From Procurement to Partnership: Is the Contract Really Designed to Deliver the Outcome?

For councils, considerable effort quite rightly goes into procurement.

The scope is developed. The procurement strategy is approved. Tender documentation is prepared. The market is approached. Responses are evaluated. Probity requirements are addressed. Negotiations take place and, eventually, a contract is signed. Then the real work begins.

And this is where an important question can sometimes receive less attention:

Has the procurement process simply produced a contract, or has it created the commercial framework needed to achieve the council's intended outcome?

Recent research into Australian council-supplier relationships, The Partnership Premium: Stronger Australian Council-Supplier Relationships and Better Outcomes, published by World Commerce & Contracting in collaboration with Local Government Procurement, raises some thought-provoking issues about the way councils and suppliers work together.

Our reading of the research is encouraging.

The foundations are there. Council-supplier relationships are generally cooperative, communication during delivery often works, and disagreements tend to be dealt with through practical discussion rather than immediately progressing to formal dispute mechanisms. But the research also points to a bigger opportunity.

Many council-supplier relationships appear capable of delivering more.

The opportunity may start before the tender

One of the most interesting themes in the research is what happens before procurement documents are finalised. Suppliers want earlier engagement and clearer scopes, while councils want better outcomes, stronger performance, greater innovation and better value for money. The report characterises those priorities as two sides of the same missing capability.

This raises an important issue for councils. When we approach the market, are we sufficiently clear about the outcome we are trying to achieve, or are we primarily describing the product or service we expect to purchase?

There is a difference.

A tightly defined specification may produce comparable tender responses. But depending on the procurement, defining the solution too early may also reduce the opportunity for the market to identify risks, challenge assumptions or propose an alternative approach. That does not mean suppliers should design the procurement. Nor does it mean compromising probity, fairness or transparency. It means considering whether the council has learned enough about the market before its requirements become fixed. That distinction can become particularly important for complex, specialist or longer-term engagements.

A good contract is not necessarily a good relationship

There is another issue worth considering.

A contract can be legally robust and still operate poorly in practice. It might contain comprehensive provisions dealing with risk, variations, reporting, performance, termination and dispute resolution. But what happens when something occurs that nobody anticipated?

• Who within council is authorised to make the decision?
• What happens when a supplier identifies a potential improvement?
• How quickly can a change be assessed?
• Where does an unresolved issue go?
• At what point does an operational disagreement become a contractual dispute?

These are not simply relationship-management questions. They are questions about contract design, governance, authority and commercial management. That is why we think councils should consider the desired supplier relationship at the same time they consider contractual terms.

Not every supplier needs to be a strategic partner

There is an important qualification.

Talk about “partnership” can easily go too far. Not every council procurement requires a collaborative or strategic supplier relationship. For an uncomplicated purchase with clearly defined requirements, limited uncertainty and little expectation of change, a transactional model may be exactly what is required.

But consider a different arrangement.

The council is engaging a specialist provider for several years. Delivery relies heavily on the supplier's expertise. Requirements may evolve. Council and supplier personnel need to work closely together. Decisions need to be made throughout delivery. Changes are reasonably foreseeable. In that environment, the relationship architecture becomes far more important.

The question therefore isn't: “Should we have strategic relationships with our suppliers?”

A better question is: “What type of relationship does this particular engagement require to succeed?”

Once that has been determined, the procurement, contract and governance framework can be designed accordingly.

Risk deserves a more commercial conversation

Risk allocation is another theme emerging strongly from the research.

The report identifies different perceptions between councils and suppliers about how risk is shared and describes risk as being shared in principle but rarely viewed as well balanced in practice. From our perspective, this raises an important distinction.

There is a difference between asking: “Can we contractually transfer this risk?”

and asking: “Who is actually best positioned to manage this risk?”

Sometimes the answers will be the same. Sometimes they won't.

A supplier asked to assume a risk it has limited ability to control may respond commercially through price, insurance requirements, contractual qualifications or its willingness to participate. The strongest contractual position on paper may therefore not always produce the best commercial outcome. This does not mean councils should relinquish appropriate contractual protection.

