Rail Industry Focus

01.07.13

‘A supplier-dependent organisation’: Network Rail Infrastructure Projects and how it is changing

Source: Rail Technology Magazine June/July 2013

Network Rail’s Infrastructure Projects business is likely to spend around £23bn during CP5 – and is determined to change the way it works with its supply chain and key contractors to improve performance, delivery, safety and sustainability. RTM heard from finance and commercial director David McLoughlin, national supply chain director Guy Stratford, and commercial projects director Stephen Blakey.

Network Rail says the past 18 months to two years have been a period of major change in its relationships with its suppliers and partners, with far more emphasis now on collaborative working, alliancing, speedy and fair payment, sustainable working practices, supplier engagement, new contract models and a far more transparent pipeline of upcoming works.

The next round of supplier feedback surveys, conducted by Ipsos MORI, is due soon – but the last set for 2012 already showed very positive movement, with 63% of suppliers saying they’d speak highly of Network Rail, and only 34% saying they’d speak critically. That was a big change on 2011 (52% speak highly, 44% critical) and there has been vast improvement since the lowpoint in 2009 (43% speak highly, 55% critical), though Network Rail also notes that some specific factors were in play that year, including the fallout from decisions to defer major works, and the huge fall in business confidence around the country due to the recession.

Network Rail generally, and its Infrastructure Projects division particularly, is a supplier-dependent organisation, and 70-80% of its multi-billion pound budget (around £4.5bn a year) is passed to suppliers.

Commercial projects director Stephen Blakey said: “We’re a supplier-dependent business: their performance is a huge reflection on our performance, and there’s a mutual dependency.”

He said the improvements in the 2012 feedback survey were “really important to us”, adding: “It’s an independent temperature check of support and of views of us as a progressive organisation, on the degree to which we collaborate, the degree to which we’re turning aspirations into tangible differences. We got a really strong response; that’s brilliant and our fingers are crossed that that trend will continue in the next round of the Ipsos MORI poll.

“There shouldn’t be any surprises – if we were fumbling the ball in some way, we’d expect, with all the touchpoints we have, to have picked up on that already.

“It’s about trying to drive outstanding value in a collaborative context – that’s what we’ve achieved in the last 18 months.”

‘Generating outstanding value for taxpayers’

Network Rail’s Strategic Business Plan would have IP spending £23bn over the five years of CP5, and while that will be reduced slightly if the ORR’s draft determination published in early June is what comes to pass, it is still a vast amount of money.

IP has about 4,500 staff, but once the cost of employing and training them is accounted for, plus its own internal business spending, the lion’s share goes straight to its tier one contractors, who again pass much of that funding through to their own sub-contractors.

The organisation’s finance and commercial director David McLoughlin said: “I want to generate outstanding value for taxpayers, and in that way make a better railway for Britain. Behaviours are important. We’re doing a lot of collaborative working. Every idea, every thought we have, we want people to test and challenge it. We want outside people to help us with this.”

He remarked on the “scale and breadth” of IP as an organisation, noting: “It touches and impinges not just on our supply chain, but on stakeholders, the community, government, industry. We have a great opportunity not to be insular in what we do, but extend beyond it and influence policy.

“We can do much more on innovation. We’ve had a portal, but have we used that to its best? We’ve got fertile ground now with our chairman [Richard Parry-Jones], who’s hot on pure R&D – we can extend beyond our boundaries, away from pure rail technology.

“We’ve got a duty to train and upskill our workforce too, and we’ll be doing more work with Gil Howarth and NSARE, and also with our professional bodies.

“That’s my agenda. We can be a huge, driving, influential force – it’s not just about improving IP or just Nework Rail, but the industry as a whole.”

At a briefing for journalists explaining the changes made in the past few years and those to come, McLoughlin and his team highlighted a few developments of particular importance, including the establishment of the Commercial Directors Forum (CDF), the tier 1 and 2 supplier engagement conferences, the new sustainable procurement strategy, the enhanced visibility of work plans for the supply chain, and the Fair Payment Charter.

The CDF

The biggest impact has undoubtedly been made by the CDF, which has instigated a number of important changes, including coming together to develop and sign the Fair Payment Charter in November 2011.

