BBC Independent Television Commissioning Deloitte & Touche LLP review presented to the BBC Governors' Audit Committee, September 2006, and a response to the review from the BBC INSIDE COVER - BLANK BBC Independent Television Commissioning BBC response to the Deloitte & Touche LLP Value for Money study At the request of the Governors’ Audit Committee, the BBC’s independent commissioning process has been subject to a value for money study to assess whether it is: •achieving best value for licence fee payers, and •making an optimal contribution to the organisation’s overall effectiveness. This study is published alongside a review by the National Audit Office (NAO) of the BBC’s risk management process.These are the last in the current three-year programme of studies, commissioned by the Governors, assessing value for money across the BBC.The BBC Governance Unit is currently working with the NAO on plans for a new programme of value for money studies that will be considered for commissioning by the BBC Trust from January 2007 onwards. In recent years there have been a number of changes in the independent media sector.Within the commercial framework, in which the BBC and independents work together, these have included changes to Terms of Trade and the Code of Practice. The full introduction of the Window of Creative Competition from January 2007 will have further implications for this relationship; so will any agreement on new media rights with the Independents’ representative body, PACT. The BBC has responded to such changes by implementing a new independent commissioning process that started to roll out in the second half of 2005.The Governors commissioned this value for money study to review the progress made so far and to provide recommendations for the BBC to ensure best value for the licence fee payer. The Board of Governors thanks Deloitte for undertaking this review and accepts the report’s conclusions and recommendations. The study acknowledges that the BBC’s ability to improve value for money in commissioning is bounded by the commercial framework that exists between it and the independent sector. However, the Governors welcome Deloitte’s conclusion that the BBC’s new commissioning process places a significant focus on effectiveness, and includes a number of controls to minimise the loss of value. While noting that there are limited areas highlighted in the Deloitte report where the process can be enhanced, the Governors support the positive action BBC Management proposes to take in response to the report. The attached response from BBC Management outlines what action is being taken to address the recommendations made by Deloitte. It has been considered and approved by the Board of Governors. Board of Governors October 2006 BBC Independent Television Commissioning BBC response to the Deloitte & Touche LLP Value for Money study The BBC welcomes the Deloitte value for money study on independent commissioning. The report, commissioned by the BBC Governors, should be considered in the context of a maturing relationship between the BBC and the independent production sector. Since the introduction of the statutory 25per cent quota, this relationship has developed into a creative partnership in which the independent sector plays a crucial part in delivering the BBC’s content strategy. It is in the interest of the UK television audience that there is a competitive and thriving independent production supply market.The BBC is committed to continuing to stimulate and support the development of this sector. The findings and recommendations in the report are timely given the introduction of the Window of Creative Competition and the implementation of the Creative Future project, the BBC’s content strategy for the next Charter period. BBC Management is committed to delivering the best value for licence fee payers and is actively addressing the recommendations in the report to continue to improve the BBC’s performance for its audiences. The Deloitte study acknowledges the complex nature of value for money considerations in relation to commissioning programmes from the independent sector. This is due to a number of factors, including the inherently creative nature of the end product being commissioned, as well as the tight regulatory environment in which the BBC operates. The study also recognises that the environment that frames the relationship between the BBC and the independent sector has changed significantly during the last few years. A number of key factors have contributed to that changing relationship: •The Terms of Trade and Code of Practice have fundamentally altered the commercial framework between the BBC and the independent sector, helping to create the venture capital for the creative industry and helping to serve the wider policy objectives of the BBC. •The growth of multi-channel TV leading to increased expenditure by all broadcasters on independent commissions, accompanied by consolidation in the market, giving the sector increased economic power and a commercially stronger business basis. •The advent of the Window of Creative Competition (WoCC) to: • ensure that the 25per cent Independent Quota is a floor and not a ceiling • create true competition between in-house and independent supply • instil confidence in the independent sector through a much more transparent commissioning process. The Deloitte report has acknowledged the major impact these factors have had in shaping the value for money agenda in relation to independent commissioning at the BBC.The report has concluded that the complicated commercial and regulatory environment has some limiting effect on the BBC’s ability to improve value for money in independent commissioning. Notwithstanding the above, the review has concluded that the BBC takes value for money considerations very seriously and is doing much to drive value for money improvements in independent commissioning. The BBC therefore welcomes Deloitte’s conclusions that: •The BBC considers value for money at all stages in the commissioning business cycle, from strategy setting and annual planning through to individual commissioning decisions. •Efficiency savings considerations form a central plank of the annual plan and the new commissioning process places a significant focus on effectiveness. •The commissioning process is executed in a consistent manner. •The commissioning framework has a number of built-in checks and balances, which are aligned to value for money objectives and efficiency targets, and that the resulting ‘control principles’ approach is a sensible one to take. •Based on tests undertaken, no material deviation from the control principles was found and the BBC has achieved some success in achieving savings. •Improved value for money will also be delivered to the BBC through the independent sector, further embracing new production techniques and financing arrangements. •The RQIV framework developed by the BBC is a robust performance reporting tool but has untapped potential in helping to demonstrate value for money in relation to commissioning. •The BBC’s evolving 360-degree approach to commissioning should continue to be rolled out and refined over time to reflect the changing shape of the rights market. The report has also made some valuable observations and recommendations for improvements, which the BBC is addressing.The main recommendations are considered below. Recommendation that the commercial framework between the BBC and the independent sector should be revisited to raise the priority of gaining value for money over improving transparency and fairness The introduction of the Code of Practice and Terms of Trade has achieved the policy objectives of improving both transparency and fairness and these principles will continue to underpin the BBC’s dealings with the independent sector.The BBC will continue to monitor changes in the market as it evolves in order to understand the benefits delivered to the buyer and supplier through this tight regulatory framework. In this way the BBC maintains a continual review of the workings of the commercial framework and looks for more imaginative ways of constructing business relationships that deliver value for money.The BBC will play a full part in the three-yearly reviews of the Terms of Trade. Recommendation that value for money considerations continue to be given sufficient consideration in the setting of in-house guarantee levels and that there should be timely reviews of tariff levels The mixture of genres and shape of the in-house guarantees are reviewed from a value for money perspective to ensure parity of range, diversity and broad value. This includes monitoring the evolving structure and dynamics of the independent sector to understand the ability of the market to meet programme demand while offering competitive prices. The BBC will review tariff levels in this evolving market every two years in line with this recommendation and as set out in the Code of Practice. Recommendation that the BBC gives consideration to other measures it can take to manage independent suppliers to achieve stronger value for money This recommendation is accepted.The Content Supply Review work undertaken by the BBC is a precursor to the development of a supplier strategy across a number of policy fronts, including value for money considerations.This work will be updated and its conclusions will inform both the shape and mixture of the supply base within the 50per cent in-house guarantee and the development of relationships within the independent sector. In addition, the BBC will continue to roll out 360-degree commissioning, which has a strong value for money dimension to it. Recommendation that the RQIV framework is further embedded within the organisation to improve performance reporting At present all divisional quarterly performance review reports to the Director-General, Executive Direction Group and Governance Unit are fully categorised in RQIV terms. However, the BBC agrees that untapped potential exists for extending this framework further to improve Value for Money (VFM) performance reporting in relation to commissioning. Management will review how best to cascade RQIV further down the organisation to strengthen VFM reporting. This review will balance the practicality of using the RQIV and public value methodology more generally at a granular level with the benefits that can be achieved in order to achieve the optimal results. Recommendation that the BBC takes a proactive role in encouraging independents to exploit their rights and ensure it collects its share of the return The BBC accepts this recommendation and will take steps to improve revenue monitoring and collection.These will include a revised process of deal tracking and reporting and a programme of royalty audits to be conducted across the independent sector. Various minor recommendations for improvements in the commissioning process as follows; •Shared database for tracking the progress of ideas through the commissioning process, reducing risk of duplication and data loss. This functionality has been factored into the BBC’s new commissioning and channel management system ‘On Air’, due to be implemented from January 2007. •Signed copies of production agreements should be scanned and electronically stored, reducing the need to search archived files for supporting documentation. Final electronic versions of all agreements and specifications will be embedded within programme records and scheduling details within ‘On Air’, eliminating the need for any scanning or archive searching. •Capture the data that will form part of the timely reporting of Ofcom performance to make preparing the report more efficient The timeliness of capturing the data to prepare reports on Code of Practice targets (e.g. deals done and response rates) will be improved. Reporting against Ofcom quotas for independent and regional production is fully automated and run off core transmission data. It is fully robust and produced on a timely basis. Auddiit..TTaaxx..CCoonnssuullttiinngg..CCoorrppoorraattee FFiinnaannccee.. BBC Governors Independent commissioning – Value for money study Deloitte & Touche LLP October 2006 Contents Preface 1 1. Executive summary 2 2. Objectives and scope 4 3. The BBC and the Independent sector 7 4. Strategy and planning 11 5. The commissioning process: Solicitation and development 16 6. The commissioning process: Negotiating and commissioning 18 7. The commissioning process: Production and delivery 22 8. Conclusions and recommendations 25 BBC Governors Independent commissioning – Value for money study Preface This report is one of a series of studies that review value for money at the British Broadcasting Corporation (‘BBC’). The programme of reviews was selected by the BBC Governors’ Audit Committee in discussion with the Comptroller and Auditor General of the National Audit Office in the context of Parliament’s consideration of the Communications Bill. This report was prepared by Deloitte & Touche LLP (‘Deloitte’) for the Governors of the BBC (the ‘Governors’). In the report we review value for money in BBC Television’s commissioning process for Independent productions. This report has been prepared for and only for the Governors of the BBC in accordance with the terms of our engagement letter dated 26 June 2006 and for no other purpose. We do not accept or assume any liability or duty of care for any other purpose or to any other person to whom this report is shown or into whose hands it may come, save where expressly agreed by our prior consent in writing. While we have consented to allow this report to be made public through the Governors’ website, we have not in so doing agreed to extend any liability or duty of care that we may have beyond that referred to above. We have not carried out an audit of the BBC’s financial statements. Our work has been based primarily on internal management information, collated during June and July 2006, which we have not verified or corroborated. BBC Governors Independent commissioning – Value for money study 1. Executive summary Context 1.5 Our study indicates that during both stages, BBC 1.1 The BBC’s relationship with the Independent sector is in a Management takes value for money considerations very period of transition. In an environment of wider changes in seriously. Efficiency savings form a central plank of the annual the marketplace: plan, which sets out programmes to be commissioned and guideline tariffs. In addition, the new commissioning process • independent producers’ proportion of BBC broadcast hours places a significant focus on effectiveness, and includes a and share of programming spend has been increasing; number of practical controls to minimise value leakage when dealing with Independent producers. • the commercial framework for the relationship was reshaped in 2004 by the Terms of Trade and Code of 1.6 The BBC’s ability to improve value for money in Practice. It will change further over coming months commissioning is, however, bounded by the commercial following an agreement on new media rights with the framework that exists between it and the Independent sector Independents’ representative body, PACT, and with the full – which serves to support the BBC’s wider policy objectives. introduction of the Window of Creative Competition (‘WoCC’) in 2007; and 1.7 The changes introduced through the Terms of Trade and Code of Practice, particularly in respect of ownership of secondary • the sector itself is strengthening and experiencing some and international rights, have significantly improved the significant consolidation. commercial position of Independents and amounted to a ‘value transfer’ to the sector. Without continual review of the 1.2 Value for money considerations in relation to Independent commercial framework, the growing importance of these commissioning are more complex than for many other forms rights could drive continuing value transfer to the of procurement because: Independent sector, changing the balance of the relationship between the BBC and Independent producers. • the inherently creative nature of the end product means that the commissioning process is designed to solicit and 1.8 As the amount of programming available to Independents to develop the best programme ideas – as well as have regard compete for increases through the implementation of the to their output cost and quality; and WoCC, and the Independents become more sophisticated in using their ownership of secondary rights to attract both • the BBC has a number of explicit policy objectives in talent and external finance, the balance of power between relation to Independents – transparency, fairness, vibrancy them and the BBC may shift in their favour. of the sector and a production quota – against which value for money considerations need to be balanced. 