1

Corporate Renewal: Lessons Learned

Response to the Transforming Contract Management,

Twenty-third Report of Session 2014-15 HC 585:

Section Twenty-eight Recommendation.

9 January 2017

2

Contents

Section Page

1 Executive Summary 3

2 Background 5

3 The Corporate Renewal Process 6

4 Lessons Learned 7

5 Behavioural Changes in Suppliers 11

6 What Departments Should Do Differently 12

7 Conclusions 13

Annex 1– Principles of Corporate Renewal 14

Annex 2 – Current Commercial Improvement Activity 17

Annex 3 – Improvements to the Corporate Renewal Process 18

3

Section 1: Executive Summary

Background

1.1 Between May and August 2013 the Secretary of State for Justice made a series of

announcements in Parliament about alleged overbilling on the Electronic Monitoring (EM)

contracts held by G4S plc (G4S) and Serco Group plc (Serco), and on the Prisoner Escort

& Custody Services (PECS) contract held by Serco. The issues experienced on these

contracts were deemed of sufficient concern to require a government-wide response.

Government considered that a review of all of G4S and Serco’s contracts with HMG was

needed and that both suppliers should undergo a process of Corporate Renewal to rebuild

government’s confidence in their management capability and governance.

1.2 Corporate Renewal focuses on the implementation of eight principles by the supplier.

These principles assess the effectiveness of management, governance processes and

provide assurance of financial stability. The Corporate Renewal approach is explained in

more detail in Section 3, and the principles are set out in Annex 1.

1.3 This document reviews the lessons that can be learned from designing and managing the

process of Corporate Renewal. As part of this review, interviews were conducted with

major stakeholders from the Cabinet Office (CO), Ministry of Justice (MOJ) and HM

Treasury (HMT), referred to in this report as ‘Stakeholders’. Individuals from Serco and

G4S were also interviewed, referred to in this report as ‘Suppliers’.

Conclusions

1.4 Process and Actions of Corporate Renewal:

1.4.1 The methodology and eight key principles of Corporate Renewal were judged to be

appropriate by the Stakeholders interviewed. Minor issues were noted against some of

the principles, which have been updated to reflect the learning in Annex 1.

1.4.2 The decision to employ external assessors to carry out the Financial Review and

monitoring of the implementation of the initial stages of Corporate Renewal by the

Suppliers was viewed as appropriate.

1.4.3 Stakeholders were divided over whether success should have been defined at the start

of the Corporate Renewal process. It was concluded that government was right not to

define success in fixed terms with a hard deadline, although it was recommended that

4

clear milestones be established so that direction could be set for suppliers without being

overly prescriptive.

1.4.4 The boards that were set up to govern the process were, in general, highly regarded and

assessed to be effective in driving progress and providing sufficient challenge to the

Suppliers. Some Stakeholders argued that the boards needed wider representation and

should have been established more quickly.

1.4.5 Given that the Corporate Renewal process involved several Departments, there was a

lack of clarity on which Department should take the lead on managing the process.

Stakeholders felt that this led to cross-Departmental tensions and confusion. To prevent

these difficulties in future, responsibilities should be allocated clearly at the outset.

1.5 Behavioural Changes in Suppliers:

1.5.1 Corporate Renewal has helped to establish healthier working relationships between

Suppliers and Departments and as a result relationships are now more transparent and

Suppliers are more cooperative. Some Stakeholders felt that it was unclear whether this

change was exclusively due to Corporate Renewal or whether this could be attributed

to other government initiatives or the changes of CEO and other senior members of staff

which took place in both companies at the same time as they were undertaking

Corporate Renewal.

1.6 What Departments Can Do Differently:

1.6.1 An increased level of contract management oversight was seen as critical. Stakeholders

asked for improved contract writing capability within government and more effective use

of audit rights on significant contracts. In addition Departments need to understand and

fulfil all obligations they have in the execution of a contract. The Corporate Renewal

process has also highlighted the risks arising from the small supplier base that

government relies upon to deliver certain services.

