Evolve

Contract Management

For the last three years the Office of Government and Commerce (OGC) has been focused on improving the quality of programme and project management in Central Government. The initiative, known as Gateway Reviews, has been picked up by the NHS for projects and programmes in Health and by the 4Ps (Public Private Partnership Programme) for Local Government. This initiative, based on a non threatening approach to independent review at key stages of a project or programme’s life, has been remarkably successful, partly because of the rigorous process of selection of reviewers and partly because of the culture change that has been delivered around major project and programme management. The maintenance of the principle of confidentiality of the Gateway Reports has been a vital contribution to the ability of review teams to conduct frank and appropriately critical investigations, and this must be continued if the initiative is not to be strangled.

For all that this is a phenomenal success story for OGC there is a very real danger, even a certainty in some areas of the public sector, that many of the benefits gained by the delivery of best practice programme and project management will come to nothing once the contract is let. There are three aspects of a project or programme which will drive its success; the business case, project or programme management and contract management. Standards have existed for business cases for many years and project or programme management have improved beyond recognition. Gateway Reviews are designed to improve these two areas but the third, contract management, remains a fundamental weakness for the public sector with a consequential negative impact on service quality, cost and benefits delivery.

This article questions the real value of applying considerable resources, skills and experience to the process of procuring a contract when, during the life of the contract, so much of the benefit is put at risk and when ongoing service quality, cost and potential for improved savings are poorly managed. My own view, based on experience, is that an effective contract manager can generate cost benefits in the order of 3% to 5% of the value of a contract.

There is some very good best practice guidance available on contract management but it remains largely ignored across a substantial part of the public sector. I will tackle the principles of best practice later in this article but let me begin by offering some of the common reasons that problems occur with contract management:

• The appointment of a contract manager is frequently left until too late in the process. The contract manager is seen as the person who will take over from the project manager and their ‘real job’ is argued only to commence after the contract is let. I can recall several project owners who have actively sought to save costs by leaving the appointment of a contract manager until as late as possible. It is, sadly, far from uncommon for contract managers to be appointed after a contract has been let and implemented;
• The choice of contract manager often has more to do with their day job and relationship to the service being provided than their qualifications for the job, their skills or their experience. Few would now question the need for qualified and experienced project and programme managers but fewer would seek a similar requirement for their contract managers, yet with relatively little effort one can see that there are obvious skills required. You can be sure that the supplier will not make the same mistake;
• It is well understood that project and programme management for any significant service require full time commitment, usually with support for project administration. Many, if not most, contract managers are given the task of contract management as an adjunct to their ‘day job’, usually without reference to their capacity to do the work. I suppose though that if, as is too often the case, the person making the appointment has a poor understanding of the role and value of an effective contract manager, this is unsurprising.

I would argue that this picture of a public sector approach to contract management where contract managers are appointed too late, on a part time basis without the necessary training, skills and experience is damaging the effectiveness and efficiency of services. I believe that the contract manager needs to be appointed by the time the procurement commences (OJEU advertisement), needs to be adequately trained or skilled and is appointed on the basis of a careful and proper assessment of the resources needed to do the job.

So let me explain why I think these things matter so much and why best practice contract management can play a full part in delivering the Gershon efficiencies expected from the public sector.

Contract Dynamics

A supplier will have, partly from experience and partly from the process of developing a bid for a service, a strong grasp of the dynamics of a contract from a commercial perspective.

This will include understanding, for example:

• Which services are most difficult to provide;
• Where improving or reducing the volume or quality of service provision has a low or high impact on the contract’s profitability;
• The cost impact of improving or reducing service quality;
• The operational difficulties of delivering staff with appropriate skills;
• The best and worst times to deliver services or products, and
• The strengths and weaknesses of the client’s own personnel.

This understanding ought to permit the supplier to maximise the benefits arising from the contract. The equivalent knowledge of contract dynamics in the client’s contract manager will enable benefits to be driven out of the contract for the client without negative impact on the relationship with the supplier.

