Managing commercial risk when entering into third-party contracts: key considerations for NHS trusts

This article was co-authored by Ellie Sowden, Trainee Solicitor, Manchester.

While NHS trusts face a steep rise in public demand for services and with mounting operational pressure, the NHS has increasingly relied on third-party service providers to help deliver and improve services and patient care, particularly with information technology and data services. This brings with it inherent commercial risk. Contractual disputes where NHS trusts have paid third-party providers for services that were never delivered, are unfortunately not uncommon.

It is vital that NHS trusts take steps to minimise the risks posed to them when entering into third-party contracts. A number of repeated issues and trends can be identified, which we share below.

Warning signs

How can trusts spot the warning signs to help prevent non-provision of services/breach of contract by a third-party service provider?

The key to protecting a commercial and cashflow position is being vigilant and identifying any early warning signs that may present themselves, before they develop into a larger problem.

There are a number of common ‘red flags’ that can signal the potential for non-provision of services or other breach of contract by a service provider. Spotting them at an early stage will give trusts the best opportunity to manage risks and take steps to mitigate their exposure.

Breakdown in relationship or silence

Often, silence from a service provider is a key indicator that there are issues behind the scenes. A provider may go ‘off the radar’ when dealing with financial difficulties while they take financial or legal advice, or may cease contact completely with end users.

Change in behaviour

Changes in a provider’s approach, manner, general way of working (including tone of emails and phone calls from individuals), and significant restructuring of workforce and operations, may be indicative that the provider is experiencing difficulties.

Missed deadline and repeated extension requests

Missed deadlines and repeated extension requests to, for example, deadlines for project delivery dates, may signify issues behind the scenes.

Customer reviews and feedback

In the age of social media and online review sites, customers and clients are often quick to rate and review a provider’s service, particularly if it is bad or in breach of contract. Being aware of where to find these sources of information and actively checking those sources may mean a potential problem is flagged before it becomes a crisis.

Market decline/industry issues

Being aware of any developments underpinning the provider’s particular industry will help identify market conditions that might affect service delivery and lead to potential issues.

Steps to minimise exposure

While it is important for trusts to be well-equipped to spot warning signs for provider issues, it is necessary to take measures to minimise risk to the trust and improve cashflow. There are a number of steps that trusts can take to do this.

Thoroughly vet third party-providers and understand what they do

This may seem like an obvious point, but increased pressure and tight timeframes can mean that in some instances this step is not undertaken as fully as it should be. Improving initial due diligence could mean avoiding potential problems altogether, and understanding the particular industry and risk profile of the provider may also assist in identifying potential causes of difficulties further down the line.

Continuous monitoring

Managing third-party risk is an ongoing process and should be proactive, not reactive. This includes considering what third-party risk management practices can be implemented or how those already in place can be improved.

Communication is key

Establishing and maintaining an open channel of communication with service providers, can greatly assist in preventing and/or resolving issues much earlier. Engaging in transparent dialogue with service providers if there are any issues or queries at any stage, will help resolve matters. Using consistent, clear communication will help identify issues with service provision at an early stage and make any issues arising easier to manage.

Review and update contracts

Contractual deficiencies often expose one or more parties to considerable risk. It is crucial that third-party contracts are regularly reviewed and any terms that need to be improved or updated are identified. Doing so gives trusts the opportunity to optimise or refine terms to better suit them and provides clarity and assurance to both parties of their rights and risks.

Seek legal advice

Whilst it may not prevent a contractual dispute, seeking legal advice at the contract formation stage is another key consideration to ensure the interests of the trust are fully considered and protected.

Ensure adequate insurance coverage

Is there adequate insurance cover in place? Trusts need to be confident that service providers have the proper insurance coverage, and should keep this under regular review to provide a layer of protection and prevent additional risk and exposure.

Read other items in Healthcare Brief – April 2023

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