Part 4: What needs to improve

4.1
As we carried out our work in the last three years, we came across examples of practices that raised questions about whether particular DHBs got value for money or unwittingly accepted risks during the purchasing process, or both.

4.2
In this Part, we set out some examples of the practices that DHBs consistently needed to improve before they would be able to answer the key questions about their procurement activity (see paragraph 1.3). We discuss the risks that DHBs are accepting (without realising it in many instances) and the effect on the underlying principles of procurement, especially value for money and fairness.

4.3
The matters discussed are based on actual practices reviewed during our work. We have chosen not to identify the DHBs involved.

Improve the focus on purchasing the right supplies and services

Connect all the procurement-related information systems

4.4
Some DHBs are still unable to provide complete information on all the contracts they have.

4.5
Most often, the information is not available in a format that can easily be consolidated with information from other procurement activity. This is usually because:

• it is a handwritten list;
• it is out of date (because it requires manual updating);
• staff carrying out "pockets" of procurement do not keep a register of contracts;¹¹ or
• formal contracts have not been put in place to cover the procurement activity.

4.6
As we have discussed previously, incomplete procurement information:

• inhibits the ability of the DHB to take a strategic and forward-looking approach to procurement;
• prevents appropriate risk management processes from being set up; and
• increases the risk that the DHB is not consistently getting value for money from its procurement activity.

Identify and manage informal spending

4.7
We have previously referred to an agency supporting two DHBs that has put in place appropriate controls to identify and manage informal spending. However, most DHBs do not have such controls in place.

Example 17
Extent of unmanaged informal spending

At one DHB, we examined a list from the payments system of "active" suppliers (those that were paid during the financial year to 30 June 2009) and compared it with the register of contracts that the DHB provided to us. There were more than 2000 active suppliers, but only 900 contracts in place. One explanation for the difference was that payments to reimburse employees for expenses were included as "suppliers" in the payment system but not recorded on the contracts register. Although this explained some of the difference, the remainder was informal spending.

4.8
Other DHBs told us that they did not have enough information to determine the size and scope of informal spending and whether the DHB was getting value for money from this spending. Informal spending is not necessarily a problem. There may well be circumstances in which a purchase does not warrant a formal contract and a purchase order is enough evidence of the purchase. However, it is of concern that DHBs did not have enough information to gauge the size and scope of this type of spending.

Reduce reliance on existing staff as trainers

4.9
When discussing the emphasis of procurement training with DHBs, we noted that a number of DHBs rely on their existing staff to "buddy" with new staff to train them in how procurement is done in that particular DHB. There are some benefits associated with this approach, particularly where the staff doing the training are recognised as having good skills and experience.

4.10
However, the staff who are training new staff in this way have not necessarily had any formal procurement training themselves. They also learned how procurement was done from existing staff when they started. The risk in this reliance on internal training is that existing staff pass on misunderstandings and bad habits to new staff.

4.11
We suggest an appropriate balance between "on the job" learning and formal training from recognised procurement professionals. This will increase the level of understanding of procurement matters and the practical application of procurement practices.

Break down the "pockets" of purchasing activity

4.12
DHB purchasing activities have, historically, been structured in a broadly similar way. Purchasing is generally dispersed widely within the DHBs, but most purchasing is carried out by provider, funder, and facilities sections. The provider section usually buys supplies and services for corporate purposes, as well as for hospital purposes. Purchasing activity can also be carried out by smaller groups, such as staff within the DHB's pharmacy, information technology team, and human resources team.

4.13
We were concerned that each section within each DHB appeared to have been acting quite independently. There was little sharing of purchasing practices between these sections.

4.14
We noted several instances where staff responsible for purchasing who were not in the funder arm, or the purchasing or supply department of the provider arm, did not have enough knowledge about DHB purchasing policies and the risks associated with purchasing. In all of these instances, the DHB had staff with appropriate purchasing knowledge and capability in their main purchasing sections, but that knowledge and capability was not shared.

4.15
All staff involved in procurement matters should understand the risks and issues associated with procurement and have a good knowledge of their DHB's procurement policy and procedures. Where this is not feasible, because the staff are infrequently involved in procurement, they should at least have access to support and advice about procurement matters or pass the procurement activity to people who are skilled and experienced. This is good risk management practice.

