Part 9: Managing contracts and relationships

9.1
The seventh stage in the procurement life cycle is:

• actively managing the supplier's performance, including contract management planning and supplier relationship management;
• involving senior management in overseeing contracts; and
• ensuring that risks are managed.

Monitoring supplier performance

9.2
The public sector needs to be aware of the contracts that are critical to service delivery across government. There have been instances, locally and overseas, where the government has had contracts with suppliers for critical services and these critical services have either failed or required government intervention. We are interested in how public organisations monitor contracts for critical services and whether they are being appropriately managed on an ongoing basis. We will consider what further work we should do as our procurement work progresses.

9.3
Public organisations need to monitor and manage a supplier's performance to assess whether they are receiving what was contracted. They should determine the extent of the managing and monitoring based on risk management and cost–benefit assessments.

9.4
It is not just a few large contracts that need to be managed well. The effective delivery of low-cost, high-volume contracts can also be critical to a public organisation's purpose, for example social services that support vulnerable individuals.

9.5
Monitoring and managing suppliers' performance – especially the performance of critical suppliers – should be a priority for public organisations.

Involving governance and senior management in contract management

9.6
We have noted that contract management capability can be a concern, particularly where organisations or their business units carry out large or "once in a lifetime" projects. This means it is important that senior managers and governors of public organisations have oversight of, and support, important procurement projects. Senior management can help to ensure that the procurement remains on track and that any issues are dealt with when they arise.

Monitoring and managing risks

9.7
Procurement risks need to be actively managed. Identifying and managing risks needs to be systematically carried out for each procurement process.

9.8
Managing risk does not mean eliminating all risks but instead fully understanding risks and then taking appropriate action about them. Such action would usually involve allocating the risk, mitigating the risk, and, where required, monitoring it. Effective risk management increases the likelihood that a procurement will go well and that the public organisation can deal with any issues when they arise.

Our proposed audit work

9.9
Effective contract management is important for effective procurement. If a contract does not deliver to expectations, then no matter how efficient or well-conducted the purchasing process was, the procurement has not been effective. Effective contract management helps ensure the effective delivery of services as well as facilities.

9.10
Public organisations need to monitor and manage a supplier's performance to assess whether they are receiving value for money. Public organisations should determine how much they need to manage and monitor supplier performance based on risk and cost-benefit assessments. Monitoring and managing supplier performance should be a priority. We intend to look into contract management.

9.11
Many larger public organisations have entered into smaller contracts (less than $0.5 million) with a broad range of suppliers. Collectively, the total contract value and risk exposure can add up to tens or hundreds of millions of dollars. Ensuring consistency of contract management and service delivery, and providing assurance throughout a large portfolio of small contracts, can be challenging. This is particularly true of large public organisations, where responsibility and oversight of contract management can be devolved across multiple teams.

9.12
We intend to look at the challenge faced by public organisations to effectively manage and monitor many smaller contracts to ensure that they are getting value for money.

9.13
Social services play a vital role in the lives of New Zealanders. Social services provide New Zealanders access to health service and education opportunities and protect and support the most vulnerable. The quality of these services and their accessibility for people in need are important.

9.14
Planning and delivering social services can be particularly difficult because:

• there might be few credible suppliers of a particular service;
• services can be complex, for example, services might be unable to be fully recorded in a specification or service level agreement, so the contract alone cannot be relied on to deliver them;
• the Government is not always the end user of the service and might not be present at the point of delivery. This can make it difficult to assess the quality of provision;
• required services cannot always be provided through one contract, and the current system needs better ways to join up services for people with multiple and complex needs;
• contracted services do not always meet the needs of their users; and
• current government budgeting processes and accountability mechanisms often favour the use of prescriptive contracts, a short contract period, and onerous reporting requirements.¹⁷

9.15
We will also look at contract management in the social services sector.

17: See New Zealand Productivity Commission (2015), More effective social services.