NAO Principles Paper on Managing Supplier Failure – 9 Key Lessons Learned

By Allan Watton on

Suppliers come in all stripes. Some operate as genuine partners – identifying ever-more effective operating practices often, without being asked. In these types of strategic relationships, everyone wins:

  • the clients/service users win because they benefit from ongoing reductions in business-as-usual (BAU) operating costs and innovation that brings new ideas to improve overall operating effectiveness.
  • the supplier also wins because it has an opportunity to gain exposure to other areas of the client’s business and may be able to widen its service delivery portfolio. So, what it may lose on BAU revenue and margins are more than compensated for by the widening of its service portfolio with the client.

Managing Supplier Failure: Sometimes, it doesn’t work that well

However, some partnerships don’t work so well, and in these circumstances suppliers can fail, and they can fail for all manner of reasons. Some of them are avoidable and lamentable, while others are simply as a part of the commercial natural selection process as they become outdated, outmoded, or just as a result of poor quality of service. They reach their natural end in the face of more sophisticated, reliable or cost-efficient competitors.

The National Audit Office (NAO) has spent years assessing how government departments deal with a variety of these relationships and one recurring thread that has time and again woven its way through this analysis is the failure of suppliers, both in structural and delivery terms, and how relevant government departments (clients/service users) have handled such an event.

The NAO decided to collate all of its findings and conclusions into a ‘principles paper’ which included nine recommendations for improvement. In an era where so many suppliers are struggling to keep up with their competitors, to manage escalating client expectations and to keep the doors open, we thought it highly relevant to share the NAOs findings.

Failure can be a relative thing

It could mean a supplier’s failure to deliver on the expectations of their client or their failure in a more finite sense. The NAO defined failure as “any situation requiring intervention above and beyond normal performance management”.

Economic, political, competitive and financial pressures can all be reasons for failure, as can a client’s reprioritisation, which may mean that your original goals no longer reflect your ‘Future State’. Essentially, some aspects of failure should be considered simply part of the natural strategic partnership cycle, something you (should) learn from.

Rather than succumbing to the temptation of witch-hunting for the culprit, it’s far better to realign your governance so that feedback intelligence on failures is gathered and changes can be implemented. On occasion a failure can become more obtuse and, though we hope this is something you’ll never have to experience, it is something that you should prepare and plan for, just in case.

This rather morbid, though certainly pragmatic, preparation for failure is based on determining relative risk profiles for every key element of the relationship, because if you can recognise a weakness early enough, then you can set in place mitigations that often minimise disruptions in service delivery.

Transfer of risk to achieve better results

If you have transparency of the risk profile of your supplier and project you are collaborating with them on, you can work out how much risk should be transferred to them. The mechanisms you choose to use to affect this transfer of risk to reduce the likelihood of failure will need to be tailored to the individual supplier. The incentives for doing so will need to be significant enough to be motivational (in the right direction) and yet create goals that are realistic enough for a supplier to be able to achieve with the right dedication.

The ‘failure plan’

While the NAO did see that many government departments had failure plans in place, their use was rare as they often intervened to prevent a supplier’s failure. This is obviously a good thing. However, there are times when you and a supplier must be allowed to work together to mitigate potential failures and to collaborate, ideally at the outset, to put a ‘failure plan’ in place which will ultimately help you avoid any surprises during any exit and transition process away from the incumbent supplier and into a new relationship.

Below you’ll find the nine key lessons that the NAO concluded after collating all of its data on the subject of supplier failure, alongside which we’ve added our own interpretation of their findings based on our experience of dealing with over 500 of these major relationships.

    1. Understand the appetite for failure

The strategies you employ to prevent or prepare for failure will depend, to a large extent, on the impact that failure might have on your department/organisation and those you are responsible for. How risky do you believe the relationship might be and what would be the outcome in the worst-case scenario?

The NAO paper explains this as follows: “The appetite for failure may be high, for example where they are using market mechanisms where users choose providers and there are many alternative providers. It may be low, such as where the department co-produces with a provider and shares the financial or reputational risks.”

    1. Plan a delivery model which aligns to the appetite for failure

The risk profile of the relationship and the significance of failure will determine the collaborative model utilised – how different government departments may work together, the way teams are formed, the governance and oversight of the project, and the mechanisms for smart awareness.

The last of these is most often represented by the establishment of an Intelligent Client Function (ICF) team. It builds closer relationships with supplier-side counterparts for early identification of issues and greater steering power when needed.

