A break in the chain

Tuesday 18 October 2022

Ashley Easen, Director Risk Control, and Phil Farrar, National Development Director, Risk Management Partners discuss issues of supplier failure and the consequences these can have on the public sector.

Economic, geopolitical and policy influences, not to mention the outfall from a recent pandemic, have made many supply chains and some suppliers vulnerable. Supplier collapse is an ever present and increasing threat.

At its point of collapse five years ago; Carillion was the UK’s second largest construction and support services’ company and was entrenched in many central and local government projects.

Since then, the UK has faced unprecedented challenges to service delivery. Brexit, COVID-19, Ukraine, energy hikes and the cost of living crisis, have affected supply chains and subsequent delivery of public services.

The aim of any public body is to deliver services effectively to the highest possible standards. One option to achieve desired efficiencies and economies is to outsource all or part of a service to the private sector. With an entrepreneurial approach, economies of scale, an eye on efficiency driven by the need to make a profit, the private sector can be better placed to deliver certain services.

This drive for service externalisation has meant the landscape of council service delivery has shifted substantially in recent years, with the public sector model being modified to deliver more for less. Increasing demand for council services is pitched against a backdrop of a reducing financial resource.

We know our councils do more than empty bins and sweep streets but citizens may not. They often don’t realise what services councils provide until they need to access them and interactions with councils vary depending on needs. Many services are delivered by external organisations on behalf of a council but residents and service users are often unaware of different providers until they fail. The most commonly outsourced council services are waste, housing and IT.

What happens if a supplier fails?

Responsibility

Do not assume that by commissioning a provider to deliver a service a council is relieving itself of responsibility when things go wrong. It is usually the case that not all risk can be transferred to another party, particularly if the service is a statutory duty. This leaves a council exposed. Undertake thorough and ongoing checks on the stability of partners.

Response and recovery

Both the immediate response and longer-term recovery need to be tackled swiftly. These are resource intensive in terms of financial and labour costs, so should be well planned for. Communications need to be carefully managed to limit reputational damage. This is particularly relevant where vulnerable service users are affected.

Resilience

At the outset of the contract planning process ensure the contingency of a failing partner is considered in depth and different situations are played out. This should facilitate a smoother transition of the service back to the council in the event of supplier failure.

Where a contractor defaults and it is decided to take that service back in-house it is important to inform insurers as soon as possible. While the function may form part of a statutory provision and is likely to be covered by an existing insurance programme, the operational aspect will carry risk the contractor is likely to have been insuring.

Very often a council’s current insurance programme, from casualty risks to asset based covers like motors and buildings, will reflect the fact that the overall risk is reduced as a result of the outsourced activity (such as highways maintenance). If the risk is to be returned to the council, insurer(s) need to be advised as they will no doubt wish to review the insurance terms, which may include for example: premiums, self-insured retention or aggregate stop loss cover.

Contract monitoring

As resources shrink and the talent market remains competitive, contract management and procurement teams frequently work at reduced levels. As a result, the resource that remains needs to refocus priorities and may be unable to monitor all contracts in as much detail as previously. Usually the focus will be on larger contracts such as highways maintenance, and smaller ones may be under less scrutiny. Smaller contractors are no less important. In the example of a care home providing services to a small number of vulnerable individuals, the consequences of failure can be devastating.

With such a reliance on outsourced service provision, public service employees are being required to operate more commercially but may not have the skills and experience to recognise the signs of difficulty in their commercial partners.

Important questions to ask:

  • What monitoring arrangements and early warning triggers have been built into the review process?
  • Should central government be providing more support?
  • How easy is it to pick up a contract mid-term?
  • What interactions have there been with the provider during the contract to facilitate variations?
  • Are there clear steps for resolving conflict and dissolving the contract?
  • Is there a central contracts register that is up to date and well maintained?
  • Do you keep a watching brief over the financial position of your suppliers?

For effective business continuity planning, councils should ensure they have identified which providers are critical suppliers. The impact of failure must be risk assessed.

Consider:

  • Could you quickly source an alternative supplier?
  • Would you be able to take the service back in-house or could a neighbouring authority support you in delivery? Pre-planning with alternative arrangements for the ‘what if’ strategy are essential to ensure service continuity.
  • Who owns the assets transferred, for example, refuse vehicles, and how does the council take possession? The contract should deal with this situation.

The impact of decisions taken today will be felt in years to come so it is important to make informed risk based decisions, which are fully documented. The investment in building strong relationships with key suppliers should not be undermined by unexpected and unplanned for surprises.

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