Plan succession

4.16
Not all staff involved in purchasing activity are qualified and/or experienced in purchasing processes. Staff attrition in purchasing can significantly affect the expertise available to the DHB. Some DHBs told us that they are having difficulty filling vacant purchasing positions, and that staff turnover had been high. This poses a significant risk to effective and efficient purchasing.

4.17
Even if the other components of a good purchasing system are present, a lack of available knowledge and skills generally means that people can make decisions during the purchasing process without fully understanding the risks of those decisions.

4.18
To reduce the risk of staff turnover and the consequent loss of knowledge, DHBs should consider the ways in which they could plan for succession to replace key personnel, and retain corporate knowledge in the form of good procurement documentation.

Make the best use of available resources internally and throughout the sector

4.19
A common comment made to us was "We could do more with more staff." This was particularly relevant to the amount and quality of contract management carried out. If staff are using efficient processes, matching their effort to the level of acceptable risk, collaborating with other entities, and taking advantage of regional and national purchasing opportunities where appropriate, more time may be released to do more. However, eventually DHBs will need to consider whether staffing levels are appropriate to cover the workload required by the procurement risks they face.

Improve the way supplies and services are purchased

Improve policy and guidance

4.20
Although we have noted significant improvements in the last three years in the standard of policies and procedures available to staff, our review of the procurement practices for individual contracts has identified some aspects where further guidance and/or training is warranted, particularly in risk identification and management.

4.21
We noted an instance where a DHB had no standard documents for competitive purchasing processes, meaning that new documents were created for each purchase. Not only did this increase the administrative time in preparing new documents, it introduced inconsistency in the requirements and purchasing process between procurements.

4.22
This same DHB was also often left in the position of accepting a supplier's terms and conditions of contract because it had no standard terms and conditions of contract to offer. This led to an excess of non-standard conditions, making it almost impossible to administer contracts to a standard that consistently reflected the DHB's policies and principles.

4.23
In Examples 9 and 10, we noted DHBs that actively shared policy and procedural guidance. We suggest that sharing could extend to standard templates for common procurement documents. This would enable smaller DHBs or those without access to skilled and experienced procurement staff to adapt these templates for their own use rather than spending time creating procurement documents for themselves.

Provide clarity on policy coverage

4.24
Some staff carrying out procurement in smaller groups (such as the pharmacy or surgical theatres) did not know about the DHB's procurement policy or that it applied to their activity. Some were working to their own "policy" standards, which were not necessarily consistent with the DHB policy and sometimes were not documented.

4.25
DHBs need to ensure that they have a clear understanding of where procurement activity is happening and what is being procured. In doing so, they should also ensure that all staff involved in procurement are aware of, and applying, the DHB's approved procurement policy.

Plan better

4.26
Many of the matters that need to improve relate to the apparent lack of systematic planning for procurement activity, at both the overall programme level and at the individual purchase level.

4.27
In many purchases we reviewed, DHBs had not allowed enough time to complete the purchasing process before the end date of the current arrangements. It was not always clear whether the planning started too late for the purchasing process to be completed or the process took longer to complete than planned.

4.28
In some cases, contracts were "rolled over" with the current supplier. For interim arrangements like this, the DHB may have to accept unfavourable terms and conditions, and may not be able to appropriately demonstrate value for money.

Example 18
Poor planning for a purchase of continuously required supplies

We reviewed a contract for consumable supplies for a DHB's surgical theatres. The contract was extended in 2007 and 2008. The documentation on file recommending the 2008 extension noted that the current supplier had increased its prices at the end of its existing contract term, and that the DHB was aware of other potential suppliers. The documentation also stated that the DHB had intended to test the market for a competitive purchase, but there was not enough time to do this because the contract had already expired. The contract was later extended for six months, at increased prices, to give the DHB enough time to complete a competitive purchase for the supplies.

4.29
DHBs face several risks if a contract ends before a new contract begins (for a continuing supply or service):

• The DHB might not be able to source the supplies or services needed.
• The terms and conditions for purchases covering the "gap" between contracts may be unfavourable to the DHB.
• If performance issues arise, the DHB could have limited ability to correct them.
• The DHB might not be able to enforce service delivery standards and reporting requirements.

4.30
Many individual purchases made by DHBs did not have evidence of adequate planning. A lack of planning for a purchase can lead to the DHB purchasing supplies and services that do not fully meet its requirements, and in a manner that exposes the DHB to challenges about the openness, fairness, or integrity of the purchasing process.

