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    Risks, resources and government-supplier relationships

  • Posted on July 17, 2018 by

    Image of people rolling boulder up hillHundreds of major change programmes, increasing demands on and expectations of public services, productivity challenges – and the massive task of leaving the EU. In the face of such demands on skills and capacity, Sir Amyas Morse, Comptroller & Auditor General, spoke recently to the Whitehall and Industry Group (WIG) about why the public sector needs private and third sector skills, experience and capacity more than ever. The NAO Blog summarises Sir Amyas’s talk about some of the current key priorities and what is needed to make the relationship mutually successful and in the best interests of people and public services.

    Government has an immensely tough job to deliver its objectives successfully while implementing the exit from the EU at a time of major transformation of public services, devolution and ongoing financial pressure [see our posts: A flexible, engaged approach to efficient public services and Successful transformation: voices of experience]. Civil servants are working extremely hard and showing great dedication to implement effectively what is likely to be the most significant change of their public sector careers. I want to assist them through the questions I ask, the independent facts that the NAO provides, and our cross-government insight into what is doable.

    As the EU Exit gets closer, prioritisation and a joined up approach across government becomes ever more important. Equally crucial, is for public, private and third sectors to work together well, exchanging ideas, skills and knowledge. The UK would need this even without the EU Exit and all the associated contingency planning, because of the need to tackle the UK’s productivity challenges and to deliver the public services that people expect in the face of growing demand and higher expectations.

    Government’s need for external support creates great opportunities for providers. But to meet it, they need to understand the political demands on their public sector commissioners, the complexity of government and the long-term, strategic problems and uncertainties that the public sector grapples with all the time.

    Three key issues underpin the current public – private sector relationship.
     
    Government must be ruthless in its focus and realistic in its ambition and use of resources

    Man faced with many projects to choose fromGovernment is asking the public sector to change the way that things are delivered, to achieve immediate cost savings and to implement programmes that are often too optimistic and not really viable [to help, we have recently published a Survival guide to challenging costs in major projects]. There will undoubtedly be ugly scrambling for resources, as even before the EU Exit decision the government’s overloaded programme of change placed strain on affordability, management and scarce technical skills.

    I have spoken and blogged previously on the EU exit: tough decisions and prioritisation needed. The government does now recognise, particularly at the level of individual departments, that it can’t continue doing everything previously planned as well as managing the EU Exit. Central coordination is also improving. However, there is still more to be done to identify and focus on the absolute essentials across government – to prioritise programmes and skill and resource allocation, especially in areas where the public sector is competing for skills and capacity with the private sector.

    And in undertaking this hard-headed prioritisation, government needs to understand the resources available to it – in-house and externally – and plan around its skills gaps both now and in the future. It is currently short of the capability and capacity to plan and manage the large number of major change programmes. As we go forward, it must expect gaps in the skills needed to implement complex and technical programmes. Some sectors also face a potential loss of EU workers.

    Government’s ambition needs to be based on realistic assessment of its ability to put in place the essential enablers, from new IT systems to Parliament’s logistical capacity to pass new legislation given the estimated nine bills and up to 1,000 pieces of secondary legislation needed by March 2019 to leave the EU.

    Moreover, government needs to ensure that funding and spending commitments are viable – which is challenging enough in terms of liabilities and commitments falling within the potential scope of the EU financial settlement [see our report Exiting the EU: The financial settlement], let alone wider spending.
     
    Major and rapid change and complex contracts demand more careful risk management

    Image of man stopping the dominoe effectGovernment is facing new risks and complexities, on top of the ‘normal’ risks around delivering services, such as the volume of demand, and ensuring that public services are delivered to even the most difficult and vulnerable consumers. Moreover, the risks of unintended consequences escalate in an environment of widespread change and when decisions are made at pace.

    Government must take a view about where – again, as a whole – it is willing to accept risk, and where it needs to act quickly and decisively to lessen it. As it simply cannot avoid taking on a lot of risk through complex programmes, especially the EU Exit process, it is important that sufficient contingency budgets are available.

    There are also decisions to be taken about the costs and consequences of transferring risks to third-party providers. Contractors are not unintelligent people who are easily out-witted into signing contracts that are in the government’s favour! They do, however, sometimes focus on winning contracts with insufficient regard to whether it is completely viable to deliver all the aims. Sometimes contracts are agreed with insufficient understanding of the risks. Sometimes the risks are known, but ignored. Sometimes risks are transferred that cannot be reasonably managed by the supplier. Sometimes risks that matter most, such as customer service, are not appropriately incentivised or managed. And sometimes contractors pass the risk back or demand a bail out when they can’t deliver.

