DECEMBER Good practice contract management framework

Transcription

1 DECEMBER 2008 Good practice contract management framework

2 The Nationa Audit Office scrutinises pubic spending on behaf of Pariament. The Comptroer and Auditor Genera, Tim Burr, is an Officer of the House of Commons. He is the head of the Nationa Audit Office which empoys some 850 staff. He and the Nationa Audit Office are totay independent of Government. He certifies the accounts of a Government departments and a wide range of other pubic sector bodies; and he has statutory authority to report to Pariament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. Our work eads to savings and other efficiency gains worth many miions of pounds; at east 9 for every 1 spent running the Office. The Office of Government Commerce is an independent office of HM Treasury, estabished to hep government deiver best vaue from its spending. The Office of Government Commerce works with centra government departments and other pubic sector organisations to ensure the achievement of six key goas: deivery of vaue for money from third party spend; deivery of projects to time, quaity and cost, reaising benefits; getting the best from the Government s 30 biion estate; improving the sustainabiity of the Government estate and operations, incuding reducing carbon emissions by 12.5 per cent by , through stronger performance management and guidance; heping achieve deivery of further government poicy goas, incuding innovation, equaity, and support for sma and medium enterprises; and driving forward the improvement of centra government capabiity in procurement, project and programme management, and estates management through the deveopment of peope skis, processes and toos.

3 Good practice contract management framework

4 This good practice framework for contract management (the framework) was deveoped in parae with the Nationa Audit Office report on Centra government s management of service contracts and was used during the fiedwork stage of the report to benchmark centra government s contract management performance against good practice. The framework wi provide the foundation for the Office of Government Commerce s revised guidance on contract management.

5 Contents Overview 4 Section One The good practice contract management framework 6 Section Two Assessing the appropriate eve of contract management 17 Section Three Linking the good practice framework with the risk and vaue opportunity assessment 22 For further information about the Nationa Audit Office pease contact: Nationa Audit Office Buckingham Paace Road Victoria London SW1W 9SP Te: Emai: enquiries@nao.gsi.gov.uk For further information about the Office of Government Commerce pease contact: Office of Government Commerce 1 Horse Guards Road London SW1A 2HQ Te: Emai: ServiceDesk@ogc.gsi.gov.uk Nationa Audit Office 2008

6 4 Overview Good practice contract management framework Overview 1 This good practice framework for contract management (the framework) was deveoped in parae with the Nationa Audit Office report on Centra government s management of service contracts, which was pubished in December 2008 (HC 65, Session ) and is avaiabe at The framework was used during the fiedwork stage of the report to benchmark centra government s contract management performance against good practice. 2 The Nationa Audit Office found that whie there are exampes of good practice, centra government s management of service contracts is not consistenty deivering vaue for money. The report estimated that better contract management coud potentiay generate savings of between 160 miion and 290 miion a year across the organisations surveyed through reduced contract expenditure. As we as financia savings, better contract management coud bring improvements in the quantity and/or quaity of services, the avoidance of service faiure, and better management of risk. 3 The framework is a good practice guide for managing a broad range of contracts. It is particuary reevant for contracts where services are deivered over a ong period of time (five years pus) where customers need to ensure that service eves and vaue for money are maintained over the duration of the contract. The framework wi provide the foundation for the Office of Government Commerce s revised guidance on contract management. The Office of Government Commerce wi aso deveop suppementary guidance, specificay appropriate to the most compex forms of contract, during The framework covers the stage where a contract has been signed and the service is up and running. It does not cover the tendering/contract award stage or some of the specific issues that arise when a contract expires or is terminated, for exampe, reating to the disposa of equipment or handover to a new suppier. Guidance on these areas, and on issues such as contract management skis, is avaiabe on the Office of Government Commerce s website

7 Good practice contract management framework Overview 5 5 The framework compements guidance provided by the Operationa Taskforce within Partnerships UK for the management of PFI contracts during their operationa phase. The framework does not, however, cover a the issues which may arise in reation to PFI contracts, which invove an added degree of compexity, for exampe in their arrangements for refinancing, managing contract variations, risk aocation and contract termination. Further guidance for managers of PFI contracts is avaiabe on the Partnerships UK website 6 The framework comprises: Section 1 which outines the activities that organisations shoud consider when panning and deivering contract management; Section 2 which discusses how to evauate the risk and vaue opportunities inherent in contracts; and Section 3 which iustrates how the activities from Section 1 and the evauation from Section 2 can be brought together to deveop contract management pans and priorities. 7 The Nationa Audit Office empoyed two experienced procurement professionas to deveop the initia framework. The framework was then tested at four workshops with representatives from government departments and other pubic bodies, speciaist procurement organisations, IT suppiers and faciities management suppiers. The framework was refined in the ight of feedback from the workshops. Further discussions were then hed with the Office of Government Commerce, the Chartered Institute of Purchasing and Suppy, and Partnerships UK to finaise the framework.

