*Warning, it’s unsafe

Any conversations that suggest alternative contracting models can engage companies to deliver social outcomes, acting in the public interest over their own, are based on a false premise that industry will subjugate their own interest in favour of their clients’ interests.

Businesses do not exist for the public good. They may do good works and they may contribute to society.

Some, like us, may choose to be in a business so that it can deliver a benefit beyond the bottom-line. We may know why we exist, but the bottom-line counts. A business must make more than it costs. It must meet tax and employee obligations. It should set money aside for growth, investment and bad days. It needs to make a return for its owners. The bigger the company, and the more public its ownership, the less flexibility to soften that focus.

The challenge in public sector contracting is to align the business objective of business profitability so that it delivers the public objective.

Smart contracting models foster enlightened self–interest, where one party will act in the best interest of the other to get a better outcome for itself.

A few courageous clients have engaged us to develop contracts which promote this behaviour, to good effect. To be clear, it does require some courage to act against public sector norms.

The prerequisite is a sound contract built on clear obligations for performance and delivery. The contract may contain elements that support a good relationship, but it is not ‘relationship contracting’.

‘Relationship contracting’ displays all the hallmarks of other management fads. Some good process, some fact, underpinned by substantial conjecture and hope. We have had alliances, strategic partnering, relationship charters, to name a few. We should also recall that not all contracts end in dismay, dispute or failure. Many deliver satisfactorily.

Contracts should be built to help make deals work. Most contracts are designed to deal with failure. We clearly need good contracts and good relationships if we want good outcomes. A good contract can help foster the behaviours and relationships which give the deal the best chance of succeeding.

We have faced down the challenge of creating good ‘deals’ across the public–private sector boundary from both sides. It is extraordinarily challenging. We know from experience: it’s our core business. To build good solutions you must understand the underlying causal issues that deliver poor contracting.

The fundamental cause

The fundamental causal issue behind poor public and private sector outcomes is a cultural mismatch. It carries all the complexity of a multi–language, cross cultural, multi–national deal. Addressing the cause, rather than applying another symptomatic treatment, creates the conditions for a successful outcome.

Business to business contracting is relatively simple – the value of the deal is measured by the contribution to each party’s bottom line. Same measures, same metric, same language: if you do this and I do this, we can measure the value each of us has gained. If you give me more, and I give you more, we will both be happy. The goodness of a deal is simply measured.

Businesses can build joint ventures and partnerships, but public organisations will always struggle to enter such arrangements. Good governance of public funds does not allow the entrepreneurship and risk appetite needed for such models. The openness to public and political scrutiny and the need to justify an ill described and malleable ‘value for money’ concept drives the need for clarity of obligation.

Ultimately, public sector procurement is going to be a purchaser–provider model.

Value for money

The public sector value, the social outcome, is complex and not easily defined, far more complex than the deliverable itself. It isn’t about money, though the arguments often are, creating an immediate mismatch with commercial behaviours. Money is low value to the public sector: it is traded to gain a public good for which measures are subjective. This public deliverable is difficult to measure: more children with better outcomes at school? Defence – no one has attacked, are we overpaying? Health – when is enough, enough?

The complexity of the ‘value for money’ concept fosters a tendency to focus on price. Fundamentally, particularly for standard style services, the base costs for competitive companies are typically similar – there are few extraordinary technologies or offerings that give one company a huge competitive advantage in its cost base. Arguing over price becomes an attack on commercial margin. This is a zero–sum game where the only loser can be the company.

This approach encourages competition and self–interest, not cooperation and enlightened self–interest. Both delivery and the relationship suffer, often before the contract is even signed, and continue to decline with every variation and change through the life of the engagement.

The singular common issue in all our public–sector engagements is to establish what will satisfy the buyer. When will they be happy? What is considered value in this transaction? The struggle to articulate what is sought, to what standard, often gives rise to uncomfortable conversations.

Contract certainty

Government seeks to contract out uncertainty to deal with this lack of clarity. Often the baseline of services is ill-defined and standards of acceptable delivery are unclear. Business is the opposite – it seeks certainty. If it is going to cost time, effort or resources those costs are going to be passed on. Not only is nothing free, flexibility is expensive. Expectations, often unstated, lead to dismay, disagreement and dispute over contractual issues. Both parties feel frustrated and wronged.

