4 lessons from the PAC on improving public sector contract management

By Allan Watton on

Contract Management SoftwarePrivate sector service providers take a hefty 50% bite out of the public sector’s total annual expenditure on goods and services. The likes of G4S, Serco, BT and a few other members of the exclusive Massive Outsources Suppliers’ Club receive £90bn of taxpayer each year. It is fair that these service providers are praised and rewarded for their successes – but they should also be held to account for their failings.

The Public Accounts Committee (PAC) recently reviewed contract management in the public sector. They were not wholly satisfied with the status quo and it seems the results of their findings indicated there is much work still to be done. The report touched on some very interesting points that have some valuable lessons for organisations involved in large scale outsourcing and strategic relationships.

However, this particular report from the PAC does seem to show a somewhat idealistic perspective on how private sector providers should behave towards their client organisations – in particular, those in the public sector.

The Right Honourable Margaret Hodge MP, Chair of the Committee of Public Accounts said “We all expect those companies being paid for services by the taxpayer to have the highest ethical standards in their work… It seems that some suppliers have lost sight of the fact that they are delivering public services, and should do so in accordance with public service standards.

The harsh reality is that private sector contractors will attempt to do their best to deliver (a) what is measured and (b) what they are rewarded on. In view of the pressures of external shareholders on these private sector providers, their primary focus tends to revolve around market share, profit and their standing in the marketplace. In other words – their responsibility to their shareholders.

These providers do not have a “civic duty to perform”. Such duties are not usually at the top of a private sector provider’s priority list, especially when many are struggling in a market where public sector clients are negotiating hard for the very best deals due to their own austerity worn budgets.

There are clear and common differences between the motivations of public and private sector organisations and these need to be recognised by the PAC. Understanding the behaviours of your service partners and what motivates them, or could be used to motivate them to achieve your expected goals, is an essential part of effectively managing your relationship with them.

Understanding this difference should enable you to build your aspirations into any contractual agreement you draw up, to work together rather than leaving such things to chance.

The PAC report points to a few instances where the differing priorities of these two worlds have collided in a very public way – using examples such as the G4S and Serco overcharging scandals. It talks of how “unacceptable and unethical” this was, and how the organisations involved have apologised.

But while it’s all well and good for the private sector to apologise for wasting taxpayer’s money, clients need to be clear that there will always be some contractors that will act opportunistically, and it is the public sector client’s responsibility to safeguard their budgets by having the right governance in place to ensure that such issues are prevented or where not prevented, remedied promptly.

We fully agree with the report’s statement that the “Government needs to rebalance commercial relationships towards its own and the taxpayers’ interests – and avoid being locked into unreasonable costs and a victim of excessive profits”. That said, what are excessive profits? In our view, profits are only excessive when the resulting outcome does not provide clear value for money for the organisation using the services. What would make more sense – a service provider who delivers poor service and poor value for money while making a little profit, or a service provider who delivers excellent value for money outcomes but who makes a good profit in the process?

Service user organisations must start to re-focus their attention on clearly quantified outcomes and value for money. Whether a private sector organisation makes a huge profit or a little profit is not the issue – it is the value for money outcome they have generated that everyone should be scrutinising.

To safeguard these interests, and to encourage the right sort of behaviour from private sector contractors, the PAC report makes the following 4 recommendations.

1. The government will not achieve value for money from its contracts until it pays much more attention to contract management.

This is undoubtedly true, but in reality – this is stating the obvious. Government is trying to position contract management as one of the most important aspects of the relationship between the public sector and private service providers. It needs to be planned for by the executive team, understood by all parties, adapted as the relationship matures, and monitored against expectations.

It is this monitoring process that the report identifies as lacking in all too many cases, stating that the public sector could be accused of “taking their eye off the ball and placing too much trust in contractors and too much reliance on the information contractors supply”. It also makes the point that it is vitally important to give those in charge of maintaining the relationship the resources and the responsibilities they require to be at their most efficient and effective. The PAC report recommends:

a. Accountability. There should be clear and specified accountability for spending throughout the entire lifecycle of a contract, so a relationship can be guided to stay on track or audit trails followed once a problem has been identified. What is missing here are a few important on-the-ground operational issues – such as the relative transient nature of the those with such responsibility compared with the average term of such a contract, often leaving new people with a very steep learning curve.

b. The right people. The Cabinet Office needs to recruit the right people into such contract management roles, prioritising adequate resourcing for Intelligent Client Function teams, recognised for the value they offer as project overseers.

c. Progress review. A review of the situation at the end of 2015, requesting reports from the Cabinet Office, Ministry of Justice and the Home Office with particular interest in what is being done to extend improvement plans beyond the “commercial directorate and into the operational management of contracts.”