8 6 Section One Good practice contract management framework Section One The good practice contract management framework Introduction 1.1 The framework defines the four bocks structure and resources, deivery, deveopment, and strategy comprising 11 areas (Figure 1) that organisations shoud consider when panning and deivering contract management, together with the key activities that fa under each of the 11 areas. Figure 1 The good practice contract management framework Strategy Market management Panning and governance Structure and resources Suppier reationship management Peope Administration Suppier deveopment Good practice framework Reationships Deveopment Contract deveopment Performance Risk Payment Deivery

9 Good practice contract management framework Section One The focus of the framework is on the activities to be undertaken during the operationa phase of the contract, i.e. after the contract has been awarded and once the service is up and running. The framework has particuar reevance to service contracts (covering information and communications technoogy, faciities management and business processes) where service eves and vaue have to be maintained and improved often over ong contract periods. Contract management in context the effect of the tendering/ contract award phase 1.3 Whist the framework focuses on the operationa phase of the contract, contract management success and the activities undertaken are strongy infuenced by what has happened during the tendering/contract award phase, in terms of both hard outputs, such as the terms and conditions that have been agreed, and the type of reationship between customer and suppier that has been estabished during the tendering/ contract award phase. In this way, the tendering/contract award phase and the contract management phase shoud be seen as a continuum rather than distinct phases, with contract management panned for from the start of the procurement process. Some of the key issues that can infuence contract management incude the foowing. Whether contract management staff have been invoved in the earier tendering/ contract award phase. The stye of the tendering process. An adversaria tendering process may ead to a more adversaria or confrontationa reationship during the contract management phase, athough good working reationships between the staff on both sides who wi manage the contract can be deveoped at the same time that separate, sometimes tough, negotiations are taking pace to finaise the contract. The cutura fit between customer and suppier. For exampe, if one party fees comfortabe working in a very process-driven, detaied manner, whie the other prefers a more open, high-eve reationship, then deveoping successfu contract management wi be more chaenging. A contract where one party fees they are disadvantaged by the terms and conditions, or the commercia terms, of the contract may ead to more adversaria contract management. Key hard outputs that have a major impact on the design and effectiveness of contract management such as key performance indicators and service eve agreements are often determined during the tendering/contract award phase.

10 8 Section One Good practice contract management framework The framework 1.4 The key activities to be undertaken under each of the 11 contract management areas are set out beow. The numbering is not intended to indicate that the activities shoud be executed in a sequentia manner. Indeed, many of the areas and activities are reevant throughout the contract management phase. 1.5 As discussed in more detai in Sections 2 and 3, not a of the 11 areas are equay reevant to a contracts. Generay, the more deveopmenta and strategic areas and activities (areas 8 to 11) become increasingy important the higher the contract risk and the greater the opportunity to add vaue. Structure and resources Area 1: Panning and governance Preparing for contract management and providing oversight 1.1 There is a panned transition from the tendering/contract award phase to the contract management phase, and a handover to contract manager; the cost of contract management is incuded in the business case and budgets. 1.2 Contract ownership is cear, with the budget hoder, senior responsibe owner (SRO), and contract manager ceary defined; there is continuity of governance as far as possibe. 1.3 There are we defined processes and a cear contract management pan, with a focus on outputs and a whoe ife approach to performance. 1.4 Overa ownership of contract management across the organisation is cear, with a contract management senior responsibe owner with responsibiity for driving organisation-wide contract management performance. 1.5 Contract management processes are aigned with, among others, wider organisationa governance processes, operationa boards, and risk structures. 1.6 Contract management issues and performance are reported through the governance structure with senior eve engagement. 1.7 Reguar assessment and evauation takes pace to ensure that the cost of contract management activities is justified and proportionate to the benefits obtained. 1.8 Knowedge management is embedded, capturing key data and essons from contract management process and experience both within the organisation and more widey. 1.9 Professiona contract management guidance is deveoped, or identified from externa sources, and made avaiabe to contract managers.