1.9 At the commissioning level, typical procurement tactics such as seeking annual cost reductions, benefiting from learning 1.3 It is in this context that we have reviewed value for money in curve effects, and taking into account alternative sources of the new commissioning process, introduced by BBC Television funding are all, to some extent, limited under these in the summer of 2005. agreements. This makes annual or repeat savings – often at the heart of a value for money approach – challenging to Key findings achieve. 1.4 We have observed value for money considerations applied during both the annual planning and budgeting process, and in the commissioning of individual programmes. Our review indicates that it is in planning and budgeting that there is greater opportunity to influence value for money outcomes. BBC Governors Independent commissioning – Value for money study 1.10 The BBC is still learning how to work most efficiently within 1.16 The amount of programming sourced from the Independent these parameters. There are examples of how the BBC has sector varies between genres, both as a function of the total managed to achieve savings through commissioning multiple broadcast hours and allocation of the 50 per cent in-house series at once, by agreeing package deals with some guarantee between genres. This will affect the attractiveness Independents and by framework deals with industry of each genre to Independent suppliers, and the balance of associations. power between the BBC as buyer and the Independents as suppliers. The BBC should continue to ensure that value for 1.11 At the same time, value for money to the BBC will also be money considerations are given sufficient attention during this driven by the extent to which the Independent sector itself allocation, in the context of wider policy objectives. evolves both production techniques and financing arrangements. 1.17 The BBC should also give further consideration to other measures it can take to manage Independent suppliers in 1.12 In this environment, it is important that the BBC has a robust order to achieve stronger value for money – within the overall approach to considering value for money – and commercial framework. In particular, while it continues to demonstrating that it has done so. In Building Public Value seek to source ideas from the widest range of suppliers, the BBC set out its ‘RQIV’ framework for ensuring it should continue to address how it can enhance the performance in public service broadcasting, a framework that commercial arrangements through the development of was later praised by the National Audit Office (‘NAO’). supplier strategies. We believe that this framework has further potential to help demonstrate value for money in relation to commissioning. 1.18 As the digital landscape evolves and the value of the BBC’s rights as a proportion of all rights may begin to fall, tariff 1.13 Each of the four elements of RQIV – Reach, Quality, Impact levels should be monitored and reviewed at appropriate times. and Value for money – form key criteria by which scheduling They should also be reviewed in the context of new and commissioning decisions are made, be that in the annual production techniques. planning or individual commissioning stages. The concept of RQIV is shared by most BBC employees we met, and the BBC 1.19 The RQIV framework could be further embedded within the Television management team have started to use the organisation, particularly in respect to reporting performance. framework as a reporting and decision-making tool. However, We do not believe it would be either practical or valuable to we believe there is room for further alignment between the seek to qualify each and every daily action in terms of RQIV. Reach, Quality, Impact and Value for money concepts, and the However, there would appear to be a middle ground in which existing metrics by which output and performance are performance and output reports were articulated in RQIV measured, which would lead to an environment in which both language. We have seen some recent reporting developments editorial and financial decision making could more easily be suggesting that this is starting to happen. validated and value for money more clearly demonstrated. 1.20 The Terms of Trade give Independents a real incentive to take Primary recommendations the lead on rights exploitation and, as it continues to enjoy a 1.14 As the Independent sector becomes stronger there may be a share of revenues through PACT agreements, the BBC may need to revisit the commercial framework between the BBC benefit from such attention to rights from the Independent and Independents. The priority over recent years has been sector. Therefore the BBC should take a proactive role in towards improving volumes, transparency and fairness. Going encouraging Independents to exploit their rights, and ensure forward, the BBC may need to reassess this and raise the that it collects its share of the return. priority of gaining value for money from Independents to ensure best value for money for Licence Fee payers. 1.15 Given that the evolution of the Independent sector will be influenced by a number of other parties, including the other broadcasters, the vibrancy of the sector cannot be the sole responsibility of the BBC. The BBC must work with the appropriate regulatory bodies with oversight of the commercial framework to ensure that a vibrant Independent sector and value for money objectives can sit comfortably side by side. The BBC will need to take the opportunity to influence these developments during the three-yearly reviews of the Terms of Trade. BBC Governors Independent commissioning – Value for money study 2. Objectives and scope Introduction • recommend improvements to the process/frameworks 2.1 In this section we set out: around Independent commissioning that could improve value for money. • the objectives and scope of this study; Scope • a definition of the commissioning process we are reviewing; 2.4 Our study addresses the current commissioning process and applied in BBC Television in the following five genres: Entertainment, Comedy, Drama, Factual and Daytime. • an interpretation of the term ‘value for money’ in the context of this report. 2.5 BBC Sport, CBBC, BBC News and Nations and Regions are excluded from our scope. Also excluded are commissions 2.2 A review of each stage of the commissioning process together related to BBC Radio, new media or any commissions issued with our value for money observations and recommendations by BBC Worldwide. follow in later chapters of the report. We consider the macro- level perspective in chapters: 2.6 This report does not include comment on any editorial decisions. Our study addresses process and controls rather 3. The BBC and the Independent sector; and than specific editorial policy. 4. Strategy and planning in the sourcing of Independent 2.7 In terms of time periods reviewed, we have looked at the productions. 15-month period between 1 April 2005 and 30 June 2006. We have chosen this period because: We then examine the following micro-level processes associated with Independent commissioning in chapters: • the Code of Practice and Terms of Trade were introduced in January 2004 and July 2004 respectively and therefore 5. Solicitation and development; commissions undertaken during this period would have been negotiated within these frameworks; and 6. Negotiating and commissioning; and • the current commissioning structure, processes and 7. Production and delivery. timelines started to be rolled out in the second half of 2005 and, therefore, reviewing commissions undertaken before The report then concludes with chapter: 1 April 2005 would provide little evidence as to the current state. 8. Conclusions and recommendations. MethodologyObjectives, scope and methodology 2.8 We have undertaken our study primarily through interviews with the executives who have overall responsibility for the Objectives commissioning process and with key staff involved in its day-to 2.3 The objectives of this study are to: day operations, together with some limited testing of the process. We have sought to: • explore the ways in which the BBC seeks to achieve value for money in the procurement of Independent productions; • understand whether the documented commissioning • identify and test the controls that exist to minimise value process reflects actual practice; leakage; and BBC Governors Independent commissioning – Value for money study • determine the key control principles that exist in relation to These are: value for money and test to see how they are applied; and • Strategy and planning – the annual process by which a • corroborate our understanding of the key control principles budget and transmission schedule is created with reference by ‘walking through’ the process with a small number of to a broad range of factors, including: public service examples of commissioned programmes. These examples broadcasting requirements, reach, impact and quality have been chosen to provide coverage across the range of objectives, channel and genre strategies, available budget genres, programme type and scale, and Independents with and cost efficiency targets; and which the BBC deals. • Performance measurement – the process by which 2.9 In undertaking our review, we have considered both the programme performance is reviewed against the original practical processes being implemented on a daily basis – channel/genre/strand strategy as well as considering its e.g. communication of requirements to the Independent value for money in terms of Cost Per Viewer Hour1 (‘CPVH’) sector, receipt of ideas, completing contractual negotiations and audience appreciation data. etc. – as well as the broader governance framework involved at key decision points, such as the Programme Finance 2.13 The position of strategy and planning, and performance Committee (‘PFC’) and the Television Business Board (‘TVBB’). measurement, in the overall commissioning process can be seen in Figure 1, with the real commissioning taking place in The commissioning process the three middle stages highlighted by the shaded boxes. 2.10 The responsibility for commissioning rests with BBC Television. Commissioning is separate from BBC In-house production and conducted by genre specific teams who commission both from In-house producers and from Independents. 2.11 The commissioning process is common to both In-house and Independents, although in practice there are some differences in how it is applied. The process itself comprises three stages which, while distinct, can overlap at the boundaries. They are: 1. Solicitation and Development – the process by which programme requirements are communicated to the In-house producers and Independent sector, ideas are Strategy & Solicitation & Negotiating & Production & Performance planningdevelopment commissioningdelivery measurement Figure 1: The Commissioning Process solicited and selected for development. Frequently this is 2.14 Given the impact on value for money of some of the decisions a collaborative process between commissioners and made in the Strategy and planning stage, we have made producers. observations on elements of this stage in so far as we consider they are informative. 2. Negotiating and Commissioning – the process by which an approved idea is fully specified as a production, prices 2.15 We have not reviewed the Performance measurement stage negotiated and a commissioning decision is made. directly, although some of the measures form part of the annual strategy and planning process. These are referred to in 3. Production and Delivery – the physical production Chapter 5. process that takes place once a programme has been commissioned. This ends with delivery of the programme to Value for money the BBC. 2.16 The BBC is funded by a Licence Fee levied on UK households and in its Charter the BBC is obliged to adhere to the highest 2.12 There are value for money implications present in all three of standards of probity, propriety and value for money in the use these stages. However, there are two additional stages – one of the Licence Revenue.2 preceding and one following this process – that are not strictly part of the commissioning process but which nonetheless 2.17 While the concept of value for money in relation to contain important value for money considerations. expenditure by publicly-funded bodies is generally understood, actual definitions vary. The Office of Government Commerce view 2.18 The remit of the Office of Government Commerce (‘OGC’) is to ensure the efficient participation in (and procurement from) markets where public money is used to fund outcomes. 1 Cost per viewer hour is calculated by dividing the cost per hour by the number of viewers who watched the programme. 2 Royal Charter for the Continuance of the British Broadcasting Corporation (1996) p.6. The Charter for the period commencing 1 January 2007 is currently in draft. 