A Contract to Transform

Weaknesses revealed by incidents of contract management of G4S and Serco have shocked the UK government. At a time that both public and private sectors depend ever more heavily on their service suppliers, what are the lessons to be drawn?

In July 2013 serious malpractice was exposed in contracts for the electronic tagging of prisoners released under licence by G4S and Serco. Ministry staff working on the competition for new contracts discovered data anomalies and separately a whistleblower reported their concerns about operating practices at G4S. The Ministry commissioned a forensic audit of the contracts in May 2013. The Secretary of State later announced that he was referring the matter to the Serious Fraud Office (SFO). The papers printed lurid tales of charges being levied for services delivered to people who had died, been returned to prison and other egregious reasons.

The UK government is heavily dependent upon sourced service provision. The National Audit Office (NAO) estimates that goverment spent £40bn in 2013-14 on sourced goods and services, representing 35% of public procurement.¹ The efficiency with which these services are managed has a significant effect on government finances, and thus the taxes citizens are asked to pay. Many commercial organisations are likely to spend a similar proportion of their income. For comparison purposes, the Office for National Statistics reported central government current account expenditure of £232bn for 2014.²

Humiliated by Laxity

The laxity with which major contracts were managed humiliated Government and its suppliers. The NAO sought to establish whether the weaknesses in the management of these two contracts were isolated or common. Sixty contracts were examined for over-billing. Thirty-four had issues to some extent. Five contracts have been referred to the police or the Serious Fraud Office. £179.4m was repaid by G4S and Serco after identifying over-billing. In a wider examination of 73 contracts, 584 operational aspects were assessed of which 343 were found to be weak:

Given the flaws in contract management controls across government, it is in our view probable that other instances of over-billing have occurred across government’s wider contract portfolio. We cannot be sure of the extent of such over-billing or whether it is material.

National Audit Office

Wider Survey

The NAO conducted a separate investigation into the most centrally affected departments, the Home Office and Ministry of Justice.³ This gave a review of the state of change within the departments, in preparation for inquisition by the Public Accounts Committee. On the whole this addresses similar issues to the first NAO review, the scope being more particularly these two departments. It reported a useful observation on competence being related to familiarity:

A general risk factor is the extent of public sector experience in the contracted-out service. For example, we understand that there are fewer problems in prisons, where government has operated facilities itself or outsourced for many years, than in electronic monitoring which has not been supplied from within the public sector.

National Audit Office

Whilst much private-sector commercial management undoubtedly avoids these failings, there is no scope for complacency in either domain. Those in the private sector should be thankful that we avoid inquisition by the Public Accounts Committee, to which these contracts were exposed.

Systematic Weakness

The weaknesses exposed by the Cabinet Office investigation were:

1. Planning and governance – departments lack visibility of contract management at board level and lacked senior-level involvement.
2. People – there were big gaps between the number and capability of staff allocated to contract management and the level actually required.
3. Administration – there was limited interaction between finance, commercial and operational contract management functions.
4. Payment and incentives – levels of payment deductions allowed by contracts were often insufficient to incentivise performance. Open-book clauses were rarely used.
5. Managing performance – contractual performance indicators were often weak and government was too reliant on data provided by contractors.
6. Risk – government did not have sufficient understanding of the level of risk retained. None of those on the review shared risk registers with the contractors to assess the quality of risk allocation.
7. Contract development – departments paid insufficient attention to the impact of contract change.  Systems for maintaining up-to-date versions of contracts were weak.
8. Managing relationships – not all departments had a strategic approach to managing relationships with suppliers. Senior level involvement was insufficient. Incentives for innovation were poor and inhibited shared approaches.

Some of the most significant quotations are:

“Contract management has been seen as a way to avoid things going wrong, rather than unlocking value…This means designing policies it has the capability to deliver.”

“Systems of governance have focused on approving new projects, as if government’s responsibility ends when the contract is signed.”

The Transformation Agenda

Beyond the ringing cry of “Never Again!” government has established a transformation agenda, into which the changes from this debacle play. This includes several factors common with commercial organisations as well as some that are peculiar:

1. A critical need to cut costs. In government it follows from the 2008 economic crash. Elsewhere from competitive pressures.
2. A strategy to move from self-provision to a commissioning approach. The NHS has commissioned extensive shared services, with the service providers being a mix of public and private organisations.
3. A strategy to break up historic contracts in an attempt to become less reliant on a few, major suppliers. This approach is known as multi-sourcing and is associated with Service Integration and Management (SIAM).
4. An economic plan to favour procurement from small and medium enterprises.