11 Good practice contract management framework Section One 9 Area 2: Peope Ensuring the right peope are in pace to carry out the contract management activities The contract manager (or contract management team) 2.1 The contract manager has continuity (ideay through invovement during the tendering/contract award processes) and a handover from the staff responsibe for the tendering/contract award. 2.2 The contract manager has a detaied knowedge of the contract and other reevant issues, such as service eve agreements, and ongoing suppier performance. 2.3 The contract manager has the appropriate skis (both specific contract management skis and more genera commercia awareness and expertise), with access to reevant training and deveopment. Experienced contract managers are utiised on key contracts. 2.4 Contract managers have accurate job descriptions, roes are positioned at an appropriate eve and saary, and there is a career path for contract management staff. 2.5 Contract managers have cear objectives and reporting ines and their performance is managed through reviews and appraisas. 2.6 The contract manager has appropriate deegated authority to manage the contract effectivey. Wider staff issues 2.7 Baanced contract management teams are brought together, with an appropriate range of skis; the teams may vary in composition over the ife of the contract to meet specific needs. 2.8 Contract management is adequatey resourced, in proportion to the importance of the contract (primariy but not excusivey its cost), and there are enough staff to carry out the required activities. 2.9 The organisation has a contract management community aowing contract managers to share good practice. The community aso pays a roe in the wider government contract management/ procurement community. Area 3: Administration Managing the physica contract and the timetabe for making key decisions 3.1 Hard copy contracts are stored and ogged, and are easiy accessibe when required; for compex contracts, a summary and/or contract operations guide is produced. 3.2 Contract management software is used for recording key information, to give, for exampe, search capabiity; reevant ongoing contract management information and documentation is retained and managed. 3.3 There are mechanisms in pace for identifying key contract trigger points, such as notice periods. 3.4 There is reguar and ad hoc reporting of contract management information. 3.5 There are mechanisms in pace for handing administration around contract cosure or termination. 3.6 The customer considers the cost of contract management activities to the suppier, and the cost is proportionate to the contract size and risk.

12 10 Section One Good practice contract management framework Deivery Area 4: Managing reationships Deveoping strong interna and externa reationships that faciitate deivery Roes and responsibiities 4.1 The contract manager understands his/her own roe and has cear visibiity of we-structured roes and responsibiities on the suppier side. 4.2 The respective responsibiities of the contract manager and the suppier are cear, and potentiay defined in a joint statement of intent or simiar document. Continuity and communications 4.3 Continuity of key suppier staff is desirabe (ideay through invovement during the saes process); where this cannot be achieved, there is a handover from the staff responsibe for the tendering process. 4.4 Both reguar structured and informa communication routes between the contract manager and suppier are open and used; customer and suppier staff are co-ocated where appropriate. 4.5 Users are given cear expectations and an understanding of the contract and the services/ performance to be deivered (for exampe, through newsetters or briefings). 4.6 Communications between the contract manager, suppier and other stakehoders (users of the contract and others such as technica experts) are effective; and stakehoders are invoved in contract management processes where appropriate. 4.7 Probem resoution processes are we defined and used, and are designed to ensure minor probems do not escaate and cause reationship issues; a bame cuture is avoided (for exampe, through the use of a reationships charter or simiar document).

13 Good practice contract management framework Section One 11 Area 5: Managing performance Ensuring the service is provided in ine with the contract Service deivery 5.1 Service management is we structured; baseines are understood by both parties, and suppiers understand the service they are required to deiver. The contract manager ensures that the customer organisation provides the suppier with the information and contacts needed to deiver the service. 5.2 A performance management framework is in pace when the contract is signed. The framework is comprehensive, objective and provides incentives for the suppier to meet or exceed agreed performance standards. 5.3 Service eves agreements are in pace, and are inked to business needs, understood by the suppier, and monitored by the contract manager and/or end users. 5.4 Suppier performance is assessed using cear, objective and meaningfu metrics, inked where appropriate to the Office of Government Commerce s Common Assessment Framework for monitoring suppiers. 5.5 Reporting is as far as possibe on a focused, by exception basis, with suppier sef-measurement and reporting where appropriate but with independent checking mechanisms to aert the customer to performance issues (for exampe, user feedback). 5.6 Cear processes are in pace to hande operationa probem resoution and resove issues as quicky as possibe. 5.7 Where appropriate, user compiance with the contract is monitored and managed to ensure maximum operationa effectiveness and vaue for money. Feedback and communications 5.8 Reguar and routine feedback is given to suppiers on their performance. 5.9 There are cear contact points for service users both within the suppier organisation and with the contract manager. Users understand what the contract is intended to deiver, and are invoved in the assessment of suppier performance where reevant. Users understand escaation routes where issues arise Changes in user requirements are captured and considered as part of forma change and contract management processes There are forma performance reviews with suppiers, with documented improvement pans agreed where necessary, covering both operationa issues and adherence to key contractua requirements, for exampe, on data security.

