I am regularly asked by local authorities and other public bodies what they can and should do about long-term service contracts and strategic partnerships with the business sector.
Often political leaders and senior executives – who may or may not be the ones who agreed the original contract – may be feeling that the relationship is tired or that performance, whilst compliant with the contract, is no longer adequate or that the entire nature of the services being contracted is no longer relevant to the client organisation. This can particularly be the case where contracts were agreed five or more years ago.
The public sector has changed a great deal. There is much less money available. Public demands, needs and expectations are almost certainly different. Technology has advanced. New policy objectives may have arisen such as the adoption of the ‘living wage’ or local supply chains. The legal duties of the public body may have changed and most likely its strategic objectives will have evolved.
Public sector leaders who find themselves with long-term contractual relationships which they would instinctively like to abandon or revise often feel powerless and trapped by the contract. This does not have to be the case.
The starting point should be to secure legal advice on what flexibility and room for manoeuvre the contract allows. But this in itself is insufficient.
Given the state of current public sector markets and the wider economy, the public sector’s relative position compared with its business sector provider could well be much stronger than might be expected in such relationships. Providers will wish to protect their commercial interests but may have to be minded of their longer-term market reputation and business development interests.
However, unless the provider is willing and is truly a ‘partner’ and not a contractor such negotiations may be hard and costly. Providers have duties to shareholders and not all take a long-term view or have business models that allow flexibility in contract terms. This is why some public bodies are now less enthusiastic about long-term service outsourcing.
My advice to local authorities and others who are considering a review of a long-term contract and/or strategic partnership would be:
- understand the contractual and commercial opportunities and consequences of major contract change or termination
- inform the provider of your intention to undertake a review and the rationale for it; it is always best to be open about intent and to seek to engage the provider in the review
- following stakeholder consultation
- reach a view on what the ideal outcome of any review would be
- decide what outcomes would be desirable from the contract and at what price
- determine whether the means of production are consistent with the current policy agenda
- consider what alternative means might be available to secure these outcomes if you were not tied into the existing contract and/or provider
- compare these outcomes and this price with the current performance and current contract ( which may have already been revised since it was originally signed) and quantify the gap
- understand what is negotiable and what you would be willing to ‘trade’ and ‘give’ to the contractor in exchange for some favourable changes to a contract
- either reach your own view or, and preferably, engage an independent advisor to assess the nature of the current relationship between your organisation and the business sector provider
- assess your negotiating strength vis-à-vis the provider
- form an opinion on the provider’s appetite, willingness to contribute to a review and willingness to consider changes to the contract
- having undertaken the above, decide your objectives, strategy and tactics for the ‘negotiation’ phase of the review
- engage an independent advisor who is acceptable to both parties to facilitate discussions – this process will need to be supported by appropriate operational, legal and commercial support and advice
- negotiate – it may be tough, but the judgement call is the pain worth the gain; and can too much pain be avoided whilst still securing gain (preferably for the provider as well as the client)?
The outcomes of such reviews could take many forms. What should matter most to any public sector leader, especially in this period of austerity, should be the achievement of the right outcomes and value for money. Long-term commitmentsand contracts which cannot contribute to or even hinder these goals have to be addressed.
If they cannot be addressed because of the contractual terms, that is a serious historical error. If they cannot be addressed because of the intransigence of the contractors, that may well speak volumes about the company’s commitment to the public sector. If they cannot be addressed because of the timidity of political and executive public sector leaders, that is unforgivable.
Public sector leaders must show purpose and resolution.