5 BBC Governors Independent commissioning – Value for money study 2.19 When striving to obtain value for money in procurement the 2.24 In the same document, the BBC introduced a new two main considerations are cost and quality; or, more performance management framework, RQIV4, in an attempt precisely, the inevitable trade-off between the two. The OGC to draw these elements together. However, the links between works with the following definition of value for money: RQIV and value for money, as it is broadly understood by the public sector rather than within the BBC, have not yet ‘The optimum combination of whole life costs and quality.’3 formally been made. 2.20 Value for money is, however, not an absolute, rather it can 2.25 Given this, we believe that perhaps the NAO’s definition of only ever be relative – i.e. option A provides greater value for value for money is the most helpful in understanding value for money than option B. Therefore, any actions that can be money at the BBC. The NAO definition is: ‘Obtaining taken are done in order to improve value for money rather economy, efficiency and effectiveness by respectively spending than attain it directly. less, getting the same for less, and spending wisely’. In respect to the BBC, these elements appear in different 2.21 In the 2004 publication Value For Money Measurement, ways: OGC Business Guidance the OGC identified four main categories of value for money gain. These are: • an example of economy might be procurement of, say, a lower quality product at a lower price – money has been • negotiating an improved deal with a supplier; saved by procuring a cheaper product; • aggregating demand across departments to exert greater • efficiency is achieved where the same quality of product or leverage on suppliers; service is procured, but at lower cost; and • reducing process or transaction costs; and • effectiveness relates balancing the quality and cost measures so that quality is maximised within cost • improving project, contract and asset management. constraints. 2.22 The above gains are aimed at government departments that are bound by conditions on how to procure and, above a certain threshold, tender for work requiring public funding. When buying originated programming, the BBC, although clearly accountable for its use of Licence Fee receipts, is not subject to the rigid procurement guidelines faced by government departments. This is appropriate given the strongly creative nature of TV production but it also raises a number of questions as to how price competitiveness is effectively reached. Value for money in the context of the BBC’s Independent commissioning process 2.23 For the broadcasting industry, Ofcom, the BBC and various academics have all considered value in great detail. In Building Public Value, the BBC sets out three elements to Public Value: • value to individuals; • value to society; and • net economic value. 3 Office of Government Commerce, Getting Value for Money from Procurement (October 2001), p.3. 4 Reach, Quality, Impact and Value for money. 6 BBC Governors Independent commissioning – Value for money study 3. The BBC and the Independent sector 3.1 During the past three years, the BBC has increased the 3.6 These are set out, in various forms, including the BBC’s proportion of broadcast hours commissioned from Building Public Value strategy document (2004), the Green Independents from 28.8 per cent in 2003/04 to 31 per cent in Paper on BBC Charter renewal (2005), and in the White Paper 2005/06, now comfortably exceeding the 25 per cent minimum (2006) that followed it. In essence, they can be summarised as: quota imposed by Ofcom. This percentage is expected to rise further following the introduction of the WoCC.5 • encouraging and supporting a vibrant Independent sector, both as a mechanism for securing long-term supply as well 3.2 In 2005/06, this equated to the BBC spending £353m as more generally fostering the growth of the UK’s creative with the Independent sector, compared with £323m in industry; and 2003/04. This accounted for almost 37 per cent of the £962m that Television spent on programming in 2005/06, with the • improving the transparency and perceived fairness of remaining 63 per cent being spent with the BBC’s own In-commercial dealings between the BBC and the Independent house production units. sector, with a particular focus on the parity of treatment compared with In-house, and position over ownership of 3.3 The BBC is in a period of transition in respect of its rights. interactions with the Independent sector. In order to review value for money in the commissioning process, it is first 3.7 In parallel with these objectives, the BBC also sets out some necessary to set the context of: specific corporation-wide goals with regard to ensuring value for money in all its activities. These were encompassed within • the BBC’s policy objectives in relation to the Independent the Public Value Test and announcement of the RQIV television production sector; performance measurement framework. • the current framework for commercial arrangements The current commercial arrangements between them; and 3.8 In the context of these policy objectives, there are three key elements to the commercial framework within which the BBC • the structure and performance of the Independent and Independent sector interact: television production industry. • Independent Quota and WoCC: The BBC set a floor of 3.4 Taken together, these three factors play a role – and one that 25 per cent of broadcast hours that would be produced by will increase as the Independent sector develops – in the Independent sector. This applies to BBC One, BBC Two, determining the degree to which the BBC can obtain value for BBC Three, BBC Four, CBBC, CBeebies, BBC Parliament, money from Independent commissions. BBC News 24 and Nations and Regions on BBC One and BBC Two in aggregate, and to BBC One and BBC Two BBC policy objectives individually. In addition, from 1 January 2007, the WoCC 3.5 During BBC Charter renewal discussions in 2004 and 2005, will come into full effect. Under the WoCC a further 25 per Ofcom and the BBC set a number of goals and expectations cent of output will be open to competition between with respect to the relationship between the BBC and the Independent and In-house producers. Independent sector. 5 BBC, Annual Report 2005/06 (July 2006), p.91. Note that in the previous year, 2002/03, the quota was not met, with only 21 per cent of programming going to Independents. BBC, Annual Report 2003/04 (July 2004), p.95; Ofcom, Communications Market Review (August 2004). 7 BBC Governors Independent commissioning – Value for money study The current quota and prospective WoCC primarily address the issue of vibrancy by guaranteeing a minimum level of volume to the Independent sector which, in principle, should encourage more entrants and deliver the benefits associated with competition. • Code of Practice: Drawn up in compliance with section 5K of the BBC Agreement and introduced in January 2004, the Code of Practice details: the process and timetable for negotiations of a commissioning agreement, the position on commercial and new media rights acquired as part of the primary Licence Fee, the use of tariffs, and the mechanics of the development process. The Code of Practice addresses the issue of transparency by clearly setting out the commissioning process that will apply to the Independent sector. The position on ownership of rights also addresses the issues of commercial fairness and vibrancy, effectively transferring value from the BBC to the Independents, and thus improving the financial lot of the sector. • The Terms of Trade: Introduced in July 2004 these are effectively a set of terms and conditions that, as a de minimis, apply to each commission. Negotiated with PACT, the UK trade body representing Independents, the Terms of Trade provide a framework agreement for primary rights, licence fees, payment timelines, principles for further use payments, and distribution arrangements. These terms are reviewed every three years. The Terms of Trade attempt to address the issue of fairness by offering the Independents better minimum commercial terms, particularly around secondary rights, than was previously the case. 3.9 These changes are generally regarded as being beneficial to the Independent sector. They have effectively changed the business model of an Independent from that of a cost-plus manufacturer with perishable products to that of an intellectual property business with assets that can be exploited across multiple channels. Independents have demonstrated that they are now able to attract outside funding which in turn can be used to drive scale expansion as well as self-funded development. 3.10 However, the Terms of Trade restrict or close off some avenues that would otherwise be open to the BBC to try to extract value for money through commissioning. Value to the schedule, expected initial investment from third parties and expected cost of production are taken into account at the point of commissioning the programme, but it is only if these change between one series and the next that the BBC can attempt to negotiate efficiency savings. In a traditional procurement function, requesting suppliers to seek continual efficiency savings is standard practice in order to meet value for money objectives. 3.11 Moreover, in the longer term, there is a question as to how the Independent sector will develop. As some Independents become larger and more successful, their bargaining position becomes stronger and their pull for talent becomes greater. We note that the BBC will need to consider these prospective developments in its approach to value for money going forward. We discuss this in greater detail in the context of the WoCC in Chapter 5. The Independent sector Market size 3.12 In 2004, the value of originated TV programming in the UK was £2.6bn.6 Of this the external TV production sector7 accounted for approximately £1.1bn of originated programming.8 This represented 42 per cent of the market for TV production in the UK – the remaining market attributable to In-house production. 3.13 The majority of this externally sourced programming is created by Independents – accounting for £0.8bn of programming in 2004. The remainder is accounted for by broadcaster controlled companies such as Talkback Thames, which are not categorised as Independents. 3.14 The Independent sector is dynamic and changing rapidly. Independents’ market share is increasing apace, from 24 per cent in 2000 to 28 per cent in 2004, according to MBD.9 Between 1993 and 2004 the market size increased by 64 per cent. This expansionary trend is set to continue, with turnover expected to double over the forthcoming decade.10 6 Ofcom, Television Production Sector Review – A survey of TV programme production in the UK (September 2005), p.4. 7 External production is defined as production by qualifying and non-qualifying Independents as well as that by vertically integrated broadcasters for another broadcaster. 8 Ofcom, Television Production Sector Review, p.4. 9 MBD, UK Independent Television Production Market 2005 (September 2005), p.21. 10 Mediatique, From the Cottage to the City: The evolution of the UK Independent Production Sector (September 2005), p.4. 8 BBC Governors Independent commissioning – Value for money study Market structure 3.15 According to recent estimates there are currently more than 800 Independents in the UK.11 The structure is characterised by a number of large businesses – five of which have annual turnover in excess of £100m – and a long tail of small, often very niche, firms with low turnover. 3.16 Consolidation is happening; a recent survey suggests that more than a fifth of sampled companies will look to merge or form a partnership with another Independent in 2006.12 Equally, independent forecasts suggest that consolidation will see the five largest Independent producers accounting for 70 per cent of the total Independent market by 2014 – the current share being just 40 per cent.13 3.17 As Figure 2 shows, although the number of buyers operating in the market is relatively small, no one buyer dominates Independent production. Figure 2: Cross-channel expenditure on In-house and Independent production, 2004 First run origination spend (£m) 1,400 1,200 1,000 800 600 400 200 0 Other MCBBC All ITV1 C4 Five S4C ITV & C4 Channel MC Independents In-house Source: Ofcom, 2005. 3.18 In terms of total expenditure the BBC is the largest buyer of programming in the UK, although this includes a large number of hours ‘purchased’ from its own In-house production unit. Channel 4, by way of its publisher-broadcaster status, remains the largest single commissioner of Independents. 3.19 Financially, the Independent sector is characterised by businesses that primarily seek to cover their costs and provide a modest return for their owner/managers. This is not the case for all Independents but appears to be a realistic objective for many. 3.20 However, profits can be variable and for smaller players in particular, comparatively low industry margins coupled with the loss of a major recommission can often be the difference between profit and loss, and ultimately survival or extinction. This volatility can be seen in Figure 3, which shows net profit margins and revenue growth rates for a selection of Independents. 3.21 Consolidation in the industry is evidenced by changing ownership patterns and high levels of M&A activity. Eight Independents now own two or more brands and recent deals include: • RDF Media purchase of IWC and Touchpaper; • Shed Productions purchase of Ricochet; • DCD Media purchase of Done & Dusted, Box and Iambic; and • Tinapolis purchase of TV Corp (Sunset+Vine and Mentorn).14 Figure 3: Independent revenue growth and profit margin Revenue growth 2004/05 109% 175% 0% 10% 20% 30% 40% Shine RDF Media58% The TV Hat Trick ProductionsAvalon Tiger AspectCelador ProductionsWall to Wall Carnival (Films & Theatre) Hit Entertainment19 EntertainmentCorp Ten Alps Shed Productions 50% 30% 10% -10% -30% Net profit margin % = £30m 2005 revenues Excludes All3MEDIA for whom no profit data is available. Source: Individual Company financials, Deloitte analysis, 2006. 3.22 Further consolidation is expected and market commentators expect this to yield shareholder value as long as ‘one-show’ Independents and shows with a short shelf life are valued accordingly.15 IPOs* are also in vogue: between January and March 2006, five small Independents floated on the Alternative Investment Market (‘AIM’). 11 Mediatique, From the Cottage to the City: The evolution of the UK Independent Production Sector (September 2005), p.3. 12 Broadcast Magazine, Indies 2006: The annual survey of the UK’s independent TV producers (March 2006), p.11. 13 Mediatique, From the Cottage to the City, p.4. 14 The eight Independents now owning multiple brands are: All3MEDIA, TV Corp, RDF, Entertainment Rights, Diverse, Endemol, DCD Media, and Ten Alps. 15 Numis, Independent TV Producers: A Preliminary Assessment of the Independent Production Sector (April 2006), p.6. * IPO: Initial Public Offering. BBC Governors Independent commissioning – Value for money study Variations across genres 3.23 A market-wide treatment of the Independent sector is potentially misleading. The market for TV production is homogeneous only in the way in which the final product is delivered. The market is characterised by a number of genres and sub-genres, whose output differs substantially. 