14 12 Section One Good practice contract management framework Area 6: Payment and incentives Ensuring payments are made to the suppier in ine with the contract and that appropriate incentive mechanisms are in pace and we managed Payment and budgets 6.1 Payment mechanisms are documented and are cear and we understood by a parties (incuding incentives, penaties, and non standard charges). 6.2 Payment processes are we defined and efficient; appropriate checks and authorisation processes are in pace for paying invoices. 6.3 The costs of the services deivered and contract management costs are mapped against budgets and aocated appropriatey. 6.4 Payment changes after the contract is et, for exampe from contract variations or benchmarking/ market testing, are made using contractua provisions and demonstrated to provide vaue for money. Payment and incentive mechanisms 6.5 Incentive structures (financia or non-financia) reate ceary to desired outcomes, and are we managed and governed, with appropriate checks and approva mechanisms. 6.6 Service credits or equivaent mechanisms are we managed and governed, and proportionate to suppier profitabiity. 6.7 Where open-book or simiar financia/pricing mechanisms are used, the process is managed professionay and fairy. 6.8 The contract manager takes action where necessary to avoid the organisation being ocked in to onerous commercia terms throughout the contract period, such as price escaation or compusory maintenance payments.

15 Good practice contract management framework Section One 13 Area 7: Risk Understanding and managing contractua and suppier risk Processes and pans 7.1 Contractua/suppier risk management is in pace with cear responsibiities and processes, identification of who is best paced to manage risk, and suppier invovement where appropriate. 7.2 Risks are formay identified and monitored reguary, with mitigating actions deveoped and impemented where possibe, and obsoete risks removed from consideration where appropriate. 7.3 Escaation and reporting routes are in pace for risk governance. 7.4 Contingency pans are deveoped to hande suppier faiure (temporary or ong-term faiure/defaut); exit strategies are deveoped and updated through the ife of the contract. Contractua terms 7.5 Contractua terms around termination are understood and monitored by the contract manager. 7.6 Contractua terms around warranties, indemnities and insurance are understood and monitored by the contract manager. 7.7 Contractua terms around security and confidentiaity are understood and monitored by the contract manager, particuary issues reating to the security/confidentiaity of persona data. 7.8 Dispute resoution processes are in pace, incuding agreed adjudication procedures, mediation, and arbitration. Ongoing suppier risk management 7.9 The contract manager monitors the suppier s financia heath and business performance (incuding through the use of credit rating agencies) The contract manager monitors the suppier s compiance with contractua non-performance issues (for exampe, on tax and sustainabiity targets).

16 14 Section One Good practice contract management framework Deveopment Area 8: Contract deveopment Effective handing of changes to the contract Change processes 8.1 The contract is reguary reviewed (with a view to updating where necessary) to ensure it meets evoving business needs. 8.2 Processes are in pace that ceary ay out the governance of contractua change who needs to approve what and how it wi happen with a focus on effective and prompt change impementation. 8.3 There are cear processes for the management of minor changes and contract variations, with a focus on the cost/effort being proportionate to the importance and vaue of the change. 8.4 There are more rigorous processes to hande major contractua changes, incuding cear approva mechanisms and accountabiities, and contros to demonstrate that changes offer vaue for money. 8.5 Where appropriate, vaue for money testing of existing services takes pace through benchmarking or other processes. 8.6 There are processes to cover the introduction of new services under the contract, incuding market testing where necessary. 8.7 Dispute handing processes are in pace to hande change reated issues. Processes for different types of change 8.8 Both parties have a cear understanding of the arrangements for any extension of the contract (both scope and time) and reated issues. 8.9 Processes are in pace to hande commercia (financia) changes to the contract in a fair and structured manner Price changes are managed fairy and effectivey with the use of mechanisms such as benchmarking, competitive tendering (for exampe, for major additiona works), or other techniques such as open book pricing as appropriate, to test vaue for money The rationaisation of specifications and demand management are considered as options to achieve better vaue for money.

