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Public sector commercial reform: doomed to fail?

June 1, 2015

Public procurement is going through testing times. The approach to service delivery is changing radically and demanding a depth of commercial skills far beyond those of the past. There is a need for far greater market awareness and engagement, to keep pace with emerging supply trends and technologies. It is also essential for government to ensure innovation and value for money through improved contract management.

These demands have led to major reform programs, many centered on the need for ‘smart buyers’ or ‘government as an intelligent client’ or ‘making government a better customer’. In other words, there is broad understanding that the public sector must focus on greater collaboration, increased transparency and ‘ease of doing business’. But as with most reform programs, the right words and sentiments at the top are often frustrated lower down in the organization. That appears to be the case with a number of today’s well-intentioned initiatives.

However, there are encouraging signs coming from the defence department in Australia, where a commitment to performance-based contracting means that public sector leadership is not just saying it wants a change in behavior, it is actually doing something about it (and I should acknowledge here that counter-parts in Canada, the US and the UK are working closely together on related concepts).

The Australian direction is not new. The first performance-based contracts go back some 10 years and in the last 3 years have been accompanied by growing use of relational contracting models. However, these moves are now supported in a recent review paper, ‘First Principles’, which builds on existing foundations and seeks to accelerate progress.

The paper contains some important directions. First among these is a re-definition of ‘the enterprise’ to include all organizations contributing to an outcome. This acknowledges the fundamental significance of the customer / supplier relationship and the approach to its governance and oversight. This is supplemented by initiatives such as interactive bidding and renewed commitment to the engagement of small-medium enterprises. Another development is the provision of related training – but not just for defence personnel: the intent is to run joint supplier-buyer programs. Each of these developments seeks to drive alignment of purpose and capability between the buyer and supplier.

At a sell-out conference last week, staff from the Defence Materiel Organization led reflections on the approach to performance-based agreements and the contribution they are making to improved relationships and results. This represents a rejection of the short-term, adversarial methods that still bedevil so many procurements and demonstrates that the right practical measures can drive real change and kindle wide enthusiasm.

There are still improvements to be made – and the conference included some hard-hitting assessments by suppliers, highlighting areas of policy and terms and conditions that still stand in the way of optimized results. But many of these are being tackled and, importantly, there are the forums for issues to be discussed openly and addressed.

IACCM’s research on performance-based contracts shows that failure rates are lower than in traditional contract models, but they require a shift in attitudes and behaviors which many (on both buy-side and sell-side) tend to resist. A lack of trust, a failure of imagination and an absence of visible leadership often combine to frustrate change. In Australia, there are clear signs that the mould has been broken and that true improvements in performance are being realized.

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