5

Section 2: Background

2.1 Between May and August 2013 the Secretary of State for Justice made a series of

announcements in Parliament about alleged overbilling on the Electronic Monitoring (EM)

contracts held by G4S plc (G4S) and Serco Group plc (Serco), and on the Prisoner Escort &

Custody Services (PECS) contract held by Serco. The issues experienced on these contracts

were deemed of sufficient concern to require a government-wide response. Government

considered that a review of all of G4S and Serco’s contracts with HMG was needed and that

both suppliers should undergo a process of Corporate Renewal to rebuild confidence in their

management capability and governance.

2.2 Following the Public Accounts Committee’s (PAC) 23rd report of 2014-2015 on Transforming

Contract Management, the PAC requested a review of Corporate Renewal, as detailed in

Recommendation 8:

This will look at whether the process was right (including financial compensation and the use

of external assessors); whether the eight principles of Corporate Renewal were the right ones

to use; and whether it has established healthy working relationships between the Departments

and the companies’1

2.3 This review provides the Cabinet Office response to all parts of the request. Section 3 looks

at the process and actions of Corporate Renewal with reference to the eight principles, the use

of external assessors, defining success and HMG’s internal governance structures. Section 4

contains the principal lessons learned. Section 5 focuses on behavioural changes in

Suppliers, by looking at whether healthy working relationships have been established and what

different behaviours Departments expect from suppliers. Section 6 provides a summary of

what Departments can do differently and Section 7 provides the conclusions of the report.

1 Transforming Contract Management, 23rd Report of Session 2014-15 HC 585.

6

Section 3: The Corporate Renewal Process

3.1 Corporate Renewal adopts a principles-based approach, providing a broad framework for a

supplier to identify issues that have caused problems in the past and to instigate changes to

rectify them. The eight principles of Corporate Renewal are as follows and are further detailed

in Annex 1:

1) Investigation

2) People

3) Corporate Governance

4) Culture and Ethics

5) Compensation

6) Transparency

7) Financial Review

8) Ongoing Assurance

3.2 The initial phase of the Corporate Renewal process required formal monitoring of the suppliers’

progress against the principles, conducted by a third party. Following this formal review phase,

government continues to monitor progress in implementing the Corporate Renewal principles

on an ongoing basis.

3.3 Grant Thornton were engaged to report on the implementation by Serco and G4S on six of the

principles of their Corporate Renewal programmes. Detailed plans to complete the

implementation of these principles were put forward by the Suppliers. Grant Thornton

assessed the deliverability of these plans and monitored their introduction. Final reports from

Grant Thornton were submitted for both suppliers in November 2014 at which point Grant

Thornton’s involvement with Corporate Renewal came to an end.

3.4 Lazard & Co Ltd (Lazard) was engaged to evaluate the suppliers against the Financial Review

principle. Lazard undertook a detailed evaluation of the financial stability of the suppliers using

published sources and provided a confidential written report early in 2015.

3.5 The Cabinet Office will undertake an annual review of the operational performance, corporate

governance structure and mechanisms, and financial position of Serco and G4S, as it will for

all HMG Strategic Suppliers. This will be undertaken in conjunction with, and leveraging the

experience of, the Crown Representatives allocated to each Strategic Supplier.

7

Section 4: Lessons Learned

4.1 This section reviews the lessons that can be learned from designing and managing the process

of Corporate Renewal. Interviews were conducted with major Stakeholders from the Cabinet

Office (CO), Ministry of Justice (MOJ), HM Treasury (HMT) and executives from Serco and

G4S, the Suppliers.

4.2 The principles were intentionally written to be flexible to allow for differing supplier

circumstances and to provide broad descriptions of expected changes in behaviours.

4.4 The majority of Stakeholders maintained that the use of the principles was the most

appropriate way to carry out Corporate Renewal. Many agreed that the principles worked for

the purposes of the exercise and covered the areas that were required. They also felt that the

principles mandated appropriate levels of change.

4.5 A small minority of Stakeholders felt that a clearer definition of what a ‘good’ Corporate

Renewal programme would look like was required, as Corporate Renewal is an ongoing

process and not all principles could be easily quantified. One stakeholder suggested that

Contract Management should feature more heavily in the principles and this will be reviewed

during future events requiring Corporate Renewal.