17 Good practice contract management framework Section One 15 Area 9: Suppier deveopment Improving suppier performance and capabiity Processes 9.1 Processes are in pace that ceary set out how suppier deveopment activities wi be panned, managed and governed. 9.2 Cear processes for benefits measurement and capture are in pace to ensure that suppier deveopment is focused on continuous improvement and achieving vaue for the customer organisation. 9.3 The customer organisation understands what motivates and drives the suppier and how suppier deveopment fits with the suppier s goas. Improvement activities 9.4 Suppier operationa performance improvement activities (for exampe, Lean and 6-sigma ), with potentia input or assistance provided by the customer organisation. 9.5 Joint working or shared activities between the two parties for the benefit of both the suppier and customer (for exampe, process improvement, shared training, task forces or joint project teams). 9.6 Suppier improvement activities reating to wider government initiatives, with input or assistance provided by the customer organisation (for exampe, on sustainabiity, disabiity empoyment issues, use of SMEs (Sma and Medium Sized Enterprises) and BMEs (Back Minority Ethnic suppiers)). 9.7 Shared risk reduction programmes or activities. 9.8 Suppy chain deveopment activities (for exampe, the deveopment of second/third tier suppier performance). 9.9 Shared management activities (for exampe, suppier boards) to drive performance improvement.

18 16 Section One Good practice contract management framework Strategy Area 10: Suppier reationship management Having a programme for managing and deveoping reationships with suppiers 10.1 A suppier reationship management programme is panned and structured with appropriate governance and senior ownership A benefits reaisation pan is in pace for suppier reationship management; there is a cear sense of what vaue is to be generated for both parties There is a focus on capturing innovation from the suppier where necessary or vauabe Knowedge management issues are addressed, incuding knowedge capture from suppiers The suppier reationship management programme considers a the suppier s interactions across an organisation and on a pan-government basis, incuding work with the Office of Government Commerce Board eve suppier/customer organisation interfaces and reationships are panned and managed in ine with overa suppier reationship management objectives. Area 11: Market management Managing the wider market issues that impact on the contract, but ie beyond the suppier 11.1 Processes are in pace to evauate and review options around deivering services in-house or outsourcing Market inteigence is used to maintain an understanding of the market and of aternative suppiers (to inform benchmarking, contingency panning and re-competition strategies) The capacity and capabiity of potentia suppiers is anaysed, and inked to wider government anaysis, for exampe, by the Office of Government Commerce There is ongoing evauation of emerging technoogies and practices, and identification of opportunities from both immediate and parae market sectors Market making is undertaken where appropriate to stimuate competition and ensure the requirements can be deivered by the market; there is an understanding of issues such as switching and bidding costs A re-competition strategy and pan is put in pace in a timey manner; the contract manager feeds into strategy deveopment for the new procurement process.

19 Good practice contract management framework Section Two 17 Section Two Assessing the appropriate eve of contract management 2.1 As set out in Section 1, the framework comprises 11 contract management areas and over 80 key activities that organisations shoud be considering when managing a contract. However, not a of these areas and activities are reevant for every service contract. The eve of resources devoted to contract management and the type of activities undertaken shoud be proportionate and justified by the potentia benefits they may deiver. 2.2 For each contract, organisations therefore need to assess the potentia benefits of contract management. This can be done using two dimensions. The benefit that can be obtained from effectivey managing the risk inherent in the contract. The potentia additiona vaue that can be obtained from effective contract management. 2.3 As the eve of risk increases, the benefits which may be derived from reducing these risks through enhanced contract management aso increase. A contract that has itte inherent risk attached to it and itte opportunity for additiona vaue woud not need or justify a arge amount of contract management resources, as the benefits that coud be achieved from greater contract management woud be sma. This may be the case even if the annua expenditure on a contract is substantia, athough sma improvements on a major contract can, of course, be significant. 2.4 Even if contract risk is ow, the potentia to generate additiona vaue from the contract can justify increasing eves of contract management resources and activities. Extra vaue coud come, for exampe, from cost reduction through process deveopment, or from persuading a suppier to increase service eves without additiona cost.