3.24 At genre level the BBC engages Independent producers to differing extents within their overall cross-genre 25 per cent quota for Independent commissioning and the ability of the Independent market to supply the requisite programming. Figure 4 shows the percentage of qualifying hours by genre across UK terrestrial channels. Figure 4: Cross-genre Independent qualifying hours by broadcaster, 2004 Genre Childrenís Religion Education Arts Other Factual Documentary Current Affairs Sport Drama Entertainment 0 20 40 60 80 100 120 % Qualifying hours commissioned from Independents, 2004 Five C4 ITV1 BBC All Source: Ofcom, 2004. 3.25 As would be anticipated, given the lack of In-house production facilities at Channel 4 and Five, it is these two channels that rely most on the Independent sector. Conversely, the BBC and ITV rely least on the Independent sector, although there is a significant contrast in the profile of reliance with the BBC using Independents most for Entertainment and Documentaries while for ITV it is Arts and Children’s. 3.26 There are notable subtleties regarding the level of effective competition by genre that are not evident from the above shares. An example of this is Entertainment: although very significant in terms of Independent market share, much of that market share is ‘owned’ by the largest 10 players.16 In other words, there is increasing scope for competition between BBC In-house and large Independents but notably little competition emanating from smaller Independents. 16 Data supplied in the BBC’s annual report to Ofcom. BBC Governors Independent commissioning – Value for money study 4. Strategy and planning 4.1 Our review is specifically focused on commissioning from Independents, not on commissioning more generally. We have commented in this chapter on the strategy and planning stages of the commissioning process only to provide the wider context for Independent commissioning, or where we consider there to be direct implications for it. 4.2 This chapter follows the planning process through its various stages, as shown in Figure 5. It is in this chapter that we consider some of the key issues in the planning of Independent commissioning, including: • tariffs and tariff ranges; • the impact of setting Independent quotas and the WoCC; and • measuring performance through frameworks such as RQIV. 4.3 The BBC spends approximately £1bn each year on network television programming across BBC One, BBC Two, BBC Three and BBC Four.17 4.4 In 2005 31 per cent of this was spent by the BBC on commissioning programmes from Independent television production companies, according to the BBC’s Annual Report.18 4.5 The mixture of programming allocated to BBC Production and to the Independents not only reflects individual commissioning decisions: a great deal of planning is undertaken prior to the actual process of commissioning. Each stage of the planning process has value for money implications. The key stages summarised in Figure 5 are: • determining how much to spend on programming; • creating a transmission schedule, allocating the £1bn to channels and slots; and Decision on how much to spendCreation of transmission schedule Determine slots to be filledby Independents Figure 5: Stages of the Planning Process • determining the proportion of programme slots that will be filled by the Independent sector, in terms of genre and channel. 4.6 Once the transmission schedule is agreed, the process of commissioning proper begins. Determining the overall programming budget 4.7 We have not addressed the rationale for setting a programming budget of £1bn to BBC Television. This is a macro decision that is made by BBC Management in the context of available income and comparative expenditure on the other services that the BBC provides. 4.8 The internal BBC cost saving programme – known as the ‘VFM programme’ – has set targets for reducing this overall budget the financial years 2006/07, 2007/08 and 2008/09. In 2005/06, this amounted to savings of £105m over the 2004/05 budget. The objective is for the same quality of programming to be delivered for a lower overall cost.19 4.9 Clearly, in seeking to achieve efficiency – achieving more for less – this programme is an example of a value for money action. However, it has no specific relevance to Independent television production commissioning, apart from setting an upper limit on the total available spend from which the Independents’ share must come. 17 Last year the exact figure was £962m, based on BBC data. 18 BBC, Annual Report 2005/06, p.92; Deloitte interview, 14 June 2006. 19 BBC, Annual Report 2005/06, p.17. BBC Governors Independent commissioning – Value for money study Allocating the programming budget to channels and slots 4.10 Based upon our discussions with senior executives involved in this process, a great deal of effort is put into the allocation. It takes place annually and typically involves five or more iterations. At this point in the planning process, it is a demand side exercise and no distinction is being made between different supply bases, i.e. In-house and Independent. 4.11 The starting point for the allocation – which is presented in the form of a channel by channel transmission schedule – is the BBC Television strategy, which operates at a portfolio level. This, in effect, incorporates the matrix of editorial and investment strategies of the four channels and the five genres. 4.12 All things being equal, the programme budget is allocated between channels and genres in a way that matches anticipated viewing numbers with programme cost. For example, a primetime slot on BBC One is likely to be allocated more money for programming than a late night slot on BBC Four. The basic measure used to help make this assessment is Cost Per Viewer Hour (‘CPVH’). This concept gives rise to the existence of programme tariffs, which are discussed in more detail below. 4.13 The allocation process also needs to take into account specific investment strategies. A good example is the launch of BBC Three, where a ’stand out’ strategy was adopted in which programme investment was in excess of what might have been achieved had CPVH been the only measure. 4.14 In addition, the iterative process needs to take into account the quotas and targets to which the BBC must adhere.20 These all affect the shape of the transmission schedule and as such the allocation of available funds. Tariffs 4.15 A tariff is in effect a guide price – actually a range – that sets out explicitly what the BBC would expect to pay for a certain type of programming on a given channel in a designated slot. These tariff ranges and descriptions are publicly available and shared with Independents. For example, the D1 tariff in Drama is for programmes that: ‘…cover a range of low-cost output primarily for Daytime together with long-running series for BBC One, BBC Two and BBC Three. Producers will use innovative techniques and clever ideas to maximise the funds available, especially for BBC Four. New talent will launch and grow here.’ 4.16 Tariffs are typically expressed in Cost Per Hour (‘CPH’) terms and are set by genre. Some have fairly narrow ranges, while others – particularly in drama – have a broad range. They are benchmarked against prices paid for similar slots in the previous two years, after taking into account inflation and technological innovation. 4.17 Under the Terms of Trade, the BBC acquires a smaller share of the total rights to a production than it did previously. No change to the basis of tariffing was made to reflect this change, it having been an explicit objective of the Terms of Trade to achieve a ‘transfer of value’ to the Independent sector. 4.18 There are two key questions in relation to tariffs and value for money: • whether tariffs provide an appropriate mechanism for commissioning; and • how they affect prices paid for Independent commissions. Tariffs as a framework 4.19 Procurement in the Public Sector is generally moving away from the concept of ‘how much can I get for a fixed budget’ procurement strategies, of which tariffs are a version. The trend is very much towards procuring against clearly identified scope and performance criteria, with each tendering supplier offering their best price. This is based upon the assumption that if the market is sufficiently competitive, lower prices will be forthcoming. 4.20 This is not to say that necessarily the lowest tender will automatically be successful as there are a range of timeliness, risk and performance issues that will also be taken into account. However, the market should be capable of returning the lowest possible price for meeting a minimum set of quality/performance standards. 4.21 The creative process of developing potential commissions has some distinct characteristics compared to many other forms of procurement. For any individual programme slot, the BBC only has an outline view of what it is seeking and it is looking for producers, both In-house and Independent, to contribute ideas around a broad theme. 4.22 In this regard, the tariff serves as a guide for producers when pitching their ideas so that, for example, they do not come back with a proposal for a landmark international natural history series with a budget of several million pounds when the BBC had intended a much lower-budget commission. 4.23 In this way, competition is created around which programme ideas constitute the most creative/innovative use of the available funds rather than price competition around a rigid programme scope. 4.24 In adopting the tariffing approach, the BBC is promoting the effectiveness element of value for money (‘getting more for the same’) over efficiency (‘getting more for less’). Efficiency is addressed in two ways: • through the overall cost saving programme we referred to in 4.8; and • by seeking to identify opportunities to introduce lower tariffs for certain slots. Impact on prices paid 4.25 The BBC is duty bound by Ofcom to report any programme (In-house or Independent) commissioned with a cost falling outside the tariff band. The report has to be accompanied with an explanation as to why the tariff was not met in that particular instance. 20 For example, regional programming, educational programming, number of repeats. BBC Governors Independent commissioning – Value for money study 4.26 However, tariffs are not necessarily the best mechanism to The impact of setting the quota and WoCC deliver improvements in value for money. The Terms of Trade 4.32 Economic theory suggests that the competitiveness of set out restrictions under which decreasing tariff ranges in an markets is strongly influenced by market structure, and the incremental manner is very difficult. Nonetheless, we have balance of power between suppliers and buyers. heard from BBC Management that in order to address this challenge and to deliver improved value for money, they have 4.33 The BBC is a large broadcaster that commissions a substantial introduced new tariff categories with much lower CPHs. For amount of programming from the Independent sector. In example, the introduction of a BBC One drama tariff with a other words it has buying power. Its actions therefore will benchmark price of £400,000 per hour rather than the more affect the structure and economics of the Independent traditional £800,000 per hour. production market. 4.27 In addition, because there are in effect no contingency funds 4.34 Genre level competition, as outlined in the previous section, held by the BBC commissioning teams, any overspends on largely reflects prevailing market conditions. Competition is one programme against tariff must be compensated for by notably lower in those genres where the BBC has a firm commissioning another programme at below tariff. In-house foothold and where barriers to entry are high, such as high-end factual programming. 4.28 The above analysis does not mean that tariff ranges are not under pressure. In certain genres the market is very buoyant 4.35 In Entertainment our research indicated that although BBC and Independent producers are confident of the value of their In-house production still accounts for more than half of BBC talent. genre output, the balance of power now effectively resides with Independents rather than the BBC. As such, the BBC’s effective 4.29 Tariffs are set without regard to the source of production influence on the market differs substantially by genre. (In-house or Independent). A further consideration is whether In-house and Independent productions offer the same value 4.36 It should be noted that a strong genre position is not to be for money at a given cost to the BBC. We have heard a range confused with market dominance and exploitation: of arguments in relation to the impact of BBC indirect costs economies of scale are sometimes necessary for efficient and Independents’ desired profit margins – and whether these production; and the BBC’s public value remit requires the BBC make a significant difference. Within the scope of our work to retain a significant presence in those genres that may we have not sought to answer what is a complex issue in and otherwise be non-economic. of itself. However, we note that in the Tipping Point report, the authors found that with all things taken into account, the 4.37 The idea of a tipping point has been mooted previously by difference was negligible.21 those concerned with growing Independent power and the BBC’s public value remit. The WoCC has been set with wide Determining the slots to be filled by Independent producers parameters and in theory this could result in any market split 4.30 The process of allocating programme slots to producers – i.e. in BBC programming of 75:25 to 50:50 in favour of In-house In-house or Independent – is not straightforward. The decision production. takes into account a number of factors: 4.38 Theoretically at least, there is split of In-house and • the minimum 25 per cent quota of broadcast hours that Independent programming which yields the best value for must be supplied by Independent producers, and in future money for the BBC. It may of course be that the optimal split the application of the WoCC; lies outside the WoCC and it will certainly depend upon future levels of consolidation in the Independent sector, and • the BBC’s medium-term supply base strategies applying at the behaviour of rival channels. This is illustrated in Figure 6 the genre and regional level; overleaf. • availability of slots in the schedule once returning series and repeats have been factored in; and • market capacity. 4.31 In theory, by this stage of the process, the exercise of allocation and accompanying tariffing has already dealt with value for money at the macro level. However, because of the size of the BBC’s expenditure with the Independent sector, we believe that the level at which the Independent quota is set – certainly at the genre level – affects the market structure. This in turn affects the degree to which value for money can be obtained from the sector. 