4.6 Suppliers requested a more measurable approach to the principles, with distinct milestones

for quantifiable principles. They also pointed out that some principles, such as Culture and

Ethics, require the embedding of long-term cultural change.

4.7 Investigation: Stakeholders approved of this principle. The process could be improved by

increasing information sharing between suppliers, HMG and external assessors. As an

example, it could be beneficial to share the results of root cause analyses conducted by the

suppliers and investigations down to operational and sub-management levels.

4.8 People: Stakeholders agreed with this principle. Contracting Authorities, where the contract

allows it, have the ability to remove individuals from working on its contracts if they reasonably

deem them to be unsuitable.

4.9 Corporate Governance: Stakeholders agreed with this principle which was quickly adopted by

the Suppliers.

4.10 Culture and Ethics: Stakeholders and Suppliers felt that whilst Grant Thornton monitored the

introduction of culture change initiatives, delivering a change of culture in a large organisation

8

was a long-term effort and unlikely to be completed in the timeframe in which Grant Thornton

monitored the suppliers. Grant Thornton highlighted this issue. Both suppliers launched

initiatives with the aim of reinforcing ethical behaviour in the monitoring period.

4.11 Compensation: There were mixed views regarding this principle. The majority of HMG

stakeholders felt the amount agreed upon was fair as it reimbursed HMG for the financial loss

caused, as well as peripheral costs such as those of the Corporate Renewal process itself. A

settlement was reached without the need for a costly court process, which government

considers a success. A minority of stakeholders felt that the negotiation process continued for

too long and a suggestion was made that there would be value in negotiations being mediated

by a third party.

4.12 Transparency: It was felt that transparency practices have improved significantly as a

consequence of this principle. A small number of stakeholders requested greater clarity as to

what exactly was being asked of suppliers.

4.13 Financial Review: Questions were raised by a minority of stakeholders over whether this

principle should be included as its impact was unclear. Greater transparency on the outcome

of the review was requested by suppliers.

4.14 Ongoing Assurance: Suppliers felt that there was too much ambiguity with this principle. The

suppliers put programme governance structures in place but felt a more specific definition and

description of what was expected would have enabled them to do this more effectively.

The Use of External Assessors

4.15 Stakeholders unanimously agreed that it was the correct decision to employ external

assessors, both for the monitoring of the introduction of Corporate Renewal plans by the

suppliers and for the financial review. Their use had the benefit of enabling suppliers to

maintain control, whilst still providing HMG with assurance.

Defining Success

4.16 There was a range of opinions across stakeholders on whether the Corporate Renewal

programme should have defined what success looked like and determined the timing of

process completion.

9

4.17 Those stakeholders advocating a firm definition of success argued that such a definition would

show transparency and create a more positive relationship with suppliers. They maintained

that to not do so left Corporate Renewal open-ended, making it harder for both suppliers and

government to make progress towards completion. Those with opposing views contended that

defining success would have been too idealistic, as ‘success’ was individual to the supplier.

Additionally, they argued that it was appropriate for government, as a customer, to require

certain behaviours of its suppliers as an output, but it was not appropriate to mandate exactly

how those outputs were achieved. Stakeholders agreed that the principles of Corporate

Renewal enabled constructive engagement.

4.18 Suppliers also maintained that it would have been too prescriptive for HMG to define what

success for their company would have looked like, as it would reduce the responsibility of

management to produce the required outputs. A firmer end point and greater detail of

expectations and process would have been appreciated.

4.19 Stakeholders suggested improvements, such as setting milestones for Suppliers, ensuring that

all contracts follow government policy on open book accounting and renaming Corporate

Renewal to remove the implication of an end point at which suppliers will be formally ‘renewed.’

This demonstrates a shift from “Corporate Renewal” to “Continuous Improvement”.

Internal Governance Structures

4.20 A ministerial committee was created in 2013 called “Markets for Government Services (MGS)”

to steer the cross-government response to the commercial issues arising from the allegations

against Serco and G4S. This was supported by a Senior Civil Service board, the Markets for

Government Services (Officials) (MGS(O)), which was chaired by Sir Jeremy Heywood, the

Cabinet Secretary. The board had 13 members which included Departmental Permanent

Secretaries and representatives from Cabinet Office and HMT. This board, which was

responsible for the oversight of the process of Corporate Renewal, met on a regular basis over

18 months and was the primary decision-making body.

