After nearly seven years working on the decommissioning of Sellafield, one of the UK’s largest nuclear sites, the Nuclear Management Partners (NMP) – a group of private sector companies who have been collaborating to manage and oversee the decommissioning process – have been removed from the contract by the government department for energy and climate change.
The NMP were awarded the contract back in 2008, then in October 2013 it was renewed for a further five years despite criticism from the National Audit Office (NAO) and the Public Accounts Committee (PAC). Terminating this contract less than a year into its renewal seems to have garnered much unwanted attention to the subject of outsourcing such a delicate and important project to a group of private sector companies. By returning the contract to the publicly run Nuclear Decommissioning Authority (NDA) the government could be seen to be questioning their stance on future outsourcing in the nuclear sector, a sector where it really pays to keep relationships on an even keel and fallout to a minimum.
The NMPs reaction to the government’s decision was one of “surprise and disappointment”. A reaction that suggests there may be misalignment between the parties in minimising the financial repercussions that the government may now face for choosing to terminate the contract earlier than both sides anticipated.
Nuclear decommissioning is highly controversial in the first place. Outsourcing decommissioning even more so. In these circumstances, how can the government, or any other public or private sector organisation, achieve a successful early contract exit, while minimising any negative impacts, financial or reputational?
Earlier we stated that the NMP was awarded the contract for Sellafield in November 2008 on an initial five-year term. The fact that the contract was then renewed for a further five years in October 2013 was surprising to many interested parties, as the NMP had been roundly criticised by the National Audit Office in 2012, who had concluded that the NMP were not delivering value for money. With the decommissioning of Sellafield due to take more than 100 years to complete, exceeding the proposed budget from the very beginning of this long and complex process is, by definition, going to need some very well articulated and detailed planning.
Despite public criticism from the National Audit Office, however, the government pushed ahead with the renewal of the contract in October 2013. This led to both the government and the NMP being heavily censured, this time by the Public Accounts Committee. They called for the NDA to monitor the progress of the NMP and terminate the contract immediately if things did not improve very quickly.
It seems evident from the outcome that the NDA did closely monitor the behaviour of the NMP, and a decision was made that they should not continue to serve the contract. Ed Davey, the Secretary of State for Energy and Climate Change thereafter announced that the management of Sellafield would return to the NDA, with a new strategic partner from the private sector to be brought on board to assist in an advisory capacity.
The change in direction of this client/supplier relationship, between the government and the NMP, especially because of the nature of the work, raises public safety and allocation of the public purse questions; these need to be considered very closely if the government is deciding on a new private sector partnership, even at a strategic level, on the project.
Dealing with the fallout
Terminating a relationship early in a mission-critical project is not a decision that should be, or is usually taken lightly. In our experience it is very unusual for a large project relationship to be terminated rather than be put back on track. There have been many situations where relationships heading for the courts can be not only salvaged, but be put back onto very high service delivery levels if an appropriate method and process is used to identify the real causes of the issues and a process adopted to rebuild trust and delivery capability.
Where the early exit route is taken, and in fairness, there are occasions where this is appropriate, you have some key considerations. Not only are there clear early exit ramifications, such as the often exorbitant financial costs involved, the damage to everyone’s reputations, and the effects on team morale, but those who rely on the services your supplier provides need to be considered. An exit is not a swift process and in the meantime, and while new suppliers are getting up to speed, or you are getting your own in-house team aligned, service levels may suffer if the wrong approach to the exit is taken.
The biggest and most immediate fallout for organisations is, of course, usually a financial one, as the costs involved in terminating a vendor relationship early can often be uncomfortably hefty. This is especially true if your initial contract was not crystal clear in setting out the exact terms of any potential withdrawal.
Before you decide to set the wheels of a termination in motion, it is, therefore, important to really examine your options and ask yourself some questions about your relationship and whether anything can be done to save it and get your service levels back to where you need them to be.
It may also be wise to explore the possibility of keeping the vendor on for certain areas of the contract in which they are performing well, and potentially exploring exiting from parts of the contract they are less effective at, rather than the whole relationship. Whether you are exiting for convenience or due to poor performance, is also a factor that needs to be widely examined: an exit for convenience is likely to cost you a lot more than an exit that is based upon the vendor being at some fault. In order to assess the health of your exit position, here are some key questions to ask yourself:
What did your supplier tell you they could achieve during the bidding process and have these achievements been met?