    We have reported on many contracts in each of these situations. For example, in Transforming Rehabilitation suppliers were expected to carry both the volume-risk of offenders passing through the system and the performance risk of reducing re-offending, which they failed to do. But you can’t expect a private sector organisation to take such risks. Consequently, the contract was renegotiated at an additional cost of £340 million to the public purse. And in the case of Concentrix, HMRC’s use of payment by results incentives led to poor, and sometimes inappropriate, customer service. The contract was renegotiated and HMRC concluded that this service may have been better delivered in-house.
     
    Mutual understanding is needed between government and suppliers

    Image of people having a serious business discussionGovernment and suppliers need to talk to each other more and understand their profound differences, as well as their shared interests. There are a lot of potentially competing agendas to be reconciled. Ministers want to be seen to be doing something substantial in response to issues. Project leads want their projects to be delivered on time and don’t want their resources being diverted to other programmes. Contractors want to win work.

    Suppliers often don’t understand the political dimension that is so significant for government. They can be too focused on the specific legal liabilities of a contract and may not take sufficient account of reputational damage, which can be much worse when public services are involved than in a conflict with another private sector counter-party.

    On the government’s part, the collapse of Carillion illustrates that it still has a way to go in appreciating the commercial pressures on its industry partners. Overall, the Carillion case actually indicates government’s management of suppliers is improving [see Investigation into the government’s handling of the collapse of Carillion]. But there was a lot of publicly-available information about Carillion’s balance sheet risks (nothing to do with its work with the UK government) about which government should have been aware. It needs to assess the financial health and sustainability of its major suppliers and use this information to protect the public interest.

    In short, the public sector needs to do more to understand operations, incentives and consequences across supply chains; to improve its due diligence and avoid creating relationships with financially-weak suppliers; and to play its own role in delivery.

     

    I expect private and third sector provision is going to be a large part of delivering public services in future because the government just doesn’t have either the skill or the financial capacity to take back much delivery in-house. But for this provision to be successful, government needs to be realistic, work within the available resources, manage risks and understand its suppliers.
     
    We invite you to comment on this post or to Contact us to discuss any of the issues raised. Further blog posts on contracting can be found on our contract insights series.
     
     
    Amyas Morse

    About the author: Amyas Morse, Comptroller and Auditor General. Amyas has been head of the NAO since 2009, before which he was a global partner with PricewaterhouseCoopers and Commercial Director at the Ministry of Defence. He has served on a range of cross-government Boards and Groups.

     


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  • 7 Comments

    7 responses to “Risks, resources and government-supplier relationships”

    1. Chris Poll says:

      Dear Amyas
      You are spot on with ‘Mutual understanding is needed between government and suppliers’.
      David Shields (former head of Govt Procurement Services) and I spent 3 years trying to work directly with John Manzoni and his Cabinet Office (Crown Commercial Services) colleagues on providing a new procurement model. The model was based on ‘mutual benefit’ between buyer and supplier rather than mutual exploitation. I spent £2.5 m of my and my shareholders money on this solution. The net net result was £5 Bn of non-bank finance available at 5% per annum without the Supplier having to provide security but HMG was covered by insolvency insurance to protect it if the supplier went bust. (The finance came from institutions and pension funds.)
      Despite Government Ministers supporting the idea, the current CEO of Civil Service (John Manzoni) rejected it in favour of just doing business with 37 major suppliers despite agreeing this solution did not contravene EU State Aid and did not involve HMG in advance payments nor in any additional risk. (In fact it reduced Govt Procurement risk). 18 months ago I pointed out to him that Carillion and other HMG suppliers were having their Trade Credit Insurance cover reduced but this was ignored and their basics of supplier risk assessment remained unchanged.

      The result was £150m of taxpayer losses and some £10 Bn of Carillion contagion. All would have been avoided if Manzoni had listened.
      Can we speak and meet?
      Chris Poll

      • Administrator says:

        Thank you for your interest in this blog post, Chris. If you would like to discuss our work any further please refer to the ‘contact us’ page of our website.
        NAO Blog Administrator

    2. @JagPatel3 says:

      C&AG is absolutely correct in identifying shortcomings in the Civil Service and the need for it to rely on both, the Private Sector and third sector if it is to fulfil its public service delivery tasks.

