Making Savings From Contract Management - Local Government Association

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ImprovementMaking savings fromcontract management

ent and contract management4789Elected members11Principles of good contract management11Chapter 1: The growing market in third-party suppliersRisks1318Chapter 2: A corporate approach to contract management19Becoming an intelligent client: the Sheffield approach21Developing a corporate approach: the Essex experience23It’s different for districts?25Collaboration: achieving mutual gains from contract management27Chapter 3: Managing performance and change to get continuous improvement31Managing performance against contract31Renegotiating contract terms35Incentives37Improving data39

Chapter 4: Realising benefits from contract management40Return on investment41Supplier relationship management44Chapter 5: Skills for contract management45Commercial acumen45Consultants46Training in contract management47Conclusion51Appendix 1: Principles of good contract management521. Provide corporate support for contract management522. Aim to get continuous improvement in contractors’ performance533. Invest in developing commercial skills534. Collaborate to maximise gains535. Monitor and benchmark costs and performance54Appendix 2: MethodologySubjective analysis return dataReferences555558

SummaryThe pressing need to find savingsmeans many councils are exploring newways of commissioning and deliveringservices. Councils need effective contractmanagement to ensure they maximiseboth the opportunities and the potentialsavings these bring. The 2010 Spending Review cutgovernment funding for councils by 33per cent to 2014/15. The 2013 SpendingRound cuts will result in cumulative cutsof 43 per cent by 2015/16. Councilsurgently seek savings from all areas of thebusiness. As councils enter more third-partyarrangements to find savings, goodcontract management becomesincreasingly important. It is about morethan ensuring suppliers meet theircontractual obligations. It can help councilsto identify and manage their own and theirsuppliers’ risks, and achieve savings andcontinuous improvement throughout thelife of the contract. There are many examples of differentarrangements put in place by councilsto manage their contracts with supplierseffectively. This report has captured anddetailed a number of these to help thesector draw on this learning.4Making savings from contract management Elected members have a crucial role toplay in setting the strategic direction forcommissioning, procurement and contractmanagement. They can ensure theircouncil supports all three functions toobtain the wider community benefits theyseek from their spending on third-partyorganisations.There is a diverse and growing marketfor council services. In 2011/12, councilsspent nearly 30 billion on contracts withthird-party organisations. This bringsrisks, as well as opportunities. In 2011/12, local authorities spent 56.6billion on buying goods and services, ofwhich over half – 29.2 billion – was onpayments to third parties. Most (76 percent) of this amount went to private andthird sector organisation. Councils spend different amounts onthird parties, depending on the servicesinvolved and their approach to servicedelivery. Social care accounts for mostthird-party payments, and education theleast. Councils deal with many suppliers – onaverage, a district council has just under200 suppliers and a county council nearly1,300. But overall, councils spend over 90per cent of their third-party payments onno more than 20 per cent of their suppliers.The biggest savings will come frommanaging these contracts effectively.