If you instructed your supplier because they offered you a specific list of KPIs and then failed to meet them further down the line (on the basis your own team did not prevent the supplier from achieving them), you have good grounds to terminate your contract with your wallet more or less intact. If you can prove that they haven’t met the standards that they promised you, then the onus, and the cost, will be on their shoulders and it will be up to them to put things right in a sensible time before the contract is terminated.
Was your initial contract well drafted and are there clauses in place that document what should be done if you need to exit early?
You already know that the starting point is to always check the contract. The challenge is that most contracts we see don’t necessarily facilitate an appropriate set of provisions that deal with the process or costs of an early exit. In a case where you believe the provider is at fault, and you have sanity checked your own behaviours to ensure you haven’t materially been a part of the problem, it is important to use the evidence of the suppliers’ initial claims during the procurement process to back up the information contained in the contract and help you to interpret who should be responsible for shouldering the financial burden of the exit.
How clearly did you communicate what you needed to your supplier and did they point out any potential problems or warn you of anything they would be unable to achieve?
As with all contracts, client/supplier relationships rely on good communication. It is, therefore, important to look back to the beginning of your relationship with the vendor to see whether you communicated your needs accurately, and whether they exercised their ‘duty to warn’ you of any potential problems with your requirements. If they promised you the world and then failed to deliver, you will have a stronger case for exiting the contract early and with your finances protected. For more advice about exiting a contract, see our previous article about Early Outsourcing Termination.
Learning from your mistakes
If an early exit turns from distant prospect into inevitability, it is crucial that you take time to learn lessons from the experience. Understanding why your relationship with that vendor turned sour is important if you wish to avoid making the same mistakes again, or allowing the same issues to taint other relationships of the same or other contracts. It is vital that you and your team are self-critical at this point and recognise any errors that you may have made, as well as noting those of the supplier that led to the situation you now find yourself in.
You also need to consider what terminating this relationship is going to mean for your organisation in the future. Will it generate negative PR? Will it cause problems with other supplier relationships? Will it affect your appeal as a client when putting other projects out to tender. If you are a supplier, how could it affect your ability to win future work? If any of these are potentially significant issues then it is important to try to minimise the impact of damage, and through a better holistic understanding of the relationship breakdown you will be able to better manage the situation.
This is also the perfect time to remind your team of ‘what good looks like ‘ and the importance of understanding this before you enter into any new supplier relationships. The lessons you learn from a failed relationship and the reassessment of your project goals will be essential factors in the development of better future relationships. Ask yourself what challenges your business is facing, how you have tried to meet them in the past and what has worked and what hasn’t, so you can relay this to any future partner. Being on the same page with regard to ‘what good looks like’ is one of the most important parts of building a successful client/supplier relationship, and the early termination of a contract is an excellent time to reassess your company’s perspective on this.
To summarise, 5 essential steps to smooth out the bumps in your contract termination
Ending a contract with a supplier is never an ideal situation, especially when they are in charge of a highly toxic nuclear facility, but sometimes the only way to achieve your project goals is to exit early with as much dignity as possible.
To sum up, here are five of the most important key steps to follow should you ever find yourself needing to terminate a contract before it has run its course:
1. Is anything salvageable?
Even if much of the contract has turned sour, there may still be areas where your supplier is performing well. Is it possible to keep them on in a more limited capacity?
2. What does your contract say?
Knowing your contract inside out and being aware as to whether it contains appropriate clarification regarding early exit is crucial at this point. If you have a weak contract you will be more reliant on ‘expert responsibilities’ to interpret the lack of clarification therein to provide evidence to support your decision and help you to avoid excessive financial costs.
3. What did your supplier promise you, and did they follow through?
Looking back to the bidding process is important as this information can be used to decide whether your exit is an exit of convenience, or an exit due to poor performance, as the latter, if provable, is likely to cost you significantly less.
4. How clear were you about your needs during the bidding process?
Checking whether the supplier understood your initial needs, whether you articulated them properly and whether your supplier warned you about potential disjoins in your expectations, are all essential, as proving either way could help you to avoid a court battle.
5. What will terminating the contract mean for your company?
Being aware of the consequences of pulling out of your contract is vital if you want to carry out a risk assessment and prepare your company for the potential political, financial or public relations explosion.
By following each of these five steps you’ll be able to make the best of a difficult situation and remove yourself from your unsuccessful contract as smoothly as possible. For further reading you may wish to take a look at our white papers on the best ways to handle a troubled outsourcer relationship and our paper on exiting a failing relationship.