The National Audit Office (NAO) recently published an insightful report on the state of commercial and contract management best practice in the public sector. We have developed a number of articles on the subject matter contained within this report – the first being an overview titled ‘New NAO Report: 20 Key insights into emerging Best Practice for commercial and contract management’, the second being this one which focuses on a vital document that the NAO report links to – the Government Commercial Function’s Government Commercial Operating Standards (Iteration ii) – which was published in October 2016.
This is an important report as it highlights the government’s commitment to the constant improvement of these commercial operating standards in order to assist public sector clients in maximising every opportunity to achieve value in their organisations. Indeed, one of the opening paragraphs of the report reads: “The purpose of the Commercial Operating Standards is to ensure effective and consistent commercial delivery, and to drive continuous improvement of that commercial capability.” Although they can be used across the whole of your organisation, our analysis of these standards are focused purely on client-supplier relationships and this guidance is just as relevant for the private sector as it is for the public sector.
The evolution of the commercial operating standards
The Government Commercial Function published its first set of commercial operating standards back in February 2016, but after six months of consultations with stakeholders they felt it was time to update them in line with the reality of their practical use. Iteration (ii) offered improved guidance for clients and more importantly, greater advice on how to measure their performance against these guidelines.
The idea is that these commercial operating standards will be reviewed and refined at least once every 12 months and plans are already in place to release a further version at the end of 2017.
The standards themselves are split into eight sections, which we’ve listed below. We have added some commentary because we believe them to be of value to you in developing strong sustainable relationships with your contractors/suppliers:
1 – BLUEPRINTS & RESOURCES
Government will ensure that it has the right workforce to deliver against each department’s pipeline of commercial activity. A key enabler will be that each department will have a signed-off blueprint that indicates their expected commercial activity, details grants where appropriate, and sets out their resource and capability requirements for the next 3 years. Each blueprint will be reviewed annually.
If you have ever been tempted to assume that instructing a primary contractor/supplier means the wholesale transfer of all responsibility for a project to a selected third party, stop.
This ‘lock, stock and barrel’ approach above to engaging in a complex service delivery relationship is a risky undertaking, and one we would advise against in most situations. Historically there have been numerous highly publicised incidents where suppliers have followed their own profit-generating agendas with little regard for the client. This is an extreme example and while issues like this may be rare today, would you wish to take that risk with your budget/project/stakeholders? Then there are the less contrived incidents, such as where competing motivations could be weighted against you if you have no seat at the table. There are also times when a project, or the relationship that governs it, can start to veer off the road without the appropriately skilled Intelligent Client (ICF) team in place to spot the issues early enough.
The standards quite rightly suggest that having the right people in the right roles to manage and monitor progress within your complex service delivery relationships is the key to success. Instructing a prime contractor does not mean washing your hands of a project – it means gaining a collaborative partner in the development and delivery of it. And, while your suppliers have certain responsibilities when it comes to performance and a duty of care, clients still have their fundamental role to play. And the right in-house people in place in the right roles to suit their talents, with the right clarity of vision and function, authority to act and an understanding of the contractual obligations all must abide by, as well as the leverage their agreements give them to guide the process, are paramount to achieving the outcomes you planned for.
2 – PIPELINE AND PLANNING
Government will prepare and retain a comprehensive view of current and future contracts and commercial activity through a commercial pipeline, refreshed every 6 months (with major changes updated as they happen), and plan commercial activity in good time.
Good governance in these complex relationships means taking responsibility for an overarching management view of the project/service delivery – it means determining who is responsible for what and maintaining a view of performance against goals to ensure that expectations are met, and it means clear and understood communication of those expectations.
Good governance, much like good contract management, also means adapting to the reality of your relationship and the stresses and strains that the real world places on it. It is good practice to continuously monitor the various facets of your governance, and to regularly assess whether changes are needed in your overall governance structure. An eye on the goal – the project outcome – is needed here to ensure that necessary adaptations are made to guide a relationship towards these ends. The standards recommend a six-monthly review and refresh, and this should be maintained throughout the relationship lifecycle. Any organisation with limited assets and multiple projects to manage must consider the allocation of those assets across their entire pipeline, based on where they can best serve and deliver. Agile governance can make all the difference.