Apply a purchasing approach suited to the purchase

4.31
The selection of a purchasing approach needs to consider:

• the overall principles underpinning purchasing activity – accountability, openness, value for money, lawfulness, fairness, and integrity;
• the strategic view of procurement that the DHB has developed; and
• the scale and nature of the individual purchase and the risks involved.

4.32
DHBs' policies usually specify a preference for competitive purchasing. However, their policies acknowledge that a competitive approach is not always appropriate for:

• inexpensive purchases;
• particular services (for example, services funded by the DHB where the relationship with the supplier is important, or where specialist advice is being sought);
• particular market conditions (for example, where there is only one supplier or provider); and
• the delivery of a particular service (for example, where the service is targeted to a specific population, which limits the number of providers able to provide the service).

4.33
An open competitive purchasing approach is an effective way of showing that the purchase represents value for money. Two or more parties compete to deliver the supplies or services. Managed appropriately, a competitive approach provides for an open and fair purchasing process that represents value for money, and an outcome for which the DHB can be held accountable.

4.34
Where a competitive purchasing approach is not seen as an appropriate approach for the circumstances of a particular purchase, DHB policies usually require justification of the purchasing approach to be adopted. Most DHBs have some guidance about the circumstances in which a departure may be acceptable. The justification should consider the overall principles underpinning purchasing activity: accountability, openness, value for money, lawfulness, fairness, and integrity.

4.35
There are also additional requirements that DHBs need to satisfy to ensure that a non-competitive purchasing approach remains open and fair, and delivers value for money. DHBs could be at risk of challenge from suppliers or providers that have not had an opportunity to submit a competitive offer for the supplies or services that were purchased by direct negotiation with a single supplier or provider.

4.36
Many of the individual purchases that we reviewed were purchased using a non-competitive approach. Some of these were justified from a strategic procurement perspective, because they were contracts for which there was no effective market or for which the relationship with the supplier was a critical element in the effective delivery of the services. However, for many others, we noted no appropriate justification for using a non-competitive approach.

4.37
We were concerned at the lack of information available about how these non-competitive purchases represented value for money to the DHBs.

Example 19
A non-competitive purchase without apparent justification

We reviewed a contract for medical supplies. The contract was originally awarded in late 2002, after what appears to have been a competitive purchasing process. The contract was for two years, with a "right of renewal" for a further two years if the supplier's performance was satisfactory. A memorandum was prepared for the DHB's Board in 2004 that recommended exercising the two-year right of renewal. The memorandum indicated that there were other potential suppliers in the market with possibly better pricing than the current supplier's. The memorandum referred to an intention to conduct a competitive purchasing process for these supplies in 2005 to ensure that any new supply arrangement was in place before the end of the two-year right of renewal term. The contract has since been extended twice, each for a one-year period. We found no documented justification for the further use of a non-competitive purchasing approach. Nor did we find any evidence that the continued extension of the contract represented value for money for the DHB. The latest contract extension expired on 31 October 2008. Although we found no further contract extensions on file, the DHB was continuing to purchase these supplies from the existing supplier.

Example 20
Weak justification for a non-competitive purchasing approach

We reviewed a contract for delivering training services. The contract was awarded in 2008, using a non-competitive purchasing approach. The justification for a non-competitive purchase was that there was a "monopolistic market", meaning that only one supplier was capable of providing the services. However, there were handwritten notes in the file about informal market approaches to other suppliers before the preferred provider was chosen. These notes clearly indicated that there were other suppliers in the market. The DHB could have used a competitive purchasing approach, to ensure that the contract for training services represented value for money.

