Section 8

Operational phase

8.1 Introduction

Weak contract management is a key reason why public sector outsourcing arrangements frequently fail to deliver the intended benefits and why high-profile failures are not uncommon. The cross-government review, described in section 2.5.4, indicates how widespread this problem is.

Public sector managers often mistakenly assume that once management of the service has been transferred to a third party, they no longer need to worry about it. The contract must, however, be proactively managed and the relationship with the supplier nurtured, in order for the outsourcing arrangement to succeed. The skills and resources required to do this should not be underestimated, but they often are.

8.2 Managing the contract and the relationship with the supplier

The mobilisation period, described in section 7, is crucial for laying the foundations for successful delivery throughout the operational period. Putting in place processes for the contract to be managed robustly and developing the relationship with the supplier are equally important; this remains the case as the project moves into the operational phase and continues to be so until the contract ends.

Outsourcing arrangements in which the contract is enforced, but the relationship with the supplier is neglected, are unlikely to be successful, even if the contract is excellently written, with KPIs perfectly calibrated to incentivise good performance. People are not motivated simply by commercial and legal forces; they need to feel happy about the people they are working with and the environment they are working in to perform well.

On the other hand, if the client focuses exclusively on maintaining good relations with the supplier, and fails to enforce the contract, this can result in both parties becoming complacent, with everything appearing to go well on the surface for a time, but the project failing to deliver benefits to the extent that it should, resulting in poor value for money.

Clients sometimes take the view that enforcing the contract too rigorously will damage relationships. This is true beyond a certain point, but it is much more often the case that public sector clients simply fail to recognise the need to manage their contracts properly and that this encourages poor performance, even if the supplier is not deliberately taking advantage of the client’s weakness. An example of this is provided in the following box.

Example – poor performance resulting from poor contract management

A local authority outsourced its construction-related professional services, but failed to put in place processes for reviewing the KPI monitoring information that the supplier was required to provide each month. For the first 18 months of the operational phase, the supplier complied with the requirements set out in the contract to submit the information, and this in turn helped to ensure that its own staff were aware of the KPIs and made an effort to meet them. However, during this period the supplier never received any comments from the client about the information that it had submitted or indeed any communication about KPIs. A key member of the supplier’s staff responsible for KPI monitoring then had to take an extended leave of absence. The supplier did not make arrangements to replace this person because there seemed to be little point in doing so. Performance of the contract suffered accordingly. It was only after repeated complaints from end users that the authority took action to rectify the situation.

8.3 Organising the in-house team

As explained in section 5.8, how the contract is to be managed is a key issue that clients must consider before they commence the procurement process. Already at that point they should be thinking about the skills that will be required, the size of the in-house team and how the team will be organised. These issues need to be considered alongside the scope of the contract – where each party’s responsibilities begin and end – in order to build up a realistic picture of what will be required on the client side to manage the contract and deliver any aspects of the services that remain in house. Although this guide has drawn a conceptual distinction between the role of a client and an in-house provider, these roles may sometimes overlap where the client organisation remains responsible for performing limited service delivery functions.

A distinction has also been drawn between managing the contract and managing the relationship with the supplier, but it is inconceivable that these activities should be divorced from each other. The people who are responsible for managing the contract are those that have day-to-day contact with the supplier’s staff and they are therefore the people who must be responsible for maintaining the relationship with the supplier on a day-to-day basis.

Unfortunately, people who are good at dealing with contractual issues frequently do not have the skills and personal qualities required to nurture relationships, and vice versa. Clients need to be aware of this when they are establishing their in-house teams. It may be worth writing into the job descriptions of contract managers an explicit duty to develop the relationship with the supplier, as well as managing the contract, and to recruit people who are able to do both. If individuals cannot be found with the required combination of qualities, then the team needs to include people with complementary skills to fulfil both functions.

The size and structure of the in-house team will depend on a variety of factors, including the size of the contract and the type of service. A typical team of three people responsible for managing a medium-sized contract might consist of:

■team leader – responsible for strategic contract management
■assistant contract manager – responsible for operational contract management
■financial and administrative officer.

It is important to ensure that financial management of the contract is closely related to operational management, rather than being left to a remote person in another department who does not understand how the contract works and what the key issues are. This role therefore needs to be carried out either by a person employed in the core client team or by someone who can devote considerable time and effort to liaising with that team and gaining a thorough understanding of the contract.

8.4 Key issues in contract management

Contract management responsibilities can be divided into two broad categories: operational and strategic, although there is no clear dividing line between the two. Operational responsibilities relate to the day-to-day management of the contract, while strategic responsibilities relate to major issues that may arise infrequently and to longer-term issues. Table 23 highlights some of the key contract management tasks under these two headings.