20 18 Section Two Good practice contract management framework Managing contract risks (a) Identifying contract risks 2.5 The initia stage in any risk management process is to identify the key risks. In the case of service contracts, the key risks can be categorised into three broad areas. Service faiure the most obvious and common risk is that the suppier does not deiver the service to the standard or timeiness specified in the contract. Service faiure can range from a reativey minor shortfa against required service eves to compete faiure. Minor faiure coud be driven by, for exampe, the customer providing uncear specifications, a ack of suppier capabiity, or a suppier cutting corners to improve profitabiity. At the extreme, financia or other probems coud cause the suppier to go out of business, uniateray withdraw from the contract, or be unabe to deiver the service. Reputationa damage even if the service is provided as specified in the contract, there is a further risk that the suppier in some manner causes harm to the customer organisation s reputation. For exampe, the suppier may act iegay or in a manner that conficts with government poicy. Suppier probems coud resut in sensitive or persona information not being kept secure, or a suppier may be deaing with vunerabe citizens where poor performance woud have operationa impications and cause reputationa damage to the customer organisation. Additiona cost this category of risk covers cases where the contract costs more than expected or budgeted, and those costs do not represent vaue for money. The amounts paid to the suppier may increase as a resut of changes in the quantity or quaity of the services deivered or their prices. For exampe, user demand may be higher than expected. In such cases, additiona costs may be reasonabe and offer vaue for money. But it is vita that processes are we managed so that vaue for money is tested and achieved on this additiona expenditure. The interna costs of the customer organisation may aso increase. For exampe, poor user perception of the service coud ead to more work being done internay by the customer s staff rather than by the suppier, with consequent additiona costs. (b) Quantifying contract risks 2.6 Once the core risks associated with a contract have been identified, the scae or importance of each risk needs to be quantified. This can be done by assessing two eements. The ikeihood (probabiity) of the risk materiaising. The impact if the risk does materiaise.

21 Good practice contract management framework Section Two 19 The ikeihood of the risk (probabiity) 2.7 Understanding the ikeihood of the risk materiaising is key to assessing its reative importance. A risk may have a huge potentia impact, but if the ikeihood of it happening is very sma, it may not be worth devoting much effort to managing or reducing the risk. In terms of service contracts, a variety of factors can infuence the ikeihood of the key risks materiaising. The technica or operationa compexity of the services being deivered. The compexity of the terms and conditions of the contract. More compex, or non-standard, terms and conditions require more effort to understand, contro and update than do concise or standard terms and conditions. The number of changes required to the contract over its duration. The number of interna users or other stakehoders within the customer organisation. The extent of the geographic area covered by the contract. The extent to which one party fees they are disadvantaged by the terms and conditions, or the commercia terms, increasing the ikeihood of disputes. The nature of the suppier itsef and its business mode. The probabiity of suppier faiure or performance issues may depend on: the suppier s interna business configuration, for exampe, there is higher risk if a suppier provides services from a singe site that is vunerabe to suppy interruption; the suppier s dependency on key staff, third party suppiers or other key stakehoders in the deivery of the service; the experience of the suppier in working with the particuar customer organisation or in the sector concerned, for exampe, a suppier who has never worked in the pubic sector is ikey to carry inherenty more risk as a suppier to government than one who is experienced in that sector; and the suppier s experience in deivering the service in question.

22 20 Section Two Good practice contract management framework The impact of the risk 2.8 Aong with the ikeihood of the risk materiaising, the overa importance of the risk is dependent on the impact were the risk to materiaise. A risk with a significant potentia impact is ceary more serious and worthy of attention than one that has ony a imited effect. Impact can be considered under the three key risk headings identified above. Service faiure can generate a wide range of potentia impacts. At the extreme, a service faiure by a critica suppier coud mean the customer organisation has in turn to stop providing services. In the pubic sector, poor suppier performance coud resut in the customer not achieving poicy objectives or PSA targets, or in the pubic who use the service suffering deays and inconvenience. A ess serious service faiure (perhaps a service that does not fuy meet the standard or specification required) coud generate a more minor oss of efficiency or effectiveness within the customer organisation. Reputationa issues can aso have an impact on the customer organisation. Whie damage may arise from service faiure as described above, this is not necessariy the case. A service contract may be deivered to specification but if, for exampe, the suppier is found to be using iega immigrants, there wi be reputationa damage and impact for the customer organisation as we as for the suppier. Quantifying such an impact is, however, often difficut. Additiona cost is the third key potentia impact. The impact of contract expenditure being greater than forecast or budgeted can be considerabe, whether it occurs through poor contro, changing requirements, or through unbudgeted but contractuay aowed price increases (for exampe, where the charges are uprated for infation). The interna costs of the customer organisation can aso be affected, whether direct contract management costs or wider costs driven by contract issues. In genera terms, the risks associated with a high vaue contract wi usuay have greater potentia impact, but the specific terms of each contract can aso affect the potentia costs. Combining ikeihood and impact 2.9 By bringing ikeihood and impact together, organisations can assess the importance of risks, prior to any mitigating actions. Importance can be assessed by scoring each eement and then mutipying the two scores to arrive at a fina risk score. For instance, ikeihood and impact coud be rated on a (very simpified) scae such as: 0 Zero ikeihood / zero impact 1 Low ikeihood / ow impact 2 Medium ikeihood / medium impact 3 High ikeihood / high impact

