Good Practice
National Audit Office Best Practice (Part3) – Properly Develop Commercial Strategy

At the end of last year, the UK’s National Audit Office issued a very useful document titled “Commercial and contract management: insights and emerging best practice”. We did provide an  initial overview of it here, and now we are into a more detailed review of its content and findings. For each area the NAO has covered, we will look at their content and then give any additional analysis or thoughts we would add to the mix. Today, we will take a look at the second of the NAO insights (as they call them) – “Properly develop strategy”.

So after “making time to develop strategy”, clearly that development has to be executed properly, because, as NAO says, “underdeveloped commercial strategies will not be achievable”.  Again, not much argument with that, and in this case, the NAO is critical of what it usually finds during its work with government organisations.

When we are given a ‘commercial strategy’ as part of our audit, we rarely see commercial options fully considered and there is often a lack of realism of what can be achieved. To avoid setting itself up to fail, government needs to use commercial strategies to outline why and how it is going to conduct commercial relationships and what it wants to get from these relationships. … we often find that ‘strategies’ do not tackle some of the core issues that need to be considered.

What the NAO looks for in its review is evidence that the buyer has really thought about the different commercial options and assessed alternatives sensibly. So the “warning indicators” include aspects such as failing to assess market capability, or a lack of realism about trade-offs. That might perhaps mean expecting suppliers to be able to generate huge efficiencies, in a very short period of time, whilst being innovative and customer focused!

The guidance gives what it calls emerging best practice; this is a very useful checklist. It suggests the need to understand the commercial landscape, business outcomes (what is achievable in line with government priorities), and capabilities / constraints. Then there is a need to assess; to carry out a commercial options appraisal. Stage three is to manage; that means looking at and managing trade-offs where those are necessary, and managing risks and opportunities – which should be “Assessed in a full review of the required commercial outcomes”.

The guidance also contains the “NAO audit framework”, which gives the questions that the auditors will consider to see if these guidelines are being followed if they are assessing a project – more essential reading, particularly if your project is going to get reviewed!

Public Spend Forum Comments

Again, it is difficult to argue with this content from NAO. It does however raise questions of capability and attitude amongst key staff.

A central key issue here is around the development and consideration of options. This requires a certain degree of what we might call creative thinking – not in the sense of coming up with wild and wonderful ideas, but the ability to think of different ways a risk and reward payment model might be constructed perhaps, or the options around how a requirement might be segmented into different contracts to appeal to firms with different capabilities in the market.

This requires commercial people who probably have a reasonable amount of past experience (to know what might work and what doesn’t work) but have not become closed in their thinking (“we’ve always done it this way”).  We don’t want see ill-considered risk-taking, but equally those who are too risk-averse will not develop the range of options that should be considered. There are technical skills involved within this “insight” as well, from market research to analytical option appraisal techniques (such as decision analysis), but attitude also plays a key part.

A similar consideration applies to the business owner of the commercial strategy and the contract. It may not be the commercial manager who is risk averse; we’ve seen cases where it is the owner of the budget who says, “just go out and get a single prime contractor who can take on all of this and sort it out for us”. That may be the right option, but as the NAO rightly points out, developing a strategy should mean a thoughtful consideration of all options in the light of both the desired outcomes and the situation in the supply market.

So more good advice from NAO, but this is one of the key areas in the end-to-end commercial process where issues of skills across government are likely to come to the fore.



First Voice

  1. Digby Barker says:

    I have no hard evidence for this, but I think there is a tendency for the Options subjected to detailed analysis to be limited as a result of allowing viability judgements to be voiced in parallel with the initial phase of simply drawing up the list of Options. As you say, a propos developing a sufficient range of commercial options, “attitude also plays a key part”. In practice I think this means that those involved need to discipline themselves not to let considerations of Risk etc impinge on the first phase of simply listing Options. This applies in particular to “commercial people who probably have a reasonable amount of past experience (to know what might work and what doesn’t work)” who might need to be ‘gagged’ to some extent (in the nicest possible way, of course !) in this first phase so they don’t stop others’ ideas at least being captured. This ensures that when the initial assessments of the Options are compaired, the relative merits of all of them are considered in parrallel to the greater benefit of the subsequent refinement and decision phases.