Contract managers have suspected it for years, and recent research into a number of public-private partnerships (PPPs) in UK local government suggests that negotiating hefty outsourcing contracts at great cost in time and legal fees does not guarantee success. In fact, the research indicates that partnerships run largely on trust and governed by lighter contract documents actually work better.
In recent years, the UK government’s efficiency agenda has promoted the growth of PPPs. In local government, frontline services in social care, education, transportation and waste management have presented fertile opportunities for the private sector to complement those in back-office, financial and support activities such as IT. Some have enabled significant investment in public infrastructure.
The Conservative government led by Margaret Thatcher imposed compulsory competitive tendering in the 1980s as a way of improving efficiency by introducing competition to the provision of some local authority services. But a focus on lowest price, together with a crude approach to contract management, resulted in stakeholder dissatisfaction and a degradation of service quality.
From 1999, local authorities carried out “best value” reviews of services, re-examining them from the point of view of service users rather than providers. Councils could decide whether improvements could best be made by delivering services in-house, by contracting with the private or voluntary sectors, or jointly with other authorities. The watchword was “partnership”.
More contracts were awarded by local authorities under the private finance initiative (PFI) – through which investment in infrastructure such as schools and waste facilities could be secured without burdening public-sector borrowing – by entering into long-term service contracts. Introduced in central government for transport, health and prison projects in 1992, value for money and the off-balance sheet investment was achieved through the allocation of operating and financial risk to the party best placed to manage it.
However, too many PPPs have failed to deliver community and business benefits. In local government, a number of projects have fallen by the wayside, some with costly negotiations that failed to reach agreement at the preferred-bidder stage, while other outsourced services have suffered from rising costs and declining service quality. This is becoming a serious problem for all stakeholders.
In 2003, after a disagreement, contractor WS Atkins withdrew from a five-year, £100 million contract to run Southwark Council’s education service three years early. Last November saw Norfolk County Council cancel a £92 million schools PFI, because Jarvis could not find a building contractor for the project. In June this year, a £100 million corporate services partnership between West Berkshire Council and Amey was brought to an early end by mutual consent because Amey did not “experience the level of business growth expected at the outset, nor the returns”. The very next day saw the decision to scrap the £1.1 billion Paddington Health Campus PFI scheme in London.
Why do they fail?
In exchange economies, rational firms seek to maximise shareholder value. This goal, generally speaking, is incongruent with that of public authorities, which seek to provide quality public services at the lowest overall cost.
Critics of PPPs question whether private firms can deliver public services to the same quantity, quality and punctuality. They may have difficulty in truly understanding public-sector priorities, or the public sector may fail to understand what firms need to sustain growth and profitability.
Some argue that formal management of a partnership, under the terms of a contract, is essential to achieve desired outcomes. The establishment of many PPPs has been characterised by protracted negotiations that result in weighty contracts that attempt to legislate for every conceivable eventuality. Key stakeholders – investors, lenders and politicians – seek assurance that the parties have arrived at the optimum apportionment of risk, delivering both a healthy return for the contractor and a quality, value-for-money service for the purchaser.
Figure 1 illustrates the conflicting contextual forces acting on PPPs in local government – those bringing the parties together and those forcing them apart.
PPPs might fail because of:
- having a rationale for outsourcing that conflicts with the local authority’s strategic objectives;
- a lack of clarity or understanding of the client’s requirements and expectations, of demarcation of responsibilities or of apportionment of risk in the contract;
- a shortage of capability and skills in local government in areas such as project management, procurement, contract and relationship management;
- short-termism, politics and stakeholder behaviour.
Clients and contractors may be unable to establish the level of trust necessary to bridge the cultural gap and resolve divergent business objectives. The parties may come together in good faith to implement an agreement as set out in a rigorously negotiated contract, only for it to fail because of frailties such as territorial protectionism, hidden agendas and prejudice.
Formal contract or more informal relationship?
Two opposing views about practices in contract and relationship management, although not mutually exclusive, battle for predominance as the essential formula for the success of partnerships:
(a) that desired outcomes will be best achieved by managing the partnership formally under the terms of a contract;
(b) that, on the contrary, performance is maximised through a less formal, though carefully managed, relationship based fundamentally on trust.