Third-party arrangements bring risks, aswell as opportunities. If these risks arenot managed corporately, they can bringabout supplier insolvency, service failure,or fraud; all with reputational and financialdamage to councils.A corporate approach improves internaland external collaboration that in turn,helps councils to improve contractmanagement. A corporate approach does not haveto mean all contract managementis centralised. Sheffield Council hasdeveloped the Intelligent Client approach,which allocates responsibilities formanaging contracts to the centre or toservice managers, depending on therisks involved. Other councils in our research had different,but still corporate, approaches. EssexCounty Council is bringing all contractmanagers into one department, dealing withprocurement, category management, andsupplier and contract management. Districtcouncils tend to use cross-departmentalgroups to coordinate and plan procurementand contract management. Collaboration across councils and withsuppliers can bring significant benefits.Increasing transparency about costs,prices and benefits in collaborativearrangements serves to improvebenchmarking across councils.Potential savings and other benefitsresult from robust performancemanagement, good data, and incentivesfor contractors to be flexible. Changeis inevitable, and in the current fiscalclimate, councils will need contractorsto share the pain, as well as gains. At a basic level, good contractmanagement is about attention to detail.It means understanding what the contractcontains, who has responsibility formanaging it, and whether performanceand costs are on track. The best result areachieved when those who are involved inprocurement and running the service worktogether to manage the contract and haveclear agreed processes and procedures inplace to help them do so. Renegotiating contract terms comes aboutbecause of changing business or serviceuser needs, better technology, marketdevelopments and legislative changes. Butalso – simply – because councils need tosave as they have less money to spend. Good relationships with contractors basedon trust will help when councils seek torenegotiate terms and conditions. Councilscan find this difficult, but they will findincentives such as profit share, and betterdata using spend analytics, can help themprepare well for negotiations. In a time of austerity, contractors may bemore willing to consider sharing the painof reduced funding, post-award. Timingis important; if the contract doesn’t havereview or renewal clauses, contractorshave less incentive to renegotiate.The high volume and value of third partycontracts suggests councils have scopeto achieve savings and other benefitsfrom contract management. This requiresinvestment to obtain returns. In our research, councils obtained savingsof between 3 and 15 per cent on the valueof the contracts over their duration, afterthe award.Making savings from contract management5

While this is not necessarily replicableacross all councils, it shows that councilsof different size and type, and facingdifferent circumstances, have the potentialto save money from contract management. As well as direct savings from reducing thescale and scope of the contract, councilscan achieve other financial benefits,including cashable and non-cashableefficiencies, avoiding unnecessary costs,enforcing penalty clauses and sharingadditional income from growth. Sheffield City Council’s comprehensivebenefits tracker system shows the financialand other benefits contract managementbrings. It also allows it to calculate a savingsper contract manager team member ofeleven times their average salary.Ensuring people with the right skills are inplace to carry out contract managementis essential to release more value fromcontracts. Managing contracts well requires specialistskills, including understanding costs andvalue, negotiating, and procurementand commissioning processes. Somecouncils have recruited staff with relevantexperience, while others have successfullyused consultants to manage or renegotiatecontracts. Training in contract management isincreasingly common. Sheffield City Counciland Essex County Council have developedcomprehensive training courses. InSheffield’s case, these support a toolkit forcentral and service managers. Sheffield hasshared this with several councils. Training in contract management is vitalin order to prepare councils for third-partyarrangements. As well as developing6Making savings from contract managementtechnical skills such as negotiationstrategies and contract law, it can fostercommercial acumen and other attributesamong staff who are more likely to becommissioners than providers. Above all, better contract managementskills will make councils more confidentthat they can release value from theircontracts and place them on an equalfooting with suppliers

Recommendations1. We urge councils to take contract management seriously. Its time has come,because councils spend significant and increasing amounts via contracts withsuppliers, often as part of their transformation to meet financial challenges. Therewill be benefits and savings to be delivered by focusing on contract management.2. We encourage elected members to consider the example of Birmingham CityCouncil and others in having a lead for commissioning, procurement and contractmanagement. This signals to the whole organisation the importance of contractmanagement in achieving a council’s objectives.3. Based on this research, and our own work to develop the National ProcurementStrategy, the LGA recommends that councils draw on the learning from thesecase studies and follow the principles of good contract management outlined inAppendix 1. These are to: provide corporate support for contract management; aim to get continuous improvement in contractors’ performance; invest in developing commercial skills; collaborate to maximise gains; monitor and benchmark costs and performance.4. We recommend councils should approach the case study councils in this researchto learn from their experience. The LGA will work with the sector to promote thislearning to enable councils use this to support their own work to better managecontracts. Their stories show that councils can release value from existing contracts.Making savings from contract management7