We encourage contracts designed for the certainty with the ability to manage the uncertain. It is very Pareto–like deal: with 80% certainty of delivery and build practices to manage the 20% of uncertainty.

The private sector is not blameless

Fault lies equally with the private sector. The public sector is their client. It is astounding at how often the talk, at the negotiating table, starts with what the seller needs rather than what they will do for their client. It is simplistic and arrogant. In our work, we spend a lot of time simply asking ‘Why would we do that?’.

It’s a bit like trying to train a group of teenagers. Eventually they get it, and a fruitful discussion can follow. We come across very few sophisticated companies, at least when we start.

More public sector expertise?

Contrary to popular views, the public sector doesn’t need to match the contractor’s technical expertise – you’re contracting to get the knowledge, don’t duplicate it. The public sector must know its own business: what are the outcomes, when have we reached ‘good’, and how much better than ‘good’ is worth pursuing? The higher the standard, the higher the price. ‘Perfect’ can be the enemy of ‘better’.

The public sector must be flexible to new ideas and be able to change. Don’t impose unnecessary public sector practices on the private sector. For example, the public sector pays in 30 days, it’s a principle. Early payment in large contracts may reduce significant costs. In one contract, we reduced the cost of money impost by more than a million dollars a year, simply by reducing the payment time without reducing other rights. Be prepared to challenge dogma for a better outcome. This is not so much expertise as leadership and cultural acceptance of change.

Business experience is in short supply within the public sector. Knowing what drives commercial entities and how best to structure an approach to market and develop the resulting contracts is essential to forming a positive relationship and delivery through the contract life. Consultants and advisers with experience of operating business can assist, but those who have spent their careers consulting are simply theorists in this regard. Choose advice wisely.

The public sector needs to be more expert at its own business, and knowledgeable of how the private sector operates if it wants better, more fruitful agreements.

Contracting for a relationship

While we are not in favour of relationships as a basis of contracting, we are in favour of encouraging good behaviour through contractual mechanisms. There are two parties in a relationship, and both have obligations. The mutual obligations should be clear. So too should any business rules about how they are enacted. Spend the time to establish these before entering an agreement. Misunderstandings, especially early in an agreement, destroy trust.

Foster communication, not just the usual contract management governance, but operating practices. Progress issues promptly or escalate for resolution. Commercial entities need decisions and seek to maintain momentum, the public sector tends to be more causal about timelines and commitment. We like to include clocks for both sides, and where matters stagnate, escalate.

Deal with disagreement well. If the organisations have a culture of righteousness in contracting, leading to stubbornness and deadlock, build mechanisms to divert to more pragmatic resolutions. These can be facilitated discussions, expert advice or independent panels of review. Not only do these approaches work, in our experience they encourage better conversations without needing to resort to outside help.

There are approaches to measuring the softer factors in a relationship such as innovation, communication, responsiveness, engagement, pro–activeness and more. If it is to be truly a relationship, these are two-way measures. Such measures can be used to foster useful strategic conversations that result in action plans targeted to improve the relationship.

In some major deals, we have linked the relationship to contract tenure. If the relationship is working why change? If it is not, why stay?

A contract and a relationship

There is a great deal of rhetoric around relationship contracting, particularly in the public sector. Even if they were workable, and we are not sure that they are, they are not suitable for public sector engagements. Regulation, public and political scrutiny make anything but a purchaser–provider model with clear obligations untenable.

Contracts need to be equitable. Clarity of mutual obligations and business rules are essential to building a sound operating relationship. Too often one party seeks not to commit to foundational process and performance standards, leaving the mutual obligation without basis.

It is possible to build softer relationship factors into a contract that also contains clear obligations for delivery. The contract is designed to assist the relationship and the agreements to work and has contingencies for when it doesn’t. If the agreement in its entirety is working well, it is in all parties’ interest for it to continue. If the relationship is failing, then it is either repaired or the parties separate.

Above all a contracted relationship is neither a consulting nor a legal matter. It is a business matter. In the public sector, you must know your business, and if you are lacking the commercial experience, seek advice from business people.

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We are on the lookout for those who can deliver outcomes, not just activity – could that be you? Why don’t you find out?

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Don’t be caught playing it too safe

If past approaches haven’t worked, it might be time to try something new. Talk to us about what we have done, and what we might do for you.

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