It means that strong protection should be deliberate and proportionate rather than automatic.

Innovation needs somewhere to go

Perhaps one of the most interesting issues raised by the research concerns innovation.

Councils want suppliers to contribute ideas and identify better ways to deliver services. The research nevertheless points to uncertainty around how supplier ideas are evaluated and adopted, and identifies risk aversion, budget constraints, rigid specifications and governance complexity among barriers to innovation. That creates an interesting practical question.

Imagine a supplier approaches a council six months into a contract and says: “We've identified a different way of delivering this service that could improve the outcome.”

• What happens next?
• Who assesses it?
• Who considers the procurement implications?
• Does the existing contract accommodate it?
• Does it change the risk profile?
• Is a variation required?
• Who has authority to approve it?
• How will the benefit be measured?

If those questions have no obvious home, a council can genuinely welcome innovation while still finding it difficult to implement. Innovation needs an adoption pathway.

The same principle applies to change more broadly.

The contract cannot manage itself

Perhaps this is the most important point. A contract is a legal instrument, but it operates in a human and organisational environment.

• People need to understand it.
• Someone needs to own it.
• Someone needs authority to make decisions.
• Risks need to be monitored.
• Changes need to be controlled.
• Problems need somewhere to be escalated.

And somebody needs to continue asking whether the council is actually receiving the outcome and value the procurement was intended to deliver. This is where contract administration begins to become commercial stewardship.

Five questions we think councils should be asking

Before entering the next significant supplier arrangement, consider asking:

1. Are we clear about the outcome we want to achieve, rather than simply the service we want to buy?
2. Have we understood the market sufficiently before fixing our requirements and contractual position?
3. Does our allocation of risk reflect who can realistically control and manage each material risk?
4. Have we decided what type of council-supplier relationship successful delivery will require?
5. Have we established the governance, authority and change mechanisms that will allow that relationship to work after contract signature?

None of these questions reduces the importance of procurement compliance, probity or contractual protection.

Quite the opposite. They help connect those disciplines with the ultimate reason the procurement exists in the first place. To deliver an outcome for the community.

From procurement to partnership

The encouraging message from The Partnership Premium is that Australian councils and suppliers already have many of the foundations required for productive working relationships.

The opportunity now is to build on those foundations. Not by adding more process for the sake of process. But by thinking more deliberately about market engagement, commercial design, risk,

authority, change, innovation and the kind of supplier relationship each engagement actually requires. This reflects the report's overall conclusion that better outcomes are more likely to come from earlier dialogue, clearer intent and stronger commercial design than simply more process.

And that leads us to the question we will explore throughout our new series:

Are we simply managing contracts, or are we designing relationships capable of delivering better outcomes?

Coming next: The Five-Point Partnership Test: Five Questions Before Contract Award

This article begins Corporate Overhaul Legal Services' Council Contracting for Council Contracting for Better Performance Series

Over the coming months, Marjana Cvetanoska and the Corporate Overhaul team will explore practical issues including:

• early market engagement without compromising probity;
• contractual risk allocation;
• scope and variation management;
• preventing contract disputes;
• creating pathways for supplier innovation; and
• moving from contract administration to commercial stewardship.

We'll also share practical tools and checklists that council procurement, governance, legal and contract-management teams can use in their day-to-day work.

About the research This article refers to independent third-party research “The Partnership Premium: Stronger Australian Council-Supplier Relationships and Better Outcomes”, published by World Commerce & Contracting in collaboration with Local Government Procurement. Corporate Overhaul Legal Services was not involved in conducting the research. References to the research are provided for commentary and discussion purposes. The views and legal commentary expressed in this article are those of Corporate Overhaul Legal Services.

About Corporate Overhaul Legal Services

Corporate Overhaul Legal Services provides legal, governance, commercial, procurement, probity, dispute resolution and related advisory services to organisations, including local government.

Corporate Overhaul Legal Services is an approved contractor through Local Government Procurement and an approved supplier through Local Buy.