Savings from better contract management

Editor's Notes

• #3: As councils commission and outsource more, attention has now turned that contract management can make in achieving savings for councils. There is a strong sense now that contract management’s time has come – that councils can save as much, possibly more, once the contract has been let as they can from tendering on the open market. We sought to explore how councils organise their contract management and where it sits with their wider strategic and operational structures, including procurement, and whether these different approaches to contract management produced different outcomes. We wanted to look at the journey councils were on – what issues, problems and barriers they had overcome and how they had done this. And mainly, we wanted the report to contain good practice examples that councils could learn from. A brief word on the research for the project. There is more information about this in an appendix to the report. Available national quantitative data on procurement spend was important in setting the context – for example, in setting the size and scale of councils’ spending on third parties to provide services for them. The main source of national quantitative data was the Subjective Analysis Return between 2004/5 and 2011/12, published by the Department of Communities and Local Government. We supplemented this with additional quantitative analysis of the spending over £500 published by councils on their websites. These latter spending data vary in scope and consistency, so we treat our findings based on this analysis with some caution. We use them to provide an indication of the number and type of third-party contracts councils enter with different suppliers. But quantitative data on spending cannot tell us anything about the quality of the management of that spend once under contract. For that reason, this project mainly used a qualitative research approach to investigate the topic, based on interviews and documentary analysis in ten councils: Allerdale Borough Council, Birmingham City Council, the London Borough of Camden, Essex County Council, Hampshire County Council, Selby District Council, Sheffield City Council, Solihull Metropolitan District Council, Swale Borough Council and Trafford Metropolitan Borough Council. The LGA and the Audit Commission would like to thank the councils that took part in the study. They have provided contact details for anyone interested in following up their experiences, which can be found in an appendix to the report.
• #4: Based on our research, we have identified these five principles of good contract management. They apply to all councils, regardless of size, type and structure, although councils in different circumstances may choose to implement them differently. This presentation explores each of these principles in more detail.
• #5: There is a growing and diverse market in third party suppliers. This part of the presentation provides context on how much councils spend on contracts with third party suppliers, and what the scale of savings might be.
• #6: In 2011/12, local authorities spent nearly £57 billion on buying goods and services, of which over half - £29.2 billion – was spent with external organisations and internal trading organisations, together called ‘third party’ payments. Three-quarters of these payments were with private or voluntary organisations providing a contracted service.
• #7: All councils spending, including with third party suppliers, has fallen since the 2010 spending review. But as a proportion of all spending on goods and services, third party payments have risen over time and now comprise over half of what councils spend on goods and services.
• #8: Different services are likely to spend different amounts on third parties. The highest spend is found in social care, where there is a large and varied private and voluntary sector market, for example, in residential care. The more services can be contracted out, the more they will be. Education and central services operate in markets that are quite different from social care or highways. Most education spending, for example, is passported through councils to schools, which then have responsibility for buying goods and services.
• #9: In this project, it was not always easy to quantify savings, nor to attribute savings specifically to contract management as distinct from procurement. Largely, this is because councils themselves calculate savings in different ways. For example, councils told us that they negotiated contracts that required suppliers to share not just the proceeds of additional income or increases in efficiencies, but also any decrease in that income, or a rise in costs. Some councils did not include savings from spotting duplicate or unnecessary costs, saying this was just good contract management – part of the day job, as it were. But others disagreed and went further, noting that removing unnecessary tasks from contracts as needs changed, spotting and claiming back overcharging, for example, should count as savings. Contract agreements with suppliers that produced additional income or reduced costs, for example, by extending partnership agreements to other councils, were also regarded as achieving savings. This was sometimes to do with the fact that income growth helped reduced the need for savings elsewhere. Likewise fixed profits and overheads – these ‘cost-plus’ contract arrangements helped to clarify exactly how the gain or pain would be shared, while providing continuity and assurance to suppliers and councils about costs and profits when demand fluctuated. Solihull’s case studies are good examples of these arrangements.
