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Are you addressing problems with contract management?

September 15, 2014

Last week, the UK’s National Audit Office provided Parliament with its latest reports on Contract Management. They are encouraging, in that they reflect the robust focus that government is placing on this discipline. At the same time, they reveal the depth of the challenge in driving improvement.

Such is the depth of these reports that I will cover them in several blogs this week; we will also shortly be interviewing the author of the reports on a webinar. It is interesting that a number of Governments are now committing significant resources to improving their contracting capabilities. IACCM is working closely with them. Indeed, it seems to me that the public sector is actually starting to out-strip most private sector companies in its grasp of the importance of contract management in today’s business environment. I often have to smile when I hear from our public sector members about the assurances they have had from senior private sector executives about their commercial skills and processes.

IACCM’s Capability Maturity Assessments are increasingly used by the private sector to review their contracting processes – and for many, the issues highlighted by the NAO ring true. Therefore I am going to start these reports with the listing of weaknesses that the audit office uncovered when it tested 73 contracts from UK ministries.

Problems with contract management

The reviews found widespread problems with how government manages its service contracts. As well as testing for overbilling, 73 contracts were tested against the 8 areas of the NAO’s 2008 good practice framework for contract management. Issues were found on all 8 areas, for example:

Planning and governance (issues on 38 out of 73 contracts tested)

Departments lack visibility of contract management at board level and lacked senior-level involvement.

People (40 issues)

Government does not have the right people in the right place for contract management. There were gaps between the numbers and capability of staff allocated to contract management and the level actually required.

Administration (39 issues)

Contract management is not operating as a multi-disciplinary function. There was often limited interaction between finance, commercial and operational contract management functions.

Payment and incentives (48 issues)

Government is not fully using commercial incentives to improve public services. Levels of payment deductions allowed by contracts are often insufficient to incentivise performance. Open-book clauses were rarely used.

Managing performance (50 issues)

Contractual performance indicators are often weak and government is too reliant on data supplied by contractors.

Risk (47 issues)

Government does not have sufficient understanding of the level of risk it is retaining on contracted-out services. None of those in the cross-government review shared risk registers with the contractors to ensure all understood who was managing what.

Contract development (50 issues)

Departments are paying insufficient attention to the impact of contract change. For example, departments made changes at operational level in isolation from other service areas. Systems for maintaining up-to-date versions of contracts remain weak.

Managing relationships (31 issues)

Not all departments have had a strategic approach to managing supplier relationships. Senior management engagement with suppliers has not been widespread across government. A lack of meaningful incentives for innovation  can inhibit shared approaches to problem solving and mutual improvement.

Do these same issues impact you?

I wonder how many of us can say that similar weaknesses do not apply in our organization, or in our suppliers or customers? At least Government is awakening to the issues – and the very real financial consequences that come from failure to address them. In the private sector, while some have made real investments in developing their contract and commercial capabilities, I fear that many executives have not even awoken to the need.

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