Local Government Association highlight the benefits of investing in contract management capability and urge councils to take contract management seriously
“The pressing need to find savings means many councils are exploring new ways of commissioning and delivering services. Councils need effective contract management to ensure they maximise both the opportunities and the potential savings these bring” says the Local Government Association of London.
A 2013 Local Government Association London (‘LGA’) report ‘Making savings from contract management’ has found that councils who invested in developing their contract management capability obtained cost savings of between 3 and 15 percent cent on the value of the contract over its term, after award.
“The high volume and value of third party contracts suggests councils have scope to achieve savings and other benefits from contract management” says the LGA. However, in order to obtain those benefits requires an investment in developing contract management capability by councils
Most notably, the LGA highlights a number of ‘contract management – critical success factors (set-out below), and notes the role that elected officials can play in terms of setting the strategic direction for commissioning procurement and contract management.
Other key observations of the LGA include:
- As councils enter more third-party arrangements to find savings, good contract management becomes increasingly important. It is about more than ensuring suppliers meet their contractual obligations. It can help councils to identify and manage their own and their suppliers’ risks, and achieve savings and continuous improvement throughout the life of the contract.
- Third-party arrangements bring risks, as well as opportunities. If these risks are not managed corporately, they can bring about supplier insolvency, service failure, or fraud; all with reputational and financial damage to councils.
- Potential savings and other benefits result from robust performance management, good data, and incentives for contractors to be flexible. Change is inevitable, and in the current fiscal climate, councils will need contractors to share the pain, as well as gains.
- At a basic level, good contract management is about attention to detail. It means understanding what the contract contains, who has responsibility for managing it, and whether performance and costs are on track. The best result are achieved when those who are involved in procurement and running the service work together to manage the contract and have clear agreed processes and procedures in place to help them do so.
- Good relationships with contractors based on trust will help when councils seek to renegotiate terms and conditions. Councils can find this difficult, but they will find incentives such as profit share, and better data using spend analytics, can help them prepare well for negotiations.
- Ensuring people with the right skills are in place to carry out contract management is essential to release more value from contracts.
- Managing contracts well requires specialist skills, including understanding costs and value, negotiating, and procurement and commissioning processes. Some councils have recruited staff with relevant experience, while others have successfully used consultants to manage or renegotiate contracts.
- Above all, better contract management skills will make councils more confident that they can release value from their contracts and place them on an equal footing with suppliers.
Contract Management – Critical Success Factors
- Requirements specified in comprehensive specification with identifiable and measurable outcomes (including service level agreements and key performance indicators).
- Involve the contract manager at the outset of the project.
- Accurate understanding of the service requirement, performance standards and any social value implications.
- Good supplier selection against an effective award criteria.
- Relationship built during procurement process and actively managed.
- Clear roles and responsibilities.
- Good knowledge of the contract.
- A contract management manual that explains key contractual provisions and documents key processes
- A good document management system.
- Identification, allocation and continuous management of risk.
- Focus on realising the benefits identified in the business case (outcomes), which also helps reduce costs.
- Encouragement of continuous improvement.
- Management of performance shortfalls.
- Adequate tools to tackle poor performance.
- Continuity of knowledge throughout the procurement and contract management phases.
Source: LGA/Local Partnerships (Ref. 4)