BBC Independent Television...

BBC Independent TelevisionCommissioning Deloitte & Touche LLP review presented to the BBC Governors' AuditCommittee, September 2006, and a response to the review from the BBC

INSIDE COVER - BLANK

At the request of the Governors’ AuditCommittee, the BBC’s independentcommissioning process has been subjectto a value for money study to assesswhether it is:

• achieving best value for licence fee payers, and

• making an optimal contribution to theorganisation’s overall effectiveness.

This study is published alongside a reviewby the National Audit Office (NAO) ofthe BBC’s risk management process.Theseare the last in the current three-yearprogramme of studies, commissioned bythe Governors, assessing value for moneyacross the BBC.The BBC GovernanceUnit is currently working with the NAOon plans for a new programme of valuefor money studies that will be consideredfor commissioning by the BBC Trust fromJanuary 2007 onwards.

In recent years there have been a numberof changes in the independent mediasector.Within the commercial framework,in which the BBC and independents worktogether, these have included changes toTerms of Trade and the Code of Practice.The full introduction of the Window ofCreative Competition from January 2007will have further implications for thisrelationship; so will any agreement on newmedia rights with the Independents’representative body, PACT.

The BBC has responded to such changesby implementing a new independentcommissioning process that started to rollout in the second half of 2005.TheGovernors commissioned this value formoney study to review the progress madeso far and to provide recommendationsfor the BBC to ensure best value for thelicence fee payer.

The Board of Governors thanks Deloittefor undertaking this review and accepts thereport’s conclusions and recommendations.

The study acknowledges that the BBC’sability to improve value for money incommissioning is bounded by thecommercial framework that existsbetween it and the independent sector.However, the Governors welcomeDeloitte’s conclusion that the BBC’s newcommissioning process places a significantfocus on effectiveness, and includes anumber of controls to minimise the loss of value.

While noting that there are limited areashighlighted in the Deloitte report wherethe process can be enhanced, theGovernors support the positive actionBBC Management proposes to take inresponse to the report.

The attached response from BBCManagement outlines what action is being taken to address therecommendations made by Deloitte.It has been considered and approved by the Board of Governors.

Board of GovernorsOctober 2006

BBC Independent Television Commissioning BBC response to the Deloitte & Touche LLP Value for Money study

The BBC welcomes the Deloitte value formoney study on independent commissioning.The report, commissioned by the BBCGovernors, should be considered in the context of a maturing relationshipbetween the BBC and the independentproduction sector. Since the introductionof the statutory 25per cent quota, thisrelationship has developed into a creativepartnership in which the independentsector plays a crucial part in delivering theBBC’s content strategy. It is in the interestof the UK television audience that there isa competitive and thriving independentproduction supply market.The BBC iscommitted to continuing to stimulate andsupport the development of this sector.

The findings and recommendations in thereport are timely given the introduction ofthe Window of Creative Competition andthe implementation of the Creative Futureproject, the BBC’s content strategy for thenext Charter period. BBC Management iscommitted to delivering the best value forlicence fee payers and is actively addressingthe recommendations in the report tocontinue to improve the BBC’s performancefor its audiences.

The Deloitte study acknowledges thecomplex nature of value for moneyconsiderations in relation to commissioningprogrammes from the independent sector.

This is due to a number of factors,including the inherently creative nature ofthe end product being commissioned, aswell as the tight regulatory environment inwhich the BBC operates.

The study also recognises that theenvironment that frames the relationshipbetween the BBC and the independentsector has changed significantly during thelast few years. A number of key factorshave contributed to that changingrelationship:

• The Terms of Trade and Code of Practicehave fundamentally altered thecommercial framework between the BBC

and the independent sector, helping tocreate the venture capital for the creativeindustry and helping to serve the widerpolicy objectives of the BBC.

• The growth of multi-channel TV leading toincreased expenditure by all broadcasterson independent commissions, accompaniedby consolidation in the market, giving thesector increased economic power and acommercially stronger business basis.

• The advent of the Window of CreativeCompetition (WoCC) to:

• ensure that the 25per centIndependent Quota is a floor and not a ceiling

• create true competition between in-house and independent supply

• instil confidence in the independentsector through a much moretransparent commissioning process.

The Deloitte report has acknowledged themajor impact these factors have had inshaping the value for money agenda inrelation to independent commissioning atthe BBC.The report has concluded thatthe complicated commercial and regulatoryenvironment has some limiting effect onthe BBC’s ability to improve value formoney in independent commissioning.

Notwithstanding the above, the review hasconcluded that the BBC takes value formoney considerations very seriously and isdoing much to drive value for moneyimprovements in independent commissioning.

The BBC therefore welcomes Deloitte’sconclusions that:

• The BBC considers value for money at allstages in the commissioning business cycle,from strategy setting and annual planningthrough to individual commissioning decisions.

• Efficiency savings considerations form acentral plank of the annual plan and thenew commissioning process places asignificant focus on effectiveness.

• The commissioning process is executed in a consistent manner.

• The commissioning framework has anumber of built-in checks and balances,which are aligned to value for moneyobjectives and efficiency targets, and thatthe resulting ‘control principles’ approach is a sensible one to take.

• Based on tests undertaken, no materialdeviation from the control principles wasfound and the BBC has achieved somesuccess in achieving savings.

• Improved value for money will also bedelivered to the BBC through theindependent sector, further embracing new production techniques and financingarrangements.

• The RQIV framework developed by theBBC is a robust performance reportingtool but has untapped potential in helpingto demonstrate value for money in relationto commissioning.

• The BBC’s evolving 360-degree approachto commissioning should continue to berolled out and refined over time to reflectthe changing shape of the rights market.

The report has also made some valuableobservations and recommendations forimprovements, which the BBC isaddressing.The main recommendations are considered below.

Recommendation that the commercialframework between the BBC and theindependent sector should be revisited toraise the priority of gaining value for moneyover improving transparency and fairness

The introduction of the Code of Practiceand Terms of Trade has achieved the policyobjectives of improving both transparencyand fairness and these principles willcontinue to underpin the BBC’s dealingswith the independent sector.The BBC willcontinue to monitor changes in the marketas it evolves in order to understand the

BBC Independent Television Commissioning BBC response to the Deloitte & Touche LLP Value for Money study

benefits delivered to the buyer and supplierthrough this tight regulatory framework. Inthis way the BBC maintains a continualreview of the workings of the commercialframework and looks for more imaginativeways of constructing business relationshipsthat deliver value for money.The BBC willplay a full part in the three-yearly reviewsof the Terms of Trade.

Recommendation that value for moneyconsiderations continue to be given sufficientconsideration in the setting of in-houseguarantee levels and that there should betimely reviews of tariff levels

The mixture of genres and shape of thein-house guarantees are reviewed from a value for money perspective to ensureparity of range, diversity and broad value.This includes monitoring the evolvingstructure and dynamics of the independentsector to understand the ability of the marketto meet programme demand while offeringcompetitive prices. The BBC will reviewtariff levels in this evolving market every twoyears in line with this recommendationand as set out in the Code of Practice.

Recommendation that the BBC givesconsideration to other measures it can taketo manage independent suppliers to achievestronger value for money

This recommendation is accepted.TheContent Supply Review work undertaken bythe BBC is a precursor to the developmentof a supplier strategy across a number ofpolicy fronts, including value for moneyconsiderations.This work will be updatedand its conclusions will inform both theshape and mixture of the supply basewithin the 50per cent in-house guaranteeand the development of relationshipswithin the independent sector.

In addition, the BBC will continue to rollout 360-degree commissioning, which hasa strong value for money dimension to it.

Recommendation that the RQIV frameworkis further embedded within the organisationto improve performance reporting

At present all divisional quarterly performancereview reports to the Director-General,Executive Direction Group and GovernanceUnit are fully categorised in RQIV terms.However, the BBC agrees that untappedpotential exists for extending this frameworkfurther to improve Value for Money (VFM) performance reporting in relationto commissioning. Management will reviewhow best to cascade RQIV further downthe organisation to strengthen VFM reporting.This review will balance the practicality ofusing the RQIV and public value methodologymore generally at a granular level with thebenefits that can be achieved in order toachieve the optimal results.

Recommendation that the BBC takes aproactive role in encouraging independents toexploit their rights and ensure it collects itsshare of the return

The BBC accepts this recommendationand will take steps to improve revenuemonitoring and collection.These willinclude a revised process of deal trackingand reporting and a programme of royaltyaudits to be conducted across theindependent sector.

Various minor recommendations forimprovements in the commissioning processas follows;

• Shared database for tracking the progressof ideas through the commissioning process,reducing risk of duplication and data loss.

This functionality has been factored intothe BBC’s new commissioning and channelmanagement system ‘On Air’, due to beimplemented from January 2007.

• Signed copies of production agreementsshould be scanned and electronicallystored, reducing the need to searcharchived files for supportingdocumentation.

Final electronic versions of all agreementsand specifications will be embedded withinprogramme records and scheduling details

within ‘On Air’, eliminating the need forany scanning or archive searching.

• Capture the data that will form part ofthe timely reporting of Ofcomperformance to make preparing thereport more efficient

The timeliness of capturing the data toprepare reports on Code of Practicetargets (e.g. deals done and responserates) will be improved.

Reporting against Ofcom quotas forindependent and regional production is fully automated and run off coretransmission data. It is fully robust andproduced on a timely basis.

Audit.Tax.Consulting.Corporate Finance.Audit.Tax.Consulting.Corporate Finance.

BBC GovernorsIndependent commissioning –Value for money studyDeloitte & Touche LLPOctober 2006

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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

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1

BBC GovernorsIndependent commissioning – Value for money study

This report is one of a series of studies that review value for money at the British BroadcastingCorporation (‘BBC’). The programme of reviews was selected by the BBC Governors’ AuditCommittee 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 commissioningprocess for Independent productions.

This report has been prepared for and only for the Governors of the BBC in accordance with theterms of our engagement letter dated 26 June 2006 and for no other purpose. We do not accept orassume any liability or duty of care for any other purpose or to any other person to whom this reportis shown or into whose hands it may come, save where expressly agreed by our prior consent inwriting.

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 thatreferred to above.

