The cost of poor contract management

29 Apr 16

Public sector procurement teams must not just ‘let and forget’ but ensure they monitor and manage contracts closely

For years, public sector buyers have been warned not to ‘let and forget’. This common mistake of awarding a contract and forgetting about it until the renewal date is, unfortunately, still widespread. As a result, many councils, housing associations and other public bodies are leaking money because they don’t know if they are getting what they paid for.

The culture of focusing on a contract’s front end – where savings are recorded – rather than across its lifetime – has actually been made worse by half a decade of austerity and increased pressure to cut costs now. The ‘let and forget’ approach that has taken root means it is often difficult to establish whether savings and other benefits are being realised throughout the duration of a contract. I know from the research I’m doing with housing and health providers, that this increasing lack of transparency and control post-award, is costing them dear – something my colleague Jo Meehan will be debating at procurement event PfH Live next month.

One example lies with the ‘value-adding’ activities that more procurement teams are building into tenders. It is not uncommon for suppliers to be asked ‘what added value would you bring if you won the contract?’ Examples include improved social value such as buying materials locally or employing a certain number of tenants.

But, no matter how well sourced a contract is, the delivery usually lies with operations staff who focus on whether the supplier meets their obligations in terms of delivery, order quantity and specifications. Operations staff are focused on the day-to-day, rather than being expected to take a strategic view and ensuring that a contract’s original intentions are delivered. And rightly so, that is their role. The problem is the gap that arises. Rarely is anyone ensuring that the value-added activities promised, are completed, or that the savings levels are being delivered throughout the life of the contract.

So what are the implications? It is inevitable that some suppliers will capitalise on a lack of control post-award, so challenges to contract decisions, damage to supplier relationships and out-of-control spend post-tender are all real issues.

Yet some of the supply firms we spoke to also found poor management of contracts frustrating. They told us that they could deliver a better service if they were managed more effectively. Others pointed out that it is inequitable for a contract to be awarded to another supplier based on their value-added promises, which are then never monitored.

We are moving into an era of transparency: politicians have, in recent weeks, been encouraged to publish their tax returns. It is essential that public organisations increase their own transparency too, so they can block challenges by providing evidence that suppliers are delivering on their promises.

A number of hurdles still do lie in the way. The procurement officers I have spoken to are aware of their departments’ failings post-tender, one even referred to contract management as “an aspiration”. Barriers include a lack of resources and problems around profile. Relegated to day-to-day buying, procurement is seen to be operating as a process-driven department, rather than a strategic one. This is a vicious circle: whilst procurement in the public sector is often perceived as having no strategic contribution, it continues to lack the resources needed to have this cross-organisational impact.

Another barrier is the relentless pursuit of savings on each contract, something that isn’t sustainable. As suppliers’ profit margins are shaven down, sooner or later this will impact quality or practice. We saw this happen in the private sector with the horsemeat scandal. The emphasis needs to be on procurement officers finding creative ways to add value to contracts, then ensuring that this value is delivered, by managing contracts more closely.

Public sector procurement teams must be empowered to enhance the work of operational staff, ensuring that all aspects of contracts are delivered well by suppliers. By being more involved in monitoring, procurement officers can add to their commercial knowledge of the sector and the markets they are buying in. This intelligence can be used at the start of the tendering process, when key business decisions are made around contracts, enabling procurement to get better terms to suit their organisation. Any lessons learnt through contract management can also be built into the re-tender specification.

If procurement teams can bridge the gaps in contract management they won’t just be extracting every drop of value across the life of existing deals, they will also improve their strategic positioning within their organisation and that can only be a good thing for cash-strapped public bodies.

  • Laura Menzies
    Laura Menzies
    lecturer in operations management at University of Liverpool Management School

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