Focus on: Term Service Contracts

Simon Thornton-Smith
Term Service Contracts (TSCs) are put in place to provide a mechanism for a client, typically with a large property portfolio, to engage with a contractor for the provision of services over a fixed period of time.

These contracts usually support the production of high value and business critical goods or services from pharmaceutical and manufacturing to bank critical assets and public sector buildings. It is not uncommon for these contracts to be in place for a very long time; with a heavy reliance on a common understanding and strong working relationship between the client and contractor.

We have seen a drive in recent years for companies to look inwards for efficiencies and value in their TSCs; generally due to economic volatility. Other sector specific market factors are also influencing the need for change such as the ‘patent cliff’ and tighter regulations within the pharmaceutical sector. This has led to an increase in procurement activity and an appetite to ensure best value is achieved in the supply chain.

Many benefits can be achieved through companies reviewing and potentially restructuring their TSCs, typically these include;

  • Direct cost savings: clients can get more for their money

  • Increased governance: putting in place up to date conditions of contract including working practices

  • Risk reduction: absolute clarity on roles, responsibilities and obligations

  • Innovations: fresh thinking and market intelligence

  • Continual improvement: ongoing audit and review process 

  • Process efficiencies: potential reduction in project interfaces and/or a more streamlined project process

Health Check

A TSC health check can be carried out in order to determine the potential benefit for individual clients against existing arrangements and for those who do not have such arrangements in place. The health check reviews the current TSC structure and provides an understanding of roles and responsibilities and contractual engagements. Costs can be benchmarked against the industry and risks assessed based on governance and compliance. The health check will provide an overall strategy and way forward for the TSCs which may set out the need for change.

Tender

Due to high importance being placed on assurance of supply, it’s vital that a number of factors are considered during the tender of TSCs in order to manage risk, including expiry dates of existing arrangements. These steps should be set out in an overall programme to be used to manage the tender process.

Typically client organisations that require TSCs have a number of departments that are involved in their day to day delivery; these include procurement, engineering and construction, legal, finance and HSE. It’s vital that all departments are engaged throughout the tender process; this can be controlled via a Stakeholder Management Plan.

Key decisions need to be made on areas such as work package structure and on whether to integrate design and build. It’s important to ensure that market intelligence is obtained through processes such as pre-qualification questionnaires to help inform the decision-making process. The tender analysis itself should also be flexible enough to allow for the appraisal of each potential outcome and economies of scale.

Transition

The outcome of the tender process may lead to the need for a transition plan – managing a change in the incumbent contractor. This plan needs to take into consideration the steps required to satisfy the Transfer of Undertakings (Protection of Employment) Regulations 2006; primarily to ensure that necessary time is allowed for the process to take place. Key incumbent owned plant and equipment should be considered to ensure that a suitable strategy is adopted post transition.

In addition, a portfolio plan is required to capture projects that will bridge the transition, with a strategy developed for each and particular attention paid to any noted as being of high importance. Training and awareness sessions should be factored in to ensure a thorough understanding of any change, in particular to those departments and individuals that will be directly impacted. Finally, reviewing the implementation process throughout the transition is vital, to ensure the TSC gets off on the right track.

Audit

Finally but most importantly; following the transition process a robust audit regime should be adopted to ensure continual improvements and KPIs are achieved. Key criteria should be reviewed including contract governance and the contractor’s application for payment. Examining and evaluating the TSC at regular intervals improves efficiency and allows you to assess risk and quality.

In Summary

There is no ‘one-size-fits-all’ solution to TSCs, the model for each organisation should be developed through the tender process and based on a combination of technical and commercial criteria. In addition, the process should not be seen simply as a procurement exercise; in order to achieve maximum benefit it’s key that all stakeholders understand and are engaged in the change process.

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