We have not carried out an audit of the BBC’s financial statements. Our work has been basedprimarily on internal management information, collated during June and July 2006, which we have not verified or corroborated.

Preface

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1.5 Our study indicates that during both stages, BBCManagement takes value for money considerations veryseriously. Efficiency savings form a central plank of the annualplan, which sets out programmes to be commissioned andguideline tariffs. In addition, the new commissioning processplaces a significant focus on effectiveness, and includes anumber of practical controls to minimise value leakage whendealing with Independent producers.

1.6 The BBC’s ability to improve value for money incommissioning is, however, bounded by the commercialframework that exists between it and the Independent sector– which serves to support the BBC’s wider policy objectives.

1.7 The changes introduced through the Terms of Trade and Codeof Practice, particularly in respect of ownership of secondaryand international rights, have significantly improved thecommercial position of Independents and amounted to a‘value transfer’ to the sector. Without continual review of thecommercial framework, the growing importance of theserights could drive continuing value transfer to theIndependent sector, changing the balance of the relationshipbetween the BBC and Independent producers.

1.8 As the amount of programming available to Independents tocompete for increases through the implementation of theWoCC, and the Independents become more sophisticated inusing their ownership of secondary rights to attract bothtalent and external finance, the balance of power betweenthem and the BBC may shift in their favour.

1.9 At the commissioning level, typical procurement tactics suchas seeking annual cost reductions, benefiting from learningcurve effects, and taking into account alternative sources offunding are all, to some extent, limited under theseagreements. This makes annual or repeat savings – often atthe heart of a value for money approach – challenging toachieve.

Context1.1 The BBC’s relationship with the Independent sector is in a

period of transition. In an environment of wider changes inthe marketplace:

• independent producers’ proportion of BBC broadcast hoursand share of programming spend has been increasing;

• the commercial framework for the relationship wasreshaped in 2004 by the Terms of Trade and Code ofPractice. It will change further over coming monthsfollowing an agreement on new media rights with theIndependents’ representative body, PACT, and with the fullintroduction of the Window of Creative Competition(‘WoCC’) in 2007; and

• the sector itself is strengthening and experiencing somesignificant consolidation.

1.2 Value for money considerations in relation to Independentcommissioning are more complex than for many other formsof procurement because:

• the inherently creative nature of the end product meansthat the commissioning process is designed to solicit anddevelop the best programme ideas – as well as have regardto their output cost and quality; and

• the BBC has a number of explicit policy objectives inrelation to Independents – transparency, fairness, vibrancyof the sector and a production quota – against which valuefor money considerations need to be balanced.

1.3 It is in this context that we have reviewed value for money inthe new commissioning process, introduced by BBC Televisionin the summer of 2005.

Key findings1.4 We have observed value for money considerations applied

during both the annual planning and budgeting process, andin the commissioning of individual programmes. Our reviewindicates that it is in planning and budgeting that there isgreater opportunity to influence value for money outcomes.

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1. Executive summary

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1.10 The BBC is still learning how to work most efficiently withinthese parameters. There are examples of how the BBC hasmanaged to achieve savings through commissioning multipleseries at once, by agreeing package deals with someIndependents and by framework deals with industryassociations.

1.11 At the same time, value for money to the BBC will also bedriven by the extent to which the Independent sector itselfevolves both production techniques and financingarrangements.

1.12 In this environment, it is important that the BBC has a robustapproach to considering value for money – anddemonstrating that it has done so. In Building Public Valuethe BBC set out its ‘RQIV’ framework for ensuringperformance in public service broadcasting, a framework thatwas later praised by the National Audit Office (‘NAO’).We believe that this framework has further potential to helpdemonstrate value for money in relation to commissioning.

1.13 Each of the four elements of RQIV – Reach, Quality, Impactand Value for money – form key criteria by which schedulingand commissioning decisions are made, be that in the annualplanning or individual commissioning stages. The concept ofRQIV is shared by most BBC employees we met, and the BBCTelevision management team have started to use theframework as a reporting and decision-making tool. However,we believe there is room for further alignment between theReach, Quality, Impact and Value for money concepts, and theexisting metrics by which output and performance aremeasured, which would lead to an environment in which botheditorial and financial decision making could more easily bevalidated and value for money more clearly demonstrated.

Primary recommendations1.14 As the Independent sector becomes stronger there may be a

need to revisit the commercial framework between the BBCand Independents. The priority over recent years has beentowards improving volumes, transparency and fairness. Goingforward, the BBC may need to reassess this and raise thepriority of gaining value for money from Independents toensure best value for money for Licence Fee payers.

1.15 Given that the evolution of the Independent sector will beinfluenced by a number of other parties, including the otherbroadcasters, the vibrancy of the sector cannot be the soleresponsibility of the BBC. The BBC must work with theappropriate regulatory bodies with oversight of thecommercial framework to ensure that a vibrant Independentsector and value for money objectives can sit comfortably sideby side. The BBC will need to take the opportunity toinfluence these developments during the three-yearly reviewsof the Terms of Trade.

1.16 The amount of programming sourced from the Independentsector varies between genres, both as a function of the totalbroadcast hours and allocation of the 50 per cent in-houseguarantee between genres. This will affect the attractivenessof each genre to Independent suppliers, and the balance ofpower between the BBC as buyer and the Independents assuppliers. The BBC should continue to ensure that value formoney considerations are given sufficient attention during thisallocation, in the context of wider policy objectives.

1.17 The BBC should also give further consideration to othermeasures it can take to manage Independent suppliers inorder to achieve stronger value for money – within the overallcommercial framework. In particular, while it continues toseek to source ideas from the widest range of suppliers,it should continue to address how it can enhance thecommercial arrangements through the development ofsupplier strategies.

1.18 As the digital landscape evolves and the value of the BBC’srights as a proportion of all rights may begin to fall, tarifflevels should be monitored and reviewed at appropriate times.They should also be reviewed in the context of newproduction techniques.

1.19 The RQIV framework could be further embedded within theorganisation, particularly in respect to reporting performance.We do not believe it would be either practical or valuable toseek to qualify each and every daily action in terms of RQIV.However, there would appear to be a middle ground in whichperformance and output reports were articulated in RQIVlanguage. We have seen some recent reporting developmentssuggesting that this is starting to happen.

1.20 The Terms of Trade give Independents a real incentive to takethe lead on rights exploitation and, as it continues to enjoy ashare of revenues through PACT agreements, the BBC maybenefit from such attention to rights from the Independentsector. Therefore the BBC should take a proactive role inencouraging Independents to exploit their rights, and ensurethat it collects its share of the return.

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Introduction2.1 In this section we set out:

• the objectives and scope of this study;

• a definition of the commissioning process we are reviewing;and

• an interpretation of the term ‘value for money’ in thecontext of this report.

2.2 A review of each stage of the commissioning process togetherwith our value for money observations and recommendationsfollow in later chapters of the report. We consider the macro-level perspective in chapters:

3. The BBC and the Independent sector; and

4. Strategy and planning in the sourcing of Independentproductions.

We then examine the following micro-level processesassociated with Independent commissioning in chapters:

5. Solicitation and development;

6. Negotiating and commissioning; and

7. Production and delivery.

The report then concludes with chapter:

8. Conclusions and recommendations.

Objectives, scope and methodology

Objectives2.3 The objectives of this study are to:

• explore the ways in which the BBC seeks to achieve valuefor money in the procurement of Independent productions;

• identify and test the controls that exist to minimise valueleakage; and

• recommend improvements to the process/frameworksaround Independent commissioning that could improvevalue for money.

Scope2.4 Our study addresses the current commissioning process

applied in BBC Television in the following five genres:Entertainment, Comedy, Drama, Factual and Daytime.

2.5 BBC Sport, CBBC, BBC News and Nations and Regions areexcluded from our scope. Also excluded are commissionsrelated to BBC Radio, new media or any commissions issuedby BBC Worldwide.

2.6 This report does not include comment on any editorialdecisions. Our study addresses process and controls ratherthan specific editorial policy.

2.7 In terms of time periods reviewed, we have looked at the 15-month period between 1 April 2005 and 30 June 2006.We have chosen this period because:

• the Code of Practice and Terms of Trade were introduced inJanuary 2004 and July 2004 respectively and thereforecommissions undertaken during this period would havebeen negotiated within these frameworks; and

• the current commissioning structure, processes andtimelines started to be rolled out in the second half of 2005and, therefore, reviewing commissions undertaken before 1 April 2005 would provide little evidence as to the currentstate.

Methodology2.8 We have undertaken our study primarily through interviews

with the executives who have overall responsibility for thecommissioning process and with key staff involved in its day-to-day operations, together with some limited testing of theprocess. We have sought to:

• understand whether the documented commissioningprocess reflects actual practice;

2. Objectives and scope

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• determine the key control principles that exist in relation tovalue for money and test to see how they are applied; and

• corroborate our understanding of the key control principlesby ‘walking through’ the process with a small number ofexamples of commissioned programmes. These exampleshave been chosen to provide coverage across the range ofgenres, programme type and scale, and Independents withwhich the BBC deals.

2.9 In undertaking our review, we have considered both thepractical processes being implemented on a daily basis –e.g. communication of requirements to the Independentsector, receipt of ideas, completing contractual negotiationsetc. – as well as the broader governance framework involvedat key decision points, such as the Programme FinanceCommittee (‘PFC’) and the Television Business Board (‘TVBB’).

The commissioning process2.10 The responsibility for commissioning rests with BBC Television.

Commissioning is separate from BBC In-house production andconducted by genre specific teams who commission bothfrom In-house producers and from Independents.

2.11 The commissioning process is common to both In-house andIndependents, although in practice there are some differencesin how it is applied. The process itself comprises three stageswhich, while distinct, can overlap at the boundaries. They are:

1. Solicitation and Development – the process by whichprogramme requirements are communicated to the In-house producers and Independent sector, ideas aresolicited and selected for development. Frequently this isa collaborative process between commissioners andproducers.

2. Negotiating and Commissioning – the process by whichan approved idea is fully specified as a production, pricesnegotiated and a commissioning decision is made.

3. Production and Delivery – the physical productionprocess that takes place once a programme has beencommissioned. This ends with delivery of the programme tothe BBC.