23 Good practice contract management framework Section Two Appying such a scae woud award a risk with a ow probabiity but a high impact a score of 3 (1 x 3), whie a risk with a high probabiity and medium impact woud score 6 (3 x 2). A process such as this can therefore give some overa rating and ranking of each risk both within a specific contract and across a portfoio of contracts. Identifying opportunities for additiona vaue 2.11 In addition to managing risk, the other aim of enhanced contract management is capturing additiona vaue, above and beyond that defined in the origina contract. Additiona vaue generay fas under the headings of service or cost; reputationa added vaue is more unusua athough not impossibe to achieve In terms of service, extra vaue can arise from a suppier providing higher service eves than expected or specified, at no additiona cost. This may have a vaue to the customer organisation, athough this is not aways the case. A 99 per cent service eve may be more than adequate, and achievement of 99.5 per cent may bring no further vaue. For exampe, a ca centre reducing the time it takes to answer cas by five seconds may not even be noticed by the caers A service provided in a different or innovative manner can aso bring vaue to the customer organisation and may not aways have a cost to the suppier. Indeed, there may be aternative service deivery modes that provide a win-win opportunity: ower costs to the suppier and better service to the customer Vaue improvement through ower costs may come about through contractua mechanisms, such as benchmarking against market prices, or through negotiation with the suppier. Cost reduction may aso arise from suppier or mutua action that enabes the customer organisation to refine its own interna process or reduce other costs The potentia for vaue improvement in a contract can be assessed in a simiar way to assessing the risks. Opportunities need to be identified and then quantified in terms of their feasibiity (simiar to the ikeihood assessment under the risk heading) and their potentia size or impact.

24 22 Section Three Good practice contract management framework Section Three Linking the good practice framework with the risk and vaue opportunity assessment 3.1 This section outines how the good practice contract management framework (Section 1) can be appied to deveop contract management pans and priorities, based on the risk and vaue opportunity associated with the contract (Section 2). Figure 2 iustrates a high eve view of how the contract management focus widens as the potentia risk and vaue opportunity increase. Responding to risk 3.2 The purpose of contract management is to manage the risks and expoit the opportunities inherent in a contract. Risk management activities fa into four categories. Figure 2 Contract management priorities Vaue opportunity Key contract management increasing focus on deveopment, strategy Mid-eve contract management increasing focus on risk, change, reationships Basic contract management focus on administration, performance Contract risk

25 Good practice contract management framework Section Three 23 Risk reduction taking action to reduce (mitigate) the ikeihood and/or impact of the risk. Risk eimination reducing the ikeihood or impact of the risk to zero. Risk acceptance acknowedging the risk but taking no action, either because the risk is not that great in terms of ikeihood or impact, or because there is nothing practica that can be done about it. Risk transfer taking action to transfer ownership of the risk to the suppier or to a third party (for exampe, through insurance). 3.3 In deveoping contract management pans, the customer organisation shoud consider the various contract management activities and seect those that respond most appropriatey to each risk identified. The greater the potentia risk and/or vaue opportunity, the more sophisticated the contract management activities and greater the resources that can be justified (Figure 3). Figure 3 Widening contract management focus as the potentia risk and vaue opportunity increases Structure & resources Deivery Deveopment Strategy Governance Transition from tendering process Peope Cear ownership High eve governance Appropriate staff resource Training and deveopment Job description and objectives Wider contract management community Administration Storage and records Reporting Reationship Suppier continuity Suppier iaison User feedback Probem resoution processes Performance Service management Service eve agreements Performance metrics Performance reviews Payment Invoice checks Incentives/penaties Contract deveopment Negotiation of changes/ new terms New services Vaue for money testing Suppier deveopment Deveopment pans Vaue measurement and capture Suppier Boards Shared training Innovation Suppier reationship management Structured reationship management programme Senior reationship governance Market management Market inteigence Market capacity and capabiity issues Re-competition Key trigger points Risk Risk management Increasing potentia risk and vaue opportunity