A study of six partnerships in local government sought to identify the success formula for PPPs – what makes them work and what makes them fail. They are mature, real-life cases amounting to a cash value exceeding £1 billion over their full term.
The PPPs are largely in outsourced corporate services, IT and other back-office and support functions, but also customer-facing services such as revenue and benefits processing and, in one case, an outsourced education service (see figure 2). The six selected cases offer a range of perceived outcomes, ranging from successful partnerships to those seen to be experiencing difficulties.
To encourage openness and frankness on what were sensitive issues about the partnership and its performance, separate interviews were conducted with the managers responsible for the partnership, representing the client and the contractor in each case. Names have been changed to protect confidentiality.
First, a simple “test of contractualisation” sought to establish a link between the success of the partnership, as measured by the partners, and the “weight” of the contract document. Although this exercise could not be described as scientific, the following conclusions were drawn from the data:
- the partnerships described by clients as best meeting expectations tended to be governed by contracts with the fewest pages of contract conditions;
- the contract governing the partnership described by both partners as meeting expectations to the least extent has no defined specification, but the most pages overall;
- the partnerships described by both partners as most “run on trust” tended to have the fewest pages of contract conditions.
Most partners believed that to manage by contract was to adopt a negative approach to the partnership. Titan’s manager said: “This week I’ve only got the contract out once, so that’s quite a good week, really”; while Neptune added: “If you revert to the sticks and carrots, you’re probably not in the right sort of relationship.”
But Ganymede’s contract manager was concerned that all the work that had gone into his contract should not go to waste: “If everyone understands what the contract is all about, you’re tempted to put it in the drawer and never take it out. But then again, we spent a lot of time developing the price-performance mechanisms and service-level agreements (SLAs).”
Neptune, a private-sector firm, believed that the relationship develops over time. “To start with it is probably more contractual, as people try and find their way and they need some touch point which defines how (a) people should be behaving and (b) what should be being delivered. I think, as it matures, the relationship takes precedence over the contract. We’ve been very assiduous in making sure the contract does not rule the partnership.”
It stands to reason that the more prior knowledge partners have of each other, the more likely a partnership is to succeed. But there is often precious little opportunity for this in a public procurement process.
In all six cases, contact between the partners during the procurement process was limited. Neptune said: “You don’t do more than scratch the surface because you tend to deal with a few people on a day-to-day basis. You get a flavour that’s conditioned by the few people that you come in contact with.”
Titan and Saturn encountered problems with “cultural fit”. During the procurement process, it was very difficult for the partners to gain an understanding of each other’s culture. Titan, the local authority client, said: “There were cultural issues, certainly, when we moved into the contract itself. They would use a different language, they talk a kind of ‘consultantese’ and we talk in our kind of ‘local governmentese’. With the different pace of the organisation, Saturn has been more widely disliked than it would like.”
The secret, according to contractor Uranus, is to evaluate the quality of relationship that can be achieved: “What actually makes these things work, in our experience, is the quality of the relationship between the organisations. If you want somebody to work with you and be a proper partner – a trusted adviser – then you have to assign a value to the level of relationship that you have and the level of trust that you can or would hope to reach.”
There was disagreement as to whether the need for continuity of personnel outweighed the need to change team members to introduce new skills into a partnership as it moves from the procurement phase through to the operational phase. Callisto, a local authority, said: “You need continuity, people around who can understand what you’re trying to do and how it’s going to be done. Two of us have been here from the start, while Jupiter has had six different site managers in six years and that has made it difficult to develop a partnership. By the time we got to number six, there were no shared objectives or understanding of what we contracted for. The relationship now is a lot more hard-nosed.”
Neptune justified changing its personnel on the grounds of motivation and approach. But the research indicates that there is often a radical, wholesale team change once the business is secured, called the “team A/team B syndrome” by some.
The disruption this caused made the team change unpopular with clients, such as Callisto: “During the tender process you’ll get their sales team. Their salary is based on winning work. They’ll promise you whatever they think it takes to win that work. Then the operational manager comes along and the authority’s expectations from the bid process can never be matched in reality.”