Explaining the genesis of the CDF and its work, Blakey made reference to the McNulty report of May 2011. He said: “One of the key things in there, in terms of driving outstanding value, is that supply chain relations are a key enabler to efficient delivery.

“We spent a lot of time looking at the dynamics in traditional forms of contract and how we could soften those dynamics through behavioural improvements, but also started to look at broader collaboration both through forms of contract but also by establishing a platform whereby we could tap into the thinking and aspirations of our supply base in a more collaborative way.

“We weren’t getting what we were looking for back in 2011…something [had to] be done in the pursuit of value for money through improved supply chain relationships.

“Our response, from David Higgins through to Simon Kirby and David [McLoughlin], and from the discussions we have as a management team within the contracts and commercial fraternity, was ‘we need to push for greater collaboration and do something tangible’.

“We wanted to establish a platform to drive that commercial innovation.”

BS 11000 and supplier engagement

Blakey continued: “We recognised we needed to actively pursue BS 11000, to identify an individual to take managerial responsibility for driving the engagement with the supply chain, our head of supplier engagement, and to set up what’s become known as the CDF.

“That forum really is a working group of the intellect and experience of the commercial discipline across rail.

“We looked at our top suppliers, top consultancies and design houses, and brought them together to develop and inform a distinct approach to commercial issues and innovation. It wasn’t Network Rail telling them what we wanted; it was opening up items for debate and seeing where there was scope for improvement.”

The CDF is working on common performance metrics for the industry, working with Crossrail Ltd and London Underground; looking at using peer group pressure to raise overall and average performance; and improving and regularising contractual issues like disallowable costs.

It has already achieved successes like the removal of the old rule that the default level of retentions would be 3%, down to zero; agreed a policy on the efficient use of parent company guarantees; incorporated sustainability issues within a revised tender evaluation process; achieved BS 11000 certification for collaborative working; been instrumental in the creation of Network Railsuppler alliances such as the ones in place for Stafford, the Hitchin Flyover and London Bridge; and has agreed to pilot the use of the NEC3 contract model.

Blakey explained: “We had our own iterative forms of collaborative contract – we’d never tried to make use of a mainstream and recognised form like NEC3, so we’ll be doing that. We’ve also opened the doors of our senior leadership programme for industry colleagues. Those are all specific outputs of the CDF.”

Fair Payment Charter

The Fair Payment Charter itself cuts standard payment terms on new contracts from 56 days to 21, and commits the signatories to pay their own subcontractors within seven days of receiving payment, a move praised by Cabinet Office minister Francis Maude MP.

Blakey said: “That takes payment from 120-150 days to an aspiration, from certification, of 28 days. That’s a huge industry change.

“Also written in and signed was that if the main contract between Network Rail and the tier 1 [contractor] was 0% retention, that’d be mirrored in their relationship with subcontractors, unless there was a specific risk.”

The pledges made in the Fair Payment Charter are not retrospective, nor are they a firm ‘rule’ – it’s a voluntary regime. This has annoyed some tier 2 contractors, as explained in detail in the Dec/Jan 2013 edition of RTM, as many feel they are still being mistreated over payment and terms by tier 1s.

Blakey admitted: “It’s fair to say that it wasn’t a guillotine moment and the world’s now completely different. But the [payment] trend is progressively shortening.”

He said he wanted to change the old adage about Network Rail – ‘they take a long time to pay, but you know you’re going to get paid’ – to ensure the organisation is seen as being among the best clients and the speediest payers.

CP5 contracting strategy

McLoughlin admitted that Network Rail has “learnt a lot” since its 2008 decision to defer some major track works, which had a big impact on its suppliers and the market generally. Its CP5 contracting strategy has been developed in a much more collaborative way.

National supply chain director Guy Stratford commented on the major changes in Network Rail from the first time he worked for the organisation, soon after it took over from Railtrack, versus now since he recently returned.

He said: “What a difference 10 years has made! That’s largely been driven by the real understanding that exists now within Network Rail that if we deal differently with our suppliers, providers, contractors, and actually listen to what they have to say and deal with them in a genuinely collaborative way, not just as a fancy word, there is value to be had from that.”

