Social housing providers spend billions of pounds outsourcing services, so how can they be sure their chosen sub-contractors won’t run into trouble? Simon Brandon takes a crash course in supply chain risk management to find out
The ink is finally drying on a major new outsourcing contract that will deliver lots of lovely efficiencies for your organisation. The procurement process was extensive and thorough. You are confident in the stability and sustainability of your chosen contractor. But did you look deep enough?
Your contractor might be in rude financial health, but what about the firms on which it depends? How far into their supply chains should landlords look when outsourcing their services?
The spider’s web
The phrase ‘supply chain’ is a misnomer. A chain is made of single links. If the name were a literal description, each supplier would rely for 100 per cent of its business on the company immediately above it - a situation that would bring any risk manager out in a cold sweat.
In fact, says Simon Dixon, head of housing at Zurich Municipal - the public sector-facing arm of insurance giant Zurich Financial Services Group - supply chains are more like spiders’ webs, although ‘not as neat’. ‘There’s lots of interaction and interdependence [between suppliers],’ he explains.
This new visualisation won’t catch on: ‘supply sort-of-web’ doesn’t have quite the same ring. But the image of a landlord at the top of a network of contractors and suppliers radiating outwards in interconnected layers is certainly more accurate.
Mr Dixon believes that a proper appreciation by social landlords of the depth and complexity of their supply chain is crucial if they are to maximise their understanding of - and therefore their readiness for - supply-side risk.
‘Can you map your supply chain?’ he asks. ‘Don’t just think about the next layer down - think about the layer below that, and so on.
‘If a housing association has gone through that exercise it is a heck of a lot further down the road to understanding the risks associated within supply chain than if it hasn’t.’
By outsourcing services, a housing provider is offloading some of the responsibility for providing those services to a third party. In doing so it loses some control over that provision. This is where risk creeps in.
Taking a risk
There is a risk to the landlord’s relationship with its customers if the quality of service falls, or if service is interrupted altogether. And, of course, there is also a risk to its reputation and brand image. But underlying and even causing all these - sitting at the heart of the risk web, as it were – is the risk of business failure.
The collapse of contractors Rok and Connaught in 2010 are, of course, still fresh in the memories of risk managers and procurement chiefs. ‘It took housing associations that used Rok and Connaught as contractors 12 months if not longer to find alternative suppliers with the same level of service for the same sort of funding,’ says Mr Dixon. ‘They [the failures] have raised awareness of what might happen. Failure is higher up the agenda for housing associations than it might otherwise have been.’
Futures Housing Group, an 8,600-home landlord covering the east midlands, had two contracts in place with Connaught when the latter collapsed. Martin Sherman, Futures’ chief operating officer, says his organisation was aware of the problems at Connaught before it went bust as a result of good communication with suppliers further down the chain. Sub-contractors told Futures about the ‘stress’ they were experiencing over payments from Connaught, he explains.
‘We very much advocate having a relationship with second and third-tier contractors. It’s vital,’ he continues. ‘We were fully aware of the relationships that Connaught had and Lovells [the winning bidder of Futures’ recent tender for its major improvements programme] has now,’ he says.
Mr Sherman adds that Futures managed to mitigate the impact of Connaught’s collapse by keeping in touch with sub-contractors so that it was aware when they were experiencing problems with payments, and also by having a ‘retention mechanism’ in place - the housing association only releases the final tranche of payments to a contractor once work is finished and signed off. This means Futures had enough money to hire Lovells to finish the jobs Connaught had originally been hired to do.
Knowing when to stop
But not everyone agrees that peering into the depths of supply chains is a worthwhile exercise. ‘Is looking down the supply chain even meaningful?’ asks John Kiely, a director of consultancy Savills’ housing and public sector arm. ‘If you’re talking about a large national contractor, are you going to do due diligence on all their sub-contractors?’
He points out that even if you were to investigate sub-contractors, there is no guarantee that the main contractor will use them. Ian Burnett, managing director of national social housing contractor Wates Living Space, says his firm has around 1,200 suppliers on its books: that’s a lot of due diligence. And even then, adds Mr Kiely: ‘Information is always historical - and most problems occur with existing contracts.’
In other words, even the best due diligence on a major contractor begins to slip out of date the moment it is completed - as it has on the contract signed at the start of this article. So what now?
