The Risks of “Missing in Action” Contract Management

For those of you who regularly read my blogs or watch my video posts, you will know that I have a very strong opinion when it comes to outsourcing and the (so called) transfer of risk to the Contractor (which of course is nonsense).

This blog, however, is on one of the topics I am most passionate about – and that is contract management – or more accurately – the lack of contract management, particularly in the public sector.  In the private sector, poor contract management leads to lower profits for that company – but does not usually have a societal impact.  Poor contract management in the public sector, however, leads to significant wastage of resources, resources that could be spent on additional services and/or infrastructure that will provide a benefit to all of society.

As we travel head long into the first budget under the Abbott Government in which it is likely that certain sections of the community are going to experience great pain – I watch on in despair as I witness (yes witness) money being unnecessarily wasted through, at best ineffective, in most cases, non-existent Contract Management.  In the public sector, practices such as contractor self assessment and supplier self reporting have begun to gain prominence as resources in place to monitor and assure contract performance have been reduced.

Perhaps the lessons of the UK over the last 12 months might spur some similar action in Government organisations in this country.

As reported in the February issue of the Prospect Magazine (UK):

Shortly before Christmas, Serco announced that it had agreed to return £68.5m (AUD122m) to the taxpayer.  An audit conducted by the Ministry of Justice (MoJ) – had uncovered systematic overcharging on its contract for electronic monitoring of offenders…….As well as being forced to reach a settlement with the government, Serco was now the subject of an investigation by the Serious Fraud Office.

It needs to be recognised here that the overcharging that was uncovered was for just one contract!!!!

The report by the MoJ released in December 2013 (link here) found significant shortcomings in contract management across a sample of contracts in the Department that I have observed first hand across Governments at all levels within Australia.  Shortfalls in the following were observed across these contracts:

• Governance, process documentation, decision making and escalation;
• Definition of roles and responsibilities;
• Resource capability and capacity;
• Management information, reporting and contract data;
• Performance management, measurement and monitoring of service delivery; and
• Validation and assurance of supplier delivery and charges.[1]

Let’s cover each of these in terms of the findings and the implications for contract management in the Government sector in this country.

Governance, process documentation, decision making and escalation

The main elements relating to Contract Governance that need to be addressed are; the existence and following of contract management procedures; change management within the contract and the management of risk.  These were found to be lacking in all of the MoJ contracts assessed in the report.

The report stated that:

• Contract management processes and procedures need to be readily available and actively implemented by the contract manager ensuring a consistent approach across the organisation.
• Processes need to be in place that clearly lay out the governance of contractual change with a focus on effective and prompt change implementation.
• Risks need to be formally identified and monitored regularly, with mitigating actions developed and implemented where possible, and ‘obsolete’ risks removed from consideration where appropriate. Escalation and reporting routes also need to be in place for effective risk governance.[2]

Where these governance structures are not in place or are not followed, the management of contract changes and risk become problematic.  What this means is that the contract, which is the very basis for the contract management relationship may in itself be flawed.

Definition of roles and responsibilities

Defined roles and responsibilities provide clarity of end‐to‐end management responsibilities, authority levels and interaction with other parties. Where roles and responsibilities are not defined or understood, there are significant risks that the organisation’s responsibilities in managing contract delivery may be missed.

The National Audit Office for the UK in their Good Practice Contract Management Framework highlights the need for:

• Contract managers to have accurate job descriptions, roles are positioned at an appropriate level and salary.
• Overall ownership of contract management across the organisation needs to be clear, with a ‘contract management senior responsible owner’ with responsibility for driving organisation‐wide contract management performance. Contract managers have clear objectives and reporting lines and their performance is managed through reviews and appraisals.[3]

My observation within a Government context is that Contract Administration is confused with Contract Management, resulting in a less than optimal approach to the management of the contract.

Let’s explore the difference.

The table below shows the differing roles between Contract Administration and Contract Management:

 

Contract Administration

Contract Management

Receive and pay invoices Receive contractor reports Process variations and changes to the contract Maintain configuration of the contract (i.e. version control) Organising contract meetings and distribution of documentation  Contract Administration is essentially a post box function. There is no need for a relationship with the Contractor.

