This case study highlights the importance of managing contracted business support processes in the public sector.

Case study: management of contracted business support processes

Source Material: Australian National Audit Office Audit Report No.12 1999-2000 Financial Control and Administration Audit Management of Contracted Business Support Processes.

With the growth in competitive tendering and contracting (CTC), the ability of government organisations to manage the delivery of goods and services provided to them, and to citizens under contract is increasingly under scrutiny by stakeholders. Government organisations are expected to pursue avenues for service delivery which lead to maintained or improved client outcomes, at similar or improved costs, without compromising accountability obligations.

This audit examined aspects of contract management in eight organisations, particularly in relation to day-to-day administration of the contract, performance management and contract succession. The audit examined the management of contracts for provision of internal services that supported the organisations' delivery of outputs-namely, internal audit, finance services, security and other business support processes.

Better practice in contract management suggests a contract's success depends on establishing a relationship, or contract management style, which is sympathetic to the contracting environment and allows managers to effectively manage the risks associated with the contract. Selection of the appropriate contract management style is based on a clear understanding of the contract management environment and a realistic assessment of risks associated with the management of the contract.

With a trend towards contracting-out critical business support processes, such as finance and personnel services, the identification, assessment and treatment of risks through the adoption of an appropriate contract management style, represents a significant challenge to an organisation's senior management.

The audit found that some elements of contract management including the contract administration, monitoring and succession phases of the contract lifecycle require improvement. In particular, management attention and action is required in relation to aspects of risk management, the control environment, information and communication, and monitoring and review components.

The audit found that the organisations' risk management activities mostly focused on those phases leading to signing the contract. Only a limited number of organisations formally recognised and assessed the risks associated with the ongoing management of contracts.

There was limited documented evidence of risk assessments at the commencement, or during the life, of contracts.

Risk management issues – management of contracted business support processes

Achieving value for money

The contract management stage of any purchase is where the public sector can finally answer the question of value for money. It is in the delivery of goods and services according to the contract, that value for money becomes evident. Conversely, if the goods and services are not delivered as expected in terms of timeframe, quality, quantity, fitness for purpose and a range of other important variables, then it is hard to prove that value for money was achieved.

Given the importance of this stage of the purchasing cycle in demonstrating the achievement of value for money, it is vitally important that risk management principles and practices be applied to ensuring that contract conditions are fully met by the provider.

It is important that risk management continues to be actively performed at this stage of the purchasing cycle. Earlier risk assessments should be constantly reviewed and monitored to detect when circumstances, and therefore risks, change. This can be achieved through proper performance monitoring of the suppliers, sound professional and industry networking and an active rather than passive approach to managing the contract. Risk management approaches suggest that, consistent with cost benefit analysis, systems should be applied to the following minimum areas:

• early detection of problems
• communication and maintaining a good relationship with suppliers
• performance monitoring and measurement
• financial monitoring
• administrative compliance with the contract

Documentation for performance and accountability

The ANAO found that a documented framework of policies and procedures covering identification, analysis and assessment of the risks to contracted activities provides the basis for effective risk management for contracts. Risk management activities generally depend on high quality policies and procedures and, in their absence, risk management practices are prone to be inadequate and applied inconsistently.

Proper documentation of the risk management framework and of the particular risk assessments for a project or contract also address the accountability requirements of a public servant. In the event that performance or outcomes are not as expected, or if a decision is questioned by a stakeholder, proper documentation will allow for explanation of the basis for the decision or action being investigated. It provides a degree of protection to staff involved by documenting the contemporaneous issues and organisational climate. It also allows for decisions to be more standardised and replicable.

Risk management for the whole process

Overall risk assessment activities and practices were considered to be inadequate in the organisations covered by this audit. The audit observed organisations generally only considered risk in the context of the initial procurement decision and in the tendering and contract evaluation and negotiation stages. Consequently, the audit found there was minimal consideration of the contract management risks associated with the final two phases of the contract lifecycle – contract administration and performance monitoring, and contract succession.

Given the importance of the contract management stage to the achievement of value for money, it is curious that organisations do not pay more attention to managing risks that might emerge at this stage. Some checklists suitable for adaptation to your organisation covering contract management and transition management have been included with the materials for this theme.

The following extracts from a Auditor-General's speech provide some final food for thought:

'There are risks which underscore the importance of accountability in the implementation of CTC (Competitive Tendering and Contracting) within the public sector. The main message is that savings and other benefits do not flow automatically from the introduction of CTC. New opportunities and new risks are introduced and, as with all other APS activities, these must be acknowledged and managed appropriately. These risks can vary in scope and include the content of the contract itself as well as the processes of tendering, selecting, monitoring and reviewing.'

'While competition is the key 'driver' for administrative savings, the nature of the public sector environment requires strong accountability elements if performance overall is to be enhanced. A key to any outsourcing arrangement is the need to retain the capacity to manage effectively the service provider. It should not just be assumed the service will be provided as agreed. There needs to be a suitable level of monitoring and review to ensure that this is in fact the case.'

'Conflicts can arise with contracts that are either too broad or too restricted in their coverage. Vague relationships do not assist either party nor lend confidence to the partnership arrangement. Clear definitions of the boundaries of a contract should assist in resolution of any disputes as to what is, or is not, covered including basic deliverables such as service levels and response times. However, contingency clauses which provide flexibility to respond to changing circumstances and an agreed mechanism for addressing problems contained within contracts can assist agencies and contractors in meeting public needs.'

'Conversely, highly restrictive and/or prescriptive contracts can reduce flexibility of both the contractor and the agency in delivery of the services, adding to compliance costs. Significant controls and high compliance costs for both the contractor and agency are detrimental to efficiency and effectiveness and can inhibit initiatives which can contribute significantly to actual outcomes or results. There is clearly a need for skills development in the public sector in the areas of project and contract management. For many, this will be a new area of expertise and one of considerable challenge.'

'The aim of agencies should be to develop partnership arrangements dependant on soundly based agreements which can literally be put in a bottom drawer for reference purposes only. The success of such arrangements depends considerably on establishing a solid basis of trust with scope for a 'give and take' relationship within the terms of any agreement. This does add an element of risk because judgement can be involved, often at relatively short notice. This is the essence of good management.'

'However, the case for such clauses has to be sensitive to the commercial nature of the contracts involved. Recently the Chairman and interim CEO of the Public Employment Placement Enterprise (PEPE) was reported as saying: 'I see the contract as being over protective boiler-plating. It's trying to protect the purchaser (Employment Department) from every conceivable possibility'

'This comment followed an earlier reported decision by the large commercial personnel agency Manpower Australia not to tender for the new Commonwealth scheme for placing unemployed in jobs, because of the relatively short duration of the contract and a cancellation clause with fourteen days notice without a reason being stated. The managing director indicated that these clauses were no basis for a commercial investment.'

Source: Outsourcing Risk or Managing through the 'Black Hole' of Accountability. Speech delivered on 20 November 1997 by Mr P.J. Barrett (AM) – Auditor General for Australia to CPA Congress 1997, Adelaide 1997.

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