Ensuring an effective transition - carrot or stick? - Sarah Sasse - ThinkHouse Public Sector June 2015

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 the transition phase of a public contract.

Sarah what is transition and why is it so important?

Sarah Sasse: Transition is the period between contract signature to full service take on which might actually be a number of months if there's a new service to take on or systems development to do. It's high risk because there is an awful lot going on, timescales are very tight, people are transferring, contracts are often being transferred, the contract probably wasn't signed when it should have been. So everything is a lot more condensed and more compressed than it should have been and for the customer prospective you don't want the service to dip so you are really concerned with service continuity and business as usual.

Mark: So what are the pitfalls that can arise during transition?

Sarah: I think the first main issue in transition is a lack of continuity of resource and that's on both parties' sides. So on the customer side, the procurement team hands over to the contract management unit. On the service provider side things move from the bid team on the sales side to those responsible for implementation or delivery.

And what that means is there is a real lack of people who actually understand what the contract is about. They haven't sat through the negotiations, they don't know why things were drafted in a particular way and that can cause real problems during this high risk, very intensive phase when there's a lot going on.

The second one is a lack of ownership at a senior level, you need that, not just when you're going through the approvals process to get the contract signed but actually when things go wrong (and they inevitably will during transition) you actually need senior stakeholders on both sides who actually understand what's going on and can be around and be available for things to be escalated to them.

And I suppose the third thing that goes wrong is that, as I said it's a very fast moving phase, and things will change, I think it's almost inevitable that the requirement that a customer goes out with pre-contract are never the ones that ultimately end up being delivered.

Mark: What can the parties do if they don't have all of the necessary information before transition starts?

Sarah: Typically you won't have all the information. You might not have all the staffing information or the list of third party contracts or you might not know in an IT contract how many servers need to be maintained.

One way you can sort of still get to contract signature, but allow both parties the security to deal with that post contract, is to have a true up mechanism or an allowable assumptions mechanism. This actually allows the supplier to make certain assumptions around you know, we've priced on the basis that so and so number of employees will come across on these terms or that there are only three third party contracts which are going to be novated.

What you then agree is what will happen if those assumptions prove to be invalid. The important thing is that there is a set timetable for this, so the assumption can only be or this process can only be activated within a certain period and also that there is a maximum risk adjustment or price adjustment which is actually undertaken if the assumption proves incorrect because that gives the customer some protection in terms of pricing going forwards.

Mark: What are the most effective remedies if there are delays during the transition phase?

Sarah: Well the remedy that people always think of when you talk about delays are liquidated damages but I think there are real issues in that it takes ages to negotiate them, suppliers hate them and actually customers invariably end up not exercising their right to liquidated damages.

So actually I tend to recommend to clients that it's much better to design a properly calibrated milestone payment structure. The remedy that gives you as a customer is that if the service provider hasn't delivered then they don't get paid and what better incentivisation can you have?

Now you do have to be careful that you don't put too much risk on the supplier so when I say properly calibrated it does need to, you know, have some alignment with the suppliers' cashflow but there is sufficient retained until delivery to make sure that the service provider is incentivised to deliver.

Mark: And what remedies are available if a service provider is under performing?

Sarah: There are a number of traditional remedies that you would use, so I think often the most effective is simply to have an obligation on the service provider if it fails to achieve a milestone to put a plan in place to actually show what went wrong and how they are going to fix it.

The downside from the supplier perspective can be that actually that can be quite cumbersome, take quite a long time and actually you just want to get on and fix it rather than wait 10 working days for the customer to approve your plan.

Other remedies that people tend to put in are perhaps a retention payment system so actually twenty per cent of each milestone payment is actually retained by the customer until overall go live is achieved. That tends to incentivise the suppliers getting to go live but I think there are other things that you might like to try.

In the model services agreement that the Cabinet Office developed a couple of years ago they actually put in a new mechanism, which is the appointment of a remedial adviser and this is a bit akin to step-in. Under step-in the customer normally puts a third party in to try and improve the system so that the services put right what's gone wrong.

A remedial adviser is actually an independent third party. The supplier has the right to nominate who that third party might be. Importantly, the service provider pays for the costs of the remedial adviser and the remedial adviser then goes in and reviews what has gone wrong and what the issues are and then makes recommendations which both the service provider and the authority as customer have to take on board and it's a way of trying to put the contract back on to a workable footing without either party, you know, having to feel they need to terminate or whatever.

Mark: How can a customer protect itself against a project going over budget?

Sarah: This is a really difficult one. I suppose the two mechanisms which people have used historically is the service provider either prices on a time and materials basis, perhaps with a cap. But that's really difficult for a customer to control, and actually these days, you know, when people are having to watch budgets, going into a project without knowing what the transition might cost is really difficult so I think typically over the last few years people have tended to use a fixed price mechanism.

It sounds very good but of course a fixed price is only as good as the specification or the scope of work that sits underneath it and, as we have already said, on these projects things change very quickly during transition. So actually if you are not careful what you find is that what started out as a fixed price contract is no longer fixed because the scope of the services has changed.

Mark: And do you have any key points to take away in terms of managing transition?

Sarah: I think the first recommendation is there are some very easy practical steps you could take. Make sure you've got copies of the contract, consider whether there are any workshops that you could actually run to resolve the continuity of resource issue.

Secondly when designing your contract really think about what remedies are included in the contract and what will really incentivise the service provider to deliver on transition.

And then I suppose the third point is around the commercial arrangements and again really think about given the services, given the transition requirements, what will be the best fit in terms of making sure that your services are delivered on time, to budget and that they work.

Mark: Thank you Sarah that's really useful.