Relationship Management with the Contractor Dispute resolution Investigation and risk assessment of variations proposed by the Contractor Proposal for variations initiated by the organisation Assurance of performance against KPIs Quality auditing Escalation of issues to a higher authority Contract reporting Chair regular contract meetings  The skills required by the person doing this function are significantly different from those of the administration function

My observation is that many Government organisations have moved away from Contract Management in favour of Contract Administration and are simply believing the data that is provided by the Contractor and paying invoices accordingly.

Resource capability and capacity

The report highlights that:

Appropriate staff levels with the capacity and skills to manage work are essential for the success of any contract. Where resource is insufficient or lacks appropriate skills and experience, any aspect of contract management is at risk of being missed.[4]

In my observation contract management is not a skill that is maintained effectively within many Government organisations.  In fact, contract assurance positions have diminished over time in favour of a combination of Contract Administrators and blind faith in the fact that the performance data provided by the Contractor is accurate and that all deliverables have been provided.  This did not work out well for the DoJ and I believe, without reservation, that similar audits on major contracts across Governments at all levels would find similar overcharging, and, in some cases, may uncover systematic contract fraud.

Management information, reporting and contract data

We often hear the mantra – you can’t manage what you can’t measure.  This is absolutely true of contract performance.  High quality management information and underlying contract data is required to facilitate decision making, manage risk and give visibility of contract status and issues to management.

Where high quality management information is not readily available, there is a significant risk that management is unable to identify or address supplier performance issues or make decisions on end‐to‐end service delivery.

What does this mean? Well first and foremost, the contract needs measurable performance measures and key performance indicators.  But these in and of themselves are of little utility if they are not supported by the information management systems necessary to capture and record data.

It has been my experience that Government organisations do not maintain these systems and so verification of performance, once again, becomes problematic.

Performance management, measurement and monitoring of service delivery

Appropriate measurement and monitoring of services delivered is one of the most important contract management activities to ensure requirements are met, management of risks and opportunities and to allow challenge and scrutiny of supplier charges. Where measuring and monitoring is ineffective, the organisation is exposed to risks that the intended end‐to‐end services are not being delivered, or the organisation is not carrying out essential activities for which it is responsible.

The MoJ Report found that:

• MoJ does not consistently measure end‐to‐end service delivery;
• KPIs are not always accurately reported and may not reflect actual service delivered or known service deficiencies;
• Examples exist where MOJ does not adequately define and monitor the KPIs to prevent interpretations by suppliers that adversely impact MOJ; and
• MoJ often relies on supplier self‐reporting of performance and does not always validate services or assure supplier systems and processes.

This last point – contractor self assessment is where I shake my head and lose all understanding.  In our personal lives and dealings, we check the work by a contractor, and if we do not get what we paid for we make a complaint or seek recompense or withhold payment. So why is it so different for contracts where public monies are concerned?

Verification of services delivered against supplier charges is the most critical contract management responsibilities in managing an organisation’s commercial risk. There are significant commercial and service management implications where verification of services and charges is not effective.

Contractor self assessment does not and cannot work – every organisation must assure itself that it is getting what it is paying for!!!!!!!

Conclusion

I believe the MoJ experience should be a wake-up call for all Government organisations in this country who manage contracts, particularly those related to service delivery.  Why? The answer is simple – Government organisations and Contractors have different drivers.  The organisation wants a service at a value for money price, whereas the company wants to maximise profits for their shareholders.  Are we that naive that we believe that contractors won’t take shortcuts when they can to reduce their costs for the provision of the service?  If they do – how are we ever going to know unless we have a systematic contract assurance process tied to well defined, measurable KPIs for which data is available to verify performance claims?

For Serco, the overcharging was £62.5m for one contract.  For those Government organisations that do not believe that systematic overcharging and overstating of performance is occurring – then have I got a bridge to sell to you. It is in Sydney – looks like a coat-hanger ………………….