In search of savings

The need to address the economic deficit and secure efficiency in public sector spending means that both central and local government are starting a careful review of existing contracts as well as having a keen eye on ensuring that new contracts deliver value for money. It is a sensible and prudent step to take but how do you go about it? Is it realistic to expect that changes can be made to existing contracts? What are the procurement risks? What are the risks of contractual challenge? Frances Woodhead looks at the contractual issues which need to be addressed and explains how to go about reviewing contracts in a practical way which seeks to minimise risk.

As a result of the need for greater efficiency, many councils are reviewing major contracts so that they meet future needs and deliver “more for less”. Many of the early models of PFI and other major arrangements were negotiated at a time when many in the public sector were less familiar with managing major commercial contracts. There was often therefore a high level of control in the management of the contract and payment and performance mechanisms. They were also written to comply with complex assessment processes, ie CAA.

The government has made it clear that jobs should be shifted to the private sector and that the private sector will continue to play a major role in delivering public services. It has already started to squeeze more out of existing arrangements. This is evidenced in the review of the BSF programme as well as the expectation that it is reasonable to expect savings of 20% to 40% from central and local government suppliers. The new context of public sector contracts is that of “the Big Society”, devolution of decision making, less state intervention and making use of the capacity of individuals and small organisations to take on and deliver services. All these things will place more demands on both existing and future contracts, enhanced by the expectation that the arrangements will mysteriously deliver savings by transformation.

Any review will need to take account of the need to deliver personalised services as well as savings. There will be a need to deliver new services or existing services differently, including an expectation that there will be consultation with different groups (for example social enterprises or GPs who are commissioning services).

How to go about it – prior preparation and planning

How well has the contractor delivered to date? What does user/client feedback say? Have KPIs been met? Are KPIs no longer relevant? It is important to ascertain how well the contractor is performing before meetings begin as this may influence your strategy and approach.

It will be important to gather together the original contract and review all the correspondence and records of change which have taken place over time to capture the current contractual arrangements. Effectively, you may be creating a new record and bible document.

A health check of the original procurement process and an assessment of whether there needs to be a fresh procurement will be important. The issue of state aid will also need to be considered as will a review of the break clauses in the agreement and exit and change arrangements.

Starting the process is undoubtedly a delicate and sensitive matter. Early discussion with providers will be important to establish a clear understanding of the perspective of all parties. Straightforward discussion about what is currently being delivered, what could be stopped and what needs to be picked up will be useful, as will be an understanding of the demands which have been placed upon the contractor for additional services. In larger organisations, it is often common for requests for services to come from a wide variety of sources which are not necessarily known about or managed by the contract management team.

It may be all too easy to say that if something is no longer being delivered, let’s stop doing it. That may however be a short sighted approach if there is the potential to pick that up in later delivery. It may be more about flexibility and adjustment, rather than slimming down.

It will also be important to contemplate the unthinkable. For example, off shoring is happening even in local government but still raises political and managerial concerns especially where sensitive data is involved and where the consequence is job losses at a local level. In reviewing existing arrangements it makes sense to build flexibility in to the contract to allow that to happen and to actively consider the practical issues which need to be addressed if it becomes a real option. Key areas will include reviewing licensing arrangements, data transfer, which jurisdiction will prevail in the event of dispute, and what will happen on termination.

There may also be complex issues to address in terms of exclusivity provisions in contracts which need to be balanced against the risk of procurement challenge.

It can be very easy to allow a review and renegotiation process to take a lot of time and resource. The important thing is to keep focused and be clear about the objectives you are seeking to achieve.

Contractual issues to address

It is not unusual in large complex high value contracts for payments to no longer reflect the substance of the original contract which was agreed. In a well managed contract, changes will have been properly scoped, recorded and documented but it is not unusual for the relationship to have evolved more informally. Before embarking on any renegotiation process it would therefore be important to review the contract specification and compare that with service delivery plans, what is being delivered in practice and what has actually been approved through a formal decision making process. Has the change mechanism in the contract been properly utilised? Do those managing the contracts have a clear understanding of how changes can be implemented? Can it be done unilaterally? Or are there limitations around changes which can be made?