2. A culture of revenue and profit driven performance incentives has too often been misaligned with the needs of the public who fund and depend on these services.

The PAC report noted that they believed contractors “have not shown an appropriate duty of care”. We have to suggest that some of the responsibility for this lies, however, at the client’s door. Contractors, more often than not, set their sights on delivering what is asked for. If you have not engaged in appropriate pre-contractual dialogue that clarified and quantified your business outcomes with the vendor clearly enough, then you are not likely to get the results you had hoped for – you get what you measure and what contractors are accountable for.

Of course contractors have a duty to warn their clients of any material issues, including their own misunderstandings, that could affect the success of a project. However, clients also have a duty to the taxpayer to conduct their own analysis to ensure that they have taken appropriate steps to ensure the provider is given every opportunity to undertake the right type of due diligence.

While the private sector has started to make the right noises about responsibility to take care of taxpayer monies, there is still some distance between rhetoric and action and we are certainly not across that particular chasm yet. The PAC report recommends:

a. That the Cabinet Office works with industry to define the rights and obligations of all parties under the duty of care between client and contractor. The duty of care highlighted by the PAC, however, is very different to that of the ‘duty to warn’. We know from experience that clients who provide the right environment to help vendors conduct appropriate due diligence have a very positive effect on the sector, not only for requiring public sector clients to qualify and quantify their needs more clearly but, through identifying ‘what good looks like’ to vendors, they will be able to drive better value.

b. Personal accountability of client-side senior executives to parliament for maintaining strong controls over public contracts.

c. A ‘corporate renewal’ process which clarifies the Cabinet Office and HM Treasury positions on what behavioural and practical changes public sector clients should make and expect from contractors.

3. Government must guard against suppliers becoming too important to fail.

The government has made it clear in recent times, and so have the PAC, that they are keen to encourage more SME bidding for tenders. They expect that by splitting larger contracts up into much more specialist bite-size portions, greater success in contractual relationships will be achieved.

The idea behind this is to encourage a more skilled and motivated pool of specialist firms into play and to spread the risk. In our own experience, the reality is very different. While it is a wonderful idea to encourage more competition, and to weaken the monopolistic hold that a few large outsourced contractors have on the public sector market, the PACs suggestions come without any practical implementation solutions. The devil is in the detail in trying to make a multi-sourced vendor arrangement drive good value.

The fundamental issue with clients setting up these relationships, is that while SME suppliers may be delighted to take on such prestigious contracts, they often don’t have the financial or staff resources to spare for the weeks of effort it can take to bid for these contracts without any guarantee of success.

SMEs are inherently more susceptible than the larger players to cash flow issues that can, and often do, make or break their company. So, encouraging SMEs into the fold is great in theory, but I am not seeing that the PAC has put much thought into the practicalities of how they will be able to continue to eat and pay their rent and salaries, whilst this ‘encouragement’ is taking place?

In general terms, the PAC report recommends:

a. Priority must be given to developing a more competitive marketplace so that taxpayer money is more frugally spent.

b. Barriers to SME entry into the bidding process need to be identified and addressed. Quite some change needs to take place to encourage smaller suppliers and contractors into the public sector outsourcing market.

c. Robust sanctions must be included and enforced on contracts, and previous performance must be taken into account when contractors are considered for new projects. In our opinion, it’s the way that contracts all too often fail to adapt (or have adaptation built into them) to a maturing relationship that is a larger issue here.

4. Government needs to rebalance commercial relationships towards its own and the taxpayers’ interests, and contractors also need to accept that spending public money brings with it a greater degree of public scrutiny and transparency.