4.21 MGS(O) was viewed as an effective structure, a good driver of progress and able to provide

challenge. The Cabinet Office and HMT were able to consider all Departments’ views in

designing and managing the process of Corporate Renewal.

4.22 There were lessons to be learned. Some decisions were delegated to a few very senior

individuals and greater Departmental representation would have been beneficial. Additionally,

stakeholders felt that it took too long to both create and disband the board.

10

4.23 There was a lack of clarity regarding which Department would lead on Corporate Renewal

which, several stakeholders argued, led to confused responsibilities between Departments and

on occasion, contradictory messages being sent to suppliers. Responsibilities should be

allocated clearly to prevent these difficulties of coordination, with one Minister accountable for

the overall outcome. Greater information sharing across Whitehall Departments would also be

beneficial.

4.24 Suppliers would have preferred government to share information more openly, such as the

assessment reports written by third parties.

11

Section 5: Behavioural Changes in Suppliers

Has Corporate Renewal established healthy working relationships between Departments and

Suppliers?

5.1 Stakeholders and Suppliers agree that Corporate Renewal has changed their relationships for

the better, although the nature of the relationship varies depending on the individual

Departments and Suppliers.

5.2 Stakeholders have mostly found that suppliers are now more open to engaging with and co-

operating with HMG, and that relationships are more transparent.

5.3 We cannot say that Corporate Renewal is the only influence on relationships between

Suppliers and Departments. There are a number of other factors which could have impacted

these relationships, particularly management changes that occurred over the same timeframe.

What different behaviours should Departments expect from suppliers going forward?

5.4 Several Stakeholders indicated that Corporate Renewal has had an impact on other suppliers

to government, as it provided a very public ‘wake-up call’ for them. In particular, other suppliers

are now more aware of Departmental requirements and the need for transparency.

5.5 Departments should expect a higher level of transparency from Suppliers going forward. One

stakeholder maintained that suppliers should be open about issues and challenges in cost

models, as well as being proactive when things go wrong; identifying the issue and being

transparent with government about its impact and root cause.

5.6 Stakeholders were keen for Suppliers to ensure that they have a full understanding of their

contractual requirements when submitting tenders. This will avoid the perception that Suppliers

submit a low initial bid in order to be awarded a piece of work with the intention of recovering

margin through aggressive change control over the life of the contract.

12

Section 6: What Should Departments Do Differently?

6.1 The Departments have changed the way they work since the discovery of the issues with the

EM and PECS contracts. One stakeholder noted that they are now more aware of the risks

that arise from poor contract management. This has consequently been a driver for

behavioural change, leading to an increased focus on building contract management capability

and a greater understanding that effective contract management requires closer working

between Departments and Suppliers.

6.2 The Corporate Renewal process has highlighted the small supplier base upon which HMG

relies. One stakeholder commented that government had not adequately planned for the

possibility of working in highly constrained markets.

6.3 Stakeholders highlighted that government must improve its contract management capability to

create increased levels of partnership to address complex, ever-changing business

environments. It is suggested that increased resources are allocated to this area to improve

government-supplier relationships. Departments need to engage earlier in discussions on

flawed contracts to create better outcomes.

6.4 One stakeholder suggested that government should make better use of its audit rights and that

it should regularly audit a sample of contracts with a total contract value of over £50m. This

would help to mitigate the risk of repetition of the events that led to the need for Corporate

Renewal.

6.5 The point was made that a long period elapsed between the time overcharging was first noticed

in the MOJ to an announcement being made in Parliament. It is suggested that expedient

implementation of Corporate Renewal would be beneficial to all parties.

6.6 Two stakeholders commented that HMG must consider how government engages with the

media over commercially sensitive issues such as Corporate Renewal. An agreed media

engagement strategy should be established, to ensure that information is made publicly

available and its content is shared with all parties in advance.