2.12 There are value for money implications present in all three ofthese stages. However, there are two additional stages – onepreceding and one following this process – that are not strictlypart of the commissioning process but which nonethelesscontain important value for money considerations.

5


Strategy &

planning

Solicitation &

development

Negotiating &

commissioning

Production &

delivery

Performance

measurement

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.

These are:

• Strategy and planning – the annual process by which abudget and transmission schedule is created with referenceto a broad range of factors, including: public servicebroadcasting requirements, reach, impact and qualityobjectives, channel and genre strategies, available budgetand cost efficiency targets; and

• Performance measurement – the process by whichprogramme performance is reviewed against the originalchannel/genre/strand strategy as well as considering itsvalue for money in terms of Cost Per Viewer Hour1 (‘CPVH’)and audience appreciation data.

2.13 The position of strategy and planning, and performancemeasurement, in the overall commissioning process can beseen in Figure 1, with the real commissioning taking place inthe three middle stages highlighted by the shaded boxes.

Figure 1: The Commissioning Process

2.14 Given the impact on value for money of some of the decisionsmade in the Strategy and planning stage, we have madeobservations on elements of this stage in so far as weconsider they are informative.

2.15 We have not reviewed the Performance measurement stagedirectly, although some of the measures form part of theannual strategy and planning process. These are referred to inChapter 5.

Value for money2.16 The BBC is funded by a Licence Fee levied on UK households

and in its Charter the BBC is obliged to adhere to the higheststandards of probity, propriety and value for money in the useof the Licence Revenue.2

2.17 While the concept of value for money in relation toexpenditure by publicly-funded bodies is generallyunderstood, actual definitions vary.

The Office of Government Commerce view2.18 The remit of the Office of Government Commerce (‘OGC’)

is to ensure the efficient participation in (and procurementfrom) markets where public money is used to fund outcomes.

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2.24 In the same document, the BBC introduced a newperformance management framework, RQIV4, in an attemptto draw these elements together. However, the links betweenRQIV and value for money, as it is broadly understood by thepublic sector rather than within the BBC, have not yetformally been made.

2.25 Given this, we believe that perhaps the NAO’s definition ofvalue for money is the most helpful in understanding value formoney at the BBC. The NAO definition is: ‘Obtainingeconomy, efficiency and effectiveness by respectively spendingless, getting the same for less, and spending wisely’.In respect to the BBC, these elements appear in differentways:

• an example of economy might be procurement of, say, alower quality product at a lower price – money has beensaved by procuring a cheaper product;

• efficiency is achieved where the same quality of product orservice is procured, but at lower cost; and

• effectiveness relates balancing the quality and costmeasures so that quality is maximised within costconstraints.

2.19 When striving to obtain value for money in procurement thetwo main considerations are cost and quality; or, moreprecisely, the inevitable trade-off between the two. The OGCworks with the following definition of value for money:

‘The optimum combination of whole life costs and quality.’3

2.20 Value for money is, however, not an absolute, rather it canonly ever be relative – i.e. option A provides greater value formoney than option B. Therefore, any actions that can betaken are done in order to improve value for money ratherthan attain it directly.

2.21 In the 2004 publication Value For Money Measurement,OGC Business Guidance the OGC identified four maincategories of value for money gain. These are:

• negotiating an improved deal with a supplier;

• aggregating demand across departments to exert greaterleverage on suppliers;

• reducing process or transaction costs; and

• improving project, contract and asset management.

2.22 The above gains are aimed at government departments thatare bound by conditions on how to procure and, above acertain threshold, tender for work requiring public funding.When buying originated programming, the BBC, althoughclearly accountable for its use of Licence Fee receipts, is notsubject to the rigid procurement guidelines faced bygovernment departments. This is appropriate given thestrongly creative nature of TV production but it also raises anumber of questions as to how price competitiveness iseffectively reached.

Value for money in the context of the BBC’s Independentcommissioning process2.23 For the broadcasting industry, Ofcom, the BBC and various

academics have all considered value in great detail. InBuilding Public Value, the BBC sets out three elements toPublic Value:

• value to individuals;

• value to society; and

• net economic value.

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3 Office of Government Commerce, Getting Value for Money from Procurement (October 2001), p.3.4 Reach, Quality, Impact and Value for money.

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3. The BBC and the Independent sector3.1 During the past three years, the BBC has increased the

proportion of broadcast hours commissioned fromIndependents from 28.8 per cent in 2003/04 to 31 per cent in2005/06, now comfortably exceeding the 25 per cent minimumquota imposed by Ofcom. This percentage is expected to risefurther following the introduction of the WoCC.5

3.2 In 2005/06, this equated to the BBC spending £353mwith the Independent sector, compared with £323m in2003/04. This accounted for almost 37 per cent of the £962mthat Television spent on programming in 2005/06, with theremaining 63 per cent being spent with the BBC’s own In-house production units.

3.3 The BBC is in a period of transition in respect of itsinteractions with the Independent sector. In order to reviewvalue for money in the commissioning process, it is firstnecessary to set the context of:

• the BBC’s policy objectives in relation to the Independenttelevision production sector;

• the current framework for commercial arrangementsbetween them; and

• the structure and performance of the Independenttelevision production industry.

3.4 Taken together, these three factors play a role – and one thatwill increase as the Independent sector develops – indetermining the degree to which the BBC can obtain value formoney from Independent commissions.

BBC policy objectives3.5 During BBC Charter renewal discussions in 2004 and 2005,

Ofcom and the BBC set a number of goals and expectationswith respect to the relationship between the BBC and theIndependent sector.

3.6 These are set out, in various forms, including the BBC’sBuilding Public Value strategy document (2004), the GreenPaper on BBC Charter renewal (2005), and in the White Paper(2006) that followed it. In essence, they can be summarised as:

• encouraging and supporting a vibrant Independent sector,both as a mechanism for securing long-term supply as wellas more generally fostering the growth of the UK’s creativeindustry; and

• improving the transparency and perceived fairness ofcommercial dealings between the BBC and the Independentsector, with a particular focus on the parity of treatmentcompared with In-house, and position over ownership ofrights.

3.7 In parallel with these objectives, the BBC also sets out somespecific corporation-wide goals with regard to ensuring valuefor money in all its activities. These were encompassed withinthe Public Value Test and announcement of the RQIVperformance measurement framework.

The current commercial arrangements3.8 In the context of these policy objectives, there are three key

elements to the commercial framework within which the BBCand Independent sector interact:

• Independent Quota and WoCC: The BBC set a floor of25 per cent of broadcast hours that would be produced bythe Independent sector. This applies to BBC One, BBC Two,BBC Three, BBC Four, CBBC, CBeebies, BBC Parliament,BBC News 24 and Nations and Regions on BBC One andBBC Two in aggregate, and to BBC One and BBC Twoindividually. In addition, from 1 January 2007, the WoCCwill come into full effect. Under the WoCC a further 25 percent of output will be open to competition betweenIndependent and In-house producers.

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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).

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The current quota and prospective WoCC primarily addressthe issue of vibrancy by guaranteeing a minimum level ofvolume to the Independent sector which, in principle, shouldencourage more entrants and deliver the benefits associatedwith competition.

• Code of Practice: Drawn up in compliance with section 5Kof the BBC Agreement and introduced in January 2004, theCode of Practice details: the process and timetable fornegotiations of a commissioning agreement, the positionon commercial and new media rights acquired as part ofthe primary Licence Fee, the use of tariffs, and themechanics of the development process.

The Code of Practice addresses the issue of transparency byclearly setting out the commissioning process that will applyto the Independent sector. The position on ownership ofrights also addresses the issues of commercial fairness andvibrancy, effectively transferring value from the BBC to theIndependents, and thus improving the financial lot of thesector.

• The Terms of Trade: Introduced in July 2004 these areeffectively a set of terms and conditions that, as a deminimis, apply to each commission. Negotiated with PACT,the UK trade body representing Independents, the Terms ofTrade provide a framework agreement for primary rights,licence fees, payment timelines, principles for further usepayments, and distribution arrangements. These terms arereviewed every three years.

The Terms of Trade attempt to address the issue of fairnessby offering the Independents better minimum commercialterms, particularly around secondary rights, than waspreviously the case.

3.9 These changes are generally regarded as being beneficial tothe Independent sector. They have effectively changed thebusiness model of an Independent from that of a cost-plusmanufacturer with perishable products to that of anintellectual property business with assets that can be exploitedacross multiple channels. Independents have demonstratedthat they are now able to attract outside funding which inturn 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 avenuesthat would otherwise be open to the BBC to try to extractvalue for money through commissioning. Value to theschedule, expected initial investment from third parties andexpected cost of production are taken into account at thepoint of commissioning the programme, but it is only if thesechange between one series and the next that the BBC canattempt to negotiate efficiency savings.

8

BBC GovernorsIndependent commissioning – Value for money studyBBC GovernorsIndependent commissioning – Value for money study

In a traditional procurement function, requesting suppliers toseek continual efficiency savings is standard practice in orderto meet value for money objectives.

3.11 Moreover, in the longer term, there is a question as to howthe Independent sector will develop. As some Independentsbecome larger and more successful, their bargaining positionbecomes stronger and their pull for talent becomes greater.We note that the BBC will need to consider these prospectivedevelopments in its approach to value for money goingforward. We discuss this in greater detail in the context of theWoCC in Chapter 5.

The Independent sector

Market size3.12 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 originatedprogramming.8 This represented 42 per cent of the market forTV production in the UK – the remaining market attributableto In-house production.

3.13 The majority of this externally sourced programming is createdby Independents – accounting for £0.8bn of programming in2004. The remainder is accounted for by broadcastercontrolled companies such as Talkback Thames, which are notcategorised as Independents.

3.14 The Independent sector is dynamic and changing rapidly.Independents’ market share is increasing apace, from 24 percent in 2000 to 28 per cent in 2004, according to MBD.9

Between 1993 and 2004 the market size increased by 64 percent. This expansionary trend is set to continue, with turnoverexpected 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.

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9


50%

30%

10%

-10%

-30%0% 10% 20% 30% 40%

109% 175%

Ten Alps Shed Productions

ShineRDF Media

Hat Trick ProductionsAvalon

Tiger AspectCelador Productions

Wall to Wall Carnival (Films & Theatre)

Hit Entertainment

58%

19 Entertainment

The TV Corp

Revenue growth 2004/05

Net profit margin %= £30m 2005 revenues

Excludes All3MEDIA for whom no profit data is available.Source: Individual Company financials, Deloitte analysis, 2006.

