THE BUSINESS ISSUE
The client – a privately–owned regulated electricity and gas distribution business – was locked into a value-destroying contractual relationship with its service provider. The contract had a closed-book fixed price arrangement for all maintenance and operational expense work but a cost plus arrangement for capital works.
The net result of the contract arrangement was a severe misalignment between the objectives of client and service provider – an implicit incentive to minimise maintenance and maximise capital expenditure activity. This lead to frequent disputes with the service provider since the client’s needs were not being met as originally intended.
Other dimensions to this complex issue which included the regulatory risk created by non-transparent costs, and inadequate client capacity to ensure the service provider acted in the client’s interests.
d2e was initially brought into manage the resolution of the numerous contract disputes that has originated as a result of the adversarial contractual relationship. After a brief review d2e concluded that the root cause of the problem was the fundamental misalignment of objectives in the existing contract, and the client’s interest would be best served by a complete change.
After gaining agreement from CEO and the Board, d2e has helped develop a completely new contract structure which aligns the parties’ interests, develop a new set of “intelligent client” capabilities and implement the changes.
- Alignment of client and supplier objectives via an open-book, cost-reimbursable contract with incentives to drive cost and quality
- Assurance of ongoing value-for-money and regulatory acceptance by splitting the services into two geographic regions but with enough similarities to provide ongoing competitive tension and comparable benchmarks on cost and quality
- Enormous improvement to client capacity by establishing in-house expertise on asset management, regulatory management, and contract management.