Beyond the contract: getting value from incumbent suppliers, part 1

By on 09/04/2018
If you fail to make provision for add-on sales during a public contract, the consequences are likely to be expensive (Image courtesy: Paul Sableman/Flickr).

Nowadays, many public commercial teams know that contract management is just as important as procurement. But there’s a third strand to good commercial operations: negotiating and managing additional work placed with an incumbent supplier. Poacher-turned-gamekeeper James Johns explains how suppliers approach ‘add-on’ sales, and suggests how public officials can maximise value for the taxpayer.

Conventional wisdom says that suppliers to government low-ball their estimates in order to win competitive tendering processes, in the hope of making big profits later from ‘add-on’ sales: additional work handed to an incumbent supplier. In reality, the era when ‘land and expand’ was a sensible strategy is over in many developed nations – but the field of add-on sales remains a tricky one for public bodies to manage, offering both substantial potential benefits and some nasty risks. I saw both outcomes during my career on the other side of the fence and many of the lessons I learned will be valuable to public commercial leaders.

In the early days of ‘first generation’ outsourcing, when services were initially being transferred from public organisations to private suppliers, businesses could be reasonably confident that the operations they were inheriting lacked strong financial controls and standardised procedures. Operations typically did not enjoy economies of scale, and were therefore often overstaffed. Due diligence allowed suppliers to identify some savings during the procurement process, but they quickly learned that there were almost always more ways to cut costs once delivery commenced. So suppliers could achieve productivity savings by introducing commercial practices: there was almost always money to be made from reforms, and they did not therefore need to price in high margins at the initial point of sale.

In today’s more mature but more competitive and fragmented market, most of these low-hanging fruit have long since been consumed; so suppliers generally require the initial contract to be commercially viable on a stand-alone basis. Government still makes for a desirable client: it’s big, tends to pay on time, and can’t go into receivership. But as the recent collapse of UK construction and outsourcing giant Carillion shows, suppliers are playing a dangerous game if they take on lots of high-risk, low-profitability contracts in the hope of making money from add-on work or efficiency savings. Nonetheless, there is still good money to be made from add-on work.

From the client’s perspective, buying from an incumbent supplier saves public bodies the cost and time involved in going out to market, and the existing relationships and knowledge that an incumbent supplier has often make delivery more straightforward – so there’s an incentive for civil servants to hand them additional jobs. But without the competitive pressure that keeps suppliers honest, there may be a temptation to quote high. How can public bodies purchase additional services efficiently, whilst avoiding paying over the odds

The answer can be broken down into five key parts. I’ll cover the first three in this article, and the latter two – concerning knowing your supplier, and maintaining competitive pressure within an existing contract – in a second piece, to be published in the next few days.

1) Lay the foundations for all additional work in the original contract.

In all but the simplest cases, your initial contract should set out all of the provisions required to make the purchase of additional work as painless as possible.

As a minimum, this should include a change control process; an agreed pricing mechanism for additional work; any provisions for contract extension; and the supplier’s obligations to assist with transition to a new supplier on exit. The contract should also set out clear definitions of the baseline scope of work, including assumptions, client/supplier responsibilities, service levels, volumes, and key parameters of time, cost and quality.

If any of these are not defined up-front – and bidders’ responses properly evaluated and agreed – then you are storing up trouble for later. You should never assume there won’t be a need to use the change control processes during the contract; it’s almost a given. The work of government is just not that predictable.

In setting these provisions, you should never be tempted to deter your colleagues from commissioning additional work by building in disincentives – such as agreeing punitive rates for additional work. This practice is not as uncommon as you might think and, even if done with the best of intentions, is a recipe for suppliers to print money.

2) Always stick to the agreed change control process.

Change control processes must be properly followed. It can be tempting, particularly in the early days of a relationship or in times of pressure, to let these things slip – perhaps assuming that it will all ‘come out in the wash’, with negative and positive changes cancelling each other out (funny how they never do). In the real world, relationships go awry; personnel move; agreements made in times of stress are remembered differently by the two parties after the crisis is over.

Whilst it’s generally unhelpful to manage everything strictly to the contract, having a contract that bears no resemblance to what is being delivered or charged for is similarly untenable. Suppliers will not wear this, pushing their account managers to drop informal agreements in order to maximise profits by pushing additional work back into the formal process. And if a raft of changes is allowed to expand until the deal is no longer financially viable for the supplier, senior managers may demand a ‘commercial re-set’: a big – and often expensive – change control process to wrap up all the amendments into a new contract.

They may underline this demand with a threat to walk away; and you don’t want to be in the position of telling your boss that either services fall over, or you need a load of additional funds part-way through the contract. Sticking to the change control process is infinitely preferable; and if you’ve done so, a supplier that has low-balled their initial estimate will have fewer grounds to argue for a re-set.

3) Always anticipate and plan for an expiring contract.

It never ceases to amaze suppliers how poorly many clients plan for contract expiry.  After all, the date of expiry is one of the few things that you know with any certainty on the day you sign a contract. You also know how long it took you to procure and agree the initial contract; it is not hard to calculate when to begin discussing what to do when it expires.

There are many options open to buyers with an expiring contract. In some cases, you may be able to stop providing the service. More frequently, you can re-tender it; bring the work in-house; assign the work to another existing supplier; or negotiate an extension with the current provider.

Negotiating an extension is usually the easiest option, and your supplier will know if you’ve left it too late to do anything else: they can – and will – also calculate how long you need for a full retender process. Whilst most suppliers will let you preserve enough of your dignity in the resulting negotiation to keep the relationship alive for a future sale, you’ll never get a good price if you’ve nowhere else to go. And if you have complaints about a supplier’s performance but fail to give yourself alternatives, you’re set for potentially difficult conversations with commercial leaders and parliamentarians.

In my second article, I consider the value of knowing your supplier; and set out ways to create competitive pressures without starting a procurement process from scratch.

About James Johns

James Johns is a consultant, strategist and digital policy advisor with more than 28 years' experience helping government organisations to make more effective use of technology. He began his career in the National Health Service and the IT services company Xansa, before spending fifteen years in a range of roles at Hewlett Packard. From 2007 to 2014 he was Director of Strategy for the firm's UK public sector business and more recently was HP's Director of Corporate Affairs for the UK & Ireland. James is a Visiting Senior Research Fellow in the Policy Institute at King's College London and an advisor to the World Economic Forum's National Digital Policy Network.

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