Route 2 - Contract & Supplier Management - Managing & Improving Performance
This section of the Contract and Supplier Management process outlines a number of activities and tools necessary to effectively manage and improve the suppliers’ performance. You must be careful not to unintentionally substantially modify the contract when considering some of the following.
Measuring Supplier Performance
Understand Contract Terms & Conditions
The fundamental purpose of Contract and Supplier Management is to ensure that the suppliers meet their contractual obligations, and that the contract requirements are successfully delivered. It is therefore essential that anyone engaged in managing suppliers reads and fully understands the contract terms and conditions, otherwise they will be at a permanent disadvantage should any issues arise. It is essential that your Organisation’s Contract Manager/Contract Management Officer is engaged from the Develop Strategy stage early in the process and participates in the development of the terms & conditions.
The Balanced Scorecards below are recognised tools for monitoring and managing contract and supplier performance.
The combined ‘Quality’ and ‘Service’ scores in the standards scorecard can be reported as ‘Quality’ on the Scottish Model of Procurement.
Key Performance Indicators (KPIs)
KPIs provide a mechanism to measure the four quadrants of the balanced scorecard (Quality, Cost, Sustainability and Service) and help organisations understand how well they and/or their suppliers are performing in relation to their strategic goals and objectives. Examples are provided on KPIs.
[For Care & Support Services please also read the Additional KPI Guidance for Care and Support Services.]
You must ensure effective contract management and monitoring to ensure that the practice of blacklisting does not occur in public contracts.
It is important that your MI requirements are clearly defined and communicated to the supplier, and that reporting arrangements are fair and proportionate and do not duplicate information already provided. MI is used to monitor the supplier or contract performance and to ensure management have the information necessary to facilitate effective strategic and operational decisions.
The approach to MI reporting should be proportionate and seek to minimise demands on suppliers for information about the delivery of the goods/service. The frequency and level of reporting should be informed by a risk assessment and may increase in certain circumstances, for example if a complaint is made about the service/delivery. The reporting arrangements might be built into the specification and/or the terms and conditions of a contract.
For some specific services, an organisation should avoid duplicating information which is collected by and is available from the regulatory bodies. This can be achieved through the development of Memoranda of Understanding and regular discussions between the organisation and the regulatory bodies.
[For Care and Support Services, in some areas Contract Management Officers routinely attend the Care Inspectorate’s post-inspection feedback sessions with suppliers.]
Contract Managers/Contract Management Officers should present information gained through contract management in regular reports to senior managers. In order to fulfill their role, they should:
prepare and issue reports summarising their actions, identifying any significant issues and detailing the conclusions that they havereached;
consider the consistency of their conclusions with those arising fromthe work of the regulatorybodies;
clearly identify the nature and grounds for any concerns and theaction that is required to secureimprovement;
consult supplierson the factual accuracy of all reports;and,
communicate regularly with suppliers and ensure that emerging findings are discussed at an appropriate level within their organisations.
Further examples can be found in the Management Information document..
Contract management arrangements should identify what will happen in the event that the contract is not being delivered as agreed, or, the agreed quality standards are not being met.
[In addition, for Care and Support Services, for example these should describe the process for agreeing the necessary improvements (where appropriate, in discussion with the Care Inspectorate) to the service and the timescales that will apply. The contract itself should specify the circumstances in which the public body has a right to terminate the contract (for example, insolvency, service failure, loss of registration.]
Performance issues should be addressed immediately, and escalated within the supplier organisation if not resolved promptly.
If you find that the supplier is not delivering the agreed level of service, you should raise this with them immediately. For expediency, this can be done by telephone but should be followed up in writing. The supplier should be asked for an action plan to ensure that the required levels of service re-commences in a short time frame. Depending on the severity of the issue, it may also be necessary to hold a face-to-face meeting with the supplier. All discussions/meetings etc. should be minuted to ensure an audit trail exists. If resolution of the issue is not completed within the timescales agreed then the issue should be escalated (see below) and your procurement contact notified of the problem.
If the issues raised are not resolved to your satisfaction, then they should be escalated within the supplier organisation, and an early face-to-face meeting arranged where actions and timescale to remedy the situation should be agreed and implemented. The recovery actions should be monitored on a regular basis to ensure that the agreed recovery / resolution dates do not slip. All discussions/agreements should be noted in writing.
- Contract Managers/Contract Management Officers should ensure the escalation process is clearly defined, understood and communicated to all stakeholders and end users.