3 – SENIOR RESPONSIBLE OWNERS & EXPERTISE
Government will maintain senior engagement throughout the commercial process, with all commercial activity on its pipeline having a senior officer (or SRO if appropriate) appointed or identified. This will ensure that the department as a whole maintains a clear understanding of the requirements.
Governance should extend to all levels of the project hierarchy to ensure the most timely and considered actions are taken when there is need for a matter to be passed up the line. Senior management must also be kept regularly updated on their role within the governance structure and with progress, issues and KPIs achieved.
Good client-side intelligence means a well-maintained supplier relationship – understanding what motivates your supplier, keeping an eye on performance and an eye out for issues on the horizon, it means being responsive and considerate, and always fostering a collaborative relationship. There will, of course, be times when actions in pursuit of these goals require a more significant shift than the day-to-day management of the project can sign-off on, and that’s when an engaged management structure is most important.
4 – EARLY CROSS-FUNCTIONAL ANALYSIS OF OPTIONS
Government, through widely sourced cross-functional analysis, will consider all relevant commercial options prior to agreeing a sourcing pathway, and produce timely commercial cases with options for appraisal.
The creation of a clear, understood and communicated business case is an essential early stage element of any project – gaining an appreciation for the outcomes you are expecting your suppliers to achieve, researching the viability of strategies for achieving them, and recognising any weaknesses or issues that would need to be overcome.
Step one would be to gain the confidence, buy-in and support of all stakeholders whose contributions will enable you to develop the most watertight of business cases. Next is to gain clarity through the information gathering stage where all stakeholders with a valuable input are asked to offer guidance and to critique strategy and outcomes. It’s essential to understand not only where you are going but where you are coming from, in order to determine clear quantified benefits from the proposed project.
Utilise the expertise and knowledge you have in-house to determine realistic goals, milestones/KPIs and clarity of both the before and after state of your project.
5 – MAXIMISING COMPETITION
Government will maximise competition by engaging with the market early, and design service requirements that are accessible to as many suppliers as possible (including small and medium-sized businesses where appropriate).
Early market testing is the process of going out to suppliers in order to ask for their input and critical friend challenge of (a) your service expectations, and (b) the benefits and return on investment you expect to realise through its successful implementation, well before the procurement stage. This is crowdsourcing at its best, drawing on the supplier community for advice on the viability of your business case when it comes to budget, schedule and outcomes.
Such an exercise is critical to help you to hone your ideas/business case, adapt it to improve chances of success, identify better ways of implementing governance, developing metrics, and managing the suppliers themselves.
If procurement is the process of identifying the partner best placed to help you to achieve your stated goals, early market testing is the process by which you refine your idea of those stated goals, realigning them to optimise opportunities, capacities and resources, ironing out weaknesses and bumps in the road.
6 – CONTRACTING
Government will make use of flexible commercial contracts that can adapt to future changes. When appropriate, Government will use model terms/standard forms of contracts with minimal amendment.
Contracts, often considered to be a battlefield, should be thought of as an exercise in early relationship building with your supplier. The most productive relationships are born out of fair and amicable agreements between the parties where each feels they have a good deal. Where pitched battles are fought over profitable ground you may win the day, but you’re likely to lose the war.
An appropriate contract strategy, one where parties come together to find the best way of motivating one another to contribute to achieving the best outcomes for all and fosters buy-in, commitment and innovation, is the most effective. However, in our experience, these are features often lacking in agreements created with less consideration for the other side (whichever ‘side’ they are on).
But before you create such an agreement, it’s important to appreciate that you will need to negotiate what a ‘fit for purpose’ contract is in the first place. Some suppliers have been known to encourage clients into standard agreements – ones that favour them and offer little support to encourage good behaviours between both client and supplier to achieve the business outcomes that both sides need.
