Four lessons we can learn from DWP and Sheffield CC contract extension decisions

By Allan Watton on

Contract_2In recent months, two major examples have been reported in the media which indicate that some relationships were made to last longer than others – the Department for Work and Pensions’ (DWP) decision to extend their relationship with HP and Sheffield City Council’s agreement to retain Capita. It seems that both of these cases, for different reasons, provide us with some insights that could help you to discover how to drive better value through approaching your extension negotiation in a different way.

Sheffield City Council and Capita’s six-year extension

In 2009, Sheffield City Council entered into a relationship with Capita to operate the delivery of numerous back office services that included ICT, council tax collection, HR and payroll. In January of this year, 12 months before the end of that contract, Capita announced that it had agreed an extension with Sheffield of a further six years to 2022, worth an estimated £140m to £170m.

Andy Parker, Capita’s Chief Executive said: “This extension will enable the Council to benefit from Capita’s wealth of experience and its capacity to drive innovation and change.” From the perspective of Computing magazine, Capita said they have been “working in partnership with the Council to define and deliver projects designed to raise revenue and save money”. In that article, Capita says “that it and the Council have identified the potential to generate significant additional savings for the Council over the life of the extended contract”.

How could any local authority resist the renewal temptation of incomes maximised and costs reduced, if it was evidenced by five years of experience working with them to qualify such a promise.

But what about the DWP renewal?

In February of this year, in what appears to be a very different example of a public body taking up the opportunity to renew their outsourced contract, the Department of Work and Pensions (DWP) made the decision to extend their relationship with HP that had, for the last five years, been managing its hosting infrastructure service. With one month to go on the contract, DWP announced that it had decided not to go elsewhere for “technical reasons”. DWP has indicated that it believed no other provider “would be able to legitimately provide the service”.

In addition, a DWP spokesperson said: “We are in the process of extending this contract for three years for the purpose of transition and exit.”

So, in this case it looks like the renewal was for the very practical reason of maintaining service continuity rather than any specific type of transformational change or cost savings. A gradual migration was deemed necessary to ensure that the contract could come to a more manageable and natural end without the complexities of bringing another supplier up to speed on their more specialist configuration of systems.

Should you stay or should you go, now..?

So, why would you consider extending your contractual relationship with your vendor/supplier? How does it benefit you and why wouldn’t you put the relationship out to tender again?

There are many reasons for supporting the tendering route, opening the project up to new ideas and innovations, fresh eyes and competitive pricing, but the procurement process suffers from four obvious disadvantages when compared with renewal:

  • Procurement Cost. The procurement process is costly and fraught with risk, not least because of the senior staff that need to be allocated to reviewing the business outcomes, current performance, appropriate documentation, reviews and assessments, research, and so forth. Senior staff that could be potentially better utilised within the existing structure to drive better value, to inspire innovation and to enhance project outcomes.
  • Time. The procurement process can be incredibly time-consuming, particularly in the public sector with the new EU procurement regulations, which have just come into force here in the UK, adding to the procedures that need to be carried out to conform to best practices.
  • Risk. In the public sector, non-compliance with procurement regulations and infighting between competing suppliers can result in legal challenges that are likely to cost in both time and money, delaying the selection process and potentially disrupting service delivery.
  • Disruption. If not structured correctly, outgoing suppliers can be prone to a lack of motivation to do more than the bare minimum of contractually required effort, and incoming suppliers must manage a steep learning curve. Either or both of these can contribute to a lack of innovation, poor drive and even the possibility of service delivery disruption. All of this has the potential to impact on the reputation of your organisation as those you’re responsible for will look to you for solutions or restitution.

But what if the relationship you have with your current supplier, or their service delivery, is not as good as it could be? An underperforming supplier can be re-motivated, a faltering relationship can be put back on track with the right approach, and often this is preferable to exchanging the devil you know for the devil you don’t. Of course, there are times when a position cannot be recovered from, where a relationship is so far gone that it is best to sever ties through a partial or full reallocation of responsibilities to another vendor, but the potential cost, time, risk and disruption of doing so must be weighed against the potential benefits.

Four lessons on how to get the most from negotiating an extension of an existing relationship

Once you have decided that the best way forward is an extension of an existing relationship, there are a few lessons, inspired by the above examples and gained through years of experience working on such relationships with clients, that could help make this decision a more rewarding one.

1. Treat the extension as a ‘new’ relationship. One very common mistake made by clients extending their relationships with their vendors/suppliers is to treat this extension as a continuation of the status quo. This is a sizeable missed opportunity as you should always look to benchmark best value on the knowledge and skills hard-won and fostered in your existing relationship. Take this chance to update and re-quantify your business outcomes, objectives, expectations, aspirations and write these up in the contract extension to help drive the right behaviours in the innovation of service delivery to determine objectives more clearly. This is your rare opportunity to reinvent your relationship. After all, in most situations, you are under no obligation to extend, so you are in a strong negotiating position to enact change if the relationship is already working (or even if it’s not) for you both.

2. Revaluate your relationship. You have the advantage of years of experience working on the relationship’s business outcomes with your existing provider. You will have significant volumes of data on performance, quality standards, strong and weak areas of service delivery, innovations realised, and much more, from which to determine the best ways of continuing to work with your provider. In other words, you now have hard data by which to judge how you can both leverage the strengths of each other to improve the win-win nature of your relationship. If you think about it, you are in a far better position now than you were at the beginning of the relationship to create a collaborative environment that drives the right behaviours between you to achieve the desired results to accomplish your planned business objectives. By definition, these will have changed substantially over time. Use this knowledge and experience to re-evaluate what ‘good looks like’, communicate this to your provider and then contract for it in a mutually beneficial way.

3. Compare and contrast performance against promises. One obvious, but often underestimated, negotiating mechanism is a complete appreciation of your provider’s performance against their contractually obligated and pre-contract promised targets. Have you both completed what you both said you would do? Are you now where you expected to be in the achievement of your outcomes? If not, exactly where are you and why? Having specific and accurate data on performance issues and inefficiencies can go a long way to ensuring that your negotiations will reap positive results.

4. Reset your KPIs – make them Smart(er). It is important to not only determine new objectives and outcomes, but to establish, with as much precision as you can achieve, a comprehensive set of markers along the way that will quantify your expectations of your provider. At the outset of the relationship such calculations will be, at best, smart guesswork calculated from years of experience on similar projects. But now, with years of performance data based on this specific relationship, far more accurate KPIs can be established and agreed to on a ‘balanced scorecard’ basis that will drive better value. The more evidence-based your calculations and reasoning the easier it will be to negotiate these new KPIs into your new agreement.

Don’t sleepwalk into your next contract renewal. Capitalise on this rare opportunity to realign and maximise the benefits you’re gaining from the relationship. Treat it as though it was a new relationship and think about what you would do and achieve differently this time around. From this, you can design a set of requirements, a contract and a governance process that will drive the right behaviours and create the right environment to achieve the best and most innovative outcomes from your relationship extension.

Even the best relationships can start to stray off course over time, and even the best intentions do not always drive the best results. There will be times when an extension will win out over putting your service delivery back out to tender. In those circumstances, make sure that you have the strongest negotiating hand possible to create the contract and the relationship that you need to achieve the best outcomes from your project.

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