IntroductionThe pressing need to find savingsmeans many councils are exploringnew ways of commissioning anddelivering services. Councils needeffective contract managementto ensure they maximise theopportunities these bring.The government’s deficit reduction planinvolves significant cuts in public spending.The 2010 Spending Review set out plansto reduce government funding for councilsby 33 per cent from 2011/12 to 2014/15(Ref. 1). Analysis by the Local GovernmentAssociation (LGA) shows that the 2013Spending Round will result in councilfunding provided through the Departmentfor Communities and Local Government’sbudget being reduced further, the cumulativefigure being 43 per cent by 2015/16 (Ref. 2).In response, councils urgently need to findsavings from all areas of business.This includes getting more savings and otherbenefits from effective managementof contracts. As a proportion of overallspending, councils have increasedthe amount that goes to third-partyorganisations1 and extended contractinginto new areas. This brings opportunities forcouncils to do more or better for less. But italso brings risks that councils must manage.18Councils call these organisations by different names; mostcommonly, ‘contractor’, ‘provider’ and ‘supplier’. We use theseterms interchangeably.Making savings from contract managementThis report aims to help councils do both. Itis for council officers and members who havea specific responsibility for commissioning,procuring and managing contracts with thirdparty organisations as well as those whooversee and monitor value for money. It usescase study examples to show how councilshave reduced costs and achieved savingsfrom renegotiation. It outlines the benefitscontract management brings, as well as thoseachieved through the initial procurement2.Procurement and contractmanagementAbout half of what councils spend is onbuying goods and services. This is agreat deal of money and they have madesignificant efforts in recent years to procurewell and efficiently, to maximise value formoney for local and national taxpayers.To date, there has been less focus oncontract management, but there is – orshould be – a close link between the two.Put most simply, contract managementenables councils and their suppliers to meettheir contractual obligations at an agreedcost and quality. But circumstances changeover the life of a contract, so it also involvesmanaging changes and variations in scope,terms and prices.2It does not address the question of whether contracting outprovides better value for money than keeping services in-house.It does not cover procurement for goods. It addresses councilsonly.

More broadly, it is part of a strategic andholistic approach called supplier relationshipmanagement (SRM). Good SRM enablesboth parties to explore contractual issuesthat affect the relationship between councilsand their suppliers or providers. Forexample, councils can engage with suppliersto renegotiate and review processes toreconfigure services to take out costs, or torespond more effectively and efficiently toemergencies.Good contract management is active anddynamic; ensuring councils can managechange and aim for continuous improvement.It helps councils to identify and managetheir own and their suppliers’ commercialrisks, within a collaborative and professionalrelationship (Ref. 3). In short, good contractmanagement helps councils to maximisesavings and service quality.The most effective councils plan and organiseprocurement and contract managementtogether, even if they involve different staff.It makes sense to involve all relevant stafffrom the planning stage, through the contractaward, then during the contract period, tothe point when the contracts are due to endand retendered or procured. The LGA haspublished guidance addressing this point,among others.Foundations are laid during theprocurement process includingspecification and setting ofservice level agreements andKPIs. Determine approach, rolesand responsibilities and involvethe contract manager at anearly stage. Focus on deliveryof benefits. (Ref. 4)Figure 1: The procurement and contract management cycleProcurementBusinesscase MonitoringImplementationContract managementSource: Audit CommissionThe key is to think of both procurement and contract management as a cycle, with twotransition points, which councils should plan for (Figure 1).Making savings from contract management9

10 Lack of effective monitoringof contracts Lack of adequate resourcing Lack of effective partnershipsworking Inability to implementdeductions Badly negotiated contract withimbalanced reward sharing Knowledge gapTransition phaseOperational phase Client/bid team disappears Advisers walk awayProcurement phaseRisks and issuesMaking savings from contract managementReviewsContract restructuringManaging service performanceSupport on acity buildingGuidanceNetwork groupsRealise benefitsFurther efficienciesManaging the clientManaging changeTeam set up/adminRelationship managementEfficiency and standardisationGeneralSource: Essex County Council Remedial activitiesEach of these stages is challenging and requires careful thought and planning. EssexCounty Council has mapped the main risks and remedial action in the transition from theprocurement through to the operational phase in their longer term contracts (Figure 2).Figure 2: Procurement risks and issues