There has long been a tradition of policy swinging between extremes in government. The early SIAM attempts showed government that managing such constructs is not easy. A recent Public Accounts Committee report acknowledged:

“It must also make sure that all suppliers have effective internal controls commensurate with their size and responsibilities at simplifying and accelerating the procurement process.” This is about as close as they come to stating that it would be a good idea if the suppliers selected were capable of delivering what is needed.

Transforming Contract Management. Public Accounts Committee. 26 November 2014.

Actions to Improve

The NAO in conducting their reviews took the classic auditor’s approach of comparing observed action with a framework that represents good practice in contract management. In this case, OGC commissioned a couple of unnamed external consultants to define this in 2008.⁴ There are many such frameworks around and this one is reasonable. Such approaches help to ensure that everything that needs to be done is addressed. Any such model has its strengths and weaknesses.

The Improvement Plan

The contract management transformation plan focusses on:

1. Enabling a commissioning approach
   1. Governance. Strengthen the senior accountability for performance of suppliers
   2. Improve contract management data and its application
   3. Integrate business functions
   4. Integrated supplier lifecycle management (activity carries on beyond signature to delivery)
2. Understanding and influencing suppliers
   1. Build intelligence on strategic suppliers
   2. Increase transparency and assurance
   3. Align incentives
3. Making the most of commercial capability
   1. Enhance the role of commercial staff
   2. Guidance and support from the centre
   3. Professional development of commercial staff

The review found that data and approaches were best developed in the field of financial management. It emphasised open-book accounting which worked well in some areas. This is not something I would generally advocate. It is easily manipulated by suppliers, is expensive and requires such a high level of skill in scrutiny that it is rarely available. Other approaches such as periodic benchmarking and maturity review are more generally effective.

Serco – Duty to the Taxpayer

The Public Accounts Committee alighted with enthusiasm on a contrite statement made by the Group Chief Executive of Serco as the rack was tightened: “there should be a new dispensation, a new way of thinking about how companies do business with the government, which is that companies owe a duty of care to the taxpayer.” They featured this prominently in the summary.

One can simultaneously hear the cries of “oh, that would be wonderful!” from the committee and the despairing thud of skull on table from the commercial folk present. Ethical operation is essential; just do not rely on it as a substitute for effective governance. Contracts are more likely to succeed if the measures and incentives are aligned to the delivery of business benefit. Commercial managers must pay attention to holding people to account through well-formed governance processes and structures. Unless you put in the work, you will not get the benefit. The return on investment can be significant.

Government Resourcing

The report made some curious statements made about government’s ability to develop and retain competent contract management staff. These focussed on the policy shackles that prevent government paying a commercial rate to able people, thus being at a permanent disadvantage with respect to the private sector. This seems to overlook the fact that every HR director has a continual struggle with staff recruitment and retention. There are cyclical shifts; in recession government offered higher rates than much of what was available in the private sector.

Policy constraint does not wash as a justification in itself. What is more likely is that the immature contract management in government means that too many departments put a low value on the role and hire an inappropriate grade of staff. Unfortunately if this is the root cause, hiring in contract management as a service may also sacrifice quality to the cheapest bidder.

Private Sector Approach

Most private sector organisations face an imbalance of power between their own staff who rarely go through major outsource service provision and supplier commercial staff who do it all the time. The normal approach is to hire in a sourcing advisor to restore the balance. Such assistance is most frequently for the short-term sourcing phase, and occasionally to establish a stronger on-going contract management capability. Permanent staff hired as part of the project then take on continuing commercial operations. The greatest overall benefit to the customer comes from effective contract management and governance over the life of the agreement, as the reports acknowledge. Constructing good governance and practice in an organisation takes time, effort and expert guidance.

Both government and private organisations suffer weaknesses in contract management. Most private organisations keep their indiscretions quiet. The advantage of such public investigation is that they can provide powerful incentives and immediate facts from which to learn. All should do so, for as the NAO found:  “The government will not get value for money from its contracts until it improves contract management.” The same may well be true for your organisation.

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A version of this article was first published in Outsource Magazine and is reproduced with permission.

REFERENCES

1. Transforming Government’s Contract Management. The National Audit Office report to the Cabinet Office. 4 September 2014. ↩︎
2. Data Sets and Tables – Appendix A Public Sector Financing tables 1-10, ONS, PSA 6e ↩︎
3. Transforming Contract Management, Home Office / Ministry of Justice. 29 August 2014 ↩︎
4. Good Practice Contract Management Framework. National Audit Office and Office of Government Commerce. December 2008 ↩︎