• #10: In our research, we found strong evidence of savings that ranged between 3 and 15 per cent of contract values. But three qualifications are important: Firstly, these are anonymous examples – including some that did not feature as case studies in the report – because they resulted from difficult negotiations between councils and suppliers. Councils did not always want to jeopardise their relationships further by making public the outcome of such negotiations, where this might suggest either that the original contract had been poorly designed, or that suppliers had been making excessive profits, or at least perceived to do so. The second qualification is that, as the earlier slide showed, because the term savings embraces a wide range of financial benefits, it is hard to compare data across councils and across contracts within the same council. This slide includes cashable and non-cashable efficiency savings, renegotiated contracts, reductions in scale and task, sharing profits and effective change control. The third point concerns extrapolation - what can these savings rates tell us about the potential savings figure across all councils? As this is a qualitative study, we cannot extrapolate from these figures to the sector as a whole. But assuming we accept that some savings will be always be possible during the life of a contract, then even a 3 per cent rate would achieve sizeable savings across the sector.
• #11: Given the number of contracts councils enter, it is highly likely that some will offer scope for post-tender savings. These figures come from the Audit Commission’s analysis of the data councils publish on the website for any spending over £500. From this, we removed some categories, such as payments to government departments, and included only payments to private contractors. But the variation in each council in how they record names of contractors and what the money is spent on means that these findings should be indicative only. What they show is the large number of suppliers each council works with. Clearly, this varies with size and type of council. But the policies of councils on contracting with other organisations also make a difference – some councils are happier than others to do this. It is also the case – as some case study councils told us – that not all councils necessarily have a corporate understanding of the range and scale of third party suppliers they engage with.
• #12: Despite the large number of suppliers in most councils, the £500 spend data also show that most councils spend the majority of their third party payments on a relatively small number of those suppliers. This is true across both districts and single tier and county councils. This smaller group of suppliers tends to be the organisations that can provide services within large-scale contracts. This suggests that it is these larger contracts that offer the best opportunity for savings. The report contains analysis of the top 25 suppliers by total spend, according to the £500 spend data. This shows that some of these work with very large numbers of councils – 9 of these large suppliers work with between 51 and 100 councils, for example, and one works with nearly all. Please note that a large proportion of this spend for some councils will be capital spending on construction, which is not reflected in the SAR third party data presented in earlier slides.
• #13: Let’s take each of the principles in turn, illustrating the savings that can be made using each one.
• #14: Corporate support for contract management Councils can be intelligent clients. The more they outsource, the more contract management will help them achieve their objectives. A counci that uses a corporate approach will: recognise and value the role of the contract manager; ensure roles and responsibilities are clearly defined and resolve internal disputes; put in place the structures, systems and processes that create effective accountability and reporting; integrate contract management within its commissioning model, ensuring that technical service expertise combines with procurement and contract management skills during the whole of the contract life; and invest money and time in developing and sustaining a capacity for good contract management.
• #15: A corporate approach does not necessarily mean centralising all responsibility for contract management. It is possible for councils to treat procurement and commissioning as corporate and strategic functions, leaving contract management to departments. But this requires leadership and clear policies that support a corporate approach. Some service managers resist greater control from the centre, believing that their technical and professional knowledge makes them best equipped to procure and manage contracts. There is truth in this; across services of different types, from safeguarding vulnerable children and adults to large-scale design and build projects, professional, service and technical expertise is vital. But so is specialist contract management skill. Our fieldwork revealed that councils used different ways of sharing responsibility for contract management. But they all have a corporate overview of the contracts that are important strategically and how to manage them. They establish clear ownership of, and roles and responsibilities for, contract management.
• #16: Sheffield City Council has over 400 contracts with third party organisations with a total value of £730 million a year; about 60 per cent of its annual revenue budget of £1.2 billion. The Council has spent five years developing the Intelligent Client approach, drawing on best practice in the private sector. It ensures the Council gets best value from suppliers, prioritises service quality and manages risks. The model is based on separating the roles and responsibilities of the corporate centre – shown in blue - and service managers – shown in yellow, with other functions shared between them shown in white. The Head of Commercial Services manages a corporate team of 55 staff responsible for all procurement, and for managing all high value and/or high risk contracts.
• #17: The corporate Commercial Services Team (CST) now directly manages a third of all Sheffield's contracts, that is, all the high value and high risk contracts, and provides support and training to service managers who manage or help to manage the rest. The CST supports service managers through a comprehensive toolkit for managing different types of contract, based on common standards and principles.
• #18: Councils can use contracts that: contain incentives and levers to vary costs and service levels; encourage innovation; have rigorous change control; and control costs and incentivise savings and other benefits. To achieve these outcomes requires active management over the life of the contract. Effective councils recognise that continuous improvement can benefit both parties and is more than a means to drive down prices.