Stratford said: “CP5 doesn’t start for 11 months. But we do have a definite aim to have most of CP5’s procurement sorted by the end of CP4. Already we have things like signalling frameworks, ETCS frameworks, professional services frameworks, level crossing replacement – they’re already in place.

The way we’re going to engage with the supplier market is already in place. “We don’t want a hiatus, or uncertainty in the marketplace – we want continuity at all levels – of expenditure, people’s employment, work teams, avoiding crazy redundancy packages.”

The new strategy also gives the four IP regions plenty of flexibility to develop their own policies and procedures, as long as they stick to the basic principles.

He noted that expenditure in the SBP for CP5 is 15% up on CP4, saying: “These are significant sums of money, and I think the marketplace is quite interested to hear this, especially with the other things that are going on around the country.”

Discussing CP5 more generally, McLoughlin said he doesn’t think benchmarking between countries works very well with systems as large and complex and with as many variables as railway networks. If the UK places more emphasis on safety (for example through lineside fencing), does that need to be taken into account when benchmarking against other countries? There are hundreds of such examples, making it difficult or impossible to get real value or meaning from simple comparators of overall network costs.

McLoughlin said: “It’s too difficult to do it at the whole-network level. We’ve had universities try to do this kind of stuff, but for one reason or another there’s always some party who says ‘it’s not right’.”

Safety

Safety is the “biggest priority” for Network Rail, which it drives home through its ubiquitous ‘everyone home safe every day’ messaging, its lifesaving rules, and a focus on safe working behaviours and cultures to avoid the accidental incentivising of under-reporting or covering up incidents.

Stratford said: “‘Everyone home safe every day’ – what can we do with our contractors to try to ensure that? We’re looking to build it into our contracts where we can.

“I’ve not got all the answers; I don’t think any of us have, though we’ve all got lots of ideas: encouraging direct employment of staff; appropriate training; familiarity of staff with the sites they’re working on, and with the colleagues they’re working with; continuous use of teams rather than breaking them up and them having to re-learn things; using assurance processes sensibly and getting safety really embedded into the way we understand our contractors; ways of rewarding good and safe behaviours and practices.”

‘Fewer partners – closer relationships’

Network Rail IP has been focusing a lot of time and attention on supplier engagement as regards the upcoming spend programme and the workbank.

Stratford said: “We’re trying to lay it all out to the best that we know it. Let’s make it available now and have greater visibility of the work, to allow more efficient planning, better use of resources, working on behaviours without having to re-learn them in six months’ time. If we expect investment by suppliers into research, development, and innovation, we’ve got to give them not just visibility of the workload, but a feeling of confidence that it can be maintained. We can go a lot further with that than we have in the past.

“We want partners, not just suppliers; culture change and behaviour change. People who understand what we’re trying to do, so they can do it with us.”

A major part of this will be IP’s effort to work more closely and consistently with fewer suppliers.

Stratford explained: “We say fewer suppliers because we’ll be tendering for a lot of works like enhancement work and multi-disciplinary improvement works via frameworks over the whole period. So Region A might go through a tendering exercise and be looking to spend £2bn with just four suppliers over CP5. That sounds to me like a lot fewer suppliers bidding for things on a repetitive basis.

“But put your mind forward five or six years – if there was £23bn to spend, it would have been divvied up amongst contractors having bid repetitively and repeatedly over that period. The actual answer in terms of how many suppliers actually get work is probably very much the same.

“But there will be some contracts, borderline tier 2, tier 1s, who won’t be bidding for the first three years then getting some work at the latter end. They’ll be embraced by tier 1s early to be partners right from the start, and they get certainty of what they’re going to do, and don’t have to waste time and money bidding.

“The relationships are established earlier and are continuous rather than staccato.”

McLoughlin added: “There’s enough work for everybody. It’s going to expand if anything.”

Andrew English, commercial director at Skanska and an important member of the CDF, said: “Having the right people in the right place at the right time to respond to these is a real headache. The level of information coming out now is actually making a huge difference – don’t underestimate it.”

But he said it’s important that dates are stuck to: “We know we can’t price everything that’s in the pipeline. If a major opportunity is put back by months, it has a major impact.

“The amount of information coming out from the portal, the roadshows, makes a huge difference – sticking to it is important.”

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