Figure 3: Independent revenue growth and profit margin

3.20 However, profits can be variable and for smaller players inparticular, comparatively low industry margins coupled withthe 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 profitmargins and revenue growth rates for a selection ofIndependents.

3.21 Consolidation in the industry is evidenced by changingownership patterns and high levels of M&A activity. EightIndependents now own two or more brands and recent dealsinclude:

• 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

1,400

1,200

1,000

800

600

400

200

0BBC All ITV1 C4 Five S4C ITV & C4

MCOther

MCChannel

Independents In-houseSource: Ofcom, 2005.

Figure 2: Cross-channel expenditure on In-house and Independentproduction, 2004

First run origination spend (£m)

Market structure3.15 According to recent estimates there are currently more than

800 Independents in the UK.11 The structure is characterisedby a number of large businesses – five of which have annualturnover in excess of £100m – and a long tail of small, oftenvery niche, firms with low turnover.

3.16 Consolidation is happening; a recent survey suggests thatmore than a fifth of sampled companies will look to mergeor form a partnership with another Independent in 2006.12

Equally, independent forecasts suggest that consolidation willsee the five largest Independent producers accounting for70 per cent of the total Independent market by 2014 – thecurrent share being just 40 per cent.13

3.17 As Figure 2 shows, although the number of buyers operatingin the market is relatively small, no one buyer dominatesIndependent production.

3.22 Further consolidation is expected and market commentatorsexpect this to yield shareholder value as long as ‘one-show’Independents and shows with a short shelf life are valuedaccordingly.15 IPOs* are also in vogue: between January andMarch 2006, five small Independents floated on theAlternative 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.

3.18 In terms of total expenditure the BBC is the largest buyer ofprogramming in the UK, although this includes a largenumber of hours ‘purchased’ from its own In-houseproduction unit. Channel 4, by way of its publisher-broadcaster status, remains the largest singlecommissioner of Independents.

3.19 Financially, the Independent sector is characterised bybusinesses that primarily seek to cover their costs and providea modest return for their owner/managers. This is not thecase for all Independents but appears to be a realisticobjective for many.

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3.25 As would be anticipated, given the lack of In-houseproduction facilities at Channel 4 and Five, it is these twochannels that rely most on the Independent sector.Conversely, the BBC and ITV rely least on the Independentsector, although there is a significant contrast in the profile ofreliance with the BBC using Independents most forEntertainment and Documentaries while for ITV it is Arts andChildren’s.

3.26 There are notable subtleties regarding the level of effectivecompetition by genre that are not evident from the aboveshares. An example of this is Entertainment: although verysignificant in terms of Independent market share, much ofthat market share is ‘owned’ by the largest 10 players.16 Inother words, there is increasing scope for competitionbetween BBC In-house and large Independents but notablylittle competition emanating from smaller Independents.

10


Childrenís

Genre

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.

Figure 4: Cross-genre Independent qualifying hours bybroadcaster, 2004

16 Data supplied in the BBC’s annual report to Ofcom.

Variations across genres3.23 A market-wide treatment of the Independent sector is

potentially misleading. The market for TV production ishomogeneous only in the way in which the final product isdelivered. The market is characterised by a number of genresand sub-genres, whose output differs substantially.

3.24 At genre level the BBC engages Independent producers todiffering extents within their overall cross-genre 25 per centquota for Independent commissioning and the ability of theIndependent market to supply the requisite programming.Figure 4 shows the percentage of qualifying hours by genreacross UK terrestrial channels.

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4.1 Our review is specifically focused on commissioning fromIndependents, not on commissioning more generally. We havecommented in this chapter on the strategy and planningstages of the commissioning process only to provide the widercontext for Independent commissioning, or where weconsider there to be direct implications for it.

4.2 This chapter follows the planning process through its variousstages, as shown in Figure 5. It is in this chapter that weconsider some of the key issues in the planning ofIndependent 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 networktelevision programming across BBC One, BBC Two, BBC Threeand BBC Four.17

4.4 In 2005 31 per cent of this was spent by the BBC oncommissioning programmes from Independent televisionproduction companies, according to the BBC’s AnnualReport.18

4.5 The mixture of programming allocated to BBC Productionand to the Independents not only reflects individualcommissioning decisions: a great deal of planning isundertaken prior to the actual process of commissioning.Each stage of the planning process has value for moneyimplications. The key stages summarised in Figure 5 are:

• determining how much to spend on programming;

• creating a transmission schedule, allocating the £1bn tochannels and slots; and

4. Strategy and planning

11


• determining the proportion of programme slots that will befilled by the Independent sector, in terms of genre andchannel.

4.6 Once the transmission schedule is agreed, the process ofcommissioning proper begins.

Determining the overall programming budget4.7 We have not addressed the rationale for setting a

programming budget of £1bn to BBC Television. This is amacro decision that is made by BBC Management in thecontext of available income and comparative expenditureon 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 overallbudget the financial years 2006/07, 2007/08 and 2008/09.In 2005/06, this amounted to savings of £105m over the2004/05 budget. The objective is for the same quality ofprogramming to be delivered for a lower overall cost.19

4.9 Clearly, in seeking to achieve efficiency – achieving more forless – this programme is an example of a value for moneyaction. However, it has no specific relevance to Independenttelevision production commissioning, apart from setting anupper limit on the total available spend from which theIndependents’ share must come.

Decision on how much to spend

Creation of transmissionschedule

Determine slots to be filled byIndependents

Figure 5: Stages of the Planning Process

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.

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4.18 There are two key questions in relation to tariffs and value formoney:

• whether tariffs provide an appropriate mechanism forcommissioning; and

• how they affect prices paid for Independent commissions.

Tariffs as a framework4.19 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. Thetrend is very much towards procuring against clearly identifiedscope and performance criteria, with each tendering supplieroffering their best price. This is based upon the assumptionthat if the market is sufficiently competitive, lower prices willbe forthcoming.

4.20 This is not to say that necessarily the lowest tender willautomatically be successful as there are a range of timeliness,risk and performance issues that will also be taken intoaccount. However, the market should be capable of returningthe lowest possible price for meeting a minimum set ofquality/performance standards.

4.21 The creative process of developing potential commissions hassome distinct characteristics compared to many other forms ofprocurement. For any individual programme slot, the BBC onlyhas an outline view of what it is seeking and it is looking forproducers, both In-house and Independent, to contribute ideasaround a broad theme.

4.22 In this regard, the tariff serves as a guide for producers whenpitching their ideas so that, for example, they do not comeback with a proposal for a landmark international naturalhistory series with a budget of several million pounds whenthe BBC had intended a much lower-budget commission.

4.23 In this way, competition is created around which programmeideas constitute the most creative/innovative use of theavailable funds rather than price competition around a rigidprogramme scope.

4.24 In adopting the tariffing approach, the BBC is promoting theeffectiveness element of value for money (‘getting more forthe same’) over efficiency (‘getting more for less’). Efficiency isaddressed in two ways:

• through the overall cost saving programme we referred toin 4.8; and

• by seeking to identify opportunities to introduce lowertariffs for certain slots.

Impact on prices paid4.25 The BBC is duty bound by Ofcom to report any programme

(In-house or Independent) commissioned with a cost fallingoutside the tariff band. The report has to be accompaniedwith an explanation as to why the tariff was not met in thatparticular instance.

Allocating the programming budget to channels and slots4.10 Based upon our discussions with senior executives involved in

this process, a great deal of effort is put into the allocation. Ittakes place annually and typically involves five or moreiterations. At this point in the planning process, it is a demandside exercise and no distinction is being made betweendifferent supply bases, i.e. In-house and Independent.

4.11 The starting point for the allocation – which is presented inthe form of a channel by channel transmission schedule – isthe BBC Television strategy, which operates at a portfoliolevel. This, in effect, incorporates the matrix of editorial andinvestment strategies of the four channels and the five genres.

4.12 All things being equal, the programme budget is allocatedbetween channels and genres in a way that matchesanticipated viewing numbers with programme cost. Forexample, a primetime slot on BBC One is likely to be allocatedmore money for programming than a late night slot on BBCFour. The basic measure used to help make this assessment isCost Per Viewer Hour (‘CPVH’). This concept gives rise to theexistence of programme tariffs, which are discussed in moredetail below.

4.13 The allocation process also needs to take into account specificinvestment strategies. A good example is the launch ofBBC Three, where a ’stand out’ strategy was adopted in whichprogramme investment was in excess of what might havebeen achieved had CPVH been the only measure.

4.14 In addition, the iterative process needs to take into accountthe quotas and targets to which the BBC must adhere.20

These all affect the shape of the transmission schedule andas such the allocation of available funds.

Tariffs4.15 A tariff is in effect a guide price – actually a range – that sets

out explicitly what the BBC would expect to pay for a certaintype of programming on a given channel in a designated slot.These tariff ranges and descriptions are publicly available andshared with Independents. For example, the D1 tariff inDrama is for programmes that:

‘…cover a range of low-cost output primarily for Daytimetogether with long-running series for BBC One, BBC Two andBBC Three. Producers will use innovative techniques andclever ideas to maximise the funds available, especially forBBC Four. New talent will launch and grow here.’

4.16 Tariffs are typically expressed in Cost Per Hour (‘CPH’) termsand are set by genre. Some have fairly narrow ranges, whileothers – particularly in drama – have a broad range. They arebenchmarked against prices paid for similar slots in theprevious two years, after taking into account inflation andtechnological innovation.

4.17 Under the Terms of Trade, the BBC acquires a smaller share ofthe total rights to a production than it did previously. Nochange to the basis of tariffing was made to reflect this change,it having been an explicit objective of the Terms of Trade toachieve a ‘transfer of value’ to the Independent sector.