      The government’s much heralded Industrial Strategy white paper finds that the skills and capabilities of those employed in the Private Sector need upgrading, if the UK is to realise its vision of a Global Britain and pay its way in the world, post-Brexit. But there is no recognition that people in the pay of the State – the other party to this Industrial Strategy, on whom its success is wholly dependent – are equally ill-equipped for their public sector roles. This lack of acknowledgment is not a surprise. The Industrial Strategy was, after all, written by people in the pay of the State!

      It would also explain why there is very little confidence in the ability of big government to fix market failures, use the instrument of regulation to curb anti-competitive behaviour, manage outsourced public service contracts or secure value for money for investments made in infrastructure.

      Indeed, the reputation of people in the pay of the State is further diminished by the fact that their ability to innovate, solve problems, learn from past mistakes and adapt to change, which is a distinctive characteristic of people in the Private Sector, has been erased in the Public Sector due to incessant conditioning of the mind from an early age. And, of course, people in the pay of the State are very good at talking a “big game” but they can’t “do it”.

      But, what is especially worrying about people in the pay of the State is that they haven’t got a clue about what it is that drives the behaviour of for-profit organisations in the free market – not least, because they have not spent a single day of their lives in the Private Sector – and yet they have been put in charge of spending taxpayers’ money to the tune of £268 billion to buy goods, services and labour from non-public sector organisations.

      Worse still, in specialised markets such as that in military equipment for the Armed Forces, the role of the regulatory authority and sponsoring agency has been combined in one department of state – the Ministry of Defence – which means that the independent scrutiny function, free from political interference, is non-existent.

      So, successful capture of a department of state by the Defence Industry amounts to taking control over both roles!

      In no other field of human endeavour are such ill-equipped people allowed to ply their trade as in defence procurement – which would explain why the Government has been getting appallingly poor value for money these last several decades.

      Additionally, the culture in Whitehall has always put greater emphasis upon people who master rules, regulations and processes instead of valuing smart working, execution and delivery. What’s more, civil servants have migrated over the years, in overwhelming numbers, to the Private Sector via the revolving door in pursuit of a second career and infected it with these traits. Which would probably explain why the Defence Industry has failed so miserably to deliver equipment to the Armed Forces that is fit for purpose, adequately sustained in-service and constitutes value for money through-life – bearing in mind that 99% of people who work in the Defence Industry right now, were previously in the pay of the State.

      Instead of doing the decent thing and educating people in the pay of the State about the ways of the Private Sector, defence contractors are busy exploiting their ignorance, for one purpose only – relieving them of taxpayers’ money – which has, in itself, left the public finances in pretty bad shape.

      It’s not so much a lack of skills in Whitehall that is the problem, but a surplus of people with the wrong skills. Some people say that they can be retrained to equip them with the necessary skills which will enable them to deal with today’s challenging public service tasks. But the undeniable truth is that these people are simply beyond repair!
      @JagPatel3

      • Chris Poll says:

        Hi Jag,

        You are 100% correct, UK procurement (especially Cabinet Office’s Crown Commercial Services) requires staff who understand business and what makes business work. This is not retraining of existing personnel but recruitment of those who understand the importance of relationships in business and role of working capital in running a company.

        Therefore, there are two pre-conditions required first at a policy level for ensuring public sector procurement is both more accountable and transparent and as well as offering ‘value for money’ when spending taxpayer’s money:-

        1. HMG’s central and local government’s Finance and Procurement departments working together. Today they have a brick wall separating them with no communication between the two parties.

        And

        2. Govt procurement (especially Crown Commercial Services) ensuring the ‘Buyer’/’Supplier’ relationship is one of mutual benefit rather than mutually exploitative. (as evidenced by recent commentary)

        Once these mind-set changes occur throughout the civil service structure, then there will be a chance that taxpayer’s money through public sector procurement will be spent on the basis of ‘value for money’.

        Then – as you say – attention should be turned to developing a coherent Industrial Strategy. The core of this must be expanding UK’s domestic supply chain (rather than rely on imported supplies). As Association of Corporate Treasurers (ACT) in 2010 (yes 8 years ago) recommended in their Bank of England Supply Chain report – https://www.treasurers.org/scf.

        ACT recommended that HMG should set the example of doing procurement with many more UK SMEs. Instead 8 years on Cabinet Office policy is to do as much as possible with the existing 36 largest providers, who in turn often source inputs from abroad and/or screw their UK SME suppliers.