But Jupiter 2 felt that a wholesale team change was justified where negotiations had been long and hard, and new personalities were needed to take the partnership forward. “The people who negotiated the contract tend to be the ones that run it when it starts. So you get an adversarial relationship where they’re always referring to the contract all the time. That is never, ever going to work. You should get a team in to negotiate the contract, to argue over it and agree on a deal, then those people should walk out and others walk in to deal with the contract in a spirit of partnership.”
For a successful partnership, evidence was found that partners should carefully manage the expectations of stakeholders, particularly staff and politicians. In a number of cases, stakeholders’ expectations of a partnership had been allowed to grow during a lengthy procurement process to the point where they could never be met. That, coupled with the belief that outsourcing a service will itself solve deep-rooted problems, often led to disappointment. Jupiter 2 said: “The clients take all of the sinewy, thorny issues that they’ve not been able to deal with and have that been sidelined for years and bundle it up into a package, give it to the outsourcer and say: ‘There you go, sort that out.’ You inherit all the people that are a real pain in the backside and are de-motivated.”
Differing views about purpose
Proteus and Neptune had different views of the purpose of their partnership. Proteus’s key drivers were cost reduction and investment: “Neptune had expectations to make huge efficiencies. They thought they were taking over services that were grossly inefficient and over-manned and that they would make huge savings.” Meanwhile, Neptune claims to have influenced the council’s drivers: “The procurement team realised there was more to this than saving money and it led to completely different opportunities in terms of re-engineering, driving the council forward. The proposition moved from saving money to service improvement, driving up quality and acting as a catalyst for major change. That driver probably came from us, because we were pushing things at them that they hadn’t really thought about. That and the fact that you couldn’t actually save a lot of money on it.”
In the self-assessment of the partnerships examined against expectations, those that were co-located generally enjoyed a greater degree of success. Managers found that clients and contractors working side by side in the same building built stronger social and professional relationships. Charon, on the council side, said: “Proximity makes the biggest difference actually. They’re here, we see them every day and if there’s a problem we can talk to them. When you’re working to a common end, it builds trust, builds a relationship.”
Partnership contracts usually include detailed governance arrangements, which involve a partnership board or other formal structure designed to escalate issues, monitor performance and make key decisions. But, over time, partners often find better ways of managing their relationship. Saturn said: “[Governance structures] in the contract are approximations of what they need to be and they need improving, correcting on the nature of the process.”
Some partnerships were over-burdened by unmanageable processes for assessing performance. There is some evidence that contractors are focused too closely on key performance indicators (KPIs), thus missing the point of the partnership. In some cases, KPIs had been set up without baseline information as to what the council was achieving prior to contract commencement. Neptune was typical of these: “For a lot of the services, the council had no idea where it was. It had no baseline. At the time we set them up, we didn’t know and the council didn’t know.”
Jupiter 2 found its targets simply unachievable: “A council officer said to me, in a quiet conversation over coffee: ‘We know we stitched you up on some of the SLAs. We sat down in a room, put these together and laughed to ourselves as if to say: ‘They’re never going to achieve these, let’s see if they’ll agree to it’.’”
Lessons and conclusions
Based on this research, 10 recommendations are made (see Checklist) that will help to ensure more successful PPPs and that are capable of immediate implementation through training for project teams sponsored by government agencies.
First, while a prospective partner’s skills, competencies and resources can be evaluated, it is difficult, during the public procurement process to assess the potential for cultural fit between the partners. Objective ways of evaluating this need to be developed.
Second, contract documentation is of limited practical use in managing some partnerships, and those that don’t continually refer to it generally have more productive relationships. But the contract provides a necessary formality to fall back on. Ultimately, partnerships are about people – better results come from managing relationships and increasing the benefits of the partnership.
Third, team changes may be justifiable on the grounds that people with different skills are needed as the project progresses, or because new personalities are needed where negotiations have been long and hard. But some believe that it’s essential to commit a few people to the project beyond transition from the procurement phase to the operational phase to give continuity. Most agree that personal relationships are important for successful partnerships.
Fourth, a shared view of the purpose of the partnership is needed if disappointment is to be avoided, and stakeholder expectations need to be managed. Expectations that are allowed to grow unrealistic just lead to failure and disillusionment.