Table 23: Key issues in contract management

Operational	Strategic
■Maintain files, eg copies of contractual documents and correspondence between the parties	■Ensure the filing structure is fit for purpose and review it periodically ■Ensure a definitive copy of the original contract is held ■Ensure a copy of the latest version of the contract is held ■Ensure there is fool-proof backup for all important files
■Maintain a calendar of dates when client and supplier obligations arise ■Remind relevant individuals of dates	■Ensure the calendar is fit for purpose and covers all key obligations ■Be aware of dates when strategic obligations arise
■Liaise with the supplier and end users on a day-to-day basis ■Deal with straightforward issues raised by the supplier and end users	■Ensure the right processes are in place for liaison with the supplier and end users ■Deal with complicated issues raised by the supplier and end users
■Review KPI monitoring information provided by the supplier ■Provide comments to the supplier ■Check that the supplier takes comments on board ■Alert the strategic manager to poor performance	■Ensure the right processes are in place to review KPI monitoring information ■Decide what action to take if performance is poor ■Review KPIs periodically, eg annually
■Submit minor change requests to the supplier and ensure they are implemented	■Submit major change requests to the supplier and ensure they are implemented
■Assist with benchmarking, market testing and/or value for money reviews	■Oversee any periodic benchmarking, market testing and/or value for money reviews, ensuring both parties comply with their obligations
■Ensure the supplier’s invoices are received on time ■Check the supplier’s invoices ■Contact the supplier with any queries ■Pay invoices	■Ensure systems for dealing with the supplier’s invoices are fit for purpose ■Deal with any major issues with the supplier’s invoices ■Monitor the affordability of the contract and take action if there is a problem
	■Maintain contingency plans for business continuity in case of supplier failure or system failure

8.5 Periodic reviews

It is easy to get bogged down in the day-to-day issues of managing a contract, but it is important to step back from these from time to time. A good way to do this is to carry out periodic reviews of the contract itself and the relationship with the supplier. The timing and frequency of the reviews will depend on a variety of factors, including the length of the contract and how innovative the outsourcing arrangement is.

The contract may prescribe that reviews should take place at specified intervals. Whether or not this is the case, it is essential that reviews are carried out. In either case, reviews are best carried out jointly with the supplier, in order to:

■benefit from the supplier’s expertise
■obtain the supplier’s feedback on the client’s management of the contract
■help ensure that the proposed changes have the support of both parties and that the supplier co-operates in implementing them.

The first review should be carried out as soon as a reasonable period for bedding-in has elapsed. This provides an opportunity for a sanity check of the key operational provisions of the contract, such as KPIs, and the processes that have been put in place. The more innovative the outsourcing arrangements, the greater the need for such a review. Issues that should be covered in this first review are set out in table 24.

Table 24: Key issues for the first periodic review

Heading	Detail
Contract terms and conditions	■Correcting any mistakes or ambiguities that impede the smooth operation of the contract
KPIs	■Fitness for purpose in terms of number, scope and wording ■How monitoring arrangements are working
Processes and procedures	■How arrangements set up at start of contract are working ■Meetings – frequency, attendance and subject matter
Relationships	■How each party perceives the relationship ■How the relationship can be improved

Section 5.7.3 explains that KPIs are at the heart of an outsourcing contract. They should therefore be a key focus of the first review.

Identifying issues at an early stage enables action to be taken before processes and behaviour become embedded and relationships deteriorate irretrievably. If problems are then resolved, they may subsequently be perceived as having been mere teething problems rather than fundamental problems with the outsourcing arrangement.

Unless the type of service is very straightforward, the contract period is short and the outsourcing arrangement operates in a static environment, it is unlikely that action taken following the first review will enable the contract to run smoothly until expiry. Otherwise, further periodic reviews will be necessary for a variety of reasons, including:

■infrequent periodic processes, such as benchmarking, will not have been tested by the time of the first review
■the client’s service priorities may change over time due to factors such as a change in the client organisation’s financial position or its policies
■external factors, such as changes in legislation, which may affect the service
■changes in personnel, in the internal structure of either the client or the supplier organisations, or in the ownership of the supplier organisation.

The frequency of further reviews will depend on the size, complexity and length of the individual outsourcing arrangement, but it is reasonable to have annual reviews, and contracts often require this.

While the primary objective of the reviews may be to improve the outsourcing arrangement, they should also be used for the wider benefit of the client organisation, feeding into the organisation’s sourcing strategy and providing lessons learned for other outsourcing projects.

8.6 Changing the contract

In a climate of public sector austerity, levels of service that were set at the time of contract signature may become unsustainable. Clients in these circumstances may have little choice but to reduce the scope of the contract and/or the quality of the specification. This is best done by negotiation with the supplier. Waste management contracts are one example of a service area where this is common at the moment.

Irresistible financial pressures should not, however, be the only reason for renegotiation of an outsourcing contract. The regular reviews described above should be used as the opportunity to consider whether the contract is continuing to meet the client organisation’s requirements and, as part of each review, the client should consider whether aspects of the contract may need to be renegotiated. Reasons for renegotiation, other than deterioration in the client organisation’s overall financial position, could include:

■a change in priorities, resulting in the outsourced services meriting a greater or smaller proportion of the organisation’s corporate budget
■to correct significant mistakes in the original contract
■a desire to increase or decrease the scope of the contract, subject to what procurement rules allow.

Although the client will rarely, if ever, have the right to make unilateral changes to the contract, it may, if the supplier is initially unwilling to negotiate, use the formal change-control mechanism to begin a process to impose the change on the supplier. This may bring the supplier to the negotiating table. If the supplier remains recalcitrant, then the client will have an uphill struggle to get the change implemented, but should not shirk this challenge if the alternative is to continue with a contract that does not meet its current needs.

Clients need to ensure that changes they make to a contract, especially to increase the scope of services, are compliant with public procurement rules. The revised EU rules have clarified the limitations on permissible changes to contracts that must be advertised in OJEU. In some circumstances, notably where the change is not clearly envisaged in the original contract, the value of the cumulative change is restricted to 10% of the original contract value. However, where changes are needed due to unforeseen circumstances, a cumulative of increase of up to 50% is permitted.

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