Incentives and Sanctions
Incentives and sanctions should be used appropriately to maintain/improve the contract /supplier performance. There are specific contract terms and conditions that can be used to help drive contract compliance/performance, and these should incorporated into the Terms and Conditions (T & Cs). You should ensure that you understand the specific contract T & C’s, and that any incentives and sanctions considered are appropriate and legally enforceable. It is recommended to seek legal advice if in doubt as to the wording, appropriateness or legality of a proposed condition.
Examples of incentives and sanctions which could be considered are listed below, but must not be applied autonomously. Appropriate internal approval must be sought and received prior to implementation.
Incentives could include (subject to substantial modification):
Contract extension options
A longer contract opportunity could provide performance motivation
Payment by result, e.g. by use of milestone payments (linked to defined deliverables)
Reduced payment terms
Conditions of Contract could include:
Retention e.g. legitimately withhold payment if deliverables are not completed (with genuine and notified reason, but compliant with previously agreed contract terms and conditions)
- Termination of the contract
Liquidated Damages (damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach)
It should be noted that for a sanction to be effectively enforced, sufficient evidence would be required to justify the claim or action. It is therefore important to have clear records for example of agreed service levels, notice periods, reminders, communications, agreements etc.
Any incentive or sanction must be enforced in compliance with the agreed terms and conditions of the contract or agreement.
Feedback and Improved Communication
Improvement opportunities can be identified by anyone engaged with the Organisation, both internally and externally. Many improvement ideas come not from the top, but from employees and suppliers operationally involved in the delivery of the service, given that they are regularly exposed to operational inefficiencies which may not be visible higher up in the Organisation. Your Organisation should seek feedback and work to develop a culture where everyone in the Organisation is encouraged to look for and suggest operational improvements in the knowledge that all suggestions will be considered.
What is Demand Management?
Demand Management can be defined as:
“the alignment of a business’ consumption with its business requirements”
It is applicable to all goods and services where internal demand and consumption can be influenced to reduce costs.
Demand Management is a key aspect of the effective alignment of external resource to meet our requirements. When demand management is considered, it is often seen as a simple matter of stopping people spending money. There are a number of other ways to look at demand management without completely preventing spend, which can provide notable savings and have a less drastic impact on the business.
Demand is often a consequence of internal practice and process rather than as a result of addressing a real need of the organisation. As the approach is about addressing change ‘in’ an organisation the starting point will be the culture, policy and behaviours of that organisation. The organisation can also participate by the sharing of best practice, benchmark behaviour, policy guidance and peer review.
Demand management can come at different points in the procurement process, from the initial purchase point e.g. making sure that software licences are purchased for the correct number of users at a single point in time or where costs are reoccurring, as an ongoing activity e.g. in a category where spend is ongoing and regular, such as stationery or postal services.
Principles of Demand Management
Demand Management, including behaviour change, represents a significant and untapped opportunity. In the short term, this is about changing expectations; in the medium term about changing participation; and in the long term about reducing need. There are 3 main principles of demand management:
1. Each business unit should have exactly what it needs in order to deliver its business objectives
2. Any resources consumed above this level represents a waste to the organisation
3. There may be many and very different ways of meeting a user need, with each way representing a different level of resource to achieve the same outcome
The three strategies listed below could be independently or jointly applied
|Eliminate||Is the requirement really needed? Can the consumption be stopped? e.g. cancel non-essential meetings, or stop the use of mobile phones for non-business calls.|
|Replace||Can we use lower cost or more effective alternatives? e.g. use video-conferencing for meetings or ensure non-confidential papaers are not treated as confidential waste.|
|Reduce||Can we use less of a product / service? e.g. don't order a monitor with every PC purchase or, schedule meetings for the same day.|
With Demand Management you should consider:
- A reduction in the demand for goods
- If there is there an option to use recycled goods to avoid buying new and could recycled goods be supplied under an existing contract
- If there is there an opportunity to consolidate orders/services to reduce costs
- If you can reduce your transactional cost by improving the purchase to pay system
Benefits of Demand Management
There are a number of benefits to an effective Demand Management strategy, many of which are driven by a change in the organisation culture and outlook and to how goods and services are specified and requested.
When robustly implemented across all goods and services; Demand Management drives public sector organisations to make the most efficient and effective use of all of the external resources it procures to meet the operational requirements. The Demand Management process challenges the norms, standards, customs and practice of an organisation to a degree not usually found in other processes.
When used as a priming process for Strategic Sourcing, Demand Management can establish the organisation requirements to be sourced to a very specific level, avoiding the development of a sourcing strategy that meets over-specified operational requirements.
