UK: Working With Suppliers: Less Shtick And More Karat

Contractual mechanisms that punish poor performance are not necessarily the most effective at achieving long-term delivery. Simon Briskman looks beyond service credits for other means of managing and incentivising supplier performance.

It's been a tough year – but have we learnt anything from our travails? Specifically, are customers wising up to the fact that working with, rather than beating up, suppliers can achieve what's best for the business in the long run?

Customer organisations have become strongly focussed on maximising value from their suppliers. They don't just want sales shtick; they want the gold standard in best practice and innovation. Yet many customers could do more to realise value if they adopted stronger relationship engagement with their suppliers.

The blame game

The G4S headlines typified 2012. G4S were pilloried for not recruiting security staff quickly enough in the run up to the Olympics. MPs blamed G4S for inadequate planning and poor management information while exonerating LOCOG, the organisers of the Games. Yet LOCOG originally estimated 2,000 security personnel were needed for the job before ramping up the requirement to 10,400 staff just seven months before the games began. These staff needed recruiting, training, vetting and accrediting in a short space of time.

The Home Affairs Committee, who were so damning of G4S's performance, also cited G4S as one of the world's leading security providers. This casts doubts on whether any supplier could have fulfilled the contract. Customers cannot afford just to blame their suppliers. They need to ensure their requirements are manageable in the first place. It was LOCOG who risked most if Olympics security was inadequate (and not every customer can call in the army if its supplier fails).

The Laidlaw report on the West Coast Mainline debacle reveals a different kind of customer governance issue. Laidlaw found that the Department for Transport didn't give adequate information to bidders and didn't put in the preparatory work to do so. Suppliers were not compared apples to apples and potentially the wrong supplier was selected for the rail franchise. This led to the very public cancellation of FirstGroup's appointment in early autumn.

West Coast Mainline and G4S are examples of how suppliers can be punished for poor customer governance. FirstGroup were blameless and will be significantly out of pocket, while as a result of G4S's poor performance, the Home Affairs Committee called for G4S to sacrifice its fee for the Olympics contract and threatened that G4S should be blacklisted from future government business.

Gambling on the government

The public sector backlash to G4S in particular has been to seek ever more robust terms which do little to address the underlying issues required to achieve sustainable services. Tougher contracts allow termination and compensation at the drop of a hat, and nowadays are frequently non-negotiable.

In the worst cases, private sector companies are being asked to take a punt on the government not withdrawing from a deal. Contracts are becoming all stick and no carrot. But customers should not rely on termination and compensation alone. The bigger question is how to achieve long-term performance.

Better ways to ensure delivery

My eyes were opened a decade ago when a senior procurement manager and I were discussing performance provisions in a deal we were putting together. Part way through the conversation, he suggested that we should not bother with service credits. They took time to manage, were usually costed-in and did little to ensure delivery. His retained organisation needed simplicity and for contract management to focus on delivery rather than retribution. We achieved this through better governance designed to put poor service delivery back on track. My contracts still contain service credits, but governance has become a more important focus over the years.

Whatever an organisation's approach to service credits, service measurement remains the key tool for service management. Poor management information was certainly a failing in the G4S contract. How should customers ensure simple but effective reporting when services are often complex to measure?

One way to keep things simple is to include a wide mix of service measurements but allow the customer to pick a shortlist to actually measure and to vary that list from time to time. This approach allows customers to choose what is currently most important to them and need not be unfair or punitive to suppliers. Another approach would be to include soft measures such as customer satisfaction or net promoter scores which better reflect overall quality of service than sample technical measurements.

Measures can be included in a balanced scorecard reflecting their relative importance. Repeat service failures should lead to remedial plans to bring the service up to the required standards. But customers should go further and consider what should happen if the service remains poor, as the lexicon of contract provisions often peters at this point. Termination becomes the final option too quickly for comfort.

Achieving the gold standard

My team have been developing mechanisms which might be described as preventative rather than remedial. In these mechanisms, service measurement can be used to reward good behaviour. Rewards might include service credit holidays, opportunities to present to senior management or the customer becoming a supplier reference site. While service bonuses can be used, they do not necessarily change supplier behaviour. The incentives chosen should reflect issues which are tailored to the supplier's interests.

Incentives can be used to drive a range of behaviours. For example, technology refresh and continuous improvement are often written into contracts but seldom implemented. What would make a supplier actively engage in value-add opportunities? Gainshare is helpful, but perhaps participation in innovation boards and opportunities to present to senior management, for instance, would motivate suppliers more. Ultimately a supplier's key driver is to remain competitive and grow its business. Customers might consider baking into the contract an extension right if the supplier remains competitive through service improvement.

These new ways of treating supplier performance show that while 2012 may have been tough, it has also presented opportunities. Those who have reflected in the lean years are discovering new ways to improve governance and supplier performance. The lessons learned are now permeating into best practice.

Customers still need strong contractual rights. But they also need contracts which reflect solid working relationships and which achieve the best possible results for their businesses, results based on value and service, not just penalties and big sticks.

Published in Outsource Magazine, Issue #30 Winter 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.