We spoke to three procurers to ask how they manage risk throughout the lower tiers of their supply chains (see boxes). There seem to be two main strands of agreement here: the first is to establish and maintain relationships with as many links in your supply web as possible, so that warning signs can be detected early; the second is to ensure alternative arrangements are in place so that services can be resumed as quickly as possible.
‘Most of our [risk management] controls come from good communication, a strong contingency plan and collaborative working,’ says Perry Scott, head of procurement at Hanover Housing Association.
‘To have a good supply chain you have to operate it in a very honourable way; you have to be good partners to each other,’ agrees Mr Burnett. ‘Good contractors have been doing this for a long time. This is the right way to do business.’
Eliminating risk: Procure Plus
Is it possible to eliminate supply-side risk altogether? Mike Brogan, chief executive of Procure Plus - an organisation that procures goods and services on behalf of a consortium of housing providers in the north west of England - thinks it is.
If one of its members doesn’t have the expertise in-house to understand and manage the supply-side risks of a contract themselves, Procure Plus will step in. It has its own procurement framework in place - agreement about the terms of its contracts with suppliers - which it licences to its landlord clients.
‘We have taken the risk out [of contracts],’ says Mr Brogan. ‘You tell us what you’re doing, and we will unpick the job and put it back together without the risk - because we know where the risk is.’
Procure Plus has around 40 clients who spend an aggregate of around £100 million a year on procurement. It aims to dispense with the risk of business failure further down the supply chain by simply not having one. ‘We haven’t got two, three or four tiers,’ Mr Brogan says. ‘We buy [goods] direct from manufacturers.’
This model also helps maintain its contractors’ financial health, he adds, because they know there is a steady stream of work, and Procure Plus can spread its members’ requirements out over the year to eliminate costly - and risky - peaks and troughs in demand.
Procure Plus began operating six years ago, and other procurement consortia have come together since then. Mr Brogan remains proud of his vanguard position. ‘We have taken the market apart and put it back together,’ he says.
Two-tier system: Circle Housing Group
‘We’re the biggest game in town,’ says Nick Walker of 65,000-home Circle Housing Group. He is overseeing the procurement of six 10-year responsive and planned maintenance contracts worth around £1.2 billion, said to be the biggest in social housing history (Inside Housing, 9 March).
That sort of cash presumably makes dictating terms to potential bidders a little easier - and Mr Walker says those terms include looking hard at bidders’ supply chains to make sure the risks of business failure further down the line can be better mitigated against.
Ensuring that second-tier suppliers have the capacity to meet the contracts’ demands is key, he says. ‘We need to know that our service providers’ suppliers have the capacity to meet our demand - otherwise we’re just hoping [they can].’
Circle also insists that its successful bidders’ supply chains only extend to a maximum depth of two tiers: ‘Not necessarily because we want to retain visibility and control, but because we believe that they [the contractor] lose visibility and control the longer the supply chains are,’ Mr Walker explains.
Should the unthinkable happen despite these measures, the last line of defence is a solid contingency plan - making sure that if a supplier fails, you know where to source alternatives.
‘This isn’t just a case of shifting things around,’ says Mr Walker.
‘You need to have plans in place to do what you said you were going to do.’
Contingency plan: Hanover Housing Association
Hanover Housing Association provides catering to more than 50 estates across England as part of its extra care provision. By March next year, Hanover will have signed three new catering contracts, a procurement process it has already begun.
When consulted, Hanover’s extra care residents asked for locally sourced food where feasible, which means that the new supply chains will include small farmers and local producers. Demonstrating their inclusion in the supply chain will earn bidders brownie points - but does using smaller suppliers like this increase the risk of business failure?
‘There is a risk in any service,’ says Perry Scott, Hanover’s head of procurement. ‘At the prequalification stage, we’ll be talking to potential suppliers about their contingency plans, but we have our own too. So if a caterer didn’t turn up in the morning we’ve got arrangements in place [with other caterers]. It’s part of our ongoing supply chain management.’
He also points out that providing business to smaller firms is exactly what they need to remain financially healthy. ‘We’re not worried about where the frozen chips are coming from,’ Mr Scott says. ‘This is about sustaining local communities.’