As a routine part of an organisation operation Demand Management can ensure that the greatest possible levels of resource are directed at front line services in the public sector.
Consideration as to how the demand will be forecast and fluctuations managed should be initially undertaken at the ‘Shaping the Requirement’ Stage, and subsequently monitored and managed throughout the lifetime of the contract. Failure to do so could result in:
- Excess material purchases and subsequent material write off/waste disposal costs
- inadequate material availability resulting in additional recovery costs and/or service breakdown
- excess, inadequate or inappropriately positioned resource
- reputational damage as a result of service breakdowndetrimental impact on the end user
Effective demand management forecasts also give the supply base the opportunity to manage their costs by positioning resource and material in line with demand.
Demand forecasting should be based on considerations such as:
Supplier lead times
Key stakeholder input
Information from other buying organisations, trade bodies and business support organisations e.g. Federation of Small Businesses and Chambers of Commerce etc.
Where practical you should look to reduce future demand and costs by using strategies such as:
considering if there is an option to fully or partially transition to recycled goods instead of buying new
reducing transactional cost by improving the purchase to pay system
innovating the supplier(s) to reduce mutual cost which should have been previously written into the contract / agreement with the supplier
For any supplier to operate effectively, it must understand and manage its demand and use this knowledge to tailor its resources and processes proportionately to ensure they deliver their service in the most efficient and cost effective manner. By understanding historical demand, an organisation can work with its suppliers to realise mutual cost and efficiency gains.
The most effective way to forecast future demand is to consider a combination of historical demand, prevailing market forces and the Organisation business plan/strategic direction. While forecasting is not an exact science and will never be 100% accurate, these elements should provide sufficient information to allow the Organisation to develop forecasts which are accurate enough to accommodate demand fluctuations during the lifetime of the contract(s) with minimal cost.
The Organisation should ensure that the supplier stays in regular contact with all key stakeholders (including suppliers), to ensure that all parties are cognisant with the prevailing supply/demand position, especially during periods of fluctuation.
A key element of Contract and Supplier Management is the proactive identification and management of risk. Risk Guidance can be accessed via the Procurement Journey.
Fraud Prevention, Detection, Monitoring and Handling
More guidance on fraud is provided on the Scottish Government Website.
Weak interactions between the finance, commercial, and contract management functions within an organisation provides a platform for fraud and overbilling. This could be as a result of error and inefficiency or by deliberate intent.
Without basic scrutiny of payments and performance, an Organisation’s departments may rely on the contractor to interpret the contract correctly which may result in error. A better scrutiny of payments and a sound understanding of the contract will quickly identify both overbilling and fraudulent activity, and allow the appropriate action to be taken
Supplier Health Check
Contracts are awarded following a thorough evaluation process which addresses some standard elements. Throughout the life of the contract, your Organisation’s Contract Managers/Contract Management Officers should perform periodic supplier ‘health checks’ to ensure the standards demonstrated during the initial evaluation have been maintained. These checks could include:
Conviction of Criminal Offences,
Compliance with Legislation and Regulatory Provisions (including Equality),
Corporate Social Responsibility:
Sustainable Procurement and Environmental Practices
Health & Safety and
[And for Care and Support Services, Care Inspectorate Inspection Reports and records.]
The frequency of the checks should be in line with the type of contract, e.g. strategic and bottleneck contracts will be checked more frequently than collaborative and routine contracts.
Innovation / Value Add
Good Contract and Supplier Management processes should encourage both supplier and organisational innovation. It should be recognised that suppliers often have innovative ideas to improve both their own and their customers’ service, however, they are frequently frustrated in their attempts to these ideas forward.
If an Organisation wants to be a customer of choice into which suppliers will invest and bring innovation, it should adopt these behaviours and allow supplier innovation and added-value activity to flourish:
Embrace your suppliers as an extension of your business. Learn from their ideas and build open and trusting relationships where innovation will thrive.
Establish a culture of trust and encourage ideas from suppliers, as they often know your business better than some of your own team.
Define and share your Organisation's definition of supplier innovation. This way suppliers can understand your internal process, where they fit in and your expectations of them.
Share as much information as you can with your top suppliers. The earlier suppliers can see your product / services roadmap, the sooner they can provide ideas to improve it.
Implement a consistent governance framework. If a supplier’s idea has potential, assign an internal owner to investigate and develop this ensuring there is accountability and development continuity.
Innovation does not have to be ‘ground breaking’. Even minor service or process adjustments can bring cost and/or efficiency gains.
Encourage collaboration within the teams, and let them know there will be some ideas will be more successful than others, but all ideas will be considered. Publicise and reward innovative contributors appropriately.
