Strategic suppliers: Understanding and managing the risks of service disruption - follow-up

18 June 2024

Rachel Boyack
Chairperson
Governance and Administration Committee
Parliament Buildings
Wellington

Tēnā koe Ms Boyack

Follow up to our performance audit – Strategic suppliers: Understanding and managing the risks of service disruption

In June 2021, the Speaker presented my report, Strategic suppliers: Understanding and managing the risks of service disruption, to Parliament. The Governance and Administration Committee (the Committee) subsequently provided its own report to Parliament in June 2022.

In mid-2023, my Office asked the public organisations¹ looked at in that audit to assess how they had responded to my recommendations. We published their responses on our website in June 2023. I decided to carry out a further follow-up in 2023/24 that focused specifically on the activities of the Ministry of Business, Innovation and Employment (the Ministry) as the system lead for procurement in the public sector, including supplier management.

To assist the Committee in its further scrutiny of the Government’s work in this area, this letter sets out our view of the progress that has been made to address my 2021 recommendations.

Background

Our 2021 performance audit looked at the public sector’s collective understanding and management of strategic supplier risk. Strategic suppliers are typically private sector companies that provide goods and services that are critical to providing public services. They could include, for example, companies that provide highly specialised services or equipment, or support technology systems that hold important information. These suppliers are not easily replaced. Significant disruptions to strategic suppliers could affect the ability of the public sector to reliably provide important services to New Zealanders.

In our 2021 audit, we looked at:

whether the Government knew which suppliers were its key strategic suppliers across the public sector;
what processes were in place for assessing and mitigating the risk of important public services being disrupted by strategic supplier failure and responding to identified risks and issues; and
what reporting was provided to the Government on strategic supply risks to the delivery of public services.

We also selected a small number of public organisations and looked at how they understood and managed strategic supplier risk.

Our 2021 audit found that most public organisations know which of their suppliers are the most critical. However, many of these suppliers support a wide range of important public services and, at the time of our audit, we found the Government did not fully understand which strategic suppliers it relied on. The Government also did not fully understand the risk of disruption to important services if a strategic supplier were to fail.

I made five recommendations to improve public organisations’ understanding of their strategic suppliers. These included ensuring that the public sector takes a co-ordinated approach to strategic supply risks and improving how public organisations identify, manage, and report on their strategic suppliers and strategic supply risks.

What has happened since our 2021 audit

In June 2023, we asked the public organisations that we audited to assess how they had addressed our recommendations. We published their responses on our website. We also raised our recommendations with the audited public organisations as part of our normal engagement work.

The audited public organisations told us that they had made some progress in clarifying roles and responsibilities for managing strategic suppliers. The Ministry also reported that it had provided guidance and support to organisations to identify and manage their strategic suppliers through a new toolkit.

I decided to carry out further follow-up work in 2023/24 because the potential impact of strategic supplier failure is significant, and in my view limited progress had been made. I have focused this follow-up work on the Ministry because of its leadership role in supporting good practice procurement and supplier management across the public sector.

What we found in our 2024 follow-up work

I wanted to understand whether the Government is now better positioned to understand its strategic supply risks than it was in 2021. To do this, my staff interviewed people responsible for improving government procurement at the Ministry and reviewed relevant documents.

The Ministry told us it supports improving the capability of organisations to identify and manage strategic suppliers, including the risk of service disruption, through the Supplier Relationship Management work programme it started in 2021. The Ministry provides comprehensive guidance and regularly engages with organisations to support them to manage supplier relationships well. This guidance includes tools that help organisations to identify their strategic suppliers and the level of engagement they should have with those suppliers.

The Ministry requires mandated organisations² to assess their procurement capability each year. This includes assessing whether an organisation has identified the suppliers and providers that are critical to delivering strategic outcomes, and whether it understands and uses effective risk-management practices to support all procurement activities. The Ministry told us that it intends to analyse the results of these self-assessments to ensure that the Supplier Relationship Management work programme is having the intended effect. This analysis will help the Ministry to identify any aspects that might need further improvement, including understanding strategic supplier risk.

In July 2023, Cabinet changed the Ministry’s role from Procurement Functional Leader to System Leader for Procurement. We were told that this change was to give the Ministry a clearer mandate to provide central oversight of procurement across the public sector. As system leader, the Ministry now has the mandate to identify and manage risks associated with strategic suppliers that support a wider range of important public services across the public sector.

To do this well, the Ministry requires good information on what constitutes a strategic supplier, and who those strategic suppliers are. This includes for individual organisations, and for the public sector as a whole. Good procurement information can also help to identify where common services and goods could be procured more efficiently. However, in October 2022, the Ministry stopped requiring organisations to report key information about significant service contracts.

My conclusion

The Ministry told us that there is other data and intelligence that is used to identify strategic suppliers across the public sector. However, these sources of information do not provide a comprehensive picture. As a result, the public sector is not well positioned to understand the risks of disruption to important services if a strategic supplier fails to provide these.

In my view, without this understanding, the Ministry has little ability to ensure that the public sector is actively managing the risks of disruption to services that are critical to New Zealanders.

My Office will continue to monitor the progress that public organisations have made in implementing the recommendations from our 2021 report. The Committee might also wish to invite the Ministry to present to them on its progress in addressing these recommendations.

Because of the public interest in this matter, we will publish this letter and attachments on our website.

Nāku noa, nā

John Ryan
Controller and Auditor-General | Tumuaki o te Mana Arotake

1: We requested self-assessments from the Ministry of Business, Innovation and Employment, the Treasury, Te Kawa Mataaho Public Service Commission, the Department of Internal Affairs, the Department of the Prime Minister and Cabinet, and the National Emergency Management Agency. Their responses are published on our website: oag.parliament.nz.

2: Mandated organisations include all public service departments and departmental agencies, non-public service departments (except the Office of the Clerk of the House of Representatives and Parliamentary library), all Crown entities (except school board trustees), and all companies named in Schedule 4A of the Public Finance Act.