The obvious quick fix
For many public sector bodies areas of annual expenditure are
largely pre-set either through the need to continue to fund key
public services or due to long term contractual commitments.
That typically leaves only a small “discretionary” element that is
often the first in which cuts are focused. However, the need
to make quick savings can be achieved by more than these
discretionary cuts, without affecting frontline services.
Is there another option with quick results?
The public sector will have entered into many contracts that may
not be being enforced or regularly reviewed and thus
not driving the value for money service that may have been
promised in business cases or expected when contracts were first
signed. The regularity with which significant elements of
committed expenditure in long term contracts are reviewed will need
to be addressed if the Government's budgets are to be achieved.
The key factors
The contract itself is at the heart of the value for money to be
achieved from any contractual commitment. However, the
operational management of that contract and the relationship of the
parties involved will also have an impact on the financial
out-turn, particularly in the context of long term contracts over
several years (or decades).
There are a wide range of specific cost saving and efficiency
opportunities within any contractual arrangement. The
following are just a few examples of the type of questions to
- Do the mechanisms in the terms and conditions allow for
refinancing or efficiency savings? For example the
contract may require the private sector to look at refinancing a
scheme to achieve a gain if (a) the scheme has been operating
successfully for some time and therefore the risk for a funder is
perceived to be lower, and/or (b) long term interest rates are more
favourable now than when the contract was initially entered
- Are there any provisions for benchmarking or market testing of
services, costs or income? These provisions may allow the
public sector to amend their service requirements and thereby drive
- Is the specification clear, consistent and complete? Is
it right for current circumstances? Is there an opportunity
to vary the service requirements? Variation procedures may be
complex and involve effective engagement and negotiation with the
private sector. Overall savings may be achieved even if there
is a cost to bring the variation into effect.
- Can cost savings be driven under the in place
arrangements? For example, are any pass through costs from
the private sector such as energy or insurance charges being
adequately examined and challenged?
- Can current contracts be renegotiated and/or terminated?
Where the original requirements of long terms contracts have
changed radically, it can be more cost effective to terminate the
contract than to continue with the current arrangement. Early
termination fees are commonplace in most recently concluded
long term contracts but it is worth examining older contracts to
check whether the same charges apply. Early no fault
termination will always carry a cost because the innocent party
will be entitled to the cost return that they would have achieved
had the contract not been terminated. However, in contracts
where it is believed that the private sector may not be getting a
viable return an early, negotiated, termination may be worth
exploring, particularly if both parties agree that the contractual
relationship is not working to their advantage.
The management of the contract
Many contracts are tainted or delivered sub-optimally not
because of the terms and conditions or specifications but because
of human factors:
- Lack of trust between the parties. The traditional
interface between public and private sector is one of suspicion of
each side’s motivations. Just like any other relationship,
contractual relationships need to be worked at. Trust may
develop over time but failing relationships can be difficult to
- Lack of continuity of staff between those procuring and those
monitoring or delivering the contracts. Those monitoring or
delivering the contract may not understand its detail because
they were not involved in the detailed procurement process.
Substantial contract terms, schedules and specifications can be
rather daunting and therefore the temptation may be to refer to
them only if there is a problem. There may also be a
loss of corporate understanding as to why contracts were structured
a particular way. These factors may mean that what the
parties delivering the contracts believe the contract requires can
differ (sometime substantially) from what is actually required by
the contract, leading to either over-delivery or
- Mismatched expectations. If users of the contract
services were expecting something different from what they
actually receive then this can lead to the perception of a failed
procurement even if the service provider is delivering exactly what
the contract requires. This perception can affect the
relationship between the parties to the contract and ultimately the
success of the procurement.
- Lack of visibility. It may be easier to blame lack of
delivery under a contract upon those who procured the contract or
were involved in the early stages of implementation, rather than to
investigate the root cause of failures and address them.
- Lack of organisation and/or resources. Complex contracts,
particularly those with detailed payment mechanisms, require a
level of organisation and commitment of resources in order to
ensure they are managed effectively and in accordance with the
contract terms. Particularly in the early stages of contract
implementation, it can often come as a surprise that the level of
resourcing on the client’s side is far higher than expected.
This should level off over time but “front loading” of organisation
and resourcing in the first few months will reap rewards in the
later phases of the contract.
- Misunderstanding or ignorance of the contract terms and
conditions or specification. Often the operation of contracts
turns on the understanding of the most junior members of teams,
e.g. does the person logging a call within the helpdesk or
reviewing a performance monitoring report know what and how the
contract requires reporting to be undertaken. They may not
have read the contract in full but early training and support for
all levels within the client team should result in optimum
Reviewing existing contract commitments does not require any new
or cutting edge thinking, or long term procurements. However,
even small changes to contract management can deliver savings
quickly, easily and with minimal cost.