Publicise supplier innovation success stories. A brief email outlining real supplier initiated added-value and the mutual benefits will encourage others to do the same.
Consider innovation as a standard KPI, and ensure innovation is on the agenda at performance reviews.
The drive for innovation should be reciprocal, and customers should be equally active in exploring innovative ideas which will help the suppliers improve their performance and service delivery.
Performance Review Meetings provide both your Organisation and the supplier with an opportunity to focus on end to end performance, identify issues, opportunities and a forum to put the appropriate action plans in place.
[For Care and Support Services, please read the Additional Guidance when Reviewing a Care and Support Service.]
The Performance Review Meeting standard agenda template can be completed by both your Organisation and the supplier in advance of the meeting, and will provide a structure to the meeting. It is suggested that there should be at least one review annually for suppliers identified under the segmentation process as requiring ‘medium level’ supplier management, and two for ‘high level’ suppliers.
A Review Meeting Template is available here, and a meeting agenda example is laid out below:
Performance Review Agenda Example (agenda can be amended to suit your personal preferences):
Introduction and Opening Remarks - Introduce attendees, recognise special or new guests and provide any opening remarks that are pertinent to this meeting such as current events, organisational changes, etc.
Review of Action Items - Each Performance Management Review meeting will produce some follow up action items for the supplier, your Organisation or both. These should be documented and followed up at the next Performance Management Review meeting.
Supplier Performance – Performance against SLAs / KPIs / Scorecards should be reviewed and discussed, and any performance concerns raised. This will be a quick review if all deliverables are being achieved, but any ‘below plan’ performance will demand more discussion and most likely recovery action plans which should be managed operationally and reviewed at the next Performance Review Meeting
Customer Performance – The supplier should be afforded the opportunity to raise any customer performance issues which may be impacting their ability to fulfill their contractual obligations
Key Improvement Areas / Opportunities – All opportunities for improvement should be explored, and once identified, action plans should be agreed. Areas to be explored should include: current performance issues, cost, process, Sustainable Procurement, Corporate and Social Responsibility, innovation / value add
Supplier presentation – The supplier should provide a business overview, including for example financial information, strategy, overarching objectives, etc.
Meeting Summary and Review of Action Items
Optional benchmarking (where appropriate)
Benchmarking costs against the suppliers’ competitors throughout the life of the contract is a recognised method of avoiding cost ‘creep’ and ensuring best value. It can be used for:
Ensuring incumbent suppliers remain competitive in the market
Keeping abreast of the market rates
A negotiation tool for cost reductions.
Step One – What to benchmark
Decide which spend category(s) you wish to perform the benchmarking exercise for. Complete a spend analysis on what you have purchased in that area for at least the last 12 months or so (by line item). Sort the data from the highest to lowest spend and then highlight the top 80 percent of the spend. This will normally be no more than 20 percent of the number of line items and should capture the majority of your spend. You now have a manageable amount of data to go out into the market place with.
Obviously, this does not cover every aspect of the potential scope of supply and in certain circumstances additional items may need to be added such as bottle-neck and specialised items. The aim is to gain an estimation of the market rates.
The incumbent supplier should be made aware that you are planning to perform a benchmarking exercise before you go out to the market place.
Step Two – Going to the market
Having selected the items you want to benchmark, you can now approach the market to understand the current prevailing costs. Benchmarking is generally an informal process and the Management Information Hub is a good source of information, as is the internet in general. You can also contact a number of suppliers directly, but it is important to ensure that the recipients of any requests understand that it is a benchmarking exercise as opposed to a business opportunity. The request should be simple enough for the suppliers to provide the information without having to spend a great deal of time doing so.
Step Three – Results analysis
You can now compare the results of your benchmarking exercise by for example, entering all the costs into a spreadsheet to determine the price difference between the costs of the incumbent supplier against the prevailing market rates. You can now determine where the incumbent supplier sits against the best, worst and average market rates.
Step Four – What next?
If you are happy with where the incumbent supplier’s pricing fits in comparison to market rates, then it illustrates that the supplier is competitive and no further action need be taken.
If you are not comfortable with where the incumbent supplier’s pricing fits, then invite them into a meeting and give them the opportunity to explain why they are not competitive against the current market rates (on no account should you divulge the competitors’ names or pricing information).
If the supplier is willing to accept that their prices are not in line with the market rate then this will be a relatively pain free cost reduction for you. If however, the supplier is unwilling to negotiate a reduction, then you should initiate the escalation process and include as an agenda item at the next Review Meeting.