Suppliers have strong commercial drivers but nonetheless generally wish to deliver a good service to their clients since this will ensure good references for other public sector contracts and can minimise their costs of management. A contract manager with the time and knowledge of the contract can negotiate improvements to the quality of service with lower overall costs. This might include removing or reducing costly services reduced and increasing the volume or quality of lower cost services.

Value for Money

Every contract of significance will be subject to changes in requirements or specification over time and will require negotiation and agreement of contract amendments or occasionally more fundamental renegotiation. It is difficult to see how a contract manager with a genuine appreciation of contract dynamics can fail to contribute strongly to the outcome of those negotiations. This would apply to decisions on the extension of contracts where the contract manager will be able to inform the debate as to whether and on what basis the extensions should be undertaken.

This level of understanding of the contract’s dynamics can only be achieved if the contract manager has sufficiently early involvement in the contract negotiations, a thorough knowledge of the contract mechanisms, a strong relationship with the supplier at all levels of management and the time necessary to devote to contract improvement.

Driving the value for money of a contract should be a specific and critical responsibility of any contract manager. Whilst it is beneficial to set value for money improvement targets for suppliers, this is not a solution to maximising value for money. Contract changes, technological changes, client side changes and statutory changes will, over time, contribute to reductions to value for money or create potential for improved value for money. Suppliers will be aware of the longer term benefits to themselves of improved value for money and stronger client relationships and will accept some changes in profitability. A skilled contract manager can engage proactively, indeed should be obliged to engage proactively, with the supplier to identify improvements in value for money and, with an understanding of the contract dynamics, negotiate a means of achieving improvements which do no create a disincentive for the supplier to perform.

Risk, Business Continuity and Exit Strategy

For the same reasons that contracts may change in respect of value for money, they will change in respect of such matters as exit strategy and business continuity requirements. Many problems have been experienced in contracts across Government as a consequence of inadequate exit strategies on the reletting of a contract or on the termination of a contract. When this problem arises it is not unusual for it to be accompanied by the payment of significant costs to the outgoing supplier even where the supplier’s own performance is the cause of the termination.

In large, complex or business critical contracts the potential threat can be managed by having a contract manager with the right capability and experience. Risk management is well understood in the context of project and programme management but risk management after the service has been implemented is weak despite the fact that many risks remain, especially those related to the supplier’s continued capacity or ability to deliver. The contract manager’s role is to ensure that there is adequate management of client side risks and that risk management plans are produced by the supplier.

Customer Service Quality

There are significant customer service benefits to be gained by effective contract management. I have heard, in my work, on several occasions that the role of a contract manager is to ‘sort out service delivery problems when they arise’. Whilst this is technically correct, it misses the point that a well trained and experienced contract manager will really be seeking to ensure that the problems do not arise by working with the supplier and driving service improvements. The contract manager will also have a role in ensuring that the client’s obligations are met and that service users have a clear and realistic expectation of the service to be provided under the contract.

Best practice in contract management demands that the contract manager is trained to a level appropriate to the complexity and importance of the contract, that they are appointed in time to influence the development of the contract and its management regime, that they are adequately resourced and that organisations have a full, detailed set of information about its contracts.

Does your organisation meet these criteria or are you at risk of losing the cash and service benefits of an effective contract management regime? Do you have standards for contract management and processes that ensure contract management is considered at the appropriate time? Are your contract managers trained and experienced? If not, the news is good. There is potential for much improvement.

Note: In writing this piece I have considered only the public sector and its performance in contract management. By so doing, I would not wish to imply that the problems are entirely problems of the public sector and that everything is rosy in the private sector, although my experience would suggest that there is in the private sector a more natural and better focus on contract management.

Our Consultant

Our Consultant is a chartered accountant and former public sector consultancy Partner at a “big four” consultancy with several years’ direct experience of managing contracts in Education and the Health Service. He was a main board Director of a company which had 1200 staff providing services to the public sector under contract and so has seen contract management from both sides of the client/contractor divide. He is an expert on public procurement and project management.

Please post comments or questions arising from Evolve Thinking to evolvethinking@evbc.co.uk. All contributions are welcome.