Mark Greenburgh: I am joined by Sarah Sasse the head of our central government team and an expert in public sector commercial contracts to discuss effective contract management.
Sarah, what are the most common areas of weakness in contract management?
Sarah Sasse: If you look at the reports coming out of Government over the last couple of years where they've looked at why government contracts failed, I think you can pick out four general themes as to areas of weakness.
The first one is a general failure by customers to manage a service provider's performance and then linked to that is a lack of control over the financial arrangements and a lack of transparency.
And then a third one is that these are often long term contracts and what they fail to do is adapt to the fact that things are going to change so there are insufficient incentives on the supplier to improve the service or change.
And then I think the final one which is a real lawyer's point is just an inability to manage change. These contracts do change but the change control processes and how you manage those is not as good as it should be.
Mark: What issues do you see with managing performance and how do you think that those weaknesses can be best addressed?
Sarah: I think some of the issues are an overreliance on the supplier's self-reporting on its performance combined with very complex KPI regimes which just prove unworkable and then often the governance's regimes are such that there's insufficient senior stakeholder engagement.
So how can you improve that? Keep your KPI regime simple but make sure it's flexible. And then on your governance and escalation dispute provisions, make sure that they're workable and that they're fit for purpose.
Mark: How can the parties address poor financial control and lack of transparency?
Sarah: I think a key thing is to make sure that both parties understand what the financial arrangements are. So a practical solution might be to have a workshop with both parties to actually understand how those work. Agree some form of financial reports, templates, don't rely too much on the really complex financial model that we attach to the contract. And then make sure that that's updated so that it keeps abreast of change with the contract.
Mark: In this age of austerity what mechanisms can protect a customer against excess profits?
Sarah: Traditionally this has always been a difficult area because we build in excess profit mechanisms, game share arrangements but they've been really difficult to work in practice. So when the cabinet office was looking at the model services agreement a couple of years ago they came at it from a different approach and they said it is reasonable for suppliers to make a profit. And, actually if they make costs savings or efficiencies they actually ought to be able to make more profit than the parties originally anticipated, but there is a limit beyond which the customer ought to be able to share in those cost savings.
So the mechanism they introduced was that the parties agree up front an anticipated contract life profit margin. The supplier then reports on that every year and, provided the actual profit margin remains within a 5% tolerance of that anticipated level, then the supplier keeps all that profit even if it's higher than was originally anticipated.
However, if the profit margin exceeds the anticipated margin plus 5% then the parties sit down and renegotiate the charging arrangements. Now there isn't any teeth to that in the sense that it is just an agreement to agree, but the intent is that the parties look at renegotiating the charging arrangements.
Mark: What incentives can there be to generate service improvements?
Sarah: Traditionally I think the way contracts have looked at managing supplier's underperformance is to look at ways in which customers can penalise them. So, service credits. In the new model services agreement there's the unacceptable KPI failure mechanism which effectively allows the supplier not to pay the supplier for a month where there's particularly poor performance, but I just wonder whether actually we should be looking at incentives in a different light.
There's traditionally been a lot of reticence about having any sort of service bonus in the contract but actually if the service provider is showing that their performance is improving, they're innovating, then shouldn't there be some mechanism to actually reward that behaviour?
And perhaps another mechanism which might be used to actually have a more honest appraisal of how the contract is going with a view then to kick starting or re-energising a partnership is to have a formal annual review and I wonder whether you could actually have that chaired by an independent third party. That's what we use when there are disputes because we go to mediation and we actually have an independent party hear what the problems are.
Couldn't you actually do that before disputes arise as a vehicle for an annual review which you actually then use to transform the relationship going forwards.
Mark: Why is change management control such an important part of contracts?
Sarah: I think we forget when we're writing contracts that things will inevitably change and so the processes and the procedures that we build in aren't perhaps practical and workable and there's a failure to engage with the operational people when devising those processes.
Secondly just the level of documentation around change management is woeful. Lots of emails being sent and perhaps partly being responded to or not. So, as a lawyer, when a client rings up and says "I've got a dispute" you say "well that's fine can I have a copy of the contract with all the latest changes" you know people normally look at you and go "ahh". So you know, really poor contract management as well, which does create real problems on the ground.
Mark: So what's your advice to improve change management processes?
Sarah: I think there are three things you can do. Firstly, involve the operational teams early on to make sure that when you're designing the process that actually it is going to work in practice.
Secondly, it does amaze me that there's a whole approvals process for both parties before you sign a contract but actually very informal arrangements when you agree changes, so I think look at your approvals process and work out whether that's fit for purpose for change.
And thirdly, the lawyer in me says just make sure that you document all the changes, that you know where they all are and even better if you've got a large change to a contract actually produce a consolidated version of the new contract.
Mark: Finally what are your key points for better contract management?
Sarah: I think for both parties make sure that you have sufficient senior engagement with the contract not just at the beginning but all the way through. Secondly, keep your service level, your KPI regime as simple as possible. But also make sure that you build sufficient flexibility into the contract because things will change.
And finally in terms of your governance, escalation and dispute resolution arrangements make sure that they're fit for purpose because in a complex long-term arrangement you are going to need them unfortunately.
Mark: Sarah Sasse, thank you very much.