Example 21

Querying justification for a non-competitive purchasing approach within the DHB

We reviewed a contract for office supplies that was originally awarded in 2003 for one year. The contract was between the supplier and an entity representing a number of DHBs. It was unclear from the file whether the original contract was awarded using a competitive purchasing approach. However, the file contained evidence that the contract had been extended in 2004 for one year, with two one-year "rights of renewal". The first right of renewal in 2005 was taken up. The entity representing the DHBs was disbanded when the second right of renewal was due in 2006. Each of the participating DHBs individually decided how to continue purchasing their office supplies. One DHB chose to directly negotiate a contract with the current supplier for three years, with a right of renewal for another two years. The paper justifying the non-competitive approach identified that the current supplier had said that it was unable to "hold prices" if the DHB chose to break away from the existing contract arrangements, but that it would "hold and improve on prices" if the current supplier was awarded a contract for a longer term. The DHB also identified that the current supplier had "demonstrated a willingness to be a proactive partner … by providing ideas and extensive reports displaying how we can best reach our goals". No other rationale was given for choosing a non-competitive purchasing approach over a competitive purchasing approach. The reasons noted for using a non-competitive approach were not in keeping with the DHB's purchasing policy. They were also, in our view, insufficient for a simple commodity purchase in a highly competitive market. The DHB might have secured a contract of equal or better value for money if it had used a competitive approach. The approving authority that signed the "Request for Contract Sign-off" included a handwritten note that read "Tender? Dispensation again". This indicates some question in the approver's mind about the justification for extending the contract rather than entering into a competitive purchasing process for the supplies. There was no documentation in the file to indicate that the issue raised by the approving authority had been satisfactorily resolved.

4.38
In the examples above, the DHBs did not provide enough evidence that the use of a non-competitive approach was fair, or that the resulting purchase represented value for money.

Manage purchasing risk

4.39
In a large number of the contracts that we reviewed, procurement risks were not appropriately considered either at the planning stage or during the purchasing process. In particular, the sorts of risks that were not appropriately considered included:

• conflicts of interest;
• managing communication with suppliers/providers; and
• evaluating competitive tenders.

4.40
We appreciate that conflicts of interest have been prominent in the health sector for some time, and that DHBs have taken steps to properly identify and manage conflicts of interest at the Board level. Many DHBs are also amending conflict of interest processes for staff. We have noted some improvements in both identifying and managing conflicts of interest. However, there is still room for DHBs to improve.

4.41
We were concerned about the lack of evidence in purchasing files that conflicts of interest had been considered, such as specific declarations or notes of discussions about conflicts of interest. All DHB purchasing sections (that is, corporate, provider, and funder sections) lacked such information, for both competitive and non-competitive purchases.

4.42
At best, this means that the potential for conflicts of interest had been appropriately discussed and managed throughout the process, but not recorded. However, our work in several DHBs indicates that it is more likely that DHBs were failing to appropriately identify, assess, or manage conflicts of interest during purchasing processes.

4.43
Where DHBs included documentation in the purchasing files, it was not always clear whether the discussion about conflicts of interest covered all of the staff and external advisors involved in planning, managing, and approving the purchase. In many instances, the conflict of interest declarations that were included in the files were only for members of the team responsible for evaluating the offers. In other cases, the declarations covered only those members of the evaluation team who were not DHB staff.

4.44
During all stages of the purchasing process, actual or perceived conflicts of interest could have a significant effect on the fairness and integrity of the purchasing process. Therefore, it is important to ask all parties involved in the purchase to identify and assess conflicts of interest.

4.45
For the few purchases where processes were appropriately applied and conflicts of interest were identified, we saw little evidence that the DHBs had assessed the implications of the conflict of interest. It was unclear whether DHBs took any action to reduce the effect of the conflict to ensure that the management of the purchase remained fair and unbiased.

Example 22
Where a conflict of interest process could be widened

We reviewed a contract where the DHB used its existing supplier of advisory services to help it draft the specification of services to be included in an invitation to tender document. The same supplier was then allowed to tender for the contract. This creates a significant risk to the fairness of the purchase process, because the supplier had the opportunity to draft the specification to suit its product or mode of operation. In addition, the supplier also had more detailed information about the intended purchase, and had that information earlier, than other potential suppliers. Conflict of interest declarations had been documented by all of the tender evaluation team members. However, in this case, it was not clear whether the DHB had considered the conflict of interest issues for the staff and advisors involved in preparing the tender documents. In addition, it was not clear whether, and how, the DHB had managed the risks of using its current supplier to draft the specification of services. The existing supplier was later chosen as the preferred supplier of these services.

Example 23
Poor management of declared conflicts of interest

We reviewed a contract for cleaning services that were competitively purchased in 2006/07. We reviewed the conflict of interest declarations in the purchasing file. Four of the eight members of the evaluation team who completed conflict of interest declarations declared that they had received hospitality from the companies that submitted tenders. Three of the four received hospitality from the organisation that was eventually successful in securing the contract for the cleaning services. There was no evidence in the file describing how the declared conflicts were assessed, managed, mitigated, or otherwise addressed. The information on the file indicated that there were 12 members of the evaluation team. This means either that four members did not complete a conflict of interest declaration or that these declarations were completed but not included on the purchasing file.