6.7 One stakeholder felt that work on Corporate Renewal with the EM and PECS contracts

diverted management attention and commercial resources from other important work. A lesson

learned is to ensure that sufficient resources are available for business as usual and the

resolution of priority issues.

13

Section 7: Conclusions

7.1 Government views Corporate Renewal as an ongoing process, and both HMG and its suppliers

must continually strive to improve performance.

7.2 Beginning this financial year, the Cabinet Office will undertake an annual review of the financial

position, operational performance and governance structure of all HMG Strategic Suppliers to

measure ongoing improvements. This will be undertaken in conjunction with, and leverage the

experience of, the Crown Representative allocated to each supplier.

7.3 This review has examined the initial implementation of the Corporate Renewal programmes

and the monitoring processes which followed, highlighting lessons which HMG can learn.

Overall, it has found that this process worked effectively, with only minor changes suggested.

These suggestions, outlined in Section 4 and Section 6 and summarised in Annex 3 will be

taken into account in future if the need arises.

7.4 As a result of the Corporate Renewal monitoring process, Departments are engaged in a

process to improve their contract management capability. It is intended that key contracts

should have a Senior Contract Owner and a cross-government community has been

established to share best practice in this area.

7.5 The Cabinet Office has created the Strategic Partnering Programme with the intent of

transforming relationships with key suppliers and to act as a coordinating function for suppliers

with contracts across multiple Departments.

7.6 Government has published Commercial Standards to codify the approach to commercial

delivery on a number of topics including contract management. Government has developed

and delivered guidance on Open Book accounting and is refreshing guidance on Contract

Management.

7.7 Since the events that generated the need for the Corporate Renewal process, government has

taken a number of steps to improve its commercial capability. (See Annex 2).

7.8 The recommendations identified in this paper to improve the delivery of a Corporate Renewal

process have been summarised in Annex 3.

14

Annex 1 – Principles of Corporate Renewal

Overview

1. Government expects the highest standards from the firms we do business with. At times

the government’s confidence as a customer might be undermined by material poor

performance or failings in governance or ethics by the supplier. In this scenario, Corporate

Renewal may be needed to enable confidence to be rebuilt. This note provides a set of

generic principles for Corporate Renewal. Successful renewal in government’s view,

however, will be more about the wider approach and culture of the firm, rather than

fulfilment of specific principles.

A set of principles

2. Following the discovery of material poor performance and apparent failings in corporate

governance and ethics, we would expect a major supplier to consider whether Corporate

Renewal is necessary. This might reflect a number of points:

1) Investigation

2) People

3) Corporate Governance

4) Culture and Ethics

5) Compensation

6) Transparency

7) Financial Review

8) Ongoing Assurance

Further detail on each of these points is provided below. This is not intended to be exhaustive

or prescriptive, but rather suggest a number of areas that suppliers in this position may want

to consider to provide their customers with greater confidence.

Investigation

Companies undergoing Corporate Renewal are likely to want to conduct their own

investigations to ensure there is a clear understanding of what has happened and why. Pace

may be important and these reviews may be most credible when arranged with a suitable level

of independence (e.g. overseen by the Senior Independent Director or by an external audit

firm reporting jointly to the Board and government). We expect that firms will want to publicly

acknowledge what has happened and explain what action is being taken to put it right.

15

People

Companies will want to assure key customers that the senior management of the firm is

untainted by the wrongdoing. Suppliers will want to take proportionate and robust action, using

appropriate disciplinary processes to deal with those who have acted wrongly. People found

to have been involved in inappropriate behaviour or to have enabled wrongdoing should not

be employed on government contracts.

Corporate Governance and systems

Firms will want to ensure that internal governance structures are sufficiently strong to provide

customers with confidence that problems will not reoccur. This includes ensuring that the

business model itself is appropriate (e.g. ensuring the company is not overstretched) and

considering whether business behaviours could usefully be improved (e.g. making the person

responsible for selling work responsible for delivering work), and that appropriate contract

management methods are being used that include feedback on performance from the

customer. Customers are likely to welcome having a clear sense of roles and responsibilities

in the firm, something that might be addressed at an individual level and when considering

corporate structure. Good Corporate Governance may also include ensuring that strong

independent challenge exists at Board level (e.g. from talented NEDs). Companies may wish

to review their approach to whistle-blowing, adopting best practice if there are currently gaps.