21 The Work Foundation, The Tipping Point: How much is broadcast creativity at risk? (July 2005), p.6. This was an independent report commissioned by the BBC. BBC Governors Independent commissioning – Value for money study Max VFM Viewer VFM Window of creative competition Independent guarantee In-house guarantee Optimum market split Independent market share (%) Source: Deloitte analysis 2006. Figure 6 – Viewer value for money and the optimum market split Measuring performance 4.43 Both during the strategy and planning stage of the process as well as post transmission, BBC Management work with a small number of metrics to guide and assess the delivery of strategy. 4.44 The evidence base for this assessment is essentially composed of cost and quality monitoring. The key value for money metrics used by the BBC are shown in Table 1 overleaf. 4.45 Cost is the forecasting and monitoring tool of finance and underpins the efficiency calculations used in the wider BBC VFM programme. This is translated to genres and channels through the strategy and planning process outlined earlier and informs genre level targets. 4.46 Quality is much more of a micro level consideration specific to each genre and channel, and manifests itself in the cost/quality trade-off on individual programme commissioning decisions. It is also implicit in the analytical work carried out by Business Information and Audience Insight and is used by strategists. 4.47 Composite measures of value for money, addressing both cost 4.39 While there are clearly a number of factors at play in and quality together, are seldom used in any capacity beyond considering the optimal split, we believe that the BBC should ‘ready-reckoning’ owing to the complexity of calculation ensure it has adequate information to be able to identify and relative to the benefits yielded. This is in essence the objective act on two scenarios: of RQIV. • where greater value for money can be achieved by 4.48 The NAO review of Public Service Broadcasting supported increasing the Independent share; and RQIV as an appropriate measure of public value. However, the evidence gathered as part of this study suggests that value for • where the scale of Independent commissioning could place money is thought of primarily as the cost-efficiency exercise of value for money at risk. the same name, and that RQIV has only recently begun to be applied at multiple levels within the decision-making 4.40 We are not suggesting in the above that the optimal balance processes. between In-house and Independent programming in achieving value for money is a matter of purely mechanical 4.49 There are potential benefits to joining up the concepts of calculation. Clearly, the value for money question is only one public value, RQIV and value for money, and arriving at a one- of the factors considered and we understand that a significant stop definition of what the BBC is hoping to attain for the amount of thinking on this matter was undertaken in the Licence Fee payer. Content Supply Review. 4.50 It would provide a consistent objective for internal 4.41 However, we do argue that the decisions that BBC decision-makers. It would also serve to demonstrate to Management make as to the allocation of genre Licence Fee payers and the Government exactly what the BBC programming spend between In-house and Independent will is working to when trying to obtain best value from the have an impact on market structure and thus affect value for Independent sector. money regardless of the efficacy of the Independent commissioning process. 4.51 An integrated framework could prove helpful in providing the linkage between the overall strategy, genre commissioning 4.42 To this end, we believe that the BBC will need to pay slates, individual commissioning decisions and the many increased attention to the development of the Independent output measures that the BBC tracks and monitors. sector and ensure that in setting and allocating the WoCC between genres, value for money is given equal consideration alongside other policy objectives. BBC Governors BBC Governors Independent commissioning – Value for money study Independent commissioning – Value for money study Table 1 – Key value for money metrics used by the BBC Type Measure Uses Deloitte comments Cost Cost per hour (CPH) Strategy and planning No implicit consideration of quality in this Used as one of the determinants of the slate measure at any stage of the commissioning iteration process. process. Finance Used for VFM programme efficiency setting and calculations. Business information Used in reporting to Ofcom and for analysis purposes. Genre commissioning Used for specific efficiency targets and forms the basis of genre tariff setting and procurement of programming. Quality Various audience surveys and Strategy and planning No implicit consideration of cost. Evidence of viewing figures Analysis used to inform genre and wider benchmarking viewing figures against rivals. strategy formulation. Audience insight Used to analyse trends in audience size and reach. Value for money Cost Per Viewer Hour (CPVH) Genre commissioning Not explicitly used in a wider strategic Used as a ‘ready reckoner’ in the context owing to inherent limitations. programming decision and referral process to TVBB. Business information Used from time to time for bespoke analysis. Value for money Licence Fee willingness to pay Strategy and planning Not Independent specific. analysis Used as a justification for Licence Fee increments and as evidence of value for money delivery. 4.52 While we have been informed that the RQIV framework 4.53 It may also be possible to embed the principles of RQIV and was never intended to be applied at the programme level, associated behaviours in a personnel performance we believe that there are steps that could be taken to deepen management framework. the application of RQIV into the commissioning process. In practice this could mean: 4.54 Having such a cascaded framework in place would support decision-making or, at the very least, help demonstrate the • explicitly linking the elements of public value with the four extent to which the BBC is delivering value for money elements of RQIV; improvements in its commissioning activities. • grouping the more than 90 monthly output performance measures under each of the RQIV headings – although we have seen evidence of some of this addressed in the quarterly reporting; • setting explicit slate level RQIV targets for each genre and perhaps even each commissioning editor; and • being explicit about what ‘good’ value for money improvements look like – i.e. in terms of RQIV in the round, not just in terms of cost. BBC Governors Independent commissioning – Value for money study 5. The commissioning process: Solicitation and development 5.1 Having established its channel and genre plans, the BBC has to secure a stream of new and original ideas to turn into programmes. This process has two elements: • Solicitation – identifying new ideas through various communication channels with Independent and In-house talent; and • Development – building the initial idea into a specification from which a television programme can be produced. 5.2 This chapter reviews these phases of the commissioning process, and considers the controls the BBC has in place to address value for money issues during it. The latter part of the chapter addresses how successful these controls are, and where there might be room for improvement. Solicitation 5.3 The actual process of solicitation of ideas is quite simple. The commissioning editors communicate their requirements to the Independent sector at the beginning of each commissioning season and then Independent producers respond with ideas. 5.4 Finding the right ideas is a key part of an editor’s/support team’s role, for which the BBC relies on his or her experience and insight. This takes up a good deal of editorial time and effort, but there is little money spent at this stage of the process. 5.5 However, a value for money question in relation to this stage of the commissioning process relates to the size and shape of the supply base. 5.6 The BBC wants to commission the best ideas. There appears to be no tried and tested rule as to where these will come from – In-house, Independents (both large and small), or an individual. Therefore, the BBC needs to maintain as broad a supply base as possible. 5.7 That said, idea generation is clearly a collaborative process and relationships between commissioning editors and Independent producers have an important role in developing ideas that are both creatively excellent and match with specific channel and genre strategies. 5.8 The status quo, in which the BBC commissioning editors appear to spend a reasonable proportion of their time ‘meeting the industry’, together with a transparent and well administered process of receiving and responding to submitted programme ideas strikes a balance between these two competing requirements. 5.9 Most procurement strategies (in both the private and public sector) are moving towards a preferred supplier model. This has a number of advantages for both procurer and supplier, including: • dealing with a small number of suppliers lowers the administrative burden of procurement; • increased volumes of procurement given to a smaller number of suppliers should drive scale economies and lead to lower prices; and • closer supplier relationships are believed to lead to better interpretation of client requirements. 5.10 We note that the BBC has a number of Independent suppliers from which it procures multiple commissions. While not formally preferred supplier relationships, this degree of interaction probably gives rise to similar benefits. 5.11 One of the BBC’s challenges will be to ensure that its supply base is properly balanced and that value for money considerations are given equal importance to objectives around vibrancy, regional growth and open access. Development 5.12 Development is the process of taking an idea from what could be as little as a single soundbite in a meeting to the point where a specification can be written that will set the commissioning process – and hence the production process – in motion. BBC Governors BBC Governors Independent commissioning – Value for money study Independent commissioning – Value for money study It is the fulcrum of the creative process, when Independent production companies pitch their best ideas to BBC editors, who must then evaluate which ideas will support and further the editorial objectives of the channel or genre.22 5.13 Once an idea has been identified, the development process puts meat on the bones of it, highlighting requirements for talent, location, filming, all the way through to post-production. A specification is created that elaborates on how the idea will be produced. This is the culmination of development – the negotiations on final specification and fees usually take place during development but the output is crystallised in the pre-production agreement. The final commissioning of a programme will be addressed in the following chapter. 5.14 Despite its importance, the development stage of the commissioning process is not one that requires a great deal of direct expenditure. Only £31.7m was spent on programme development across the BBC last year, slightly up on 2004/05.23 ‘The BBC ... the most important originator of new comedy in the UK, spent a total of approximately £500,000 on scripted comedy development [in 2004/05].’ This represents a tiny fraction of total spending on network television programming, although these numbers do not include overheads, and a good deal of editorial time is spent on the development phase.24 5.15 Nevertheless, development is the first stage in turning an idea into a television programme, and it is fundamental to the overall process. This chapter examines the place of value for money in development both in terms of direct expenditure and implications for value for money decisions in commissioning and production. Value for money in development 5.16 The BBC must aim to maximise opportunities to bring great ideas to the screen, while minimising time and money spent on projects that will not be successful contributions to the BBC’s channel and commissioning strategy.25 5.17 An editor must strike a fine balance between providing enough support for creators or writers to deliver the best possible proposition, without simply spending money on development that could be better used in production, or on another project. 5.18 To maximise value for money, the BBC must take ideas from pitch to a well developed idea supported by scripts, treatment papers, taster tapes or pilots as appropriate. Projects that will not deliver the required combination of quality, reach or impact for a slot should be avoided; or, if developments are proving to be unsuccessful, they should be recognised as such and terminated at the earliest opportunity. 5.19 The BBC has a number of controls in place to ensure that value for money is considered when decisions are taken on funding development, including: • first of all, development budgets are limited across the board, encouraging selectiveness in which projects receive funding; • development funding must be approved by the Programme Finance Committee (‘PFC’); • detailed breakdowns of development funding by project, genre and channel are distributed to commissioning executives each month in some genres. Unusual items or trends are flagged; • new talent, particularly new writers, must produce detailed scripts before they are likely to be considered for funding; • when development funding is agreed, the BBC obtains the exclusive right to develop the idea with the producer until it makes a final commissioning decision; and • if a developed idea is rejected and then taken elsewhere by the Independent producer, the producer is obliged to reimburse the BBC. 5.20 While the development process remains a creative part of the BBC’s work and bureaucracy is rightly limited, the controls mentioned above suggest that value for money is given consideration at this stage. 5.21 With regard to the difference between development funding for Independents and In-house production, the process is understandably more complex for external bodies. Specifically the approval process is more complex and controls based, and reflects the fact that the risk associated with development funding is higher when dealing with Independents. 5.22 In summary, our review has found that the BBC has relatively strong procedures in place to minimise and control development expenditure. If anything, the value for money risk in relation to development is that the BBC does not spend enough money on development, thus losing out on ideas that had unfulfilled potential. Opportunities to improve value for money in development 5.23 Cost savings in development are not likely to be material in comparison to those that can be made during planning or commissioning. 