4.46
We noted examples where communications had been poorly managed:

• Information had been provided to some tenderers but not others.
• Invitations to visit the premises of individual tenderers were accepted without ensuring that the premises of all tenderers were visited.
• Individual tenderers had been allowed to visit the DHB and discuss aspects of the tender, but the DHB had not given the same opportunity to all tenderers.

Example 24
Poor practice in responding to communication and offers from potential suppliers/providers

In some purchases we reviewed, a party responding to the invitation to submit a competitive offer had asked a question of the DHB. The DHB provided the answer to only that party. This meant that others intending to compete for the purchase were not given the same information. The DHB ran the risk that the other parties were unable to compete on the same basis as the questioner, and could challenge the purchasing process based on that unfair advantage. We also reviewed a purchase in which one party submitting a tender offered to show DHB representatives around its operating base. Such a site visit was not a requirement for the purchase. The DHB accepted the offer but did not advise other parties who had submitted tenders that the DHB was now prepared to make site visits. Therefore, the DHB gave one party a potential advantage – to give a more thorough explanation of their operation than would have been possible in writing. Furthermore, that party was able to make a personal connection with the DHB's representatives who would be selecting the successful tender. In this purchase, another party became aware that the site visit had occurred and complained to the DHB about the unfair process. The purchasing process was delayed until the DHB's representatives visited the complainant's base of operations.

4.47
In Example 24, the management of the communications might have adversely affected the openness, fairness, and integrity of the purchasing process. This increased the risk that unsuccessful suppliers and providers might challenge the purchasing decision in some way, whether through legal, political, or other accountability processes.

4.48
In many of the competitive purchases we reviewed, there was little or no record of:

• the evaluation process, in either an evaluation plan or otherwise;
• the evaluation's results, in either detailed "scoring sheets" or another form; or
• a recommendation for awarding the contract, based on the evaluation completed.

4.49
In these contracts, we were unable to determine whether the evaluation was conducted in a fair and transparent manner. We were also unable to determine whether the evaluation was in keeping with the information provided to the competing parties.

4.50
The absence of this documentation means that the DHBs might not be able to support the decision to award the contract to a particular party. They might not be able to demonstrate that the evaluation was conducted in a manner that was fair and ensured the best value for the DHB from the competing proposals.

4.51
Some files contained evidence of decisions made during the evaluation that did not meet our expectations of a fair and transparent process. Examples included:

• DHBs used evaluation processes that were different from those set out in the invitation documents. Evaluation criteria were altered, additional evaluation criteria were added, or weightings of criteria were amended, after the offers were opened.
• Additional steps were added to the evaluation, such as presentations, site visits, or interviews, without a clear understanding of how these were to be included in the evaluation process.
• The evaluation documentation indicated one party was preferred, but the contract was awarded to another party for reasons that were not documented.
• Some parties were given an opportunity to amend their offers after the closing date for offers.

Example 25
Deviation from the planned evaluation process

We reviewed a contract where the DHB was funding residential mental health services in the community. The contract was awarded through a competitive process. The documentation on the file recording the evaluation process introduced new criteria into the evaluation that were not in the "Request for tender" documents. These new criteria were apparently introduced to the evaluation after the initial scoring of the tenders. The new criteria were scored during interviews with two short-listed parties. However, the documentation was not clear how these new criteria were combined with the initial scoring to determine the final preferred provider.

Example 26
Supplier evaluated the highest not being awarded the contract

We reviewed a contract for patient-related supplies that was a collaborative purchase by a number of DHBs. The documentation of the evaluation of submissions indicated that all participating DHBs agreed that one supplier was preferred and the contract should be awarded to that supplier. However, the DHB we reviewed awarded a contract for these supplies to its existing supplier, who was not the same as the preferred supplier. The DHB advised us verbally that its clinicians preferred the existing supplier's products, and that this influenced its decision. However, there was no documentation on the DHB's files to indicate why it had chosen a different supplier, or how it had concluded that its existing supplier represented better value for money than the supplier preferred by the DHBs as a result of the collaborative purchasing process.

