Savings from better contract management SOPO Conference 11 November 2013

Transcription

1 Savings from better contract management SOPO Conference 11 November 2013 Tina Holland, Local Government Association Mark Wardman, Audit Commission Emma MacLeod, Audit Commission

2 Project aims and methods To identify how councils can achieve savings through better contract management, in addition to any savings they obtain through tendering and award. And to: understand the different structures and models for managing contracts that councils use to meet their strategic and operational needs; explore how effective these structures and models are in helping councils to achieve savings; identify the barriers councils face in implementing effective contract management; and provide good practice examples about how councils have achieved savings. Our research methods We carried out case study visits in ten councils We analysed DCLG s Subjective Analysis Returns 2004/05 to 2011/12 for trends in third party payments We analysed the 500 plus spend data on council websites to understand more about how many and what type of third party suppliers councils used

3 Key messages from the research In 2011/12, councils spent nearly 30 billion on contracts with thirdparty organisations. This brings risks, as well as opportunities. Councils need effective contract management to ensure they maximise the opportunities and the potential savings. But this requires investment. A corporate approach improves internal and external collaboration that in turn helps councils to improve contract management. Potential savings and other benefits result from robust performance management, good data, and incentives for contractors to share the pain, as well as gains. Ensuring people with the right skills are in place to carry out contract management is essential to release more value from contracts.

4 We recommend that councils adopt the five principles of good contract management provide corporate support for contract management aim to get continuous improvement in contractors' performance invest in developing commercial skills collaborate to maximise gains monitor and benchmark costs and performance

5 Context what councils spend on third party payments for services and what they can save

6 Councils spend nearly 30 billion with third parties mainly private and third sector organisations Local authority spend on goods and services 2011/12 6,724,282 2,828,831 29,231,374 17,821,947 Premesis related expenditure Transport Supplies and Services Third party payments Source: DCLG Subjective Analysis Returns 2011/12

7 And the trend is upwards 100% Local authority spending on goods and services 1st April st March % spending on goods and services 50% Transport Premises related expenditure Supplies and Services Third party payments 0% 2004/ / / / / / / /12 Source : Dept of Communities and Local Government Subjective Analysis Return

8 Social care services spend most on third parties, education the least Third party payments as a proportion of total service expenditure 1 April March % Education Central Services Cultural Other services Planning Housing Environmental Highways Social Care Source: DCLG Subjective Analysis Returns 2011/12

9 Councils mean different things by savings Sharing pain as well as gain Avoiding/reducing overspend through change control Removing unnecessary costs/activities Improving productivity (for non-cashable savings) Claiming back over-charging Profit-sharing incentives Fixed profit margins/limited overheads

10 But savings are real and significant even if approximate and hard to quantify Annual contract cost Contract length Annual contract managemen t savings Council A 1.5 million 4 years 0.15 million 10% Savings as % of annual contract cost Council B 9 million 28 years 0.25 million 3% Council C 60 million 20 years 9.1 million 15% Council D 30 million 25 years 2.7 million 9% Council E 4.5 million 30 years 2.7 million 5%

11 Councils use a large number of suppliers... Districts Counties London boroughs Met. districts Unitaries Mean number of suppliers Minimum Maximum

12 ... but most spend more than 90% of their third party spend on up to 20% of their suppliers

13 To achieve savings and other benefits, we recommend that councils follow the principles of good contract management 1. provide corporate support for contract management 2. aim to get continuous improvement in contractors' performance 3. invest in developing commercial skills 4. collaborate to maximise gains 5. monitor and benchmark costs and performance

14 Principle 1: Provide corporate support for contract management

15 A corporate approach does not mean a wholly centralised function Central/service responsibilities can be shared based on contract risk (value) There will be some tension between corporate centre and services, but this can be managed Procurement and contract management specialists can support service managers But also challenge them where benefits can be achieved more cost-effectively

16 Sheffield Council s Intelligent Client Model shows this in action

17 Sheffield s approach to managing contract risks Cost per year Greater than 2 million Managed jointly by the corporate team and service managers Managed by the corporate team Between 25,000-2 million Less than 25,000 Managed by service departments Low risk Medium risk High risk

18 Aim to get continuous improvement Renegotiate Build in incentives

19 Swale Borough Council negotiating and renegotiating, while maintaining performance Costs to fall by 10 per cent over seven years from initial 3.3 million Terms and conditions require continuous improvement and savings But the Council was reluctant to invoke penalty clauses to maintain motivation for high performance Council team spent 6 months assessing potential efficiencies Joint trialling to release efficiencies for supplier Eventual cost reduction of 12 per cent, saving Council 425,000 in remaining two years of contract No reduction in service quality