• #19: Swale Borough Council considered their savings target as a joint challenge for themselves and the supplier to overcome. Together, they trialled changes to assess impact. They achieved lower costs by releasing efficiencies for the supplier; for example, releasing equipment the supplier could use on other contracts. This helped the supplier to minimise the impact on its business. As far as possible, the council wanted to avoid making claims against the supplier for failing to reach targets, to maintain the motivation of their supplier to work collaboratively. The Council and the supplier worked together to reduce costs by 12%. This saved the Council around £425,000 over the remaining two years of the contract, without damaging service quality.
• #20: An excessive focus on outputs may bring rigidity into contractor performance rather than the flexibility both sides seek. So many councils and their partners seek to agree key performance indicators that measure outcomes. Not all councils find this easy. Solihull Metropolitan Borough Council uses indicators of performance in areas known to affect user satisfaction, which it developed at a strategic level in collaboration with partners. The Council's maintenance and repairs partnering contract guarantees the partners payment for all works undertaken plus an agreed overhead and profit figure based on a forecast annual turnover. The turnover is reviewed on a quarterly basis to enable the partnership to adjust to the level of resources required. At the end of the financial year, any recovery of excess overheads is reimbursed. This has resulted in a reimbursement of £138,000 to the Council over the seven years that the contracts have been operating. The contracts also include a pain/gain arrangement for specific projects which enables the council and partners to agree a target cost for each project. If the projects come in below the target cost, then the savings are shared equally between the Council and partners. Conversely, if a project comes in over the target cost, additional costs are also shared equally between the Council and the partners. The Council also provides other councils an option to buy into this arrangement. Between 2007 and 2012, the partnership delivered works under budget by £516,000 resulting in savings of over £258,000 for the Council
• #21: Effective councils understand that contract management requires specialist skills that are linked with, but different from procurement or service delivery.
• #22: Contract managers need many skills, but perhaps they can be best categorised under the heading of commercial acumen. This involves: understanding costs and profit, and the market, as well as service quality; being on top of the contract detail, including review and renewal dates; a robust approach to renegotiation, including knowing the legal implications of any proposals; and being able to foster professional relationships with suppliers through supplier relationship management, or SRM. SRM seeks to ensure councils receive the best possible deal, while recognising the risks to, and needs of, their suppliers. Commercial skills are in short supply in local government. To boost capacity, councils can: recruit staff from a commercial background; appoint consultants (more on this later); adopt or adapt the approaches developed by other councils; and train their staff. There are now a number of useful training programmes and associated guidance developed by councils to improve contract management. They are available at small or no cost to others. Two examples, from Sheffield and Essex, are shown on the next two slides
• #23: No commentary
• #24: No commentary
• #25: Some councils use consultants to negotiate savings from existing contracts, sometimes on a ‘no-win, no-fee’ basis. In doing so, councils must balance their need to make savings against the risk that hard renegotiations of contracts may damage longer term relationships with suppliers. Both Allerdale and Birmingham have successfully used consultants, achieving major savings for a relatively small outlay. They provide a ready source of particular expertise that even a council like Birmingham, with a large procurement function, may find helpful on occasion. For Allerdale, as with other small councils without large corporate resources, perhaps the key outcome from using a consultant was an increase in its confidence in entering negotiations and in renegotiating contracts with suppliers.
• #26: Councils can work collaboratively: internally across services to reduce the tension that can exist between central contract management staff and service managers; with suppliers and contractors to agree mutually beneficial outcomes from changing terms and conditions; and with other councils to share information about prices and performance, learn of innovations and manage risks. Regardless of whether or not councils call their contracts partnerships, they can develop and sustain relationships that promote flexibility in managing change and a good understanding of the impact of change on each party to the contract. Collaboration has an unrealised potential to promote more transparency about prices and performance. Councils can extend the benefits from collaborative procurement to make supplier performance and costs more open and transparent.
• #27: Improvement and Efficiency South East (iESE) has established, through Hampshire County Council, a regional construction framework, which was a founder member of the former National Improvement and Efficiency Partnership for the Built Environment iESE's South East and London construction framework has eight contractors, and any public authority in the South East and London can use the arrangement to procure and deliver building works worth more than £1 million. The iESE management team manages the framework using nationally agreed performance measures, as well as a number of indicators reflecting local and regional requirements. Information about costs, prices and performance across the contractors is collected on behalf of councils using the framework. This produces approximate benchmarking, accepting that not all jobs have the same specification, depending on each council's circumstances. Grreater transparency encourages contractors to improve their performance and councils to work together to share information and increase their individual negotiating power. Collective working also allows councils to influence suppliers, for example, to engage more local small and medium enterprises, use fair payment charters and recruit apprentices. The quantifiable benefits councils have gained across the former NIEP include: 85% of subcontractors are SMEs; 64% of subcontractors are local to the area; and 87% of all construction, demolition and excavation waste no longer goes to landfill.
