Commissioning: When contracts go wrong

When a commissioned service cannot deliver good outcomes or value for money, the financial, reputational and operational impact on the commissioning organisation and the impact on its service users cannot be underestimated.

Failures in prominent government contracts such as the collapse of Carillion have recently made the headlines. Critics of service outsourcing point to such examples as perceived failures in public sector commissioning; however, with £250bn spent by public organisations on goods and services every year, commissioning is not going away.

When contracts do fail, it should be a learning opportunity for commissioners and prompt positive - if occasionally painful - change.

Why contracts fail

Peter Smith, director of Public Spend Forum Europe, identifies that poor contract management is the cause of many of the biggest problems and issues experienced by public sector procurement. The performance and financial management of contracts is integral to the commissioning cycle, but practice is rarely consistent. In some organisations, one commissioner or team manages the service end-to-end, while in others, contracts are managed by dedicated managers or operational teams.

The outcome of such dispersal is that responsibility for a contract's performance can become unclear and relationships with providers difficult. Integration of strategic commissioning, procurement and contract management can mitigate this risk.

Contract management is often poorly understood by organisations - to the extent that CIPFA, the public services accountancy body, published guidance aimed at officers "in the unenviable position of being given responsibility for a contract without the benefit of any handover from the procurement team, any prior experience of managing contracts, or any training". Successful contract management requires a diverse skill set, from specialist subject area knowledge, negotiation and project management to communication and relationship-building.

Contract management is an undervalued role, often performed in addition to core responsibilities. This is especially true when funding is tight, but some organisations are beginning to highlight the need for contract management as a specialist discipline.

Learning from failure

The response to any contract issues needs to be proportionate and appropriate to the situation. Nevertheless, here is some good practice identified around mitigating and resolving problems:

• Contract failure is rarely a given, but establishing a contract management plan at the outset can avoid issues later on. The Crown Commercial Service recommends that "contract ownership, management processes and governance mechanisms are clear with defined roles and responsibilities".
• Reviewing contracts regularly ensures that a focus on outcomes and value for money is maintained. If issues do arise, there should be a clearly-documented process for how these will be dealt with and the procedure for escalation. All disputes and their resolution should be recorded so that decision-making is evidence-based.
• Before entering a contract, it can be helpful to agree an exit plan, both for the natural end of a contract and in the event of dispute. Contingency plans are also vital to protect vulnerable service users in case of contract failure, and one of the reasons why the impact of Carillion's downfall was mitigated was the fact that the government's contingency planning for this contract was independently deemed to have worked relatively effectively.

Remedying contract failure

If robust planning and contract management does not succeed and performance, financial or relationship issues cannot be resolved, a commissioner can allow the contract to come to a natural end or to activate clauses that enable early termination. This prompts a further question - to retender the contract or manage the service in-house?

Bringing provision in-house offers many benefits and is often the preferred option for local authorities as it can be mobilised quickly in the event of a crisis. This model gives greater control over delivery and the use of resources and can be an effective way of joining up services. However, bringing in the provider's staff can be costly in terms of human resources, management structure, IT equipment and pension liabilities. In-house delivery also risks reduction or loss of the budget envelope for the service through efficiencies, as well as the added social value delivered by external - particularly voluntary sector - providers.

Recommissioning contracts that have previously been unsuccessful can be risky, but the benefits may be greater - this option gives the opportunity to embed learning from past experience and to re-evaluate the aims, objectives and outcomes of the service. It may result in complete remodelling of the service or simply better structuring of the contract so as to meet the client's and service users' needs. This can facilitate improved relationships, service delivery, outcomes and value for money, but the framework for contract management and risk sharing must be established at the outset of the commissioning process and considered throughout it. In response to this need, in February the government published the Outsourcing Playbook, outlining a series of new policies for making outsourcing decisions and contracting outside suppliers for the delivery of public services.

• Toni Badnall-Neill is strategic commissioning officer for children's services at Central Bedfordshire Council