20 Solihull Council: savings from incentives in property services repairs contract Contract costs 2007/8 to 2011/12 Reactive works Planned works All works 4,679,000 12,007,000 16,686,000 Savings 731, ,000 Pain/gain savings 516, ,000 Staff savings 45,000 68, ,000 Admin. Efficiencies 74, , ,000 Reduced overheads 55,000 82, ,000 Total savings 907, ,000 1,685,000 savings as % of contract 19% 6% 10%

21 Invest in developing skills

22 What skills do councils need, and how do they get them? Commercial Awareness Understanding the detail of contract terms and prices Timing - understanding how and when to enter renegotiations Relationship management Maintaining regular contact Building relationships with suppliers Developing capacity Contract management training including the use of centrally driven tools and frameworks Staff continuity from tender to management Pro and cons of using of external consultants (relationships?)

23 These are example components from Sheffield Council s comprehensive contract management training toolkit Contract process management Contract performance management SRM process management Dispute resolution Benchmarking Governance Risk management Benefits realisation Relationship management Transition Quality audit Stakeholder management and communications

24 And these examples are from Essex County Council s comprehensive self-assessment contract management competencies toolkit Examples Level 1 (basic) Level 4 (advanced) Contract management Commercial acumen Relationship management Understands the role of KPIs Identifies and helps to exploit commercial opportunities Manages strategic and non-strategic client relationships appropriately Experienced in negotiating SLAs Develops and supports an entrepreneurial culture across the service Identifies and manages critical new strategic relationships

25 Consultants can bring benefits, but not all councils want to use them Allerdale Borough Council saved 1 million from contracts worth 4.6 million (at a cost of 9,000) As well as savings, staff gained greater confidence from using an external consultant and new skills: better understanding of contract terms and details better and more realistic relationships with suppliers more risk-aware, less risk-averse approach enhanced negotiation skills Birmingham saved 2.7 million from energy contracts, at a cost of 30,000 But other councils believe consultants damage contractor relationships, leading to poorer long-term value for money

26 Collaborate to maximise gains

27 Improvement and Efficiency South East sees many benefits from collaboration... Data on costs, prices and performance shared Approximate benchmarking Greater transparency leads to greater sharing and increase in negotiating power Collective approach influences contractors: 85% of subcontractors are SMEs 64% of subcontractors are local 87% of construction waste no longer goes to landfill

28 ... including savings

29 Solihull Council s property repair partnership contract passes on savings to others As well as Solihull s own 1.5 million savings over the contract length, Nuneaton & Bedworth Council expects to achieve over 262,000 savings over three years through reduced average job costs and lower back office costs. This is based on an anticipated 2459 orders per year and a baseline budget of 606,875 Domestic cost per order Void cost per order Baseline Year 1 Year 2 Year Savings 60,688 87, ,941

30 Monitor and benchmark costs

31 What data do councils need, and how do they get them? Benchmarking Problems with standardising information on costs, prices Opportunities from collaborative working and regional forums Market intelligence Regular discussions with existing suppliers re costs and services Engaging with stakeholders and service users Performance management Establishing baselines Developing and using KPIs to drive improvement and monitor costs Being on top of the contract

32 Birmingham Council: keeping track of spending on contract 100 Spend Compliance Compliance to using Purchase Orders by Volume Percentage Spend "On Contract" Spend not using existing Contracts "Off Contract" Non Compliance to using Purchase Orders by Value 0 Qtr 1 09 Spend 184M Qtr 2 09 Spend 193M Qtr 3 09 Spend 192M Qtr 4 09 Spend 140M Qtr 1 10 Spend 162M Qtr 2 10 Spend 177M Qtr 3 10 Spend 194M Qtr 4 10 Spend 150M Qtr 1 11 Spend 167M Qtr 2 11 Spend 118M Qtr 3 11 Spend 150M Qtr 4 11 Spend 159M

33 Sheffield Council tracks costs and benefits Sheffield commercial services team savings/person thousand Savings/person / / / / /12

34 Some savings come from spotting mistakes Savings from incorrect indexation calculation Indexation value Actual indexation paid Correct indexation increase Contract life

35 For further information Tina Holland, Programme Manager - Productivity, Local Government Association tina.holland@local.gov.uk / Mark Wardman, Senior Research Manager, Audit Commission m-wardman@audit-commission.gsi.gov.uk