Supplier due diligence is a hot topic in government following the collapse of Carillion and profit warnings from other large public sector contractors. This places John Sayles FCCA at the sharp end of events. John has been head of commercial finance at Crown Commercial Service for the last three years, heading up a new function to consider the viability of potential public sector contractors.
“The essence is to undertake the due diligence and supplier assurance role for all new suppliers that may wish to join a framework that CCS is operating,” Sayles explains. “We are very much involved at the front end in terms of assessing the risk of financial failure of particular suppliers for a commercial agreement. For government, that reduces the risk of a particular supplier going down.”
Crown Commercial Service is a non-executive body of the Cabinet Office, which generates revenues that contribute to the Exchequer. The revenues that John’s function provides are raised through a levy on the contract price charged by the supplier to public bodies. But that contract price is lower because of the work of CCS, so the public sector achieves a net gain.
For some types of procurement, supplier failure risk is low. With stationery and office equipment, for example, if the supplier ceases to trade an alternative supplier can be easily sourced and there is no financial loss for the public body as there will be no prepayment. But, explains John, “there are other procurements, such as cyber services or major IT procurement, where there are larger call-offs and the role of Crown Commercial Service is to be an enabler for government to take some of the heavy lifting out of the procurement work, providing frameworks that government and public sector organisations can call off.”
John’s team – which is actually himself and one colleague, who is training to be ACCA qualified – undertake due diligence on between 50 and 60 frameworks per year. That due diligence involves researching the economic and financial standing of every new supplier, with a focus on four pillars of business activities – buildings, people, technology and corporate services. For each framework there can be as many as 300 to 400 bidders, whose viability and sustainability must be assessed in rigorous detail.
The buildings pillar includes facilities management and is being carefully reviewed by the public sector following the collapse of industry giant Carillion. “We are looking at this very carefully,” concedes Sayles. “There is more concern in that marketplace now.” While the government is undertaking a policy review on what can be learnt from the Carillion experience, John is open that some responses are obvious. One is to recognise that even if a subsidiary is in good health, it can be sunk by the parent company being in a weak situation. Recent experience also underlines the Importance of not just going for the cheapest bidder, but of ensuring the sustainability of contractors.
Due diligence by CCS involves the use of Dun & Bradstreet for a basic assessment of a potential supplier. This is backed, normally, by asking for the company’s last two years’ audited accounts. If it is a new start, John and his colleague will look at business plans and finance lines. Where there is a shortage of appropriate financial information, the team will do what John calls “a deeper evaluation”. They will also look for warning signs, such as the loss of key personnel.
Certain principles are central to assessing the sustainability of a potential contractor. Risk evaluation is key, as is understanding risk profile. By subscribing to Dun & Bradstreet’s alert service, John’s team hope to obtain early warnings of problems. But the intention is to strengthen the early warning system through greater knowledge sharing of problems across the public sector. This is vital with regard to strategically important suppliers. Greater transparency is central to improving supply chain assurance and is backed by the use of ‘open book accounting’, through which suppliers share information about the costs and profits of a specific contract with the client.
John’s role goes beyond checking supplier sustainability and also involves obtaining the best prices from contractors. “We do the evaluation of the market, the pricing negotiations and put together a deal which is good value for money for government and the public sector, which will then bring savings,” he says. “In essence it is an economies of scale model, aggregating demand.” The range of providers can include public sector contractors – for example, NHS hospitals seeking to improve their own economies of scale by supplying laundry cleaning services to other local NHS bodies. John’s role is also to assist the government fulfil a political objective of opening-up more public sector procurement to the SME sector. The target is for SMEs to undertake a third of government contracts by 2022.
Prior to working for CCS, John was senior investigating accountant and financial controller at the Ministry of Defence, where his role supported
project teams in submarine programmes. This followed private sector positions, including as financial controller for large hotel operations.
John qualified in 2003, while working for the Inland Revenue. “My FCCA qualification has been tremendously important,” he reflects. “The breadth of the range of areas studied gives you a broad experience.” And Sayles is committed to giving back to the profession and ACCA. “I attend local CPD events,” he explains. “It’s important to share with the local accounting community. ACCA is a very valuable resource.”