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Public Sector Contracting: In Need Of Urgent Repair

June 25, 2009

So far as I know, the memorandum issued by President Obama on March 16th calling for improved contract management was a first. I am not aware that any other head of state ever highlighted the importance of contract management discipline in the effective and proper application of public sector funds.

Recent incidents demonstrate the urgency of this need. For example, Sherry Gordon reported yet more problems for the UK’s National Health Service when she wrote recently on Spend Matters. And the US press has been full of the contention in Virginia, where Northrop Grumman won a major IT outsourcing contract that is now riddled with questions. A further variant arose earlier this month, once again affecting the UK health service, when the press questioned the competence of procurement in its use of reverse auctions to select and deliver outsourced care services – and its failure to oversee the results (see Reverse Auctions).

It can be tempting to blame the suppliers. For example, it is suggested that Northrop Grumman lacked the skills and experience to undertake the outsourced work in Virginia and the media in the UK is pointing at BT as the culprit for missed deadlines and service level failures. But in the end, projects like these depend upon a high degree of collaboration and honesty between the parties. They also require robust governance and rigorous performance management. And that has to be a mutual commitment and capability. Blame is rarely all on one side; and certainly not when, as these incidents suggest, the problems and issues go back over a number of years.

Today’s complex, service-based deals demand selection and post-award management procedures that are far more robust than most public sector agencies are equipped to provide. Traditional procurement training is inadequate – and in many cases makes the problem worse. The tendency for public procurement policy to focus on price alone is reinforced by training programs that treat suppliers as untrustworthy and to be held at arm’s length (see for example my recent blog on A Simple Way To Undermine Procurement Success). In many cases, delivery personnel have little training in supplier relationship and performance management, there is little or no continuity of staff and fragmented responsibility for outcomes.

President Obama’s concern was echoed in a recent report by the UK’s National Audit Office, which focused on the challenges in post-award contract management and highlighted deficiencies in current practice. Last year, a Rand Corporation report on EU Public Procurement Policy (based on research by IACCM) was scathing in its observations of contracting policy and practice. The report highlighted the distorting effects of risk-averse terms and conditions, often compounded by the use of external consultants and law firms. Overall, it found that the lack of robust and transparent contracting principles not only sets the seeds for potential failure of many projects, but also leads to higher pricing due to the levels of risk that suppliers must bear.

All the evidence suggests that the need for improved contracting competence is urgent. It is refreshing that President Obama’s advisers have understood the need; and there are similar steps afoot in the UK and Australia. However, given the scale of today’s public sector expenditure, combined with the need to ensure greater efficiency and (shortly) savings, the pace of change must be faster.

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