To maximise the benefits from procurementand contract management together, councilsneed to provide clear corporate leadershipand support for contract managers, whetherin the centre or in service departments.Elected members have a key role to play.Elected membersElected members can play an importantrole in setting the overall strategic directionfor commissioning and procurement.Birmingham City Council has created acabinet member role for Commissioning,Procurement and Contract Management.This reflects the importance the Councilattaches to getting maximum value from the 3.5 billion annual spend, of which 1 billionis via contracts with third party suppliers.Member involvement is key toensuring that the right goodsand services are procured, thusdelivering more of their Council’spriorities at prices that reducethe needs for cuts elsewhere.Scrutiny has an equal role withthe Executive in driving additionalvalue, including Social Value,from contracts, grants andpartnershipsCouncillor Stewart Stacey, CabinetMember for Commissioning, Contractingand Improvement Birmingham CityCouncil (Ref. 4)Principles of good contractmanagementBased on the research for this project, wehave identified five key principles that underpineffective contract management. Appendix 1contains full details. In brief, they are:Principle 1: Provide corporate supportfor contract management. Becomean intelligent client, integrating contractmanagement within the commissioningmodel and ensure clarity of roles andaccountabilities.Principle 2: Aim to get continuousimprovement in contractors’ performance.Build in incentives that minimise costs andmaximise quality, to the mutual benefit ofcouncils and their suppliers.Principle 3: Invest in developingcommercial skills. Recognise that contractmanagement requires specialist commercialskills that may be in short supply within thecouncil and invest in training and externalhelp where necessary.Principle 4: Collaborate to maximisegains. Extend the benefits from collaborativeprocurement to the management ofcontracts, and realise the benefits fromgreater cross-council collaboration, aswell as effective partnership and supplierrelationship management.Principle 5: Monitor and benchmarkcosts and performance. Use ICT andother systems and processes to produceinformation about the number and valueof contracts, the benefits and costs theygenerate, and where possible, how thiscompares with other councils.Making savings from contract management11

This report shows how councils have madeprogress in these important areas, thebarriers they have faced and the benefitsthey have achieved. It covers: the growing market in third-party suppliers(Chapter 1) a corporate approach to contractmanagement (Chapter 2) continuous improvement in contracts(Chapter 3) the benefits contract management brings(Chapter 4) the skills needed for contract management(Chapter 5).The appendices contain the principles ofgood contract management, informationabout case study councils’ approaches, andthe study methodology. There are contactdetails for each case study council, so thatreaders can follow up any matter with themdirectly.12Making savings from contract management

Chapter 1The growing market inthird-party suppliersThere is a diverse and growingmarket for council services. In2011/12, councils spent nearly 30billion on contracts with third-partyorganisations. This brings risks, aswell as opportunities.A large and growing part of council spendingis on third-party organisations to provideservices. In 2011/12: local authorities spent 56.6 billion onbuying goods and services3, which wasnearly half (49 per cent) of all their revenuespending over half of this amount ( 29.2 billion)was spent on external organisations andinternal trading organisations, togethercalled ‘third-party’ payments Most (76 per cent) third-party paymentswere to private contractors, includingvoluntary sector organisations providinga contracted service.Council spending, including on third parties,has fallen since 2009/10, following the 2010Spending Review. But third-party spend hasrisen as a percentage of all spending ongoods and services. In 2011/12, spending onthird parties in real terms accounted for 52per cent of all procurement, compared with49 per cent in 2009/10 and 47 per cent in2004/5 (Figure 2).3Spending on goods and services includes premises, transport,supplies and services, internal trading organisations, externalcontractors and discretionary transfer payments.Making savings from contract management13