12

BBC GovernorsIndependent commissioning – Value for money studyBBC GovernorsIndependent commissioning – Value for money studyBBC GovernorsIndependent commissioning – Value for money study

20 For example, regional programming, educational programming, number of repeats.

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4.26 However, tariffs are not necessarily the best mechanism todeliver improvements in value for money. The Terms of Tradeset out restrictions under which decreasing tariff ranges in anincremental manner is very difficult. Nonetheless, we haveheard from BBC Management that in order to address thischallenge and to deliver improved value for money, they haveintroduced new tariff categories with much lower CPHs. Forexample, the introduction of a BBC One drama tariff with abenchmark price of £400,000 per hour rather than the moretraditional £800,000 per hour.

4.27 In addition, because there are in effect no contingency fundsheld by the BBC commissioning teams, any overspends onone programme against tariff must be compensated for bycommissioning another programme at below tariff.

4.28 The above analysis does not mean that tariff ranges are notunder pressure. In certain genres the market is very buoyantand Independent producers are confident of the value of theirtalent.

4.29 Tariffs are set without regard to the source of production (In-house or Independent). A further consideration is whetherIn-house and Independent productions offer the same valuefor money at a given cost to the BBC. We have heard a rangeof arguments in relation to the impact of BBC indirect costsand Independents’ desired profit margins – and whether thesemake a significant difference. Within the scope of our workwe have not sought to answer what is a complex issue in andof itself. However, we note that in the Tipping Point report,the authors found that with all things taken into account, thedifference was negligible.21

Determining the slots to be filled by Independent producers4.30 The process of allocating programme slots to producers – i.e.

In-house or Independent – is not straightforward. The decisiontakes into account a number of factors:

• the minimum 25 per cent quota of broadcast hours thatmust be supplied by Independent producers, and in futurethe application of the WoCC;

• the BBC’s medium-term supply base strategies applying atthe genre and regional level;

• availability of slots in the schedule once returning series andrepeats have been factored in; and

• market capacity.

4.31 In theory, by this stage of the process, the exercise ofallocation and accompanying tariffing has already dealt withvalue for money at the macro level. However, because of thesize of the BBC’s expenditure with the Independent sector, webelieve 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 canbe obtained from the sector.

The impact of setting the quota and WoCC4.32 Economic theory suggests that the competitiveness of

markets is strongly influenced by market structure, and thebalance of power between suppliers and buyers.

4.33 The BBC is a large broadcaster that commissions a substantialamount of programming from the Independent sector. Inother words it has buying power. Its actions therefore willaffect the structure and economics of the Independentproduction market.

4.34 Genre level competition, as outlined in the previous section,largely reflects prevailing market conditions. Competition isnotably lower in those genres where the BBC has a firm In-house foothold and where barriers to entry are high, suchas high-end factual programming.

4.35 In Entertainment our research indicated that although BBC In-house production still accounts for more than half of BBCgenre output, the balance of power now effectively resides withIndependents rather than the BBC. As such, the BBC’s effectiveinfluence on the market differs substantially by genre.

4.36 It should be noted that a strong genre position is not to beconfused with market dominance and exploitation:economies of scale are sometimes necessary for efficientproduction; and the BBC’s public value remit requires the BBCto retain a significant presence in those genres that mayotherwise be non-economic.

4.37 The idea of a tipping point has been mooted previously bythose concerned with growing Independent power and theBBC’s public value remit. The WoCC has been set with wideparameters and in theory this could result in any market splitin BBC programming of 75:25 to 50:50 in favour of In-houseproduction.

4.38 Theoretically at least, there is split of In-house andIndependent programming which yields the best value formoney for the BBC. It may of course be that the optimal splitlies outside the WoCC and it will certainly depend uponfuture levels of consolidation in the Independent sector, andthe behaviour of rival channels. This is illustrated in Figure 6overleaf.

13


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.

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Measuring performance4.43 Both during the strategy and planning stage of the process as

well as post transmission, BBC Management work with asmall number of metrics to guide and assess the delivery ofstrategy.

4.44 The evidence base for this assessment is essentially composedof cost and quality monitoring. The key value for moneymetrics used by the BBC are shown in Table 1 overleaf.

4.45 Cost is the forecasting and monitoring tool of finance andunderpins the efficiency calculations used in the wider BBCVFM programme. This is translated to genres and channelsthrough the strategy and planning process outlined earlierand informs genre level targets.

4.46 Quality is much more of a micro level consideration specific toeach genre and channel, and manifests itself in the cost/qualitytrade-off on individual programme commissioning decisions.It is also implicit in the analytical work carried out by BusinessInformation and Audience Insight and is used by strategists.

4.47 Composite measures of value for money, addressing both costand quality together, are seldom used in any capacity beyond‘ready-reckoning’ owing to the complexity of calculationrelative to the benefits yielded. This is in essence the objectiveof RQIV.

4.48 The NAO review of Public Service Broadcasting supportedRQIV as an appropriate measure of public value. However, theevidence gathered as part of this study suggests that value formoney is thought of primarily as the cost-efficiency exercise ofthe same name, and that RQIV has only recently begun to beapplied at multiple levels within the decision-makingprocesses.

4.49 There are potential benefits to joining up the concepts ofpublic value, RQIV and value for money, and arriving at a one-stop definition of what the BBC is hoping to attain for theLicence Fee payer.

4.50 It would provide a consistent objective for internal decision-makers. It would also serve to demonstrate toLicence Fee payers and the Government exactly what the BBCis working to when trying to obtain best value from theIndependent sector.

4.51 An integrated framework could prove helpful in providing thelinkage between the overall strategy, genre commissioningslates, individual commissioning decisions and the manyoutput measures that the BBC tracks and monitors.

14


4.39 While there are clearly a number of factors at play inconsidering the optimal split, we believe that the BBC shouldensure it has adequate information to be able to identify andact on two scenarios:

• where greater value for money can be achieved byincreasing the Independent share; and

• where the scale of Independent commissioning could placevalue for money at risk.

4.40 We are not suggesting in the above that the optimal balancebetween In-house and Independent programming inachieving value for money is a matter of purely mechanicalcalculation. Clearly, the value for money question is only oneof the factors considered and we understand that a significantamount of thinking on this matter was undertaken in theContent Supply Review.

4.41 However, we do argue that the decisions that BBCManagement make as to the allocation of genreprogramming spend between In-house and Independent willhave an impact on market structure and thus affect value formoney regardless of the efficacy of the Independentcommissioning process.

4.42 To this end, we believe that the BBC will need to payincreased attention to the development of the Independentsector and ensure that in setting and allocating the WoCCbetween genres, value for money is given equal considerationalongside other policy objectives.

MaxVFM

Viewer VFM

Window ofcreative competition

Independentguarantee

In-houseguarantee

Optimum market split

Independent market share (%)

Source: Deloitte analysis 2006.

Figure 6 – Viewer value for money and the optimum market split

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15



4.52 While we have been informed that the RQIV frameworkwas never intended to be applied at the programme level,we believe that there are steps that could be taken to deepenthe application of RQIV into the commissioning process.In practice this could mean:

• explicitly linking the elements of public value with the fourelements of RQIV;

• grouping the more than 90 monthly output performancemeasures under each of the RQIV headings – although wehave seen evidence of some of this addressed in thequarterly reporting;

• setting explicit slate level RQIV targets for each genre andperhaps even each commissioning editor; and

• being explicit about what ‘good’ value for moneyimprovements look like – i.e. in terms of RQIV in the round,not just in terms of cost.

4.53 It may also be possible to embed the principles of RQIV andassociated behaviours in a personnel performancemanagement framework.

4.54 Having such a cascaded framework in place would supportdecision-making or, at the very least, help demonstrate theextent to which the BBC is delivering value for moneyimprovements in its commissioning activities.

Type

Cost

Quality

Value for money

Measure

Cost per hour (CPH)

Various audience surveys andviewing figures

Cost Per Viewer Hour (CPVH)

Uses

Strategy and planningUsed as one of the determinants of the slateiteration process.

FinanceUsed for VFM programme efficiency settingand calculations.

Business informationUsed in reporting to Ofcom and for analysispurposes.

Genre commissioning Used for specific efficiency targets and formsthe basis of genre tariff setting andprocurement of programming.

Strategy and planningAnalysis used to inform genre and widerstrategy formulation.

Audience insightUsed to analyse trends in audience size andreach.

Genre commissioningUsed as a ‘ready reckoner’ in theprogramming decision and referral processto TVBB.

Business informationUsed from time to time for bespoke analysis.

Deloitte comments

No implicit consideration of quality in thismeasure at any stage of the commissioningprocess.

No implicit consideration of cost. Evidence ofbenchmarking viewing figures against rivals.

Not explicitly used in a wider strategiccontext owing to inherent limitations.

Value for money Licence Fee willingness to payanalysis

Strategy and planningUsed as a justification for Licence Feeincrements and as evidence of value formoney delivery.

Not Independent specific.

Table 1 – Key value for money metrics used by the BBC

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5.1 Having established its channel and genre plans, the BBC hasto secure a stream of new and original ideas to turn intoprogrammes. This process has two elements:

• Solicitation – identifying new ideas through variouscommunication channels with Independent and In-housetalent; and

• Development – building the initial idea into a specificationfrom which a television programme can be produced.

5.2 This chapter reviews these phases of the commissioningprocess, and considers the controls the BBC has in place toaddress value for money issues during it. The latter part of thechapter addresses how successful these controls are, andwhere there might be room for improvement.

Solicitation5.3 The actual process of solicitation of ideas is quite simple.

The commissioning editors communicate their requirementsto the Independent sector at the beginning of eachcommissioning season and then Independent producersrespond with ideas.

5.4 Finding the right ideas is a key part of an editor’s/supportteam’s role, for which the BBC relies on his or her experienceand insight. This takes up a good deal of editorial time andeffort, but there is little money spent at this stage of theprocess.

5.5 However, a value for money question in relation to this stageof the commissioning process relates to the size and shape ofthe supply base.

5.6 The BBC wants to commission the best ideas. There appears tobe 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 andrelationships between commissioning editors and Independentproducers have an important role in developing ideas that areboth creatively excellent and match with specific channel andgenre strategies.

5.8 The status quo, in which the BBC commissioning editors appear tospend a reasonable proportion of their time ‘meeting the industry’,together with a transparent and well administered process ofreceiving and responding to submitted programme ideas strikes abalance between these two competing requirements.