Fifth, co-location enhances relations between partners and the more successful partnerships occupy the same premises. Informal structures provide a vehicle for resolving differences and developing the partnership.
Finally, the processes for measuring and managing performance require careful design. Even in a small sample, the research found performance indicators that were unmanageable and burdensome, that detracted from the purpose of the partnership, that lacked baseline performance data, and even targets that the clients knew to be just plain unachievable. Those that had found performance regimes capable of adaptation to reflect a changing environment had enjoyed success in their partnerships.
Public-private partnerships are critical to public-service delivery. They are often tremendously complex and have to be run in the right way to give the public value for money and allow businesses to achieve sustainable growth and profitability. Many councils have relied upon external legal, technical or financial advisers to craft tightly drafted contract documentation at great expense, but have failed to recognise the importance of relationship management, even though successful partnerships depend on it. Councils are waking up to the need for better procurement skills, and this should extend to include people with well-developed supplier relationship skills.
It’s a challenge to which our profession should respond.
CASE STUDY: Shared experience builds trust
Of the six partnerships studied, the outsourced local education service is perhaps best meeting stakeholder expectations. Against a background of political opposition to private involvement in running state schools, the local authority (“Charon”) and its partner (“Pluto”) found ways to overcome early problems and this shared experience has served to build trust.
The director of education heads the contractor’s team. “We have discussions at a high level between equal partners and that’s what makes it work. Personal relationships are far more important than formal governance structures.
“I cannot think of one instance where we have escalated an issue to the next level, to involve the chief executive of the council and the managing director of Pluto, my line manager.”
Early on, the contractor had limited contact with councillors, a key stakeholder group. “My predecessor never attended council meetings. With questions from the public or elected members, I thought it was important that Pluto should be represented. Now, either I or one of my assistant directors attend the council’s public meetings, so we can be questioned about anything that’s going on. I’ve got no fear of being accountable to the council or the public for what we do.”
Both partners have also worked hard to re-establish a workable performance framework. “The contract was first set up with an absurd number of targets,” says Charon’s contract manager.
“However, after a year,” he continues, “we realised that it was completely unmanageable to have all these targets and so we’ve got a new set of indicators. The people who have the biggest problem with the arrangement are the Audit Commission, who are very unhappy that we haven’t got more monitoring. But our GCSE exam results have improved substantially over the past few years and that is what it was supposed to be about.”
CHECKLIST: Recommendations for successful PPPs
1. Bidding for PPPs is a costly business and bidders need a high level of confidence in the information given to them to price their tenders. Take steps to assemble all information pertinent to the undertaking, such as financial data and details of transferring staff and assets, as early as possible.
2. Develop methods of evaluating bidders for “cultural fit” to form part of the selection process. These need to be as objective as possible to comply with public procurement rules.
3. Invite shortlisted bidders to participate in real pilot projects to allow both potential partners to acquire first-hand knowledge of working together. This establishes channels for sharing information and establishes a history of solving problems together: the building blocks of trust.
4. Make building the relationship the focus of attention at preferred-bidder stage, rather than the contract document. Keep the documentation short and make sure both parties regard it as a formality for the partnership to fall back on, rather than the modus operandi by which the partnership will be governed.
5. While team changes will be necessary to introduce appropriate skills at evolving stages of the partnership, commit a number of team members to seeing the project through so as to preserve continuity and protect established personal relationships.
6. Periodically, both partners should check that their vision for the partnership continues to be shared.
7. Carefully manage stakeholders and their expectations, especially those of politicians. They can make or break the partnership.
8. Co-locate the management and operational teams in the partnership. Aid co-operation by working to reduce the physical and psychological barriers between the partners.
9. Recognise that governance structures established during negotiations are only approximations of what are actually needed. Nurture informal structures for joint decision-making, monitoring and issue resolution. Involve the politicians in the partnership at a strategic level.
10. Develop performance measurement and management regimes such that they:
- are manageable, with a sensible number of meaningful KPIs;
- are relevant to the vision and the fundamental purpose of the partnership;
- are measured relative to a known baseline of performance;
- are achievable;
- are capable of adaptation to reflect changing circumstances.
Andy Davies is head of procurement at Surrey County Council in the UK (andy.davies@surreycc.gov.uk)
