A systems-based approach can improve outsourcing in government projects

To remain responsive to challenges faced within today’s uncertain and complex outsourcing ecosystem, government organisations must innovate and evolve their practices to accommodate change, both in terms of technological progress and the knowledge and tools applied to steer such advances.

Understanding the allocation of risk between government and its industry suppliers is not a new topic, and the transfer of risk in their outsourcing arrangements has been aired in government reviews over the last 20 years. Government guidance provided by the Treasury’s 2020, Green Book stresses the importance in assessing what is being inputted into the design of a procurement, and how this may implicate the outcome of the procurement activity. Driven by the initial communication of a requirement, a government sponsor will undergo an iterative process of clarification using market insights to establish the most appropriate packaging and contract model, based on its interpretation of risk, complexity, capability and technical interfaces.

Yet ‘bad news’ stories are still frequent in many public sector outsourcing projects and whilst private providers can manage some risks well, a number of large contracts have been undermined by the “government transferring risk that the private sector cannot reasonably price and manage, rather than sharing risk appropriately, as the Treasury’s Green Book prescribes^[1]”.

So how can government bodies implement such guidance more effectively? A systems thinking based approach could add prerequisite value to the management of risk in the public sector’s outsourcing process:  

1. Understand the totality of risks being allocated

Current thought leadership identifies the allocation of risk as an important front-end activity when considering the optimum procurement approach and contracting model to be adopted in an outsourced requirement. In practice, a government purchaser will often construct a risk allocation matrix to inform its commercial decisions, distributing the ownership of risk to the party best placed to manage it. For example, the purchaser will self-allocate finance related risk, since it is responsible for paying for the goods produced. The provider on the other hand will be allocated responsibility for managing the risk associated with the delivery of the requirement, whereas aspects such as legislative and regulations typically follow risk-sharing characteristics.

Risk allocation matrices therefore provide the sponsor with a useful tick-box exercise which can later be used to inform the content of the formal contract. Rather than simply using off-the-shelf contracts, with boilerplate terms and conditions, this pre-requisite method of risk management promotes optimal allocation of risk, as opposed to maximum transfer, and contributes towards delivering the governments overarching procurement aim of achieving value for money. 

The risk allocation matrices instinctively compel the purchasing organisation to view its risks as isolated parts, instead of wholes. Consequently, the process of incorporating risk allocations into the written contract becomes fragmented and the overarching intent of the procurement approach can be misaligned or lost. 

For this reason, government organisations and their industry outsourcing partners could benefit from constructing visual tools which clearly illustrate the overarching balance of risk allocation within a contract, before it is finalised and signed-off. Using the draft contract as a basis, the risk allocation embedded within the clause and sub-clause text can be identified (e.g. ‘the contractor shall…’, ‘the contracting authority shall…’ or a close variant) and the distribution quantified. 

Mapping these along a horizontal axis, the average risk allocation can be visualised, informing commercial and project managers of the bigger picture. It also encourages them to reassess the risks allocated for their alignment with the overarching intent of the procurement model chosen – clearly, a procurement model seeking to foster collaboration should reconsider a maximum transfer approach.

2. Map the interconnectivity of the contract

The pillars of systems thinking have been derived from the biological sciences, where naturally occurring resources display reliance on other resources to function; just as a seed needs warmth, moisture and sunlight in optimal proportions. Central to the fundamental toolkit of a systems thinker is the concept that everything is interconnected, shifting our thinking away from linear structures and recognising the circular, dynamic and interconnected myriad of behaviours and relationships. 

By understanding the interconnected parts embedded within an outsourcing contract, the purchaser can become better informed by the hotspots within the contract that require careful management, ensuring that the team best placed to manage that contractual obligation has been allocated. One approach is a form of systems mapping which illustrates the relationships between different parts of the contract. By plotting the contracts’ indexed clauses on a horizontal axis and, mapping the clause-to-clause references made throughout its content, a visual illustration of the contracts’ level of interconnectivity can be created as shown in the figure below. 

It is worth noting that interconnectivity within a contract is common practice, since it highlights the cause and effect of the contracting partys’ actions. For example, the purchasers default on a payment to the provider will trigger a clause on interest owed, and even reference the contract termination on default clause. In many cases, the connections which build relationships between contractual clauses are implemented to achieve contractual robustness. Often however, overcomplicating these patterns of connectivity can result in issues of misinterpretation or unintended consequences. 

Mapping the interconnected parts of a contract

So what next?

Integrating pre-requisite systems thinking techniques when planning for and designing a new outsourcing arrangement could produce insightful perspectives to both government and industry practitioners tasked with managing the through-life risks that characterise an outsourced project.

In so doing, government purchasers can ensure that their risks are suitably allocated, and the contract’s hotspots are highlighted and managed appropriately. Taking the time to reflect on these dynamics early in the project lifecycle should contribute towards better management of risks in public sector projects, and consequently, greater savings on cost, duration and reputation.

Further reading

• Systemic Risk in Public Sector Outsourcing Contracts
• Project and programme research centres: Lessons for scholarship, policy and practice
• Making risk work for your project (APM Learning 🔒)

_{[1] Sasse, T., Guerin, B., Nickson, S., O’Brien, M., Pope, T. and Davies, N., (2019). Government outsourcing. What Has Worked and What Needs Reform. Institute for Government. 
Image: G-Stock Studio/Shutterstock.com; and from Katherine Bloomfield, adapted from Bloomfield, K., Williams, T., Bovis, C., & Merali, Y. (2019). Systemic risk in major public contracts. International Journal of Forecasting, 35(2), 667-676. https://doi.org/10.1016/j.ijforecast.2018.10.005}