5.24 However, value may be added to the commissioning process where good development helps bring an idea to fruition. As larger producers become more and more capable of their own R&D – for example, Endemol recently set aside £15m for a digital investment fund – the BBC may find development spend can be directed more strongly to smaller players.26 5.25 On a more day-to-day level, other genres are not always aware of programme ideas until they have been commissioned because, when submitted, they are logged in databases that are not shared across genres. The BBC should consider employing a resource specifically to monitor ideas in development and commissions. This is in order to reduce the risk of inefficiencies, such as duplicate ideas being commissioned. 22 Commissioning editors work within a genre, but will be fully aware of channel strategy and objectives. 23 BBC, Annual Report 2005/06, p.110. 24 The Work Foundation, The Tipping Point, p.44. 25 Deloitte interview, 30 June 2006. 26 New Media Age, 22 June 2006. BBC Governors Independent commissioning – Value for money study 6. The commissioning process: Negotiating and commissioning 6.1 When an idea has been developed into a fully rounded programme outline, the BBC faces a decision on whether or not to go ahead with production. This phase of negotiating and commissioning centres around two outputs: • the commissioning specification – a detailed document that summarises the results of development, and provides the parameters to which the Independent will work; and • the contract with the Independent, which includes the price the BBC will pay, agreement on rights and other details concluded in negotiation. 6.2 These two documents are, of course, closely related. The commissioning process is about achieving the highest possible quality included in the specification for the programme, within the limitations of the available budget. 6.3 This chapter begins by examining the process of negotiating and commissioning, and then looks at the risks to value for money within that process. The following sections briefly highlight the main controls currently in place to mitigate those risks and, finally, we consider where there might be room for improvement. 6.4 Preferences on talent, production values, locations, and so on, clearly have a role in the value for money equation. However, it is not within the scope of this report to review these editorial decisions. This chapter, instead, focuses on the processes that have been put in place to help the BBC achieve value for money when negotiating with Independent producers. The nature and scope of the commissioning process 6.5 Development can be an exciting and creative process for all involved, but with relatively little at stake in terms of cash investment. Commissioning, on the other hand, involves tough negotiations, agreement on detailed specifications, and often commitment to substantial subsequent expenditure on the part of the BBC. 6.6 It is in commissioning that the BBC aims to maximise the scope and quality of the commissioning specification within available budgets. It is therefore focused on achieving value for money through effectiveness. 6.7 Commissioning at the BBC is a combined effort by editors and business affairs managers. Early in discussions with the Independent, a tariff range and a potential slot in the schedule will have been communicated – the editor will have a plan as to how each programme will contribute to BBC channel and genre strategy. It is the responsibility of the editor to ensure that this contribution is maximised within available funds. 6.8 The business affairs managers focus more on the legal and financial aspects of discussion with the producer, and as such they are more concerned with the contractual arrangements. Their role includes ensuring compliance with legal issues and the BBC’s financial guidelines and making sure that costs are kept within the tariff range. Business affairs managers also take responsibility for negotiating agreement on rights, within the Terms of Trade. They have specific efficiency targets to meet as part of the BBC VFM programme, and consequently they are often the champions for value for money more widely during commissioning. 6.9 An area in which the BBC has made value for money improvements that assist the business affairs managers in their work has been through negotiating framework agreements with organisations, such as the Performing Rights Society, for contributor rights. These agreements simplify the rights position, reducing administrative costs for all parties, and are believed by the BBC to have reduced overall contributor rights’ payments. Value for money during negotiating and commissioning 6.10 The natural editorial drive at the BBC is to aim for the highest quality programming achievable; but, because budgets are limited, editors must stretch each pound as far as they can. Money saved on one project will mean extra funds for another. Thus the commissioning process revolves around a continual ‘juggling of the slate’, and conversations between editors and the business affairs team that aim to balance the number of high-budget programmes with that of medium or low-budget ones. BBC Governors Independent commissioning – Value for money study 6.11 This drives a cost consciousness at the BBC that means value for The document thus provides a baseline for any changes money is considered daily. That said, our study identified several during production, and the cost of changes can be areas where there is a risk of value for money leakage: apportioned according to who has requested the deviation from the original agreement.30 • definition and measurement of value for money in the process; 6.16 The system of a fixed price attached to a Commissioning Specification was introduced in 2004 in the new Code of • flexibility in the commissioning specification; Practice. Prior to that, Independents provided a line-by-line • transparency of budgets from Independents; budget, which was initially agreed but then tended to be the subject of numerous changes between commissioning and final • the challenge of estimating the future potential of rights; delivery of the programme. Agreeing a fixed price attached to and a detailed specification has changed the emphasis for the BBC to ensuring that they get what they want up front.31 • recovering royalties from Independents following sale of rights. 6.17 Yet there are challenges that have emerged from this approach. Television production is an endeavour that can be Definition and measurement of value for money in the subject to change after filming has begun. The BBC, having process agreed a fixed price, works hard to hold producers to it in 6.12 From our interviews with key executives and commissioning order to keep costs under control. However, there are cases staff, it is clear that while everyone can explain the concept, where this is, for one reason or another, either impractical or there is no explicit agreement across the BBC on the definition undesirable. Additionally, in a fixed price environment there is and measurement of ‘value for money’.27 This means that, a tendency to play it safe – tick the boxes and pick up the while communication through editorial and business affairs cheque – that may stifle innovation to some extent. meetings ensure that those involved have a broadly consistent view, some will be working to a definition of value that Transparency of budgets from Independents emphasises different aspects of the BBC’s remit to others. 6.18 A further challenge that has been created by the fixed price This leaves value for money as a rather inexact objective environment is that it has reduced transparency between meaning different things to different people.28 Independents and the BBC. This problem can be particularly acute for BBC commissioning editors when a returning series 6.13 Although CPH is used as the principal measure of value for is being considered. The BBC, owing to changes in operating money at the time of commissioning, editors may think of procedures prompted by the Terms of Trade, does not usually value for money in terms of quality of output subject to see any detail on an Independent producer’s budget, making budgetary constraints. Finance and business affairs, on the it difficult to negotiate as it is not clear if the cost base for the other hand, may consider CPH as the primary value for money production has changed.32 This is perceived to be the case in driver. relation to must-have talent. The BBC often has a good understanding of the reserve price of the individual, but a lack 6.14 CPVH is also considered at the time of commissioning, but of transparency may reduce the BBC’s understanding of the only as a ‘ready reckoner’ to determine prospective value for details of production during negotiations. money on a commission in relation to its proposed place on the slate – after all, no viewer will actually see the programme Estimating the future potential of rights as a factor in value until it is broadcast. Thus getting to the right price for the for money right programme with an Independent producer remains an 6.19 The value of future rights, and in particular new media rights, art rather than a science. is a challenging issue for the BBC. Independents, through recent PACT agreements, have won the right to retain a high Flexibility in the commissioning specification proportion of these rights but, because they are an unknown 6.15 The commissioning process, of course, varies considerably. quantity, negotiations remain focused on traditional ‘We’re not making jam’, in the words of one BBC executive, programming budgets. and every commission is different.29 But the BBC does attempt to inject greater solidity once a Commissioning Specification 6.20 Moreover, Independent producers can find additional funding has been agreed. The Commissioning Specification is crucial for a project through co-production, or may increase their to the production of any programme. It is here that editors revenues from a programme by selling secondary UK and Independents scope and agree what the final programme television, international or new media rights. In either case the will look like. value of the programme to the Independent producer has increased, but it is difficult for the BBC to know this with any degree of precision. 27 Deloitte interviews, 14, 20–21 June 2006. 28 Deloitte interviews 20–21 June 2006; Process Audit reviews. 29 BBC briefing to Independent producers, 30 June 2006. 30 Deloitte interview, 21 June 2006; Process Audit reviews. Note: The sample used as part of our study yielded no instances of scope or specification change. 31 Code of Practice for the BBC’s dealings with the Independent sector, as agreed by Ofcom (January 2004), p.7; Deloitte interviews, 20–21 June 2006. 32 Deloitte interview, 6 July 2006. BBC Governors Independent commissioning – Value for money study 6.21 The BBC is not permitted to calculate the price that it wishes to pay by finding out a programme’s budget and subtracting co-production investment from that to arrive at a cost less investment figure. This ‘netting off’ is forbidden by Ofcom, reducing the BBC’s ability to drive value for money through the reduction of primary right costs. 6.22 The advent of 360º commissioning, an initiative to consider secondary and new media rights when commissioning that has been encouraged from the most senior levels of the BBC, suggests that such rights will have to be taken into consideration more and more in future commissioning.33 Recovering royalties from Independents following sale of rights 6.23 When rights have been agreed, and indeed realised, the BBC has to ensure it recovers its share of those revenues. The BBC retains a certain percentage of royalties for every production it commissions, but there are currently no mechanisms through which these can be tracked effectively. Reliance is on the Independent producer to ensure money is appropriately paid to the BBC. 6.24 This relies on an assumption that the producer would not wish to risk its relationship with the BBC over fairly insignificant amounts of money. However, the fact that the BBC does have to commission external firms to carry out royalty audits on some producers, from time to time, suggests that improved tracking of such money should be considered. And, as the multimedia, digital world grows, these revenue streams are not expected to remain so small.34 Existing controls on value for money 6.25 The BBC has a number of checks and balances in place to support editors and business affairs managers as they navigate the path to finalising a commission. These include: • regular meetings, including commissioners, commissions coordinators, genre controllers, business affairs teams, slate managers etc., to ensure that all have a clear view of what is likely to be commissioned; • involvement of both editors and business affairs managers throughout the process, with both attending all key meetings with producers; • a slate budget assigned to each editor within which he or she must work while commissioning the requisite number of hours of programming planned into the schedule; • final sign-off from a Programme Finance Committee; and • escalation, where CPVH is likely to exceed target, to a Television Business Board.35 6.26 These controls do not match up precisely to the risks highlighted in the previous section, but they do go some way towards mitigating those risks. In addition, the BBC attempts to maintain flexibility in the system through ‘re-prioritisation funding’, which is money set aside to enable a genre to commission in areas of strategic importance where appropriate. 6.27 Presently, during the commissioning process, business affairs managers rely on the editor to keep them informed of progress. While these individuals attend price negotiations, they tend not to attend development meetings where editorial decisions are made. 6.28 This series of checks and balances in the commissioning process incentivises those involved to constantly consider value for money, and, when things go outside tariff, value for money issues have good visibility at senior levels in the organisation. 6.29 We believe, based upon our work in this study, that the BBC has put in place a good system of controls to ensure value for money without becoming overly bureaucratic. Opportunities to improve value for money in negotiation and commissioning 6.30 Allowing for the fact that the BBC must be cautious of implementing too much rigidity or bureaucracy in its controls, there are, nevertheless, some opportunities for improving the commissioning process to ensure greater value for money. 6.31 The first of these is in finding a definition of value for money that all commissioning editors agree upon and work to. This may be a small change, perhaps only making explicit something that is implicit at the BBC, but it will reduce the margin for editors to pursue different value for money objectives. 