Both town halls and Whitehall need to establish effective exit strategies should their suppliers go bust. Service delivery can be outsourced, but responsibility for it cannot
The news that insolvencies among public sector suppliers jumped 26% over the last year is a stark reminder of the financial pressure and knock-on effects facing many organisations in the context of government spending cuts. It is also another example of the risks inherent to supply chains that face local authorities and government departments at the very time when they arguably most need a robust outsource-supplier network.
Public sector bodies are becoming well versed in the considerations that must be made before committing to a new supplier. But, unfortunately, as these figures suggest, it is possible for a proper risk management process to be followed and still be affected by supplier failure. For this reason, effective exit strategy planning is essential.
Pre-agreed by both the local authority and any third parties, an exit strategy will enable the authority to quickly take back activity or transfer it to another third party in the instance of supplier failure. And, as outsourcing spans further afield than back office functions and into the realm of critical services, this could not be more important.
The contents of a robust exit strategy can be discussed at length, but there are a few aspects that make good practice and responsibly planning for physical assets and employees is one crucial area. Local authorities must ask how assets will be transferred, valued and who they legally belong to. Who will be responsible for redundancy payments and pensions and, above all, who will be communicating this to staff?
Equally, is there any intellectual property that needs to be considered and can it be easily accessed? Information is often not held in physical form, and copyrights, trademarks and brand names all need to be properly accounted for. Similarly, who holds the access to and licensing of the actual systems on which the data is held must be clear.
Of course, a good exit agreement will also clearly outline how it should be implemented if the need arises, including exact timings and format. This can prevent ‘organisational divorce’ and the lengthy legal issues that it can entail. Maintaining a calculated approach when one party is facing insolvency may not be easy, but it should ensure that the ongoing work of the local authority is not damaged.
Ultimately, local authorities and government departments cannot afford to turn their back on the risks assumed by the contractor once they accept a contract, including supplier failure. Whilst delivery of the service can be outsourced, responsibility for it cannot.
A local authority’s reputation can easily be damaged by the perception that it has failed to protect its residents’ interests, particularly as we know that members of the public do not differentiate between a supplier and the authority.
However, as long as authorities make sure their exit strategy is comprehensive and flexible in its application, they should be able to work through the challenges whilst ensuring continuity of essential services.
Andrew Jepp is director of public services at Zurich Municipal
Andrew raises some critical issues.
When letting a contract a public body should undertake effective due dilligence on the provider including its financial strength, business model and ownership. It must then take this into account when selecting a preferred supplier proportionate to risk.
Clients should demand to see regular verififed or verifable reports on the financial strength of key suppliers. And contractually ensure that they have the right to veto or at least be consulted over significant changes to providers’ underpinning business models and ownership.
Clients have to retain or have access to the necessary capacity to step in to take over or transfer over failing contract or contractor in order to sustain services. In the case of many contracts for services and goods anym break in provision would be unacceptable and need to be avoided at all costs. Therefore, for major contracts public sector clients must have resilience plans and monitor their suppliers in ways that would allow them to step in in advance of major failure.
They need to have effective supply chain management and be assured that the prime contractor also has such arrangements. This does not have to be the case.
The costs of such contigency arrangements must tbe taken into account when deciding whether to contract or not to do so.
Unfortunately the pursuit of the cheapest tender and / or the lack of procurement and client management capacity across the public sector has led to some very costly failures when services have been contracted out. This can be avoided,