Culture and Ethics

Having reviewed their culture and ethics, companies will want to swiftly tackle any gaps,

probably introducing new policies to demonstrate that strong ethical standards exist at all

levels. Firms may wish to review their published code of ethics to ensure that key customers

have a clear sense of the expectations set by the company themselves. But having the right

policies and procedures in place will be only part of the story. Customers will expect to see

that these are being communicated to and acted upon by staff at all levels.

Compensation

Swiftly agreeing appropriate compensation for wrongdoing may help companies rebuild

confidence with their customers.

Transparency

Greater transparency is likely to help rebuild customer confidence. This could include

embracing open book accounting, strengthening the role of internal audit and considering

whether audit reports can be shared more easily with customers. It may also involve co-

16

operating with any investigation by the National Audit Office or agreeing to forensic audits

requested by government.

Financial Review

Companies will want to reassure their key customers that they are not in a position of financial

distress and that service delivery is not threatened. An external financial audit might support

this goal: demonstrating the strength of their underlying financial position.

Ongoing assurance

The supplier will want to ensure that government (as a key customer) can closely track delivery

of their corporate renewal plan and may want to consider whether an independent audit

process (perhaps led by an accountancy firm) might support this goal.

Confidence will be built over time as agreed steps are implemented and embedded. As well

as reporting regularly to government on progress companies may wish to ensure there is an

external audit early in the process (perhaps 4 weeks in), followed by subsequent reports as

appropriate. Companies may wish to agree a series of steps to be completed, or milestones

to be set, the last of which would result in companies moving from the intense phase of

Corporate Renewal to ongoing continuous improvement.

Naturally, any discussions on renewal must not prejudice any investigation by the authorities

into the conduct of suppliers, their officers, or other individuals employed by them. However in

principle it is envisaged that renewal could be progressed in parallel with any criminal or

regulatory investigation.

17

Annex 2 – Current Commercial Improvement Activity

In line with the development of other functions the Government Commercial Function is

being strengthened by improvements in the capability of the resource held centrally that

works in support of departments;

The Commercial Capability team is delivering an ambitious capability programme, which

includes the recruitment of senior, experienced commercial staff into the Civil Service.

This is informed by the development of department blueprints at an organisational level

and supported by an enhanced learning and development offering. This includes

proactive talent management and the Assessment and Development Centres which

have assessed over 600 individuals this year.

Over the last 5 years, Crown Representatives have resolved performance issues,

identified savings opportunities and avoided legal challenges with Strategic Suppliers. In

addition to this, the Markets and Suppliers team began the Strategic Partnering

Programme in 2015, to focus on the most difficult outsourced service areas and, where

beneficial, re-design certain service areas to attract innovative suppliers, deliver strong

performance, savings and to create sustainable markets. This is a long-term programme

which will change how we work with and manage suppliers.

The Complex Transactions Team is providing direction to Departments, improving their

commercial capability, and assisting them with their most complex deals.

In October 2016 the Commercial Assurance team published the second iteration of the

commercial standards. This sets the benchmark for the way in which we manage

suppliers with an emphasis on improved planning and early engagement to help ensure

the scenarios that led to the need for corporate renewal are less likely to recur.

18

Annex 3 – Improvements to the Corporate Renewal Process

This section highlights key learnings that should be borne in mind in the event of future

Corporate Renewal processes.

Defining Success

It should be made clear from the outset that Corporate Renewal is not a process with a defined

end point after which a supplier is formally considered to be renewed. It should instead be

seen as a process with agreed milestones used to assess implementation of the agreed

actions, the last of which marks the start of ongoing continuous improvement.

Accountability

It should be made clear at the outset which department is leading on the implementation of

the Corporate Renewal process, with clear, single lines of communication established with the

supplier stating which Minister has ultimate accountability for the outcome.

Communication

An agreed media engagement strategy should be established, to ensure how information is

made publically available and its content is shared with all parties in advance.

Resource

Sufficient resources should be made available to ensure that business as usual is maintained

whilst the resolution of priority issues of Corporate Renewal are progressed.