All public managers should manage contracts

Choose a public service organisation — it could be where you work or your local government or a major hospital — and I will bet you that the number of human resources professionals is greater than the number of procurement professionals. Not only that, it will be far out of proportion with the split of the budget between employee and non-employee expenses. Why is that? 

An example

Let me use myself as an example. My CIPFA professional qualification course included general theories about management but it was mostly about accounting and trained me to be an accountant and not a manager. Therefore, after qualification, I went through the whole management development process as part of my professional development. I did management courses on recruitment, leading a team, equalities and diversity, disciplinary procedures and communication. I also did some skills-based training on things like report writing and presentations. What I didn’t do was any training in connection with procurement, contract management and negotiation skills. In fact, I don’t think those courses were available to me.

As it happened, almost immediately after I qualified I became involved in an outsourcing project and other outsourcing projects happened fairly regularly throughout the 20 or so years I worked as an public sector accountant. I learned, therefore, about procurement and contracts from the lawyers and procurement professionals I worked with. Whilst this is great on-the-job training, if I had been assigned to some different tasks and projects as a newly qualified accountant I never would have learned this stuff. I doubt, though, that it would have stopped me becoming a finance director because it was never on a person specification or asked about in an interview

Does it matter?

I think this matters. I think weak contract management skills is an under-recognised problem. 

The Open Contracting Partnership’s 2020 Annual Report estimates that public contracts amount to $13 trillion a year. That is something like 15% of the world’s total GDP and about half the total spending by governments. The proportion of government spending through public contracts will vary between countries and programme areas, but it is clear that procuring and managing contracts needs to be a significant component of the work done by public managers.

I think the senior managers in an organisation need to know how to manage contracts and suppliers given the proportion of spending that is not an employee spending. I find it very hard to believe that senior private sector managers get their jobs without having experience of managing contracts and suppliers. 

I think that if an organisation’s managers know nothing about contract management and supplier relationship management then they do not know the good from the bad, they do not know if their organisation is good or bad at managing its suppliers. That has to be an issue. 

What should be done?

Actually I don’t think the answer is for public sector organisations just to recruit a mass of qualified procurement professionals and hope that fixes things. What I think needs to happen is more subtle than that. I think public managers need their training and development to encompass the provision of public services through outsourced suppliers just as much as through direct employees. They should continue to have their training in recruitment and diversity and so on; but they should also have training in the parallel arts of procurement, contract management, and supplier relationship management. 

This applies to public finance professionals just as much as to public managers in general. Public finance professionals can play a positive role through the whole contract life-cycle. They can help in the procurement phase; they need to understand contracts in order to give advice during the delivery phase of a contract, and how it affects the budget. If things go wrong then public finance professionals can help with the exit from the contract and its replacement with an alternative supplier or even the direct provision by the public organisation.

None of these things will happen by accident. I think the professional accounting syllabuses need to incorporate procurement, contract management and negotiation as key skills for finance professionals. I think they could also encourage their students to adopt a more commercial approach in their thinking so they can understand suppliers better. 

More generally, a good starting point for any organisation would be to analyse how much of its activity is done by direct employees and how much by contractors and train its managers to match.

Book recommendation: Getting to Yes by Roger Fisher and William Ury

Last week I saw this story about how Northamptonshire County Council hopes to deal with the financial difficulty it is in by renegotiating its supplier contracts. Taken on face value, if 70 per cent of spending is through contracts with external suppliers it makes sense to seek to reduce expenditure by renegotiating some or all of those contracts. The expert cited in the article is, rightly in my view, concerned about how difficult this task will be, especially given that the suppliers know how perilous the Council’s financial position is.

There is a risk that some of the suppliers might not want to renegotiate, and that others might walk away from the negotiating table, but I think the Council’s team need to try. Step one might be to identify a priority order for dealing with the contracts, taking into account factors such as size, duration, the historical performance of the supplier, etc. But what next? How can the Council negotiate itself new deals it can afford?

This is where my book recommendation comes in. Over the years I’ve attended several courses on negotiation skills but none of them have been as helpful as reading Getting to Yes by Roger Fisher and William Ury. This is a relatively short book, written in a friendly, easy style and it can set you up for any kind of negotiation—in your home life as well as at work. The authors are part of the Program on Negotiation (PoN) at Harvard Business School so they know what they are writing about.

There’s no getting away from the fact that successful negotiations rely on preparation. The better you are prepared the better the outcome will be. And, if I boil it down, the preparations require two main things. First you need to understand your BATNA (the best alternative to a negotiated settlement you have) and the other party’s BATNA. Understanding both of these helps you to evaluate whether the offer on the table is acceptable or not to either or both of you.

The second key message in the book is to focus on each party’s interests and not to take fixed positions. The authors believe that if the parties focus on their interests and think creatively they can often find solutions that both are happy with. This is a way of thinking about negotiations in a way that is not so conflictual and more prone to result in win-win solutions than win-lose solutions.

Connecting this back to Northamptonshire Council’s predicament, they are clearly going to have to do a lot of work to understand the BATNAs relating to so many contracts but that will be an essential step. And although it may be a difficult situation, if the Council focuses on the interests of both parties it may work out agreeable solutions. Clearly the Council is desperately in need of reducing its financial commitments but there are choices. What I don’t think will work very well is the Council making an aggressive opening statement along the lines of “As one of our contractors we need you to reduce your prices by 50%.” The chances are that this will make the contractor defensive and likely to take a position of pushing back with an explanation of why that can’t and won’t happen.

To get the spending reductions it is after the Council needs to have a constructive dialogue focused on “getting to yes”. It has options that can help this dialogue such as reducing the volume of services, reducing performance standards, offering longer contract durations, offering exclusivity, changing the terms of the contract that the supplier feels are onerous or that oblige the supplier to incur higher costs. There could be many more. The important thing will be listening to the other party to each contract on an individual basis, working out what their interests are and then working together to agree a change or set of changes to the contract that give each party what they are looking for.

If this has whetted your appetite about Getting to Yes you can buy the book from Amazon using this link. Also, the PoN’s website is a useful resource and you can sign up for their daily newsletter on the site. Alternatively you can follow PoN on Twitter at @harvardnegoti8 and William Ury is @WilliamUryGTY.