Figure 2: Proportion of local authority spending on goods and services2004/05 to 2010/11Procurement of goods and services mises relatedexpenditureSupplies andservicesThird partypaymentsSource: Local Authority Subjective Analysis ReturnWithin councils, different services spend varying amounts of their total budgets on third-partysuppliers. In 2011/12, social care accounted for the largest proportion (57 per cent) andeducation the smallest (9 per cent). This variation reflects the different markets in suppliers(Figure 3).14Making savings from contract management

Figure 3: Third party payments by service area60Third party payments as a proportion of total service raerCerlsulvituceioatucEdrasn0Source: Local Authority Subjective Analysis Return 2011/12The market for third-party suppliers is large and diverse. The Audit Commission analysedthe spending data over 500 per item published by councils between April 2011 and March20124. In this period, the mean average number of suppliers across the councils in theanalysis was 517, but this varied widely across and within each type of council (Table 1)5.Table 1: The numbers of suppliers in each type of councilCouncil typeDistricts CountiesLondonBoroughsMetropolitan UnitaryDistrictsAuthoritiesSingle Tierand CountyCouncilsAllMean averagenumber Source: Audit Commission4In 2011, the Secretary of State for the Department of Communities and Local Government directed councils in England to publish allpayment items over 500. This provides a potentially valuable source of data on third-party spend, although the variation in recordingpractice across councils makes collation and analysis difficult. Appendix 2 gives more detail about these issues.5This figure excludes redacted and non-third party organisations.Making savings from contract management15

The analysis also suggests that the biggest savings are most likely to come from the largestcontracts. Figure 4 shows that councils spend most money (93 per cent) with a relativelysmall number of suppliers.Figure 4: Most councils spend over 90 per cent of their third party paymentson no more than 20 per cent of their suppliers80DistrictsPercentage of councils70Single tier and county councils60504030201000-1011-2021-3031-40 40Percentage of suppliers receiving third-party spendSource: Audit CommissionThe analysis showed that the 25 firms that received the most third-party spending from councilshad contracts worth 6.6 billion (14 per cent of all third-party spending). These large organisationsoften work with several councils, including one that worked with 317 councils (Table 2).Table 2: The number of councils contracting with the top 25 suppliersby volume of council spendingNumber of councils with which contractors work Number of top 25 contractors1-25226-50551-1009101-1504151-3004301- 3501Source: Audit Commission16Making savings from contract management

Some of these large suppliers are specialists,for example, in waste management orconstruction, while others provide multipleservices. Most work for all types of council.This suggests that there is opportunityfor councils to take a more strategicand collaborative approach to supplierrelationship management (SRM). It is worthexploring within and across councils whethermajor suppliers could more effectively –and cost-effectively – meet their strategicobjectives. This will in many cases includelocal economic development, through usingits procurement spend to invest in local smalland medium-sized enterprises (SMEs) inthe supply chain. (See section on SRM inChapter 4).In a 2012 survey conducted with 34 ChiefFinancial Officers, over half (54 per cent)reported that financial pressures will leadto greater outsourcing (Ref. 7). In times ofupheaval and disruption, it is all the moreimportant that councils retain the capacityto manage the risks involved in third-partyarrangements.One 2013 survey found that nearly half (47per cent) of councils’ procurement spendgoes to small and medium-sized businesses(Ref. 5). Many social care providers are in thiscategory. Another project in London reportedthat 29 councils in the capital worked withmore than 53,000 suppliers (Ref. 6).Councils are changing their business models,as they restructure to make large-scalesavings. Shared services and outsourcingare more common. Such measures are oftenassociated with transformation programmes,involving large-scale restructuring andreconfiguring of services, staff redundanciesand transfer under TUPE regulations.Making savings from contract management17