It will also be worth reviewing whether the contract specifically provides an obligation on the contactor to deliver savings and/or continuous improvement and whether that has actually been achieved. Have services been benchmarked against other providers? This is particularly important in the current climate. There will be an increasing focus on engagement with and delivery of strategic objectives meeting the satisfaction of service users rather than compliance with a detailed service specification.

It will also be important to identify circumstances where the contractor may have implemented a change but not charged for it and to undertake a realistic assessment of whether any proposed changes will place the contractor in a difficult commercial position within the marketplace. It is important to remember that contractors do need to make a profit and not have unrealistic demands placed upon them if the contract is to work – it is not a one way street.

Transformation and savings

A number of public/private shared services (particularly back office functions) have been delivered through a strategic partnership model, maximising opportunities for outsourcing and shared business support functions across sectors to reduce costs and make the most of assets. It takes time and trust to develop high functioning shared services and many have struggled in the early phases. A higher level of success has been achieved with those set up through a competitive dialogue process which allows a longer pre contract period to develop the relationship and ideas of both parties. These arrangements are seen as the basis for future transformation of services especially where those arrangements which are for the benefit of local authorities, health, police and other public authorities.

If a renegotiation is completed effectively it should be possible to achieve savings without making cuts in the quality of service. This can be achieved effectively through setting up a more strategic partnership which takes a longer term view of the relationship and service delivery. The partnership could also be developed to incorporate a number of existing contracts to streamline governance and reduce contract management costs.

Governance arrangements

The governance structures will need to be reviewed in the context of shared services and personalisation of services. You may choose to develop a common model for a number of contracts and include a wider range of sectors or individuals in decision making processes about future service delivery to reflect the role of the public sector as commissioner or enabler of services, taking account of the needs and wishes of service users. It is important to remember that this commissioning role will inevitably mean that the public sector will remain responsible for ensuring quality and performance for the contracts. Getting clear governance arrangements in place to negotiate and implement a new phase of the contractual relationship is a critical factor in exploiting efficiencies, sharing ideas and creating a climate of  innovation. This enables the parties to develop opportunities for mutual commercial benefit whilst establishing high quality public services which exploit similarities between sectors to achieve a greater benefit.

Practical steps to take

Having gained a full understanding of the way the contract is currently operated and how change mechanisms work, the sensible thing to do would be to have a broad discussion with the contractor about how to take the contract forward into the future. Listening to the contractor about their experience of the contract thus far and their vision for the future will be as important as setting out a list of requirements on behalf of the authority. It will be important to preserve the good relationship and deal in a sensible and positive way with underperformance issues.

There are likely to be a large number of complex issues to discuss in major long standing arrangements and it can therefore be a good idea to establish which are priority areas for achievable change and focus on those. By having a structure and timetable supported by a sound negotiating team for both parties a great deal can be achieved. The importance of open communication and regular face to face meetings cannot be under estimated and can achieve a great deal quickly.

Setting up a project board to oversee the arrangements and give a strategic steer is also valuable. One of the key responsibilities of the project board will be to ensure that decisions are taken lawfully within the terms of delegated authorities and where appropriate Company law requirements and any requirements for reporting matters formally to Council.

Both the current economic climate and the amount of change in the public sector may lead to contractual failure or a need to terminate existing arrangements. A sensible discussion and review of exit and termination provisions would be wise, to enable a smooth transition to replacement provision with minimal disruption to service delivery. At the end of the day it is possible that the original contract is no longer fit for purpose and so alternatives could be explored.

Conclusions

The overall objective of reviewing and renegotiating contracts is to ensure that the public sector has the benefit of well regulated, accountable and transparent arrangements that give good value for money and meet local needs. This will mean less resource spent by everyone on overheads, a shared clarity of purpose and more resource spent on preventative work in a cost effective way.

The key steps are :-

1. Identify the commitments made by suppliers and partners that may have been overlooked.
2. Re- evaluate and review the possibilities together with the contractor to achieve an adjustment of service, pricing and means of reducing costs.
3. Review the options and consequences of terminating the contract and starting afresh, taking account of procurement and state aid risks.
4. Make sure that the revised (or new) contract is flexible and fit for the future.

The new challenge may be how to incorporate social enterprises into the model quickly and seamlessly without incurring additional contractual costs.

Frances Woodhead is a consultant solicitor at Eversheds. She can be contacted on  0845 498 4305 or by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it..