These revised standards from the NAO aim to develop awareness in all negotiators that such standard supplier agreements are often not the best fit for their needs. For relationships that involve more than the simple supply of commodities and standard services, a tailored agreement is usually the advisable way to go.
The standards look to inform clients that agreements should be negotiated, fair and flexible to the needs of the relationship, and that all changes must be accurately tracked.
Flexibility must be built into your agreements. The days of signing and forgetting about contracts filed in the basement, never to see the light of day unless there is a major dispute to resolve, are over. Today’s contractual agreements should have at least a six-monthly review and refine process incorporated within them. This is the biannual opportunity for all parties to sit down together, assess progress, determine weaknesses, and incorporate all the knowledge they have so far amassed about the project as well as one another’s motivations, capacities and capabilities and refine the agreement accordingly to achieve better outcomes.
While the standards don’t deal with the process of structuring a process to arrive at a fit for purpose contract, they highlight a few of the key principles that should be borne in mind when coming up with a contracting strategy.
7 – CONTRACT MANAGEMENT
Government will ensure the implementation of adequate contract management processes to ensure measurable performance against the requirements throughout the contract lifecycle.
The ultimate purpose of a contract is to drive parties towards a common goal, the outcomes stated at the outset. Contract management’s task is to keep the ship heading towards the right spot on the horizon, to recognise when they’re off course and to adjust accordingly.
The only way this can be possible is if you have:
- A clear direction – the outcome determined in the business case and incorporated within the contractual agreement.
- A defined way of measuring progress – a set of agreed metrics and KPIs that reflect the behaviours you want to drive between yourself and the supplier.
- Skilled staff monitoring and measuring in order to identify progress along the route – in-house expertise that can collaborate and innovate with the supplier, reward when appropriate, monitor, report and hold suppliers accountable for non-performance when necessary.
- The will to adapt to the needs of the project, the participants and the playing field – flexibility to change your operating governance and contractual agreement, should you depart from the agreed course.
The contribution of the standards to the process is about recognising the importance of monitoring, driving the right behaviours for innovation, and having the right people in charge of the relationship.
8 – SUPPLIER RELATIONSHIPS
Government will develop a comprehensive view of its supply chain and apply relevant strategies to manage industry capacity. At a strategic level, Government will create and maintain strategic supplier relationship management (SRM) programmes with its highest impact suppliers, both across Government and for each department’s commercial portfolio.
Supplier relationships are best developed, maintained and managed by those with expert knowledge of your business, of the project, and of what motivates suppliers. It requires someone with breadth of commercial experience as well as someone adept at building strong working relationships that must last for years without crumbling. They must be part friend, part colleague, part analyst and part authority. This is a tough combination to find in an individual or team. But this is the role that an Intelligent Client Function (ICF) team plays.
The standards define ICF as SRM (supplier relationship management), but essentially, it’s a similar role – a team in the front line of a client’s relationship with its suppliers. They are tasked with forming bonds that enable clients to understand the mindset of their suppliers. They must recognise when things might be about to go astray, to appreciate the stresses and strains of individuals, departments and organisations they are partnered with, and to have the ear of management to ensure that when change must happen – to stave off disaster, refine strategy towards success, or encourage greater innovation – that these things can happen quickly and decisively
The summary provided by the NAO of the Government Commercial Operating Standards (Iteration ii) is a very positive step in the right direction. It shows a serious commitment at a fundamental level in learning from the challenges and successes of the past, and a promise to continue to do so into the future.
The eight standards noted above are each of significant importance, offering guidance on clear and sensible ways of mitigating risk in your complex relationships, in maximising opportunities and building stronger, closer bonds that foster collaborative relationships with key suppliers. It should be remembered that these are simply foundational principles, but every positive step, in an environment that can be challenging at the best of times, is a movement in the right direction.
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