence to the client, that the supplier is acting in the client’s interests as well as its own.
Separately, in the unlikely event that there are supplier staff who would consider manipulating performance data, this transparency is often enough to deter any temptation to hide or manipulate these figures to inflate profits or visibility of reduced costs on a project.
Just to re-emphasise, our own experience is that the majority of staff within strategic suppliers can be trusted, but a few bad eggs do inadvertently filter through occasionally.
3. Regular independent benchmarking
Many major project relationships last for years and much can change in that time. Changes in technology, manufacturing practices, staff resourcing, materials, government legislation, organisational objectives and more can result in the costs you’re incurring on your contract, being out of step with the reality of the market.
The way to ensure that you are always paying a ‘fair’ price is to undertake regular ‘fit-for-purpose’ and ‘like-for-like risk’ benchmarking exercises. These are usually conducted by independent specialists, where you compare the costs you are being charged with other suppliers out there.
It’s important to emphasise in your terms of reference for cost benchmaking, that the process is both ‘fit-for-purpose’ and ‘like-for-like-risk’ on the service delivery side. Without these two key parameters in your terms of reference, the benchmarking analysis will not mean much in practical terms and will likely be argued with by the supplier, as not being on a like-for-like-risk basis in respect of the services/solutions they are delivering.
Where significant discrepancies are uncovered, it’s also important that the evidence from the benchmarking specialists is used to engage with your suppliers to renegotiate with them, so that fair levels are re-established and aligned.
For open book accounting to be an effective commercial trust rebalancer, it’s important to have people onboard who can interpret this financial and performance data in the appropriate context. They will drill down into it to identify any discrepancies, investigate them and challenge suppliers whose data is either insufficient or that shows that more can be done to afford transparency and fairness in the relationship.
Six years ago, when Rupert Soames became chief executive of Serco, he made sweeping changes to the organisation. And, on the matter of the tagging scandal that had hit the company the year before, which clearly has had reverberations through the years since, he has been publicly forthright and apologetic on behalf of Serco.
His response to the news of the former directors being charged was to reportedly openly admit that there were those in the company who had “understated the level of profitability of its electronic monitoring contract in its reports to the Ministry of Justice”, and that “Serco apologised unreservedly at the time, and we do so again”.
His forthrightness is commendable and has gone a very long way to helping Serco to regain its standing in the outsourcing/major project community.
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