‘Living Wills’ – the answer to contractor financial instability?

21 January 2019

What are Living Wills?

In a speech to the Business Services Association at the end of 2018, Minister for the Cabinet Office, David Lidington made a number of announcements regarding the outsourcing of government contracts. The most notable of these announcement related to the creation of ‘living wills’ by a selection of government outsourcing suppliers. Capita, Serco, Engie, Interserve and Sopra Steria have all volunteered to test the new practice which will see each company create a ‘living will’ setting out a plan determining what would happen in the event of insolvency of the company. This is a similar system to that put in place for banks in the aftermath of the financial crisis.

Why have they been introduced?

The change comes in the wake of the collapse of the then largest supplier of outsourced services to the UK government, Carillion, in January 2018 which rocked the public sector. According to the public inquiry into Carillion’s liquidation, it demonstrated the need for an “ambitious and wide-ranging set of reforms” to “reset our systems of corporate accountability”.

Although contingency planning for the liquidation of Carillion was commenced by the Cabinet Office in July 2017 following profit warnings from the company, its success was limited due to the inexistence of a complete list of Carillion’s government contracts. The Cabinet Office’s search for information on Carillion’s existing contracts was still ongoing when the company collapsed in January 2018. The hope is that ‘living wills’ will front-load the process of identifying the current supplier contracts and provide a clearly structured plan of action in the event of a company’s liquidation.

Carillion’s collapse received widespread media attention, causing nervousness in the public sector. A survey carried out by the New Local Government Network (NLGN), found that only 15% of council leaders say they plan on outsourcing more over the next two years, with 39% saying they plan on outsourcing less over the next two years. Yet, outsourcing is still a crucial means of delivering public services; according to a report by consultancy firm Arvato UK, public sector outsourcing spend increased to £998m in the first half of 2018. It is clear that a certain level of government reform was necessary to reassure the public sector and the wider public of the viability of the practice.

With recent fears surrounding another of the Government’s outsourcing giants, Interserve, who has debts of around £650m and is seeking a second rescue deal as it looks to avoid liquidation, the introduction of ‘living wills’ is timely.

How useful will they be?

It is too early to conclude on the usefulness of ‘living wills’, but having a single document setting out the existing contracts that are in place, along with an emergency plan to aid in damage control, can only serve to curtail the overall negative impact on the relevant services. However, it is clear that ‘living wills’ are by their very nature a recovery plan to be implemented should the outsourcing supplier fail, they are not designed to prevent the event from occurring.

Further Announcements

Along with the introduction of ‘living wills’, Lidington made further announcements regarding the future of outsourcing in the UK, some of which will hope to have a proactive impact on the industry. This includes a new measure introducing a “presumption in favour of running a pilot where government is outsourcing a service for the first time”. The hope is that by testing the service in the private sector at an early stage, any inherent risks and implementation challenges will be established prior to launching the full scheme, thereby allowing for better value for money overall.

Confirming statements made by the Cabinet Office in October 2018, Lidington also announced that key performance indicators (KPIs) will be published for the Government’s most critical contracts, with the first data set being published in early 2019. Up to 5 contract specific KPIs for each of the Government’s top 500 contracts will be recorded in a government-wide database. This is a further proactive change that should help to identify financial and service standard issues at an earlier stage, thereby allowing such problems to be rectified before it is too late.

The final of Lidington’s announcements aims to gear public procurement more towards “social value.” The plan is to extend the provisions of the Social Value Act, requiring social values to be expressly accounted for in evaluations of prospective outsourcing providers. It remains to be seen how this requirement will be implemented in practice, alongside other drivers for government procurement including value for money, and, in the context of outsourcing company crises, quality and resilience.

The Cabinet Office has emphasised that government outsourcing is a necessity, with the private sector being better placed to provide certain services. It is hoped that measures such as ‘living wills’, pilot schemes, KPIs and social value considerations increase the resilience of outsourcing contracts and also that of the public sector clients who enter into them.

Practical Advice

In the meantime, we suggest these early practical considerations when procuring outsourced services:

  1. Keep payment provisions simple: the payment provisions are often the most complex part of an outsourcing contract, with potential for contract terms governing the payment of the contractor to be used as an indirect and sometimes aggressive means to tackle commercial risk allocation and consequences of contract default. Keeping the payment provisions straightforward not only helps to improve transparency, particularly important when contracts come under independent audit or public scrutiny, but also reduces the need for extensive specialist advice to understand a mechanism which the contracting authority should in fact be able to confidently manage and operate on a day-to-day basis.
  2. Avoid over-engineering KPIs: This is another important element of outsourcing contracts which is sometimes used in conjunction (or confusion!) with the payment provisions as a micro-management tool. While KPIs can incentivise efficiency, it is important to carefully consider whether something of political importance at the start of the contract, will necessarily be a key driver in the longer term.
  3. Retain flexibility: In longer-term contracts, it is important to anticipate probable changes needed during the course of the contract and put in place adequate measures, to enable the services to reflect updated needs, within the framework of the original contract and in compliance with procurement law.
  4. Create resilience: ensure that step-in rights which allow the public authority to assume control of the outsourced services in certain circumstances, e.g. upon contractor default, are sufficiently detailed, and cover what is important to the authority in the ‘worst case’ scenarios, e.g. intellectual property rights, databases, and tangible assets.
  5. Companies’ financial standing and consortia: consider the authority’s requirements in light of the nature and value of the particular services, prior to inviting tender qualification responses, and seek appropriate specialist advice. The standardised questionnaires often used ‘off-the-shelf’ are unable to anticipate the circumstances of a particular service and authority.
  6. Understand and use the contract: ask any advisors who prepared the legal and financial documents to provide ‘user manuals’ and training on effective use and operation of the contract. Ensure that the ‘know-how’ is shared with any newcomers to the contract management team, particularly in a long-term contract.

 

 

Juli Lau is an Associate who along with others in Sharpe Pritchard’s Infrastructure team and Outsourcing and shared services team, advise on all aspects of PPP and major outsourcing projects. Allan Owen is a Trainee Solicitor, who has worked in both the Infrastructure team and the Outsourcing and shared services team. Sharpe Pritchard is on the Government Procurement Service (GPS) full commercial panel and we work across all parts of the public sector.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

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