Making Savings from better Contract Management
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Savings from better contract management
Tina Holland, Local Government Association
Mark Wardman, Audit Commission
Emma MacLeod, Audit Commission
SOPO Conference
11 November 2013
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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.
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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
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Context
what councils spend on third party payments for services . . .
. . . and what they can save
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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
£17,821,947
£29,231,374
Premesis related expenditure
Transport
Supplies and Services
Third party payments
Source: DCLG Subjective Analysis Returns 2011/12
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And the trend is upwardsLocal authority spending on goods and services
1st April 2004 - 31st March 2012
47.1 48.1 48.7 48.2 49.6 49.2 51.5 51.6
34.5 34.2 32.9 33.7 31.7 32.831.5 31.5
12.8 12.4 13.0 12.7 13.1 12.9 12.1 11.9
5.7 5.3 5.4 5.4 5.6 5.1 4.9 5.0
0%
50%
100%
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12
% s
pe
nd
ing
on
go
od
s a
nd
se
rvic
es
Transport
Premises relatedexpenditure
Supplies andServices
Third partypayments
Source : Dept of Communities and Local Government Subjective Analysis Return
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Social care services spend most on third parties, education the least
9 1115 15 18
3841
45
57
0
10
20
30
40
50
60
70
80
90
100
Educa
tion
Centra
l Ser
vices
Cultu
ral
Oth
er se
rvice
s
Plann
ing
Housin
g
Enviro
nmen
tal
Highw
ays
Socia
l Car
e
%
Third party payments as a proportion of total service expenditure 1 April 2011 - 31 March 2012
Source: DCLG Subjective Analysis Returns 2011/12
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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
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But savings are real and significant – even if approximate and hard to quantify
Annual contract cost
Contract length
Annual contract management savings
Savings as % of annual contract cost
Council A £1.5 million 4 years £0.15 million 10%
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%
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Councils use a large number of suppliers . . .
Districts Counties London boroughs
Met. districts
Unitaries
Mean number of suppliers
195 1249 881 891 777
Minimum 30 617 531 418 211
Maximum 369 2119 1306 2202 1461
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. . . but most spend more than 90% of their third party spend on up to 20% of their suppliers
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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
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Provide corporate support for contract management
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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
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Sheffield Council’s Intelligent Client Model shows this in action
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Sheffield’s approach to managing contract risks
Cost per year
Greater than £2 million
Between £25,000 - £2 million
Less than £25,000
Low risk Medium risk High risk
Managed by the corporate
team
Managed jointly by the corporate team and service
managers
Managed by service
departments
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Aim to get continuous improvement
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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
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Solihull Council: savings from incentives in property services repairs contract
Reactive works Planned works All works
Contract costs 2007/8 to 2011/12
£4,679,000 £12,007,000 £16,686,000
Savings £731,000 £731,000
‘Pain/gain’ savings £516,000 £516,000
Staff savings £45,000 £68,000 £113,000
Admin. Efficiencies £74,000 £111,000 £185,000
Reduced overheads £55,000 £82,000 £137,000
Total savings £907,000 £778,000 £1,685,000
savings as % of contract
19% 6% 10%
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Invest in developing skills
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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– Pros and cons of using of external consultants (relationships?)
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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
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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 Understands the role of KPIs
Experienced in negotiating SLAs
Commercial acumen Identifies and helps to exploit commercial opportunities
Develops and supports an entrepreneurial culture across the service
Relationship management
Manages strategic and non-strategic client relationships appropriately
Identifies and manages critical new strategic relationships
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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
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Collaborate to maximise gains
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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
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. . . including savings
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Solihull Council’s property repair partnership contract passes on savings to others
Baseline Year 1 Year 2 Year 3
Domestic cost per order
£131 £118 £113 £107
Void cost per order
£521 £469 £445 £423
Savings £60,688 £87,997 £113,941
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
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Monitor and benchmark costs
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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
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Birmingham Council: keeping track of spending on contract
Spend Compliance 2009 - 2012
0
10
20
30
40
50
60
70
80
90
100
Pe
rce
nta
ge
29 45 57 59 65 69 75 83 74 78 82 82
19 14 6 2 1 0 0 0 0 0 0 0
76 70 74 82 87 84 91 89 92 94 95 95
15 21 14 8 5 4
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
Compliance to using Purchase Orders by Volume
Spend "On Contract"
Spend not using existing Contracts "Off Contract"
Non Compliance to using Purchase Orders by Value
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Sheffield Council tracks costs and benefits
Sheffield commercial services team savings/person
64
176249
420
557
0
100
200
300
400
500
600
2007/08 2008/09 2009/10 2010/11 2011/12
£ th
ousa
nd
Savings/person
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Some savings come from spotting mistakes
Savings from incorrect indexation calculation
0 5 10 15 20 25 30
Contract life
Ind
ex
ati
on
va
lue
Actual indexation paid
Correct indexation increase
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For further information
Tina Holland, Programme Manager - Productivity, Local Government Association
020 7664 3319 / 07766 252 856
Mark Wardman, Senior Research Manager, Audit Commission
07974 007 230