RisksCouncils remain legally and democraticallyresponsible for services they outsource andso must manage the associated risks of theiroutsourced contracts. These include supplierinsolvency6, service failure, reputationaldamage, and extra costs (Ref. 8).Our research suggests that these risks aregreater when councils: have a fragmented approach toprocurement and therefore contractmanagement, with service and otherdepartments following different approaches have poor documentation and systems forcapturing knowledge, leading to loss oforganisational ‘memory’ when staff leave fail to read, understand and monitorcontracts.Contract fraud, known as mandate orchange of bank details fraud, is a growingrisk in local government. It occurs whenfraudsters persuade councils to divertcontract payments to their bank account.This is a high-value, high-risk fraud,where just one failure to follow preventionprocedures can lead to a big loss. In 2012,the Audit Commission reported that ten localgovernment organisations detected mandatefraud with a total value of more than 4.6 million (Ref. 9).618There have been a number of high profile service failures inlocal government in recent years. For example, building andsocial housing repairs firm Rok went into administration inNovember 2010 just one month after winning a 10 millioncontract for homes in St Albans City and District Council, and afew months after winning contracts worth 2 million across theNorth West.Making savings from contract managementThe councils in this research have beenon a journey to manage these risks. Some –like Sheffield City Council and Essex CountyCouncil – have developed comprehensivesystems and processes. Others are atdifferent stages on the journey. But all havereduced risks and improved benefits asa result of paying corporate attention tocontract management. The next chaptershows how a corporate approachto managing contracts helps.

Chapter 2A corporate approachto contract managementA corporate approach to internal and externalcollaboration helps councils to improvecontract management.The councils in our research also believed itwas important to pay attention to the basics.These include knowing:A corporate approach does not necessarilymean centralising all responsibility forcontract management. It is possiblefor councils to treat procurement andcommissioning as corporate and strategicfunctions, leaving contract management todepartments. But this requires leadershipand clear policies to support a corporateapproach. Links between the centre andservices can create an effective andproportionate means of monitoring andmanaging risks, and drive a consistentapproach and accountability. how many contracts the council hasSome service managers resist greatercontrol from the centre, believing that theirtechnical and professional knowledge makesthem best equipped to procure and managecontracts. There is truth in this; acrossservices of different types, from safeguardingvulnerable children and adults to large-scaledesign and build projects, professional,service and technical expertise is vital. Butso is specialist contract management skill. how much spend is on contract when contracts are due for renewal orretendering where contract documents are who is responsible for monitoring contractcompliance what terms and conditions contractscontain.This research confirms the importance ofthe guidance published by the LGA andLocal Partnerships, which contains a numberof critical success factors for contractmanagement.Our fieldwork revealed that councils useddifferent ways of sharing responsibility forcontract management. But they all have acorporate overview of the contracts that areimportant strategically and how to managethem. They establish clear ownership of,and roles and responsibilities for, contractmanagement.Making savings from contract management19

Contract management – critical success factors Requirements specified in comprehensive specification with identifiable andmeasurable outcomes (including service level agreements and key performanceindicators). Involve the contract manager at the outset of the project. Accurate understanding of the service requirement, performance standards andany social value implications. Good supplier selection against an effective award criteria. Relationship built during procurement process and actively managed. Clear roles and responsibilities. Good knowledge of the contract. A contract management manual that explains key contractual provisions anddocuments key processes A good document management system. Identification, allocation and continuous management of risk. Focus on realising the benefits identified in the business case (outcomes), whichalso helps reduce costs. Encouragement of continuous improvement. Management of performance shortfalls. Adequate tools to tackle poor performance. Continuity of knowledge throughout the procurement and contract managementphases.Source: LGA/Local Par

Chapter 5: Skills for contract management 45 Commercial acumen 45 Consultants 46 Training in contract management 47 Conclusion51 Appendix 1: Principles of good contract management 52 1. Provide corporate support for contract management 52 2. Aim to get continuous improvement in contractors' performance 53 3.

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