This is a time of transition for the public sector, as financial constraints mean taking a private sector-style approach to supply chain management. But more outsourcing and new partnerships lead to an increase in risk and a fresh set of challenges
On 21 May, the UK National Audit Office’s head, Amyas Morse, called for public bodies to work together more effectively to maximise savings from procurement activities. It’s a sign of the times.
The traditional way many public sector organisations supplied services has given way to a new model involving partnerships, outsourcing and many variations of both of these. Faced with the challenge of doing the same, or more, with significantly less resources, local authorities are reviewing their relationships with suppliers, contractors and partners. They are adopting many of the strategies that are commonplace in private sector supply chain management, such as precise contractual agreements that specify exactly who does what and when, and contingency planning identifying alternative sources of supply.
It isn’t only back-office functions that are involved. Increasingly authorities are outsourcing their frontline services, such as social care and housing. Zurich Municipal’s head of strategic risk, David Forster says: “When I ask local government managers what is the primary purpose of their local authority, they often say ‘to deliver quality services’. But that’s really only partially true now. I believe their role is to deliver outcomes – they may not be directly involved in the operational function of delivering the service.”
Clarity is needed
Supply chain management is no longer a fringe activity, but part of a tremendous shift in the way the public sector operates. Much of the work that local authorities do is now outsourced, not just to the private sector but to partners and other agencies, such as the NHS and the police and fire authorities.
Authorities’ partners include housing associations and charities. Many councils have transferred their tenant property portfolios to housing associations. While the latter operate their businesses as going concerns, covering their costs, they still have to meet social housing requirements.
Zurich Municipal’s senior strategic risk principal consultant for social housing, Joseph White, says that it’s not uncommon to have a number of different housing providers in a single area, while some housing associations operate in many localities, sometimes as many as 50. “It is a challenge for the local authority and housing association partnership, in terms of the former making sure that social housing plays a part, and for housing associations to understand how they fit into the authorities’ model.”
But housing associations require a more traditional supply chain approach, for example towards contractors and maintenance companies. Those that carry out their own developments also need to manage relationships with private sector developers, as well as construction firms. White says: “In my experience, there is a lack of clarity and understanding around how social housing fits into the broader public sector supply chain context.”
Charities are in a similar position to housing associations in that they often represent a key local authority partner and member of its supply chain. For this reason, says Zurich’s head of charities and social organisations, Paul Emery, charities need to understand their part in that chain. Who are their key critical providers and what would happen to the charity if these broke down in terms of the charity’s resilience and continuity?
Some charities work with partners to deliver services, so they need to think about those partnership risks and the resilience of the partnership. It’s crucial for them to understand the risks, calculate the costs of managing them, and make sure that these costs are built into their payment for delivering the service. Plus, good risk management gives them a competitive edge when competing to be a supply chain partner. Local authorities feel more comfortable outsourcing when they know that there are checks to ensure outcomes are being delivered and that their partner is resilient.
Managing the risks
Handing over responsibility for delivery of essential services is clearly not without its dangers. In these circumstances, Forster says risk management moves from trying to manage the risks of your organisation to trying to capture and manage the risks of contractors, suppliers and partners. “You need to look outside the walls, understanding and addressing the contingency issues around your partners,” he says.
Certainly, there is no dearth of examples where things have gone wrong. And while the blame may rest on one of a local authority’s partners, it’s generally the authority that carries the can.
Partnership risk management requires some particular skill sets – skills not necessarily held by the manager in the authority originally organising the direct service. This is exacerbated by the fact that, if several organisations are outsourcing to the same partner, a particular authority may come fairly low down the pecking order if something goes wrong. “You don’t have any ‘command and control’ anymore,” Forster warns.
Alarm chairman and head of risk management at Hertfordshire County Council Paul Dudley says he works closely with his procurement and business continuity colleagues, and the latter work closely with suppliers to ensure that they have appropriate plans in place should challenges arise.
Dudley sees some of the major risks for local authorities arising from relationships. “Contracts are often long-term and it’s important they have a firm foundation.” In fact, an Audit Commission report on shared services showed that a few had failed because relationships turned sour. For example, with an IT-shared managed service, all the major benefits such as new IT tend to be delivered up-front. Once the contract settles down, disillusionment can set in. Dudley stresses that agreeing how you are going to work together is vital.
Regarding resilience of service provision, he says that a joint risk register is often useful. “If you take a potential threat like pandemic flu, it’s not just going to affect the authority but every organisation. You need to establish what plans you and your partners have in terms of keeping services going.” Dudley also emphasises the need for quality control. “Many councils have contracts with care homes, for example, and it’s important to ensure that these contracts allow for inspection arrangements, for dealing with disputes and, if necessary, cancellation of the contract. Most of the people involved in this industry are decent organisations and trying to do a good job, but councils have a finite amount of money and there are risks about making sure you are buying a good quality service for the money that you are prepared to pay.”
Zurich Municipal’s report ‘Public sector supply chain: risks, myths and opportunities’ looks in detail at the risks public sector organisations face. It can be downloaded at www.newworldofrisk.com