With taxpayer money at stake it is only right that contractors should be prepared to be completely open with how they are using it and on what. Open book access should be expected, transparency encouraged and adaptability built into contracts that will allow for costs to be reviewed on a regular basis so public sector clients are not locked into unreasonable and misaligned service delivery and costs. The PAC report recommends:

a. Tighter controls on regular KPI reviews, productivity incentives and early warning signs of performance issues. Asking the right questions and developing the right foundations for the agreement from the very beginning is paramount here, going all the way back to procurement this will boost performance throughout the relationship.

b. Greater transparency should not only be requested but demanded, through open book access and instructions on how this additional information might benefit the public sector client in their efforts to more effectively manage the contract.

c. The publication of service contract performance will give greater visibility to all parties and will help others in the public sector to make more informed decisions when it comes to selecting the right suppliers for their relationships.

To briefly summarise our thoughts on the recommendations regarding SMEs from the PAC:

1. Direct bidding by SMEs. Encouraging SMEs to bid directly for government contracts (or in fact, SMEs bidding for any large contracts – even for private sector organisations) is commendable. However, the ‘blind spot’ of the PAC on this is how are SMEs going to survive in the meantime if they are going to spend weeks on ‘speculative’ bidding for each contract? SMEs by definition have to ‘hustle’ to find work and for most small organisations, trying to find work (marketing and selling) is their biggest cost and most significant risk of survival. While I do not agree to any extent of larger contractors ‘ripping off’ public sector organisations, the larger fees and higher profitability comes because of the overheads and risks they take in bidding for these contracts.

2. SMEs bidding through larger contractors. SMEs bidding through larger contractors provides a much greater degree of safety for the smaller supplier. However, this means the larger contractor then takes on the contractual and reputational risk of (a) the SME not being able to fulfil its specialist area of the contract, (b) the SME needs paying before the main contractor gets paid because it has its own salaries and rent to pay – thus increasing the financial risks for the main contractor and (c) if the SME business fails part-way through delivering the contract, the main contractor has to find another SME that can deliver the remaining aspects of the contract or it takes the brunt of having to reimburse the client for monies already paid. Often this means it takes a double whammy – the large contractor itself has not been paid, but has already paid out to the SME that has failed. A blind spot of a lot of public sector organisations (mainly through the poor communication of the larger contractors) is that the above risks are the reason why, in my view, larger contractors are entitled to a ‘fair’ margin and return on investment over and above the direct cost of the SME providing the service.

3. Managing SMEs. The implementation of the PAC’s recommendations will be difficult for public sector organisations. In our experience, most senior executives do not see the value in having an appropriately resourced and financed Intelligent Client Function team. The irony is that managing a large prime contractor requires less client side resourcing than managing a team of multi-sourced SMEs. In fairness, the government has been trying for some time to raise the awareness and profile of contract management, both through the Crown Commercial Service (CCS) and the Major Projects Authority (MPA). Even those beastly green-headed ogres at the NAO (I jest – I am a big fan of the NAO’s work) have recognised the government have been making progress in this area through their report “Transforming contract management”, albeit, and I agree with the NAO on this, progress is not being made fast enough by the government.

4. SME cash flow. This is, without doubt, the biggest blind spot that the government, the NAO and the PAC have not recognised in respect of dealing with SMEs. SMEs cannot go ad-infinitum without being paid. So, a decision needs to be made. In consideration for receiving the most innovative solutions, at a significantly lower cost, delivered faster and by a team that would rather have hot reeds stuck up their finger nails than have a project fail, then SMEs need to be paid fast, and in stages. On certain projects, they will even need to be paid up-front to fund development. This ‘shared risk’ model is not endemic within the public sector. Yes – you can tie SMEs to all sorts of contractual responsibility, without payment until the project is finished and threaten to take their first born if the eventual deliverables are not fit for their intended purpose – but SMEs cannot work to these constraints without going bust, probably sooner rather than later. The answer, in our experience, is to put together really strong monitoring expertise through a genuinely Intelligent Client Function that can understand how to structure a ‘win-win’ governance process, that accepts dealing with SMEs comes with its own, and very specific, risks. Yes – there are risks, but these can be minimised – ensuring the public sector gets the most innovative and value driven solutions, while also paying SMEs quickly, can create a sustainable business that can continue to drive maximum value.

However, none of the above will happen until there is a more common grip on reality by not only the government itself, but by those who hold them to account. We are seeing small glimmers of hope. They just need some acceleration.

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