• #28: In addition to the benefits of achieving local priorities, collaboration also produces financial savings. iESE calculates that this form of construction brings savings in different areas, including the construction stage, in less overspending, lower professional fees and fewer claims. As well as these procurement savings, the greater transparency the initiative generates allows for comparison of costs, quality and performance across projects, taking into account the different scopes and scales they involve. This creates a form of informal benchmarking, that influences in-contract discussions as well as new tenders.
• #29: Solihull Council’s Property Services Team now manages property services for other councils, using one of four delivery models, based on how much control over service delivery the client council wishes to retain. In April 2013, Solihull signed a three year Service Level Agreement with Nuneaton and Bedworth Borough Council to provide electrical maintenance for domestic properties. Solihull Council has agreed guaranteed savings from joint working between itself and its partnering contractor to reduce the average job costs across both councils. In addition, Nuneaton and Bedworth Borough Council have made additional savings through a reduction in back office costs. The partnership is set to deliver guaranteed fixed savings for Nuneaton and Bedworth Borough Council of 10% in year one, and an additional 5% in years two and three. Total expected cashable savings are over £262,000 over the life of the contract. The Council anticipates that it will be possible to drive average job costs down even further over the life of the contract; and any savings will be shared equally between the two Councils and the partnering contractor.
• #30: Councils can put in place systems and processes, including e-procurement, that allow them to: map how many contracts they have; measure how much of their spend is on contract; collect independent feedback on performance to help monitor contract compliance; and measure the benefits, including savings, they obtain. Effective councils know their key customers (internal, external, end user, other stakeholders) and: develop performance indicators that are important to them; and align these indicators with business outcomes and review them regularly. Councils can benchmark their contract spending and outcomes internally over time and with other councils. This provides market intelligence about current and potential suppliers and emerging technologies. It informs their contingency planning and re-competition strategies.
• #31: Benchmarking requires good data, which are not always easy to come by. The LGA supported the London Borough of Camden to lead a pan-London project that reported indicative savings from ICT purchases of £2.45 million in its first year. This project, which has now been extended to cover the whole country, identified savings from different prices paid for ICT by councils. Such sharing can enable comparisons of contract terms and conditions, as well as price. Trafford Council’s case study illustrates the benefits of councils maintaining good market knowledge through retaining strong links with local and national suppliers of social care services. The Council’s continual dialogue with current and emerging providers paved the way for an agreement on a zero uplift of costs over a two year period. There is no doubt that having the right terms and conditions that enable flexibility, measure costs and quality accurately and share the benefits of good performance are very important. And while it might be seen as a basic requirement, the need to keep on top of contracts emerged as a key source of savings, which the next slides exlpore.
• #32: Birmingham City Council has a tracking system for showing how much spend is on contract. It also makes sure that procurement and contract management staff work together from commissioning to contract close, which enables contract managers to understand contract details, spot errors and manage change effectively.
• #33: Sheffield City Council has a comprehensive system to monitor progress against anticipated financial and non-financial benefits for each contract the central procurement team works on. This enables it to calculate a return on its investment in contract management, which has increased over the past five years and the Council now calculates that each contract manager now contributes savings equivalent on average to eleven times their annual salary. Greatest savings come from reducing contract scale, avoiding unnecessary costs and process efficiency savings.
• #34: Sheffield provides a good example of how paying attention to contract compliance can avoiding significant unnecessary costs. Following the appointment of a dedicated contract manager with commercial experience to manage a 30 year PFI contract, the manager identified an excessive inflation rate on the indexation charge. A successful challenge and consequent renegotiation brought a single saving of £232,000 based on the ten years of the contract to date. These costs would have increased substantially over the remaining 20 years.
• #35: It has not proved possible to cover all the good practice examples from the case studies in this presentation. Please contact any of them directly for more information. Their contact details are in Appendix 2 of the report. Tina Holland at the LGA and Mark Wardman at the Audit Commission are happy to answer any questions about this report.