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.

Why a smile could make a difference to public services

A couple of weeks ago I was teaching 53 police officers about managing public money as part of the national High Potential Development Scheme. At one point I was talking about pricing strategies and I drew a idling curve on the board to illustrate the idea that the production of goods creates a smaller part of the value than the design that proceeds it and the marketing that follows. At the time I couldn't remember the person behind it but it has nagged at me until I found the answer. What I was explain got the class was the Stan Shih smile curve of value.

Stan Shih was the boss of Acer computers and he put forward this idea about value in the early 1990s. He was thinking particularly about IT products and the picture above summarises the theory. It seems to me very likely it applies in IT today. Certainly if I think about myself as a customer of Apple then I know I get value from the design of the hardware and software, the packaging, the customer service, the Apple Store. And I can well believe that the cost of the components and assembly of the MacBook Air that I'm typing with amounts to less than 10% of the price I paid for it.

If this is the case for IT companies, is it true for others? Perhaps not all businesses but there are loads where the cost of manufacturing is a tiny proportion of the retail price and a lot of the value of the product comes from the design, branding, marketing, etc. For instance, clothing (how can All Saints get £40 for a cheap-looking t-shirt with a blurry print or replica football shirts sell for £70?), cola and soft drinks, bottled water, restaurants, cosmetics, champagne, brand name painkillers. I'm sure you can think of others.

What has this got to do with public services? Well, public bodies are provide services to the same people who buy all the things I've mentioned above. These people value more than just the creation of the products they buy so when it comes to public services perhaps public bodies should think about:

• how they design their services
• developing their brand and reputation
• how they distribute (or make available) their services to users
• how they will look after users after the service has been delivered.

Going back to the police service, whilst I am not an expert it seems to me that one common issue relates to supporting victims of crime. I might suggest that currently the focus of police leaders is in producing the service so that officers respond quickly to a call and deal with the immediate issues. Aside from anything else, this is a measurable output. How many calls have we taken, graded by urgency? How long has it taken to respond to each?

I think there has been work by senior police officers about the police brand and reputation is important to officers and police and crime commissioners alike. On the Stan Shih curve, brand comes before production. One choice a consumer has about any product is which brand to choose. The only choice a person has after an incident is whether to contact the police at all. I live in Derbyshire; I don't have the option to call in Lancashire Police because I prefer their brand of policing.

The police are less focused, I think, at keeping the victim informed about progress afterwards. If the public derive more value by feeling that they are being 'taken care of' after they were burgled (say) than from the officer's initial visit then the police ought to focus more resources on the former than the latter. But the outputs from this are less tangible and difficult to measure. I wonder, though, whether a change in emphasis would improve public satisfaction.

Transaction costs have to be paid for

Ronald Coase, a Nobel Prize-winning economist, died last week. Way back in 1932, when he was 21, he did some research into why it was that companies did not use pricing and markets to organise themselves internally even though they relied on pricing and markets being the best way to operate an economy. (See this article for the importance of this theory for the development of the internet.) The answer, he found, is that using an “internal market” brings with it transaction costs. To have an internal market a company (or other organisation) would need to spend money and resources negotiating contracts and passing invoices between divisions and units. Much easier, then, to manage an organisation by some form of command and control regime. In the public sector we have seen various flavours of internal markets and they are still in place, notably in the NHS. I'm sure the government and others would claim that the greater efficiency of suppliers that results from competition outweigh the transaction costs and perhaps they are right. (If anyone can point me to recent research which addresses this issue I'd be very grateful.)

What's on my mind, though, is a slightly different point. In a competitive market there has to be scope for losers as well as winners. We can see that because some businesses just don't get off the ground and because even successful companies can lose their market share (Nokia, for example). How can you have room for losers in an internal market without incurring waste? In particular, when the market is for public services upon which, say, vulnerable people rely, what happens if their provider is the equivalent of Nokia--once upon a time the best provider but now falling behind the performance of others? There's nothing the recipients can do: they don’t have true customer power because they don’t pay for the service (at least they don't pay the provider directly and have the option to take their money elsewhere) and the long term contract the provider has with the public authority means there isn't an immediate threat of competition to perk up their performance. I think this is because having incurred the transaction costs of procuring the contract the public authority will be reluctant to incur additional transaction costs in ending it early unless the performance is abysmal.

I think what this points me towards is the importance of good contract management for the duration of a contract. Good contract management can represent the service users and also prevent the public authority from getting in to a position where it even has to think about terminating the contract and incurring all the costs that would involve.

I think public authorities are also coming around to this view. Certainly I find myself more often talking with my clients about contract management than I used to. I suspect this reflects the maturity of the outsourcing market in two ways. First, public authorities and providers both understand the commercial issues relating to the contracts and are able to reach workable agreements much more readily than they used to. Second, public authorities who’ve reviewed their experience of contracts over the last, say, 10 years will often recognise that they have not felt in full and proper control of their contracts and that they ought to have invested in contract management skills from the outset.

I think what this means is that if an organisation wants to use contracts, whether for an internal market or externally, it is important that they recognise that good contract management will be a significant transaction cost and they need to be willing to pay for it.