    1. Plan for how to respond in the event of a provider failure

Failure may be an abstract construct at the outset of a new relationship with your supplier, particularly one you deem to be a strategic partner, but it is an eventuality that needs to be prepared for. The when, what and how of response to failure needs to be formulated, documented, agreed and, should it be deemed necessary, acted upon.

    1. Put in place appropriate oversight to monitor providers, proportionate to risk appetite

Historically, there have been many clients who have believed that suppliers themselves were best placed to take a significant proportion of responsibility for oversight of their own performance. Evidence suggests that this is rarely the best plan of action.

In most client–supplier relationships it is important to retain enough in-house expertise and governance to effectively monitor supplier performance, identify issues on the horizon and to know how to handle them with the nuanced subtleness gained from a closer working relationship. I’m speaking of the creation of an interdepartmental team that we like to call the Intelligent Client Function (ICF) team.

    1. Agree with providers and service users what constitutes failure and its consequences

Failure is not always a single point – it is often experienced along a spectrum. The ‘failure plan’ you construct at the outset of your relationship will have determined the threshold beyond which ‘failure’ can be determined. It will also usually include the specific areas of commercial and operational impact that varying degrees of failure would inflict on your department, organisation and end users.

This will help you to determine when a situation is still recoverable and when things have moved beyond being able to rebuild trust. It is important to agree with all internal stakeholders what these thresholds are and to make clear to your supplier that these thresholds exist.

How much of your failure plan you choose to share with your suppliers is, though, up to you as the purpose of your openness is to motivate, to guide and to encourage a supplier towards behaviours that will avoid the threshold ever being reached or to steer them back on course. Only you can determine what that will take.

    1. Balance the need to be consistent with the need to respond to individual circumstances

To penalise or to support: that is the question. When a supplier fails to deliver, do you set in motion your failure plan, following the agreed path, actioning your contractually approved mechanisms for escalation, or do you work together more constructively?

The reality is that it’s often best to find a way that is somewhere in-between these extremes, unless poorly constructed contract terms make collaborative working difficult. It’s important to be mindful of the commercial trust you can earn or lose as a result of your responses to failure. Consistency could be considered reliable, predictable and stable, offering your supplier a clear path to walk.

However, it’s also important to adapt to the individual situations, to be able to deviate from the mechanisms that have been agreed to evidence that you consider the relationship to be a collaboration. This range of flexibility needs to be determined to maximise positive behaviours while discouraging negative ones.

    1. Assess the ways in which the response to a failure has affected the perception of the appetite for failure and, therefore, the incentives operating upon providers

Words show intent; actions evidence commitment. Despite the information you have shared with your supplier about failure thresholds and ramifications, it’s how you act in the face of thresholds being crossed that will determine a supplier’s perception of you.

Slavish adherence to your legal recourse may be interpreted as harsh and autocratic. However, taking a ‘we’re all in this together’ approach could be seen as you being an ‘easy target’ by not following the contractual mechanisms outlined.

Of course, both following the contract and working collaboratively have their place in steering a relationship, but charting a course that uses these mechanisms appropriately and focuses on a path that’s confidently between the two, where strength is shown when needed to guide the right behaviours and generosity is shown to build greater supplier buy-in, is the smart approach to perception management.

    1. Reconsider the health of their providers

What does a failure say about your supplier? Is it a minor deviation, a one-off situation or a signal of worse to come? It is in your interest to thoroughly review the commercial and operational health of your suppliers on a regular basis, to assess their markets, their motivations, their relative productivity.

It’s important to ask the right questions of the right people to decide whether external or internal influences may be leading them down a path that could impact on their ability to deliver in the relationship.

    1. Share lessons about failure within and outside the department/organisation

At the same time, it’s equally important for clients to review their own role in the relationship on a regular basis. Has your team contributed to any of the issues that have been identified by either side? Are there operational matters that could have been undertaken better?

What can be learned from each instance of failure that could be used to either prevent a similar experience being repeated or that can be applied in a more general sense to improve the relationships you have, to be more crisis aware in all your dealings with your strategic partners?


The NAO Principles Paper draws on years of research and experience and is, therefore, worthy of note and consideration. For our part, the nine lessons are part of a much bigger picture and are logical conclusions. Focusing on planning for the best while still strategising for the worst, building more stable, smarter relationships with suppliers and learning, and growing, from the lessons of the past.

The NAO aims to understand what causes the observed issues and suggests that we all look a little deeper to appreciate the ways in which the organisations that supply us with services, and the people who work for them, can be motivated into more positive actions.

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