6.32 A second opportunity lies in the implementation of 360º commissioning. This is already well under way at the BBC. It will further encourage the consideration of rights – of all descriptions, not only new media – in the commissioning process, and in the assurance of value for money within it. The BBC faces a serious challenge in ensuring that Licence Fee payers see the value derived from rights sales returned to them, either in the form of lower Licence Fees or higher- quality programming. 6.33 Monitoring and collection of royalties from those rights will also become more important – hitherto the monies involved have often not justified effort to recoup them.36 It should not be assumed that this will remain the case, and the BBC should take steps to enhance the process involved in recovering royalties from Independent producers. 33 PACT agreements; Mark Thompson speech on Creative Future, 26 April 2006. 34 Deloitte interviews, 20–21 June and 3 July 2006. 35 Process Audit review; Negotiating Mandates and PFC minutes reviewed. 36 Deloitte interview, 21 June 2006. 6.34 The BBC should consider what it can do to encourage greater transparency between the Corporation and Independent producers. Full transparency on both sides will help the BBC to identify and extract value for money by making clear where cost inflation exists; by opening up opportunities around co-production; and by bringing greater clarity to opportunities for the exploitation of rights. The planned three-year reviews of the Terms of Trade would be an ideal opportunity for the BBC to develop a new position on such key issues. 6.35 Finally, there are several process improvements we believe should be considered: • There is some duplication of data being held or used for reporting purposes. Different genres use different tools (spreadsheets and databases) for tracking and reporting purposes. All data should be held on a central database or network to reduce the risk of data loss. • The signed copies of all Programme Production Agreements and Commissioning Specifications should be scanned and stored electronically. This will reduce the need to search archived files for supporting documentation. BBC Governors Independent commissioning – Value for money study • The BBC should consider the appropriateness of the P4A database as a system for storing completion documents. The P4A was designed for in-house use and has resulted in some efficiencies. The database is not, however, open to Independents, owing to challenges in providing software support for them. Consequently, information stored within it has to be downloaded manually and sent to Independents when the BBC wishes to communicate that data. This is a very manual process, it is unevenly applied across genres, and the advantages of a central database are undermined by the variations in usage. For example, because of the volume of programmes in BBC Factual, they are unable to use P4A to store these documents and send Word templates via email instead. • Ofcom reporting data should be populated on a continuing basis. Some genres have this information readily available from a database while others need to compile the data line by line at the quarter end. This will help to make reporting quicker and more accurate. BBC Governors Independent commissioning – Value for money study 7. The commissioning process: Production and delivery 7.1 Production is the process of taking an agreed specification for 7.7 We have not observed any occurrences within our testing a commission from paper to programme. The process has sample where the final price paid exceeded the contracted three main phases: pre-production; production; and price, although we understand from discussion that this does post-production. sometimes occur. This can arise in situations where the Commissioning Specification changed during the production 7.2 Pre-production involves ensuring that planning and process. In such a case – where the change in scope could be preparation are in place to facilitate the effective and efficient initiated by either party – the Commissioning Specification creation of the programme. Production then involves the and revised contract price must be approved again by the creation of the programme. Post-production centres around Programme Finance Committee. editing the output and turning the film into the final product. 7.8 The use of fixed-price agreements provides a significant 7.3 Delivery is a more compact and discrete stage than incentive for the Independent to cut costs during the production; representing the final element in the programme-production stage, as any economy or efficiency savings accrue making process. It refers to the physical handover of the solely to the Independent.39 Assuming that the programme is outputs of the production process, any subsequent reviews, to be produced on budget, the only variable left in the value versioning and revisions, and the completion of necessary for money equation by the production and delivery stage is paperwork to close down the engagement. quality of output. Ensuring value for money in this context is all about guaranteeing that the final deliverable conforms to Value for money in production and delivery at least the minimum standard expected by the BBC and 7.4 By their very nature, Independent commissions are hard implied by the Commissioning Specification. to influence once a programme specification has been agreed. Having agreed a fixed price for the programme, and with the BBC’s success in achieving value for money in production and decision-making process effectively transferred to the delivery Independents, it is the Independents who then determine the 7.9 The BBC has various controls in place to ensure that the final quality of the programme.37 deliverable from the Independent commissioning process meets the required standards and, ultimately, quality 7.5 Although the BBC does retain final editorial control38, that requirements. These controls may be thought of as quality control is realistically limited to the production monitoring checks of one kind or another and are composed of: process and a final say on what is eventually committed to film. • output versus Editorial Specification checks; 7.6 Fixed-price contracts ensure that both the risks and rewards of • standards and compliance checks; and the production process are passed over to Independents. Any cost overruns must be absorbed by the Independent, unlike • technical specification checks. previously, where the BBC was funding shortfalls through cost-plus. 37 Our research has determined that cost overruns are rare, and cost undershoots (leading to more output than originally agreed) are rarer still. 38 BBC Code of Practice. 39 It should be noted that the incentive to ‘play fair’, and thus secure further work with the BBC, works in the opposite direction to the incentive to economise overzealously. BBC Governors Independent commissioning – Value for money study Output versus editorial specification 7.10 The first, and arguably most crucial, of these – monitoring of output versus editorial specification – involves a comparison of the commissioning specification (Schedule 2) with programme output. 7.11 The Commissioning Specification details, among other things: • Editorial Specification; • Creative Brief; • Production Brief; and • Key Approvals. 7.12 We have observed that the Commissioning Specification does not dictate creative or production requirements to the last detail; instead Independents are given the flexibility to deliver the theme and mood of the commissioned idea. This is understandably subject to the specific non-negotiable parameters, such as the inclusion of key talent. 7.13 The editorial team is required to review a tape of each production prior to transmission with a view to making compliance and/or editorial changes. Additionally, the editorial executive responsible for the commission will have regular updates with the Independent to discuss progress on the production and any significant issues arising. Both the Terms of Trade and Code of Practice allow for the BBC to request progress reports at specific stages of the production process. This enables formalised monitoring of progress against expectations. 7.14 Where there is a potential impact on cash flow or delivery date, this is communicated to both the business affairs manager and commissions coordinator, who will then manage any required variations to the commissioning specification, as well as holding back payment, requesting written status reports and updating the delivery schedule respectively. 7.15 Progress reporting is normally matched to the staggering of the cash flow funding and thus the Business Affairs Manager/Finance department would match any invoice received to the progress report prior to approving payment. We observed, however, that this was not applied consistently across all genres; for instance BBC Drama does not request the progress reports as a ‘must have’, relying on the editorial executive to have regular conversations with the Independent and update the Business Assurance team accordingly. 7.16 Where progress reports are requested, the business affairs managers will match the invoice to the progress report prior to forwarding the invoice to finance for processing and payment. Where progress reports are not mandatory, this is usually processed without further approval by the Programme Finance Committee as the approval of the Licence Fee, is sufficient to enable the payment of the invoice to the Independent. 7.17 The Terms of Trade allow the BBC to withhold two instalments of five per cent each for tape delivery and paperwork delivery (referred to as holdback). The final payment to the Independent is not approved until all delivery paperwork has been received and approved internally. Payment profiles are published in the Terms of Trade.40 7.18 Across the genres only 10 per cent of the fee is retained for delivery, and all live shows are subject to a 10 per cent retention. Only 15 per cent of the total fee is retained until approval of a fine cut of episode one in Drama programming, with 20 per cent retained to the same stage in both Entertainment and Factual. Although these holdbacks may appear low in value, they reflect a need for cash flow early in the production process. Standards and compliance 7.19 Broadcasting standards and compliance issues are covered by the BBC Television compliance form (mandatory for all productions) and a process of referral. This process works to minimise the risk that inappropriate content is broadcast. 7.20 The process is applied to both Independent and In-house productions and the form itself features a series of 41 yes/no questions as to the inclusion of offensive language, nudity and other contentious content. 7.21 To gain approval, BBC staff are required to check the form before referring any issues to the requisite person/ department. There are 23 reasons for mandatory referral to the Controller, Editorial Policy – ranging from the witnessing of illegal activity to non-approval for the portrayal of a living person. The programme may be referred for other reasons to the legal department, the head of the department in question or the channel controller. 7.22 As and when the programme passes through the referral process, final compliance sign-off for Independent programming has to come from the genre Commissioning Editor or, in instances of very low compliance risk, sign-off can be delegated appropriately. 40 The table contains payment schedule guidelines for each genre, although if agreed by the Independent the BBC can pay on completion. This schedule is designed to ‘remove the need in the majority of cases for detailed negotiation between the parties, while ensuring that they reflect the particular production schedule’. BBC Governors Independent commissioning – Value for money study 7.23 Any necessary compliance change is passed to the Evidence of inefficiencies across control measures Independent, who makes the change before resubmitting for 7.30 The process of controlling for quality of final output is not a second technical review (see below). If the editorial change linear in practice. The delivery team collates the compliance is initiated by the BBC, it is usually performed In-house and forms and uploads to the compliance database, which the BBC bears the cost of such changes. Occasionally, the triggers a request for approval at the editorial end. The Independent would request a tape after the technical review compliance form requires the editor to sign off on editorial to make further editorial changes (of their own accord) and control but there is no proactive check to ensure editorial thus would bear the cost of the subsequent second technical satisfaction prior to technical review. review. 