5.9 Most procurement strategies (in both the private and publicsector) are moving towards a preferred supplier model. This has a number of advantages for both procurer andsupplier, including:

• dealing with a small number of suppliers lowers theadministrative burden of procurement;

• increased volumes of procurement given to a smallernumber of suppliers should drive scale economies and leadto lower prices; and

• closer supplier relationships are believed to lead to betterinterpretation of client requirements.

5.10 We note that the BBC has a number of Independent suppliersfrom which it procures multiple commissions. While notformally preferred supplier relationships, this degree ofinteraction probably gives rise to similar benefits.

5.11 One of the BBC’s challenges will be to ensure that its supplybase is properly balanced and that value for moneyconsiderations are given equal importance to objectivesaround vibrancy, regional growth and open access.

Development5.12 Development is the process of taking an idea from what could

be as little as a single soundbite in a meeting to the pointwhere a specification can be written that will set thecommissioning process – and hence the production process –in motion.

5. The commissioning process: Solicitation and development

16


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• first of all, development budgets are limited across theboard, encouraging selectiveness in which projects receivefunding;

• development funding must be approved by the ProgrammeFinance Committee (‘PFC’);

• detailed breakdowns of development funding by project,genre and channel are distributed to commissioningexecutives each month in some genres. Unusual items ortrends are flagged;

• new talent, particularly new writers, must produce detailedscripts before they are likely to be considered for funding;

• when development funding is agreed, the BBC obtains theexclusive 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 bythe Independent producer, the producer is obliged toreimburse the BBC.

5.20 While the development process remains a creative part of theBBC’s work and bureaucracy is rightly limited, the controlsmentioned above suggest that value for money is givenconsideration at this stage.

5.21 With regard to the difference between development fundingfor Independents and In-house production, the process isunderstandably more complex for external bodies. Specificallythe approval process is more complex and controls based, andreflects the fact that the risk associated with developmentfunding is higher when dealing with Independents.

5.22 In summary, our review has found that the BBC has relativelystrong procedures in place to minimise and controldevelopment expenditure. If anything, the value for moneyrisk in relation to development is that the BBC does not spendenough money on development, thus losing out on ideas thathad unfulfilled potential.

Opportunities to improve value for money in development5.23 Cost savings in development are not likely to be material in

comparison to those that can be made during planning orcommissioning.

5.24 However, value may be added to the commissioning processwhere good development helps bring an idea to fruition. As larger producers become more and more capable of theirown R&D – for example, Endemol recently set aside £15m fora digital investment fund – the BBC may find developmentspend can be directed more strongly to smaller players.26

5.25 On a more day-to-day level, other genres are not always awareof programme ideas until they have been commissionedbecause, when submitted, they are logged in databases that arenot shared across genres. The BBC should consider employing a resource specifically to monitor ideas in development andcommissions. This is in order to reduce the risk of inefficiencies,such as duplicate ideas being commissioned.

It is the fulcrum of the creative process, when Independentproduction companies pitch their best ideas to BBC editors,who must then evaluate which ideas will support and furtherthe editorial objectives of the channel or genre.22

5.13 Once an idea has been identified, the development processputs meat on the bones of it, highlighting requirements fortalent, location, filming, all the way through to post-production.A specification is created that elaborates on how the idea willbe produced. This is the culmination of development – thenegotiations on final specification and fees usually take placeduring development but the output is crystallised in the pre-production agreement. The final commissioning of aprogramme will be addressed in the following chapter.

5.14 Despite its importance, the development stage of thecommissioning process is not one that requires a great deal ofdirect expenditure. Only £31.7m was spent on programmedevelopment across the BBC last year, slightly up on2004/05.23 ‘The BBC ... the most important originator of newcomedy in the UK, spent a total of approximately £500,000on scripted comedy development [in 2004/05].’ Thisrepresents a tiny fraction of total spending on networktelevision programming, although these numbers do notinclude overheads, and a good deal of editorial time is spenton the development phase.24

5.15 Nevertheless, development is the first stage in turning an ideainto a television programme, and it is fundamental to theoverall process. This chapter examines the place of value formoney in development both in terms of direct expenditureand implications for value for money decisions incommissioning and production.

Value for money in development5.16 The BBC must aim to maximise opportunities to bring great

ideas to the screen, while minimising time and money spenton projects that will not be successful contributions to theBBC’s channel and commissioning strategy.25

5.17 An editor must strike a fine balance between providingenough support for creators or writers to deliver the bestpossible proposition, without simply spending money ondevelopment that could be better used in production, or onanother project.

5.18 To maximise value for money, the BBC must take ideas frompitch to a well developed idea supported by scripts, treatmentpapers, taster tapes or pilots as appropriate. Projects that willnot deliver the required combination of quality, reach orimpact for a slot should be avoided; or, if developments areproving to be unsuccessful, they should be recognised as suchand terminated at the earliest opportunity.

5.19 The BBC has a number of controls in place to ensure thatvalue for money is considered when decisions are taken onfunding development, including:

17



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.

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6.1 When an idea has been developed into a fully roundedprogramme outline, the BBC faces a decision on whether ornot to go ahead with production. This phase of negotiatingand commissioning centres around two outputs:

• the commissioning specification – a detailed document thatsummarises the results of development, and provides theparameters to which the Independent will work; and

• the contract with the Independent, which includes the pricethe BBC will pay, agreement on rights and other detailsconcluded in negotiation.

6.2 These two documents are, of course, closely related. Thecommissioning process is about achieving the highest possiblequality included in the specification for the programme,within the limitations of the available budget.

6.3 This chapter begins by examining the process of negotiatingand commissioning, and then looks at the risks to value formoney within that process. The following sections brieflyhighlight the main controls currently in place to mitigate thoserisks and, finally, we consider where there might be room forimprovement.

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 editorialdecisions. This chapter, instead, focuses on the processes thathave been put in place to help the BBC achieve value formoney when negotiating with Independent producers.

The nature and scope of the commissioning process6.5 Development can be an exciting and creative process for all

involved, but with relatively little at stake in terms of cashinvestment. Commissioning, on the other hand, involvestough negotiations, agreement on detailed specifications, andoften commitment to substantial subsequent expenditure onthe part of the BBC.

6.6 It is in commissioning that the BBC aims to maximise thescope and quality of the commissioning specification withinavailable budgets. It is therefore focused on achieving valuefor money through effectiveness.

6.7 Commissioning at the BBC is a combined effort by editors andbusiness affairs managers. Early in discussions with theIndependent, a tariff range and a potential slot in theschedule will have been communicated – the editor will havea plan as to how each programme will contribute to BBCchannel and genre strategy. It is the responsibility of the editorto ensure that this contribution is maximised within availablefunds.

6.8 The business affairs managers focus more on the legal andfinancial aspects of discussion with the producer, and as suchthey are more concerned with the contractual arrangements.Their role includes ensuring compliance with legal issues andthe BBC’s financial guidelines and making sure that costs arekept within the tariff range. Business affairs managers alsotake responsibility for negotiating agreement on rights, withinthe Terms of Trade. They have specific efficiency targets tomeet as part of the BBC VFM programme, and consequentlythey are often the champions for value for money morewidely during commissioning.

6.9 An area in which the BBC has made value for moneyimprovements that assist the business affairs managers intheir work has been through negotiating frameworkagreements with organisations, such as the Performing RightsSociety, for contributor rights. These agreements simplify therights position, reducing administrative costs for all parties,and are believed by the BBC to have reduced overallcontributor rights’ payments.

Value for money during negotiating and commissioning6.10 The natural editorial drive at the BBC is to aim for the highest

quality programming achievable; but, because budgets arelimited, editors must stretch each pound as far as they can.Money saved on one project will mean extra funds foranother. Thus the commissioning process revolves around acontinual ‘juggling of the slate’, and conversations betweeneditors and the business affairs team that aim to balance thenumber of high-budget programmes with that of medium orlow-budget ones.

6. The commissioning process: Negotiating and commissioning

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6.11 This drives a cost consciousness at the BBC that means value formoney is considered daily. That said, our study identified severalareas where there is a risk of value for money leakage:

• definition and measurement of value for money in theprocess;

• flexibility in the commissioning specification;

• transparency of budgets from Independents;

• the challenge of estimating the future potential of rights;and

• recovering royalties from Independents following sale ofrights.

Definition and measurement of value for money in theprocess6.12 From our interviews with key executives and commissioning

staff, it is clear that while everyone can explain the concept,there is no explicit agreement across the BBC on the definitionand measurement of ‘value for money’.27 This means that,while communication through editorial and business affairsmeetings ensure that those involved have a broadly consistentview, some will be working to a definition of value thatemphasises different aspects of the BBC’s remit to others.This leaves value for money as a rather inexact objectivemeaning different things to different people.28

6.13 Although CPH is used as the principal measure of value formoney at the time of commissioning, editors may think ofvalue for money in terms of quality of output subject tobudgetary constraints. Finance and business affairs, on theother hand, may consider CPH as the primary value for moneydriver.

6.14 CPVH is also considered at the time of commissioning, butonly as a ‘ready reckoner’ to determine prospective value formoney on a commission in relation to its proposed place onthe slate – after all, no viewer will actually see the programmeuntil it is broadcast. Thus getting to the right price for theright programme with an Independent producer remains anart rather than a science.

Flexibility in the commissioning specification6.15 The commissioning process, of course, varies considerably.

‘We’re not making jam’, in the words of one BBC executive,and every commission is different.29 But the BBC does attemptto inject greater solidity once a Commissioning Specificationhas been agreed. The Commissioning Specification is crucialto the production of any programme. It is here that editorsand Independents scope and agree what the final programmewill look like.

The document thus provides a baseline for any changesduring production, and the cost of changes can beapportioned according to who has requested the deviationfrom the original agreement.30

6.16 The system of a fixed price attached to a CommissioningSpecification was introduced in 2004 in the new Code ofPractice. Prior to that, Independents provided a line-by-linebudget, which was initially agreed but then tended to be thesubject of numerous changes between commissioning and finaldelivery of the programme. Agreeing a fixed price attached toa detailed specification has changed the emphasis for the BBCto ensuring that they get what they want up front.31

6.17 Yet there are challenges that have emerged from thisapproach. Television production is an endeavour that can besubject to change after filming has begun. The BBC, havingagreed a fixed price, works hard to hold producers to it inorder to keep costs under control. However, there are caseswhere this is, for one reason or another, either impractical orundesirable. Additionally, in a fixed price environment there isa tendency to play it safe – tick the boxes and pick up thecheque – that may stifle innovation to some extent.

