28 November 2008
This summer's standard assessment tests fiasco was one in a long line of outsourcing disasters. But it provides a route map for future partnerships, says Andrew Rigby
As the deepening recession takes hold of the news agenda, it's easy to forget the succession of calamities that beset the government over the summer, leading to near-daily calls for the prime minister's resignation.
Among them was what is now known as the 'Sats fiasco'; the delay in the marking of the 2008 national curriculum standard assessment tests for 1.2 million 11 and 14-year-olds. The Qualifications and Curriculum Authority gave nought out of ten to the contractor, global giant ETS Europe, and ended its five-year contract.
The termination deal involved ETS repaying £19.5m and cancelling invoices worth £4.6m, out of a total 2008 contract value of £39.6m. The company – a subsidiary of a US not-for-profit organisation – was left facing a loss of £50m and saw the QCA struggling to restore confidence in the Sats process. Since then, the government has scrapped the Sats for 14-year-olds, but plans to continue with the tests at other levels, for 2009 at least.
Confidence is badly needed in government contracts. In the past 12 months, losses of government data, often by external contractors, have been all too common. And just last week Liberata, the company responsible for paying out student grants, lost its contract after failing to make payments in time for the start of the academic year. Now, with the UK's ID card project getting under way, and the government beginning to award contracts, taxpayers rightly demand that some lessons be learned.
ETS, apparently freed from contractual obligations of confidentiality, used a session before the Commons children, schools and families committee in September to give its side of the Sats story. This provided a useful lesson in what can go wrong in an outsourcing relationship and, crucially, how those problems can be avoided or managed by means of a suitable contract.
ETS has admitted that it did face 'technical and operational problems' in its performance on the Sats contract. However, it says that the QCA contributed significantly to the project failings in two ways: first, it made changes in the scope of the programme, and secondly it delayed taking 'key' decisions. ETS claims that, in fact, it sought to terminate its contract with the QCA as early as June, at which point it was already clear that the changes that the authority was insisting on would result in a major financial loss for ETS.
In any outsourcing transaction, it is clearly in the interests of both parties to pin down exactly what is required by way of service – scope, method, timing, etc – and related output. The agreement should include a clear, precise and objective set of requirements that have the support of stakeholders on both sides. Pricing and payment decisions will have been based on these requirements, with the parties seeking to maximise value for money by reference to the agreed scope of the services and related matters.
However, the reality is that any outsourcing transaction is a work in progress, and in practice descriptions are likely to change. This must be acknowledged in the agreement, by incorporating mechanisms to deal with the legal, commercial and operational challenges arising from these changes.
Contractual change control provisions typically consist of an elaborate 'agreement to agree' – a provision in a contract whereby the parties agree that they will try to agree on a particular matter if and when the need arises, rather than agreeing it in advance and setting it out in the contract. Faced with the difficult task of assessing the likely impact of future and unspecified change, the parties will generally try to protect themselves by ensuring that changes will not take effect except with their case-specific – and therefore properly informed – consent. This is not ideal from a purely legal perspective as an agreement to agree is either impossible or at best very difficult to enforce.
In many cases, however, this might be the only practical option for dealing with the majority of changes. The risks inherent in this approach can be managed by means of time-limited and otherwise clearly defined procedures and an effective alternative dispute resolution mechanism. Together these can ensure that service changes are proposed, discussed and, hopefully, agreed quickly and efficiently at the appropriate level in both organisations.
The agreement to agree approach is sometimes combined with more legally certain provisions concerning specific types of change. One party has the right to unilaterally impose these changes and the contract will specify the related effect, if any, on price. The precise nature and extent of any such rights will depend in each case on the respective bargaining strengths of the parties.
Whatever is agreed, though, each party should ensure as far as possible that it does not agree in the contract to absorb the costs of future changes on a basis that could, in the worst-case scenario, leave it materially exposed. In the ETS case, it seems that a lack of suitable change control protections not only left ETS in difficulties, it actually ultimately contributed to the breakdown of the whole outsourcing arrangement.
ETS also cited the QCA's delay in reaching project decisions, including over the online training of markers and on markers' contracts. Again though, the outsourcing agreement should deal expressly with delay by either party, explaining its effect on the rights and obligations of each of them.
From the supplier's perspective, delays on the part of the customer in doing any of the things on which the supplier's performance depends should 'stop the clock' for the project timetable. All subsequent deadlines should change as appropriate, to reflect the duration of the delay. The supplier should also consider whether this alone will provide sufficient protection, or whether it should also be in a position to obtain compensation from the customer for any additional costs involved in performing to the amended timetable – for example, where subcontractors or other resources have been lined up for specific dates and will not be required until later.
The customer, however, will clearly be looking to minimise the impact on progress, and on its pocket, of any internal delays on its part. It is worth bearing in mind that excessively one-sided or unrealistic provisions, while theoretically providing maximum protection, might not always lead to effective contractual performance. The Sats contract was increasingly troubled, partly due to delays of several months in the project decision-making process. If the contract doesn't share out the resultant risk on a clear and reasonable basis, it is more likely that the supplier either won't be able to perform, or will take the view that it is more cost-effective to break the contract and negotiate a settlement.
The QCA is now in the course of letting the Sats contract for 2009, on a one-year basis only. At the same time, Lord Sutherland has been conducting an independent inquiry into the summer's events and is expected to report to Ofqual and the Department for Children, Schools and Families before the end of the year.
Successful outsourcing to the new supplier will be dependent on addressing the failings identified by the inquiry, through a combination of legal and practical measures. The terms of the new outsourcing agreement seem like a good starting point for these purposes.
Andrew Rigby is a partner at the legal firm Brodies and an expert on outsourcing issues
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