Example 27
Unfair opportunity to amend an offer after tender closing date

We reviewed a contract where a DHB used a competitive purchasing approach, requesting quotes from three suppliers, to secure supplies of a relatively standard range of products. Its existing supplier submitted a quote representing a substantial increase in its previous pricing. After all the quotes were submitted, the DHB sent a note to its existing supplier indicating that it had received cheaper quotes from their competitors, and identified that the DHB staff expressed a preference for the existing supplier's brand of product. This note went on to solicit an amended quote from the supplier to obtain a lower price. There was no evidence that any of the other suppliers were offered the opportunity to amend their quotes. The existing supplier was awarded the contract. The documentation on the file recommending the award of the contract to the incumbent refers to a process to "negotiate" the extent of the price increase down.

Align the term of the contract with the underlying need for the supplies or services

4.52
In one DHB, most of the contracts we reviewed for services the DHB was funding were either contracts for one year or subject to a detailed annual review. A large proportion of these contracts were for health services that were expected to be delivered for periods much longer than a year, such as aged residential care services, mental health care services, and Māori health services. The annual contract documents were repeatedly renewed and re-issued.

4.53
This DHB was not alone in this practice (although it was the most notable example). In the other DHBs we visited as part of our performance audit work, more than half of the contracts we reviewed for long-term services were contracts for only one or two years. The contract files did not explain why the contract terms were so short compared to the expected duration of the services.

4.54
This practice creates unnecessary administrative effort, for both the DHBs and the service providers, for little observable benefit. A strategic understanding of the nature of the services under contract, and enhanced guidance and training on how to manage longer-term contracts (including options for termination clauses and ways of issuing variations for small changes) could significantly reduce the administrative workload. In doing so, the costs of administering agreements for delivering longer-term services could also be reduced.

Take particular care that contracts can be ended if needed

4.55
Most DHBs have some contracts that do not contain a specified end date and can be terminated only if the service provider performs poorly. Such contracts are commonly referred to as "evergreen". Most (but not all) of these contracts were inherited by DHBs from the Ministry of Health or the Health Funding Authority. Some evergreen contracts were entered into by DHBs shortly after they were established in 2000, while others have been entered into more recently.

4.56
These contracts pose a risk to DHBs, particularly in circumstances where they may need to terminate the contract for reasons other than poor performance. Changes to legislation, government policy, funding availability, or service priorities might require the services to be rationalised, or funded or delivered differently. Although such changes could require an evergreen contract to be terminated, DHBs have no apparent rights to terminate the contracts for those reasons.

4.57
Some DHBs have modified evergreen contracts to include a provision allowing them to "terminate without cause" with six months' notice. These new clauses remove the evergreen nature of the contracts, enabling the DHBs to recognise the long-term nature of the services while having the flexibility to respond to changing circumstances and changes in the supplier's performance.

4.58
DHBs should have a structured programme of reviewing their current evergreen contracts where contractually possible. The outcome of the review should be either to put evergreen contracts on to a more conventional basis with a specified end date or to insert appropriate termination clauses.

Plan the transition from one contract to another

4.59
The transition from an existing supplier to a new supplier for the same supplies or services is a particular risk in procurement.

4.60
We noted several examples where the relationship with the existing supplier was not managed well. This led to an unwillingness on the supplier's part to help the DHB in its transition to a new supplier. In some cases, the DHB had not done enough planning when entering the previous contract to enable it to enforce appropriate transition assistance (including the release of information about the delivery of previous services, and the transfer of patient information). In other cases, the delivery performance of the current supplier dramatically decreased during the transition, leaving the DHB without timely access to the supplies.

4.61
Planning for the possibility of transition to a new supplier should be included in the conscious risk management process when planning the procurement. This enables appropriate expectations to be included in the contract documents to cater for transition requirements. It also provides a basis for managing the supplier/provider relationship for the contract, including the fact that the contract may not be renewed when it expires.

Link historical supplier or provider performance with purchasing evaluation

4.62
DHBs purchase a large number of supplies and services on an ongoing basis. Therefore, DHBs have access to information about the past performance of a large range of suppliers and providers. However, we noted little formality in the way in which DHBs accessed and used this information during the evaluation of proposals from previous (and current) suppliers or providers for the next competitive procurement process.

4.63
Appropriate documentation of supplier or provider performance, and processes to access and use this information consistently during evaluations, can reduce the risk of perceptions of bias (either positive or negative) when previous suppliers are involved in new purchasing processes.

Get the supplies and services you thought you were buying

Provide better policy and guidance on contract management

4.64
Contract management activity occurs in an even wider range of places in DHBs than purchasing. It often consists of operational staff managing the day-to-day transactions and detailed delivery of supplies and services, as well as nominated staff managing the relationship with, and overall performance of, the suppliers or providers.