Transparency of budgets from Independents6.18 A further challenge that has been created by the fixed price

environment is that it has reduced transparency betweenIndependents and the BBC. This problem can be particularlyacute for BBC commissioning editors when a returning seriesis being considered. The BBC, owing to changes in operatingprocedures prompted by the Terms of Trade, does not usuallysee any detail on an Independent producer’s budget, makingit difficult to negotiate as it is not clear if the cost base for theproduction has changed.32 This is perceived to be the case inrelation to must-have talent. The BBC often has a goodunderstanding of the reserve price of the individual, but a lackof transparency may reduce the BBC’s understanding of thedetails of production during negotiations.

Estimating the future potential of rights as a factor in valuefor money6.19 The value of future rights, and in particular new media rights,

is a challenging issue for the BBC. Independents, throughrecent PACT agreements, have won the right to retain a highproportion of these rights but, because they are an unknownquantity, negotiations remain focused on traditionalprogramming budgets.

6.20 Moreover, Independent producers can find additional fundingfor a project through co-production, or may increase theirrevenues from a programme by selling secondary UKtelevision, international or new media rights. In either case thevalue of the programme to the Independent producer hasincreased, but it is difficult for the BBC to know this with anydegree of precision.

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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.

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6.21 The BBC is not permitted to calculate the price that it wishesto pay by finding out a programme’s budget and subtractingco-production investment from that to arrive at a cost lessinvestment figure. This ‘netting off’ is forbidden by Ofcom,reducing the BBC’s ability to drive value for money throughthe reduction of primary right costs.

6.22 The advent of 360º commissioning, an initiative to considersecondary and new media rights when commissioning thathas been encouraged from the most senior levels of the BBC,suggests that such rights will have to be taken intoconsideration more and more in future commissioning.33

Recovering royalties from Independents following sale ofrights6.23 When rights have been agreed, and indeed realised, the BBC

has to ensure it recovers its share of those revenues. The BBCretains a certain percentage of royalties for every production itcommissions, but there are currently no mechanisms throughwhich these can be tracked effectively. Reliance is on theIndependent producer to ensure money is appropriately paidto the BBC.

6.24 This relies on an assumption that the producer would notwish to risk its relationship with the BBC over fairlyinsignificant amounts of money. However, the fact that theBBC does have to commission external firms to carry outroyalty audits on some producers, from time to time, suggeststhat improved tracking of such money should be considered.And, as the multimedia, digital world grows, these revenuestreams are not expected to remain so small.34

Existing controls on value for money6.25 The BBC has a number of checks and balances in place to

support editors and business affairs managers as theynavigate the path to finalising a commission. These include:

• regular meetings, including commissioners, commissionscoordinators, genre controllers, business affairs teams, slatemanagers etc., to ensure that all have a clear view of whatis likely to be commissioned;

• involvement of both editors and business affairs managersthroughout the process, with both attending all keymeetings with producers;

• a slate budget assigned to each editor within which he orshe must work while commissioning the requisite numberof 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 aTelevision Business Board.35

6.26 These controls do not match up precisely to the riskshighlighted in the previous section, but they do go some waytowards mitigating those risks. In addition, the BBC attemptsto maintain flexibility in the system through ‘re-prioritisationfunding’, which is money set aside to enable a genre tocommission in areas of strategic importance whereappropriate.

6.27 Presently, during the commissioning process, business affairsmanagers rely on the editor to keep them informed ofprogress. While these individuals attend price negotiations,they tend not to attend development meetings whereeditorial decisions are made.

6.28 This series of checks and balances in the commissioningprocess incentivises those involved to constantly considervalue for money, and, when things go outside tariff, value formoney issues have good visibility at senior levels in theorganisation.

6.29 We believe, based upon our work in this study, that the BBChas put in place a good system of controls to ensure value formoney without becoming overly bureaucratic.

Opportunities to improve value for money in negotiation andcommissioning6.30 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 thecommissioning process to ensure greater value for money.

6.31 The first of these is in finding a definition of value for moneythat all commissioning editors agree upon and work to.This may be a small change, perhaps only making explicitsomething that is implicit at the BBC, but it will reduce themargin for editors to pursue different value for moneyobjectives.

6.32 A second opportunity lies in the implementation of 360ºcommissioning. This is already well under way at the BBC. It will further encourage the consideration of rights – of alldescriptions, not only new media – in the commissioningprocess, and in the assurance of value for money within it.The BBC faces a serious challenge in ensuring that Licence Feepayers see the value derived from rights sales returned tothem, either in the form of lower Licence Fees or higher-quality programming.

6.33 Monitoring and collection of royalties from those rights willalso become more important – hitherto the monies involvedhave often not justified effort to recoup them.36 It should notbe assumed that this will remain the case, and the BBC shouldtake steps to enhance the process involved in recoveringroyalties from Independent producers.

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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.

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• The BBC should consider the appropriateness of the P4Adatabase as a system for storing completion documents.The P4A was designed for in-house use and has resulted insome efficiencies. The database is not, however, open toIndependents, owing to challenges in providing softwaresupport for them. Consequently, information stored withinit has to be downloaded manually and sent toIndependents when the BBC wishes to communicate thatdata. This is a very manual process, it is unevenly appliedacross genres, and the advantages of a central database areundermined by the variations in usage. For example,because of the volume of programmes in BBC Factual, theyare unable to use P4A to store these documents and sendWord templates via email instead.

• Ofcom reporting data should be populated on a continuingbasis. Some genres have this information readily availablefrom a database while others need to compile the data lineby line at the quarter end. This will help to make reportingquicker and more accurate.

6.34 The BBC should consider what it can do to encourage greatertransparency between the Corporation and Independentproducers. Full transparency on both sides will help the BBC to identify and extract value for money by making clear wherecost inflation exists; by opening up opportunities around co-production; and by bringing greater clarity to opportunitiesfor the exploitation of rights. The planned three-year reviewsof the Terms of Trade would be an ideal opportunity for theBBC to develop a new position on such key issues.

6.35 Finally, there are several process improvements we believeshould be considered:

• There is some duplication of data being held or used forreporting purposes. Different genres use different tools(spreadsheets and databases) for tracking and reportingpurposes. All data should be held on a central database ornetwork to reduce the risk of data loss.

• The signed copies of all Programme Production Agreementsand Commissioning Specifications should be scanned andstored electronically. This will reduce the need to searcharchived files for supporting documentation.

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7. The commissioning process: Production and delivery

7.1 Production is the process of taking an agreed specification fora commission from paper to programme. The process hasthree main phases: pre-production; production; and post-production.

7.2 Pre-production involves ensuring that planning andpreparation are in place to facilitate the effective and efficientcreation of the programme. Production then involves thecreation of the programme. Post-production centres aroundediting the output and turning the film into the final product.

7.3 Delivery is a more compact and discrete stage thanproduction; representing the final element in the programme-making process. It refers to the physical handover of theoutputs of the production process, any subsequent reviews,versioning and revisions, and the completion of necessarypaperwork to close down the engagement.

Value for money in production and delivery7.4 By their very nature, Independent commissions are hard

to influence once a programme specification has been agreed.Having agreed a fixed price for the programme, and with thedecision-making process effectively transferred to theIndependents, it is the Independents who then determine thequality of the programme.37

7.5 Although the BBC does retain final editorial control38, thatcontrol is realistically limited to the production monitoringprocess and a final say on what is eventually committed tofilm.

7.6 Fixed-price contracts ensure that both the risks and rewards ofthe production process are passed over to Independents. Anycost overruns must be absorbed by the Independent, unlikepreviously, where the BBC was funding shortfalls throughcost-plus.

7.7 We have not observed any occurrences within our testingsample where the final price paid exceeded the contractedprice, although we understand from discussion that this doessometimes occur. This can arise in situations where theCommissioning Specification changed during the productionprocess. In such a case – where the change in scope could beinitiated by either party – the Commissioning Specificationand revised contract price must be approved again by theProgramme Finance Committee.

7.8 The use of fixed-price agreements provides a significantincentive for the Independent to cut costs during theproduction stage, as any economy or efficiency savings accruesolely to the Independent.39 Assuming that the programme isto be produced on budget, the only variable left in the valuefor money equation by the production and delivery stage isquality of output. Ensuring value for money in this context isall about guaranteeing that the final deliverable conforms toat least the minimum standard expected by the BBC andimplied by the Commissioning Specification.

BBC’s success in achieving value for money in production anddelivery7.9 The BBC has various controls in place to ensure that the final

deliverable from the Independent commissioning processmeets the required standards and, ultimately, qualityrequirements. These controls may be thought of as qualitychecks of one kind or another and are composed of:

• output versus Editorial Specification checks;

• standards and compliance checks; and

• technical specification checks.

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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.

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7.15 Progress reporting is normally matched to the staggering ofthe cash flow funding and thus the Business AffairsManager/Finance department would match any invoicereceived to the progress report prior to approving payment.We observed, however, that this was not applied consistentlyacross all genres; for instance BBC Drama does not requestthe progress reports as a ‘must have’, relying on the editorialexecutive to have regular conversations with the Independentand update the Business Assurance team accordingly.

7.16 Where progress reports are requested, the business affairsmanagers will match the invoice to the progress report priorto forwarding the invoice to finance for processing andpayment. Where progress reports are not mandatory, this isusually processed without further approval by the ProgrammeFinance Committee as the approval of the Licence Fee, issufficient to enable the payment of the invoice to theIndependent.

7.17 The Terms of Trade allow the BBC to withhold two instalmentsof five per cent each for tape delivery and paperwork delivery(referred to as holdback). The final payment to theIndependent is not approved until all delivery paperwork hasbeen received and approved internally. Payment profiles arepublished in the Terms of Trade.40

7.18 Across the genres only 10 per cent of the fee is retained fordelivery, and all live shows are subject to a 10 per centretention. Only 15 per cent of the total fee is retained untilapproval of a fine cut of episode one in Drama programming,with 20 per cent retained to the same stage in bothEntertainment and Factual. Although these holdbacks mayappear low in value, they reflect a need for cash flow early inthe production process.

