Getting value for money from existing contracts is a challenge for most organisations. This is especially true when services/products and contractual charging regimes are complex and difficult to understand. This often leads to a lack of commercial control and a loss of value. The good news is that better contract management is achievable, will unlock meaningful cost savings and improve your relationship with suppliers.
Third party spend in the emergency services sector currently sits in the region of £2.8bn per annum; across both UK Police and Fire and Rescue services.
Our experience of working with the sector shows that most organisations are still battling with setting up a robust contract management function leading to value leakage of 5 per cent to 15 per cent.
Our contract lifecycle management tool identifies a number of focus areas for organisations to maximise value for money from contracts. In this article, we explore these focus areas and other contract management critical success factors in.
Life-cycle contract management is a pre-requisite
The success of contract management is strongly influenced by what has happened during the procurement and contract award phase. Therefore, the pre-and post-award phase should be seen as a continuum rather than distinct phases, and so contract management should be planned from the start of the procurement process.
Life-cycle contract management refers to activities which need to be performed throughout the contract’s life to ensure value for money is secured at the procurement stage and realised during its operational and exit/renewal phase. The following figure illustrates the typical stages in a contract’s life.
The first step is to adequately define the need i.e. what service and product the organisation is looking to acquire. This then feeds into the specification where clear communication and clearly defined requirements are critical to allow well-informed decisions to be made in relation to supplier capability and capacity to deliver on the contract. Lack of clarity and a poorly defined specification is a key driver for multiple post-award contract issues and significant value leakage, therefore organisations should invest adequate resources and engage with key stakeholders to ensure the specification is clearly defined and is fit for purpose.
Case Study: well defined specification is critical to get value for money from the contract.
An emergency services organisation we worked with had outsourced their IT management services. The key stakeholders wanted an outcome based contract. However, the team developing the specification failed to align the commercial structure of the contract with this key objective. The key elements of the specification such as contract price, performance measures, how services will be delivered etc., focused heavily on inputs. As a result, the supplier was getting paid regardless of their performance with minimal service deductions and there was no financial incentive for the supplier to strive for good performance. Performance measures focused on measuring inputs with no real indication of delivery against outcomes. They paid the supplier a lot of money and received a very poor service.
Comment: What is important to you as the buyer should also be important to the supplier. The contract should align both organisations objectives. A well written specification would have ensured that outcomes are clearly defined and underlying performance standards measures the outcomes and what really matters. It also would have linked the contract payment to outcomes to ensure the supplier is financially incentivised to deliver on agreed outcomes.
- The business case should be aligned with the organisation’s overall strategy and objectives, it should describe clearly how the contract arrangement will meet these objectives. Affordability and critical success factors should be considered, as well as an initial analysis of risks and related activity that may impact or support the delivery of the contracted service. The clearer the business case; the more informed the decision-making process can be.
- Adequately resourced and effectively planned procurement processes can help organisations capture maximum value from contracts during the procurement process. Many clients we have worked with have failed to achieve this due to lack of planning, 'rushed' procurement process and poor market management/engagement.
- A lack of planning for contract deployment is another reason for value-leakage. This stage should deal with the transition of the contract from tendering stage to operation stage; establishing the contract operation and management team as well as processes and controls. The plan essentially acts as a set of instructions to the tendering stage and prevents gaps in operational delivery that could lead to value leakage, reduced benefit realisation, and disputes between buyer and supplier.
- The operational contract management stage deals with three key areas to ensure the value captured during the tendering stage is realised. The three areas are; robust contract administration, effective service performance and delivery management and proactive relationship management. Robust operational contract management can help organisations to ensure that contracts are always aligned with their strategic aims, value leakage is detected/prevented and supplier relationships are enhanced.
- Contract close/exit stage can really help organisations evaluate what went well and what needs to be changed in the future. Managed well, this stage can also ensure smooth service transition from one supplier to another and reduce transition cost. Some of the clients we have worked with have opted to perform commercial and open book reviews as part of this stage to help them identify and recover any overpayments and better understand what needs to change going forward.
Download the full report to find out how you can maximise value from your contracts.