        Developing UK domestic SME base is vital not just for current UK Industrial Strategy but is essential in a post-Brexit world as intermediary imported inputs currently account for 60% of all UK consumption and worryingly 70% of all UK exports. Under Bi-Lateral trade deals the intermediary imported input component of UK exports will suffer a tax surcharge by the importing country (e.g USA) of 35% (see existing USA-Canada and USA- Mexico or EU-South Korea bilateral trade agreements).

        The ‘Great’ will only be put back into Britain if UK produces more goods and services domestically. The UK procurement must set the example and unless UK government’s public sector procurement sets the example of procuring with UK based SMEs then UK economy will be. Disaster post-Brexit.

        It is UK SMEs that pay the vast majority of taxes that UK politicians and civil servants spend (not international corporates).

        So in addition to both policy changes and mind-set changes required in public sector procurement, there must be an understanding of the importance of Supplier working capital. A survey of 2 years ago discovered that 99% of all SME supplier failure to Crown Commercial Services and the Department of Business was down to lack of Supplier working capital yet the Department of Business took on average 43 days to approve the invoices raised by the SME Suppliers who were in the focus groups!!!

        Apparently this average delay of 43 days between a Supplier issuing an invoice (after the delivery note was approved) and HMG actually approving that invoice for payment was not uncommon. True HMG paid an approved invoice within 5-10 working days but the survey found the Suppliers were often out of funds for a total of 50 days AFTER they had completed their contract.

        The working capital shortage was not just the post-delivery delay but also the period from award of contract or receipt of purchase order and the delivery of goods and services. On average this we found this was a further 110 days!

        So Jag you are right, much needs to be done in overhauling HMG procurement and the need for an effective Industrial Strategy for UK economy.

    3. Mr R W Ebley says:

      ISO standards are needed for all Politicians and all other bodies funded by the people

    4. Pearl Baker says:

      I come from a completely different area. The Consumer, and ‘expert’ in the ‘inner’ systems of Housing Benefit Subsidy’s are being ‘exploited’ by LA (not all) but at least one I have been investigating over three years. This may sound ‘small pickings’ but over the entire countries this could run into millions if not billions, at great cost to the TAX Payer, and the ‘vulnerable’.

      ‘Supported Accommodation’ is the ‘gravy train’ to high rents no questions asked. ‘Vulnerable’ tenants are often NOT SUPPORTED, or SUPPORT is Funded by the LA NOT the LANDLORD, none of these can be classed as ‘EXEMPT’ accommodation. The HB/Subsidy Division [DWP] finally referred me to the ‘set of regulations’ the Independent External Auditor refer to when Auditing Housing Benefit claims. ‘SPOT CHECKS’ only.This is the technical ‘bit’ those tenants subject to section 117 of the 1983 MHA should receive FREE aftercare, SUPPORT on Housing Benefit FORMS are ‘dressed up’ as ‘intensive Housing Management/Housing services delivery’ I refer to Social Security Commissioners Turnbull (CH/423/2006 CH/3811/2006 CH/1289/2007 looked at the definition under regulations 10 of the 1995 Housing Benefit regulations.’The second test is that the Landlord (or someone acting on THEIR behalf) has an obligation to provide care, support or supervision to the tenant’
      ‘The amount of care, support or supervision provided by the Landlord can vary considerably but it must be more than minimal”
      ‘As with the provision of accommodation it should be the Landlord that has ULTIMATE responsibility for providing care, support or supervision or provides a level of support that the authority is satisfied is more than ‘minimal’

      I provided evidence to the NAO and the HB/Subsidy Division [DWP] that the LA Contracted out to Private Company on a ‘floating’ support Contract. This does NOT satisfy EXEMPT CRITERIA for a HB/Subsidy claim by a LA.
      The LA confirmed NOT ALL of the residents in this one bedroom complex will require or receive SUPPORT.
      All the tenants in this one bedroom complex are ‘charged’ the same rent, ‘claiming’ SUPPORT is being provided on their HB/claim form.
      The NAO and the HB/Subsidy were instrumental in the time it has taken to conclude my complaint. The PHSO viewed by TWEET on TWITTER and actually moved it along to [an individual at] HB/Subsidy Division (at my request) where he provided me with sufficient evidence in proving my case against an ‘illegal’ subsidy was being paid to a LA regarding ‘EXEMPT’ accommodation that failed all the tests for qualification.
      The PHSO now have the final evidence that proved my complaint against the DWP which has implications for the NAO.

      • Administrator says:

        Thank you for your comment, Pearl. This has been passed onto the team that has replied to you on this matter previously. They will respond to you directly. Please note that we have redacted the personal details contained in your comment. Administrator

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