Est. reading time: 6 minutes
Author: Will Harris
The National Audit Office (NAO) report on ‘Managing the Commercial Lifecycle’ is a great guide to improving your own procurement processes. Here we share some interesting findings and the key areas to make changes in.
The UK’s independent public spending watchdog, the National Audit Office (NAO) released its report on Good Practice Guidance: Managing the Commercial Lifecycle in July 2021. Here, we summarise the findings and share key areas where manufacturers can learn from procurement best practices and improve core practices.
Good procurement practices can play a vital role in improving profit margins. It can also play a key role in ensuring operational resilience in times of crisis. There are good reasons to pay attention. The report draws on 20 years of data and insights to provide advice on how to best manage each part of the commercial lifecycle. The findings are split into 10 sections that address strategic and procedural considerations. Most importantly there are recommendations for improvement.
The following is a synopsis of the key recommendations and practical expectations. The full report is available at the end of this article. It provides more in-depth information and case studies on each section.
1. Commercial Strategy
Commercial strategies should demonstrate consistently how commercial agreements align with wider strategic objectives at an organisational level. The strategy should establish an approach for managing risks and incentives throughout the commercial lifecycle.
- Clear alignment between policy and intended outcomes within the strategy.
- Clear business case containing realistic appraisal of the commercial options. Consideration of how the commercial strategy and contract will react under different scenarios.
Appropriate skills need to be in place so that teams can work collaboratively to apply relevant expertise and remain effective. This is key for manufacturing as new processes, systems, and technologies are inevitably going to be implemented and will require new items to procure.
- Expertise and the correct skills will be vital to ensure success. (This is especially true as the manufacturing landscape changes going into industry 4.0).
- Capability plans include operational resilience to address unplanned demands.
3. Accountability and governance
Organisations need to demonstrate robust, effective, oversight of contractual arrangements and overall portfolios.
- Accountability is defined and responsible officers are appropriately empowered.
- Reliable and timely managed information is used for rapid diagnosis of issues and prompt action.
- Appropriate assurance regimes are in place and there is clarity over responsibilities for internal governance.
4. Transparency and Data
This section on improvements isn’t so relevant to manufacturing but there are some expectations below which are relevant to the industry.
- Transparency rules and guidance are applied and followed in full.
- The collection of data is transparent, proportionate and timely to support the understanding of processes and the market.
- Data specification makes the data easy to share and use – consider open data standards, including common taxonomies and unique contract identifiers.
- Data protection guidelines are followed with clear, consistent and agreed on principles.
- Expertise is used to interpret and act on information to improve contract management and outcomes.
Organisations should be clear about what outcomes they are seeking to achieve, to help set out their requirements when entering into commercial agreements.
- Requirements need to be defined in business cases, with evidence to support appropriate gateway reviews and approvals.
- When developing requirements, organisations should engage users and the market to help develop requirements.
- Sustainability assessments are undertaken that demonstrate the consideration of risk, uncertainty and capability.
- The full business case includes a review that the requirements are still appropriate.
6. Sourcing approach
There should be better consideration of all sourcing alternatives and of how effective competition supports value for money.
- An appropriate sourcing approach is chosen, aligned with risk management and an assessment of the market.
- Trade-offs are assessed in a review of the required commercial outcomes.
- Procurement processes and a contract management plan are defined alongside a sufficient knowledge base to support the approach.
7. Market Monitoring
There should be consistent awareness of when and how to engage with the market, including improving understanding of competition and financial resilience.
- Knowledge of the market is used to inform operational requirements.
- Procurement is transparent on the requirement and includes uncertainties and likely variations.
- Market monitoring is undertaken to support the development of successor contracts when appropriate.
8. Process and agreement
There should be consistent adherence to the established procurement processes and timetables to realise benefits.
- The procurement approach is structured according to established procedures, reflecting risk tolerance.
- Processes balance speed and agility with the benefits of competition derived from participation by a range of potential suppliers.
- The contract establishes suitable incentives and mechanisms to drive the desired relationship and act in the interest of the organisation.
- Procurement and transparency rules and principles are followed in full.
9. Contract management
Organisations should give active attention to the quality of performance and delivery throughout the commercial lifecycle to supplement routine monitoring.
- Strategic relationship management and formal contract mechanisms should be in place.
- Organisation and supplier obligations and responsibilities are clearly set out, and both parties work closely and flexibly together.
- Processes for meeting contractual obligations are formalised, and incentives and penalties are used consistently and appropriately.
- There is an appropriate administration infrastructure in place and managers can draw on the right support including more senior people.
10. Review, transition, and exit
Planning and preparation for a range of future options should always be in evidence from the outset and built into cost estimation.
- Plans for potential routes to end a contract are built in from the start, including logistical requirements, governance, and reporting.
- Required levels of flexibility are built into the contract process at all stages and agreed changes are formally written into the contract.
- Contingency plans are put in place for supplier failure.
- Lessons learned are built into the plan for the contract review and transition.
Best practice guidance
Overall, the report is accessible and provides examples of good practices for each stage of the procurement process. It’s likely that your organisation already incorporates much of this into your operations but there is always room for improvement.
The report can be a valuable read. The NAO conducts regular research into government commercial activities, resulting in 209 reports in the last 20 years. They are a rich source of data and insights.
If you would like to learn more, the report itself contains a lot more information and some great case studies that explore the suggestions through real-world examples. There are also other interesting reports published by the NAO that complement this one.