Contract management risk: A continuous balancing act between buyer and supplier

John Collington is the former Government Chief Procurement Officer. Here is his personal perspective on this critical subject - a view which benefits from his experieence as an ex buyer who has also been a large, mid cap and SME supplier. 

In June 2018, I was surprised to receive a request from the Clerk of the Parliamentary Audit Committee (PAC), to attend a session as a witness on the PAC review on Strategic Suppliers, called in the wake of the Carillion demise.  The main reason for my surprise was that I had been out of the Government Commercial space for 6 years and I had to ask the Clerk “if he was sure that John Collington was indeed on the list of witnesses to give evidence”.  Once this had been verified, I was able to look forward to what was going to be my third appearance before the PAC - whom I hold in the highest regard, and particularly the current Chair and the Comptroller General of the NAO. I was able to read the NAO report on the management of strategic suppliers in advance and ensured I was as prepared as possible. The Chair introduced me to the PAC as someone who had a unique perspective; I had been a senior buyer within the Home Office and Cabinet Office from 2007-2012, was now a senior executive for a supplier new to delivering services to  Government having recently been awarded a major contract let by CCS, and also had experience and success in encouraging SMEs to bid for Government contracts. So, my views on managing contract risk are multi-dimensional and I believe balanced, when so often I find it’s only the view of either the buying entity or the supplier that is presented.

 

Let’s look at this in some more detail. 

Supplier and contract risk from the buying entity view:

This starts at pre-procurement stage and focuses on the financial viability and sustainability of the potential supplier. It continues through the procurement process, where the supplier’s responses to the requirements and draft contract terms are tested and evaluated, resulting in award to the winning bidder.  Although it takes an enormous effort to get to this stage, it’s only a milestone reached and not the end destination. Future milestones include the implementation of the solution, the go-live and then the ongoing management of both the supplier’s performance and the contract. In addition, it’s imperative that the supplier’s performance beyond the contract should also be measured and managed, with a continuous view on other key areas, including financial trading, employee engagement, and overall company performance.

Contract risk from a supplier’s view:

This starts when the supplier considers whether to bid for the opportunity presented. Dependent on the procurement and size of the contract, this takes time and consideration from the executives of the potential bidder, as they must evaluate the potential cost of bidding, competing priorities and the potential investment costs should they be successful in winning the contract.  As the PAC/NAO review and report from last year uncovered, many large-scale contracts are front loaded with risks at the early stages of contracts and consequently financial reward only materialises in the later stages. Boards and executives must assure themselves that the potential rewards from competing for, winning and then delivering the contracted goods and services, outweigh the risks.  Therefore, the focus on risk assessment is just as important by the potential bidders than it is with the buyers. This view on risk continues throughout the life of the contract.

 

In summary

Based on my real-life experiences, I believe there are 4 key factors that are fundamental to better buyer/supplier relationship management and in effectively managing contract risk: 

1. Ensure the requirements are clearly stated at the outset and the commitments of both buyer and supplier are clearly understood – avoid any opportunity for misunderstanding
2. Aim for a balanced sharing of the contract risks and rewards – as, a contract with all the risk sitting with either the supplier or the buyer is more likely to run into difficulty, as history has consistently shown
3. In addition to individual risk assessments produced and used by both the buyer and supplier, develop and operate a continuous joint risk assessment and embed this is as part of the contract performance process
4. For the buyer - ensure there’s a continuous focus on the supplier’s performance and activity beyond that of the contract being managed.  Don’t rely purely on supplier self-assessment or even assessment by auditors.  Take advantage of intelligence readily available in the internet age or tailored through new intelligence products coming to the market to embrace third party assessment.