7.31 This has sometimes triggered editorial reviews after the Technical and delivery specification technical review, with the BBC needing to make a change to 7.24 Technical checks are designed to ensure that the deliverable a tape that has been technically reviewed, although we did is of the required format and technical quality for not attempt to quantify the frequency of this. transmission. The technical requirements are embodied in a guide – BBC Technical Standards for Network Television Differences between Independent and In-house production Programme Delivery – and checks are made against these 7.32 The key difference between In-house and Independents in guidelines. This section covers delivery dates, delivery format, the delivery process is in the technical quality of the delivery. details on publicity stills, promotional preview and production The BBC has an efficient and experienced In-house post- credits. production team who are well versed with the BBC’s own delivery requirements. Independents are given the option of 7.25 The BBC has a dedicated team of delivery coordinators, who using a third party facilities house and this can sometimes lead ensure that the tapes conform to BBC technical requirements. to incompatible technical delivery or poor-quality delivery. They are also responsible for collating and filing all completion paperwork. Stages of progress reporting are detailed in a 7.33 While the BBC does not lose from a financial perspective, as delivery section within Schedule 2 of the agreement and this the Independent bears the cost of subsequent reviews, this varies for each production. Schedule 3 is standard for all could lead to inefficiencies in terms of the delivery team, pre-production agreements and outlines all the generic additional use of the technical studios, last-minute deliveries requirements of the production company before the and possible non-transmission. production can be classified as complete. Together these detail the stages for progress reporting, which form a tool to Opportunities to improve value for money in production and monitor progress and hold back payment if required. delivery 7.34 In contrast to earlier stages of the commissioning process, 7.26 There appears to be some inefficiency in the technical delivery value for money improvement options in this final stage will of tapes, whereby the delivery team is often subjected to have minimal financial impact. Nonetheless, we have intense time pressure to ensure that the tapes are delivered identified some minor recommendations: to Red Bee Media, a digital media enabler, in time for broadcasting. • The BBC may wish to assess the costs and benefits of encouraging the use of the In-house post-production 7.27 We understand that tapes should be delivered for technical facility, which currently also undertakes assignments from review at least two weeks prior to transmission. However, in outside the BBC, and reflect this by reducing the Licence some cases tapes are sent directly to Red Bee Media from the Fee paid. external facilities house with little time for a technical review. • The BBC may wish to draw up a list of preferred 7.28 The Licence Fee includes one technical review as standard post-production houses. but sometimes there are multiple technical reviews on the same production because the post-production work • The BBC may wish to ensure tighter adherence to delivery performed by the Independent does not meet the BBC’s dates by Independents, and with that incorporate more standards. In such instances, an extra technical review fee is timely editorial reviews into the process. incurred. This is set against the production account and is deducted from the final payment to the Independent. • The BBC may wish to further encourage a closer working environment between editorial and delivery, although we 7.29 The BBC has a post-production facilities house, which it recognise that the process is changing with a view to this prefers the Independents to use for post-delivery technical outcome. changes so as to avoid a second technical review. In some cases, the Independent takes the option to be charged for the studio facility but not the second technical review. BBC Governors Independent commissioning – Value for money study 8. Conclusions and recommendations 8.1 Conclusions drawn from this study must first acknowledge that the commissioning of productions from Independents by the BBC is subject to a broad range of policy considerations and supporting commercial and regulatory frameworks. 8.2 The BBC operates in an environment that is subject to a high degree of regulation – it has around 90 quotas to meet; and in dealing with Independents, it is expected to conform to a Code of Practice and Terms of Trade. 8.3 Value for money is therefore only one of many measures that the BBC must consider as it plans, develops and ultimately commissions television programmes from Independents. This means that, while value for money is always considered in commissioning decisions, it is seldom the defining factor. 8.4 Nonetheless, our study has identified both areas in which the BBC is doing much to drive value for money improvements and areas in which we believe there is room for further improvement. These occur at three levels: • the commercial framework between the BBC and the Independent sector; • the strategy and planning process; and • the execution of the commissioning process. 8.5 Our findings and recommendations are detailed in each of the relevant chapters of this report and summarised below. The commercial framework Our findings 8.6 The environment that frames the relationship between the BBC and the Independent sector has changed significantly in the past few years. This is a result of a number of factors, including: the growth of multi-channel TV, increasing expenditure by all broadcasters on Independent commissions, and a number of significant changes to the regulatory and commercial framework within which they interact. 8.7 The BBC’s wider policy objectives with respect to the Independent sector are as follows: • to establish a fully-level playing field between In-house and Independent television programme makers in all programme areas; • to ensure that Independents receive a fair commercial deal; and • to make sure that the 25 per cent Independent television quota is at all times a floor, never a ceiling. 8.8 The three key developments involved are: new and explicit commissioning processes; the Terms of Trade and Code of Practice; and the WoCC, which has been announced but not yet implemented. Between them they offer the Independent sector a number of key advantages over its previous position: • an increase in the volume of commissioned output; • improved commercial terms, particularly in relation to the ownership of secondary and tertiary rights; and • greater confidence that the commissioning process is applied consistently to both In-house and Independents, with the expectation that commissions will be awarded on the merits of innovative and creative ideas. 8.9 These developments have reset the framework within which the pursuit of value for money is undertaken – in the context of the BBC’s wider policy objectives. However, the market environment continues to evolve and the BBC will need to consider how it can maximise value for money as it does so. 8.10 Going forward, it will need to address value for money implications of three current trends: • growth in the number of channels through which content is broadcast, with the potential for the proportion of the total rights value of a production acquired by the BBC under the current Terms of Trade to fall; 26 BBC Governors Independent commissioning – V26alue for money study BBC GovernorsIndependent commissioning – Value for money study BBC Governors Independent commissioning – Value for money study • consolidation of the Independent sector and the emergence of commercially stronger businesses within it; and • an increasing share of programming being secured from Independents, shifting the balance of power. 8.11 As the Independent sector gets stronger, the power balance between buyer and supplier will shift. In certain genres, such as entertainment, this balance has arguably already shifted a long way to the Independent sector. As the balance changes, the question of value for money must be reconsidered. 8.12 We believe that, unaddressed, these trends could reduce the BBC’s capacity for achieving value for money, irrespective of the effectiveness that the BBC can embed within its commissioning process. Our recommendations 8.13 In order to ensure that the commercial environment is conducive for delivering value for money for Licence Fee payers, the BBC needs to continually assess, at a genre level, the structure and dynamics of the Independent sector. 8.14 In addition the BBC needs to address how it deals with the potential for the Terms of Trade and Code of Practice to drive a continual and growing transfer of value to the Independent sector, particularly as the value of secondary rights grows. 8.15 The BBC has already set out down the path to 360º commissioning. This should continue to be rolled out, and must be refined over time to reflect the shape and dynamics of the market for intellectual property rights currently developing for UK television. 8.16 At the same time the BBC should consider improving its procedures, particularly in tracking and capturing its share of royalties resulting from sales of secondary and new media rights. Strategy and planning Our findings 8.17 The annual planning stage has significant value for money implications because it sets out the buying plan for the commissioning teams to follow. 8.18 We have not reviewed the process by which the overall programming budget is set nor how it is allocated to channels and genres. Both tasks clearly have value for money considerations but neither is related solely to Independent commissioning – the focus of our study. Nonetheless, from our discussions with the BBC management responsible for this process, it is clear that value for money is one of the key variables given consideration. 8.19 We have, however, addressed two elements of the decision-making process of these allocations that do have a direct impact upon Independent commissioning: • Agreeing the Independent quota and WoCC with the regulator has an impact on the structure and dynamics of the Independent sector, particularly at a genre level. The BBC conducted a comprehensive exercise – the Content Supply Review – to understand the ability of the market to meet certain levels of programming volume as well as the ability to offer competitive prices. Given the pace at which the Independent sector is changing, we believe that a similar exercise should be conducted reasonably frequently. • Tariffs have a big impact on prices paid for Independent commissions. This is not to say that prices are wrong but the existence of tariffs means, at a practical level, that competition is based upon ideas and not prices (within the constraints of the regulatory environment). This has the potential to give rise to less value for money unless tariff ranges are reviewed on a timely basis, particularly in light of the growth of digital multi-channel viewing and the corresponding decrease in the proportion of viewing accounted for by first screening. 8.20 The RQIV framework was announced in Building Public Value, which was published in June 2004. We have seen evidence that the framework and four key measures form part of the annual strategy and planning process, and that targets are set at an overall channel portfolio level. 8.21 However, while the framework has undoubtedly been communicated to the employees engaged in commissioning from the Independent sector – and forms part of the current vocabulary – it is only recently that much use has been made of the framework for reporting and there would appear to be further use that could be made of it in coming years. 8.22 Having such a cascaded framework in place would aid decision-making or, at the very least, help demonstrate the extent to which the BBC is delivering value for money improvements in its commissioning activities. Our recommendations 8.23 As part of its application of the aggregate 50 per cent in-house guarantee at the genre level, the BBC must have regard for the Independent market structure and its ability to continue to deliver value for money. This is particularly relevant in the context of the BBC’s own plans to strengthen its supply base in the regions. 8.24 Tariff levels should be regularly monitored and reviewed. As the digital landscape evolves and the proportion of all viewing for a programme accounted for by first window falls, the BBC must ensure that in keeping tariffs constant in real terms, it does not engage in a continual and growing transfer of value to the Independents. 8.25 The RQIV framework should be extended so that it can be applied to the reporting of activity throughout the organisation. Departmental and genre performance and output measures should be, so far as is practicable, categorised within Reach, Quality, Impact or Value for money. BBC Governors Independent commissioning – Value for money study The commissioning process Our recommendations 8.32 We have identified a number of areas in which small Our findings improvements could be made: 8.26 The BBC has communicated the structure of its commissioning teams and the timetable and process for • Increased consideration of joint development opportunities commissioning programmes. This process is intended to apply with Independents, particularly around the exploitation of equally to In-house producers and Independents and is new media. documented in some detail on the BBC’s commissioning website. • Tracking and monitoring the progress of ideas through the commissioning process – preferably through a shared 8.27 Our work has found that the commissioning process is database accessible to personnel across different genres, executed in a broadly consistent manner across the BBC, thereby reducing the risk of duplication. following a path through development, negotiation, creation of a Commissioning Specification and sign-off for the • All data should be held on a central database or network commission by the Programme Finance Committee. Variations from which different personnel can run reports or extract within that framework reflect the nuances of commissioning data. This will also reduce the risk of data losses. by each genre, and represent a practical response to different situations. • Signed copies of all Programme Production Agreements and commissioning specifications should be scanned and 8.28 Built into the framework are a number of checks and balances stored electronically. This will reduce the need to search – procedural and sign-off – that are aligned with value for archived files for supporting documentation. money objectives. The process and commissions themselves are not homogeneous enough to make a strict controls • Review the appropriateness of the P4A database as a environment appropriate. system for storing completion documents. 8.29 Therefore, the BBC has adopted a ‘control principles’ • Capture the data that will form part of the Ofcom approach in which individual commissioners are given some performance reporting at appropriate times in order to personal autonomy while adhering to the overarching make the process of preparing the report more efficient. principles. We believe this is a sensible approach to take. • Introduction of self-assessment for compliance monitoring, 8.30 We have tested these controls through both corroborative for example, periodically asking staff involved in the enquiry and sample testing and have not found any material commissioning process to formally confirm that they have exceptions or deviations to the control principles. complied with all requirements. 8.31 We note, however, that while much has been done to 8.33 In addition, the growth in the importance of secondary, improve the documentation and audit trail with regard to international and new media rights means these must be Independent commissioning, this is not yet as well developed considered a higher priority than has been the case hitherto. for In-house productions. To some extent this is because the We note that 360º commissioning marks an attempt to take nature of ‘contracting’ with In-house producers does not such rights more into account when negotiating. The BBC require the same level of documentation as for third parties. must also ensure that it follows this positive step with similar Nonetheless, we believe that there is some scope for initiatives in revenue assurance to make sure that royalties improvement in this area. accruing are monitored and collected. 8.34 The Terms of Trade give Independents a real incentive to take the lead on rights exploitation – and, while it continues to enjoy a share of revenues through PACT agreements, the BBC may benefit from such attention to rights from the Independent sector. Therefore the BBC should take a proactive role in encouraging such initiatives from Independents, and seek to maximise returns. 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