4.65
We have noted a general improvement in procurement policies and procedural guidance over the last three years. This is mainly in purchasing policies and procedures, with the policies and procedures for contract management not keeping pace.

4.66
Operational staff may not have experience in contract management. Clear guidance would enable operational staff to fully understand their contract management responsibilities. Better policies and procedural guidance would also inform these staff of the DHB's record-keeping requirements to support the decisions they make.

Plan for managing the contract when the purchase is being planned

4.67
Our reviews of individual contract management practices noted a general absence of formal contract management plans, even for those purchases that were very high value and/or especially important to the DHB. DHBs should be planning how they will manage the delivery of supplies when they are planning for the purchase. This is the best time to do the delivery planning because many of the contract monitoring requirements can be incorporated in the contract terms and conditions included in the purchasing documentation.

4.68
We acknowledge that a lack of formal records does not necessarily mean that planning was not done or that contracts were not managed. However, the fact that risk management and the development of key performance indicators (KPIs) also need to improve indicates that DHBs could generally improve their contract management planning.

Systematically match the contract management response to the level of risk

4.69
Our discussions with contract management staff identified that there was often little correlation between the contract risk and the planned contract management activity to address that risk. We found that few DHBs had linked the requirements for monitoring, and the way in which monitoring would occur, with the risk of performance or delivery failure for the particular supplies and services.

4.70
Some DHBs have unwritten "rules of thumb" that they proactively manage only the top 10 or 20 provider arm contracts (by either volume or value). Given that many DHBs have several hundred provider arm contracts, this leaves a large number of contracts that are managed only if something goes wrong.

4.71
It is unclear whether this is an appropriate response to risk. It is also unclear whether DHBs are spending large amounts of time reacting to service delivery problems that could have been managed more effectively and efficiently by using a proactive approach.

4.72
In some DHBs, the rationale for external review of providers of services was based only on the amount of funds available and a requirement to cover all of the designated contracts in a specified period. This means that providers about whom the DHB had service delivery concerns were scheduled for review in the same way as providers for whom no concerns have been raised.

Define appropriate key performance indicators for managing performance

4.73
A large number of contracts that we reviewed included specific performance reporting requirements by the supplier or provider, but did not appropriately specify the standards expected by the DHB for delivering services and how those would be measured (commonly referred to as KPIs).

4.74
The risk of unclear service delivery performance expectations is that the DHB is unable to effectively monitor and enforce the service delivery standards it was expecting when it purchased the supplies or services. Such standards are left open to interpretation and uncertainty.

Link financial systems and contract systems to monitor the spending on a contract

4.75
We noted a number of examples where contract managers did not have appropriate access to, or were not actively monitoring, the volume and value of spending against the expectations in the contract.

Example 28
Poor monitoring of actual spending against contract arrangements

In one DHB, we noted a contract in which the total amount spent in one year was 2.5 times the total value of the three-year contract. It was unclear whether this was a substantial increase in the volume of purchases made for the supplies included in the contract, or whether additional supplies were added to the contract without a formal contract variation. In another DHB, we reviewed a contract worth $1.2 million. The amount paid to that contracted supplier exceeded the contract value by a third. The DHB's subsequent analysis identified that the additional spending was on non-contract items. The DHB is in discussions with this supplier to formalise contract pricing and delivery arrangements for the additional product lines. Our final example relates to a contract for which the DHB had negotiated a recovery should the amount of supplies ordered be less than the expected volume contracted for. The actual volumes ordered were consistently under the volume contracted and yet no recovery had been sought.

Know whether enough attention is being paid to procurement

Learn from reviews of contract management practices

4.76
Although we noted that internal audit is beginning to focus on purchasing to ensure that purchasing is conducted in keeping with policies and procedure and good practice, we found that the internal audit team was giving little attention to contract management practices.

4.77
If DHBs are applying effective and efficient purchasing processes, the success of the procurement still depends on managing the contract to ensure that the required supplies and services are delivered at the right quality and for the contracted prices. Contract management deserves just as much self-review attention as purchasing activity.

11: Some staff in DHBs regularly spend money on supplies or services, even though their role is not solely focused on procurement (for example, some theatre staff are responsible for buying theatre supplies but are not members of the provider arm's procurement team).

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