26 24 Section Three Good practice contract management framework 3.4 For exampe, the more operationa contract management activities (areas 1 to 7 of the framework covering structure and resources, and deivery) address common risks, often reating to suppier performance faiure. Monitoring against key performance indicators, for exampe, is designed to reduce the risk of suppiers faiing to deiver services as required or, if they do fai, to pick this up quicky and prompt remedia action. A contract that has major risk in terms of potentia cost overrun may require management focused around areas such as contro of interna demand, carefu budgeting and payment, and we managed change processes. 3.5 More sophisticated contract management activities can be the appropriate response to more subte risks. For exampe, getting cose to a suppier through suppier reationship management may give eary warning of an important strategic change in the suppier s business that coud affect its abiity or appetite to provide the service. 3.6 If unacceptabe risks remain, even after mitigating action has been taken, customer organisations shoud consider widening the scope of their contract management to incude further deveopment activities. For exampe, if there is a significant risk that a suppier coud go out of business, merey monitoring the suppier s financia performance may not be sufficient mitigation, and deveopment work to identify aternative sources of suppy may be necessary. 3.7 Figure 4 on page 26 at the end of this section iustrates in more detai how the reative focus on the 11 contract management areas that comprise the framework may widen as the risk and vaue opportunity increase. Responding to vaue opportunities 3.8 As we as managing risk, contract management shoud address potentia vaue opportunities. Not every contract wi have such an opportunity, but most compex service contracts wi have the potentia to deiver further vaue above that contained in the initia contractua terms. 3.9 As with risk, different contract management approaches can be appropriate to pursue such opportunities. For exampe, performance management may stimuate service improvement above that defined in the initia contract; benchmarking or market testing can drive cost reduction during the ife of the contract; and suppier deveopment activities may generate opportunities for mutuay beneficia process improvement.

27 Good practice contract management framework Section Three 25 The resources required for contract management 3.10 A further factor to consider in deveoping contract management pans is the type and eve of resources required, as this wi vary for different types of contract. In broad terms, operationa risk may require a considerabe quantity of contract management resources, whie managing more sophisticated risk or vaue opportunities can require higher ski eves and capabiity rather than simpy more resources. Deveoping contract management over time 3.11 Contract management activity may need to change over time, depending on the nature and compexity of the service being provided. In the case of simpe services, the service wi be deivered immediatey once the contract has been agreed and wi probaby be a standard off the shef service. In this event, the required contract management approach shoud aso begin immediatey and is ikey to remain fairy unchanged throughout the ife of the contract. For more compex services, there may be a need for a transition period where the fu service is not deivered immediatey once the contract has been agreed for exampe, where a new suppier is taking over a catering service that has previousy been deivered in-house or by another suppier. The focus of contract management activity wi therefore need to change as the contract moves from transition to deivery phase. Very compex services usuay require onger periods of deveopment and transition, with the customer organisation needing to vary its contract management approach quite significanty over the course of the contract. For exampe, deivering a major customer facing service may require the deveopment of systems prior to ive deivery. There is a parae here with construction contracts, where the deveopment phase can encompass the entire contract. A design, buid and operate contract is a direct parae to many major service contracts The approach presented in the framework is designed to be robust and fexibe enough to hande a these options. For exampe, during the period of contract transition, deivery is often the key area of activity, where deivery reates to the activities that the suppier (with input from the customer organisation) must undertake to prepare for service deivery. Contract management during this period may we focus on the risk of deays to the service going ive and on the need for contingency pans. Once the service deivery period is under way, deivery activities wi remain important, but other factors may become more reevant to address continuing risk or opportunity, with areas such as performance management, contract deveopment and suppier reationship management assuming a higher priority.

28 26 Section Three Good practice contract management framework Figure 4 Anaysis of typica contracts and the required contract management focus Loca office ceaning/printing Risk Low/ medium Vaue opportunity Low Panning and governance Peope Administration Reationships Performance Payment Risk Contract deveopment Suppier deveopment Suppier reationship management Market managment Muti-site catering/ feet management Medium Medium Corporate desktop IT/tota faciities management Medium/ high Medium/ high Tota IT outsourcing/ passport production Very high High Required contract management focus Litte or no focus Some imited focus Considerabe focus Very high focus

29 This report has been printed on Consort 155. Design & Production by NAO Marketing & Communications Team DP Ref:

30