Standards and compliance7.19 Broadcasting standards and compliance issues are covered by

the BBC Television compliance form (mandatory for allproductions) and a process of referral. This process works tominimise the risk that inappropriate content is broadcast.

7.20 The process is applied to both Independent and In-houseproductions and the form itself features a series of 41 yes/noquestions as to the inclusion of offensive language, nudityand other contentious content.

7.21 To gain approval, BBC staff are required to check the formbefore referring any issues to the requisite person/department. There are 23 reasons for mandatory referral tothe Controller, Editorial Policy – ranging from the witnessingof illegal activity to non-approval for the portrayal of a livingperson. The programme may be referred for other reasons tothe legal department, the head of the department in questionor the channel controller.

7.22 As and when the programme passes through the referralprocess, final compliance sign-off for Independentprogramming has to come from the genre CommissioningEditor or, in instances of very low compliance risk, sign-off canbe delegated appropriately.

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Output versus editorial specification7.10 The first, and arguably most crucial, of these – monitoring of

output versus editorial specification – involves a comparisonof the commissioning specification (Schedule 2) withprogramme 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 doesnot dictate creative or production requirements to the lastdetail; instead Independents are given the flexibility to deliverthe theme and mood of the commissioned idea. This isunderstandably subject to the specific non-negotiableparameters, such as the inclusion of key talent.

7.13 The editorial team is required to review a tape of eachproduction prior to transmission with a view to makingcompliance and/or editorial changes. Additionally, the editorialexecutive responsible for the commission will have regularupdates with the Independent to discuss progress on theproduction and any significant issues arising. Both the Termsof Trade and Code of Practice allow for the BBC to requestprogress reports at specific stages of the production process.This enables formalised monitoring of progress againstexpectations.

7.14 Where there is a potential impact on cash flow or deliverydate, this is communicated to both the business affairsmanager and commissions coordinator, who will then manageany required variations to the commissioning specification, aswell as holding back payment, requesting written statusreports and updating the delivery schedule respectively.

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 theneed in the majority of cases for detailed negotiation between the parties, while ensuring that they reflect the particular production schedule’.

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Evidence of inefficiencies across control measures7.30 The process of controlling for quality of final output is not

linear in practice. The delivery team collates the complianceforms and uploads to the compliance database, whichtriggers a request for approval at the editorial end. Thecompliance form requires the editor to sign off on editorialcontrol but there is no proactive check to ensure editorialsatisfaction prior to technical review.

7.31 This has sometimes triggered editorial reviews after thetechnical review, with the BBC needing to make a change to a tape that has been technically reviewed, although we didnot attempt to quantify the frequency of this.

Differences between Independent and In-house production7.32 The key difference between In-house and Independents in

the delivery process is in the technical quality of the delivery.The BBC has an efficient and experienced In-house post-production team who are well versed with the BBC’s owndelivery requirements. Independents are given the option ofusing a third party facilities house and this can sometimes leadto incompatible technical delivery or poor-quality delivery.

7.33 While the BBC does not lose from a financial perspective, asthe Independent bears the cost of subsequent reviews, thiscould lead to inefficiencies in terms of the delivery team,additional use of the technical studios, last-minute deliveriesand possible non-transmission.

Opportunities to improve value for money in production anddelivery7.34 In contrast to earlier stages of the commissioning process,

value for money improvement options in this final stage willhave minimal financial impact. Nonetheless, we haveidentified some minor recommendations:

• The BBC may wish to assess the costs and benefits ofencouraging the use of the In-house post-productionfacility, which currently also undertakes assignments fromoutside the BBC, and reflect this by reducing the LicenceFee paid.

• The BBC may wish to draw up a list of preferred post-production houses.

• The BBC may wish to ensure tighter adherence to deliverydates by Independents, and with that incorporate moretimely editorial reviews into the process.

• The BBC may wish to further encourage a closer workingenvironment between editorial and delivery, although werecognise that the process is changing with a view to thisoutcome.

7.23 Any necessary compliance change is passed to theIndependent, who makes the change before resubmitting fora second technical review (see below). If the editorial changeis initiated by the BBC, it is usually performed In-house andthe BBC bears the cost of such changes. Occasionally, theIndependent would request a tape after the technical reviewto make further editorial changes (of their own accord) andthus would bear the cost of the subsequent second technicalreview.

Technical and delivery specification7.24 Technical checks are designed to ensure that the deliverable

is of the required format and technical quality fortransmission. The technical requirements are embodied in aguide – BBC Technical Standards for Network TelevisionProgramme Delivery – and checks are made against theseguidelines. This section covers delivery dates, delivery format,details on publicity stills, promotional preview and productioncredits.

7.25 The BBC has a dedicated team of delivery coordinators, whoensure that the tapes conform to BBC technical requirements.They are also responsible for collating and filing all completionpaperwork. Stages of progress reporting are detailed in adelivery section within Schedule 2 of the agreement and thisvaries for each production. Schedule 3 is standard for all pre-production agreements and outlines all the genericrequirements of the production company before theproduction can be classified as complete. Together thesedetail the stages for progress reporting, which form a tool tomonitor progress and hold back payment if required.

7.26 There appears to be some inefficiency in the technical deliveryof tapes, whereby the delivery team is often subjected tointense time pressure to ensure that the tapes are deliveredto Red Bee Media, a digital media enabler, in time forbroadcasting.

7.27 We understand that tapes should be delivered for technicalreview at least two weeks prior to transmission. However, insome cases tapes are sent directly to Red Bee Media from theexternal facilities house with little time for a technical review.

7.28 The Licence Fee includes one technical review as standardbut sometimes there are multiple technical reviews on thesame production because the post-production workperformed by the Independent does not meet the BBC’sstandards. In such instances, an extra technical review fee isincurred. This is set against the production account and isdeducted from the final payment to the Independent.

7.29 The BBC has a post-production facilities house, which itprefers the Independents to use for post-delivery technicalchanges so as to avoid a second technical review. In somecases, the Independent takes the option to be charged for thestudio facility but not the second technical review.

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8.1 Conclusions drawn from this study must first acknowledgethat the commissioning of productions from Independents bythe BBC is subject to a broad range of policy considerationsand supporting commercial and regulatory frameworks.

8.2 The BBC operates in an environment that is subject to a highdegree of regulation – it has around 90 quotas to meet; andin dealing with Independents, it is expected to conform to aCode of Practice and Terms of Trade.

8.3 Value for money is therefore only one of many measures thatthe BBC must consider as it plans, develops and ultimatelycommissions television programmes from Independents. This means that, while value for money is always consideredin commissioning decisions, it is seldom the defining factor.

8.4 Nonetheless, our study has identified both areas in which theBBC is doing much to drive value for money improvementsand areas in which we believe there is room for furtherimprovement. These occur at three levels:

• the commercial framework between the BBC and theIndependent sector;

• the strategy and planning process; and

• the execution of the commissioning process.

8.5 Our findings and recommendations are detailed in each ofthe relevant chapters of this report and summarised below.

The commercial framework

Our findings8.6 The environment that frames the relationship between the

BBC and the Independent sector has changed significantly inthe past few years. This is a result of a number of factors,including: the growth of multi-channel TV, increasingexpenditure by all broadcasters on Independent commissions,and a number of significant changes to the regulatory andcommercial framework within which they interact.

8.7 The BBC’s wider policy objectives with respect to theIndependent sector are as follows:

• to establish a fully-level playing field between In-house andIndependent television programme makers in all programmeareas;

• to ensure that Independents receive a fair commercial deal;and

• to make sure that the 25 per cent Independent televisionquota is at all times a floor, never a ceiling.

8.8 The three key developments involved are: new and explicitcommissioning processes; the Terms of Trade and Code ofPractice; and the WoCC, which has been announced but notyet implemented. Between them they offer the Independentsector a number of key advantages over its previous position:

• an increase in the volume of commissioned output;

• improved commercial terms, particularly in relation to theownership of secondary and tertiary rights; and

• greater confidence that the commissioning process isapplied consistently to both In-house and Independents,with the expectation that commissions will be awarded onthe merits of innovative and creative ideas.

8.9 These developments have reset the framework within whichthe pursuit of value for money is undertaken – in the contextof the BBC’s wider policy objectives. However, the marketenvironment continues to evolve and the BBC will need toconsider how it can maximise value for money as it does so.

8.10 Going forward, it will need to address value for moneyimplications of three current trends:

• growth in the number of channels through which contentis broadcast, with the potential for the proportion of thetotal rights value of a production acquired by the BBCunder the current Terms of Trade to fall;

8. Conclusions and recommendations

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• consolidation of the Independent sector and the emergenceof commercially stronger businesses within it; and

• an increasing share of programming being secured fromIndependents, shifting the balance of power.

8.11 As the Independent sector gets stronger, the power balancebetween buyer and supplier will shift. In certain genres, suchas entertainment, this balance has arguably already shifted along 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 theBBC’s capacity for achieving value for money, irrespective ofthe effectiveness that the BBC can embed within itscommissioning process.

Our recommendations8.13 In order to ensure that the commercial environment is

conducive for delivering value for money for Licence Feepayers, 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 thepotential for the Terms of Trade and Code of Practice to drivea continual and growing transfer of value to the Independentsector, particularly as the value of secondary rights grows.

8.15 The BBC has already set out down the path to 360ºcommissioning. This should continue to be rolled out, andmust be refined over time to reflect the shape and dynamicsof the market for intellectual property rights currentlydeveloping for UK television.

8.16 At the same time the BBC should consider improving itsprocedures, particularly in tracking and capturing its share of royalties resulting from sales of secondary and new mediarights.

Strategy and planning

Our findings8.17 The annual planning stage has significant value for money

implications because it sets out the buying plan for thecommissioning teams to follow.

8.18 We have not reviewed the process by which the overallprogramming budget is set nor how it is allocated to channelsand genres. Both tasks clearly have value for moneyconsiderations but neither is related solely to Independentcommissioning – the focus of our study. Nonetheless, fromour discussions with the BBC management responsible for thisprocess, it is clear that value for money is one of the keyvariables given consideration.

8.19 We have, however, addressed two elements of the decision-making process of these allocations that do havea direct impact upon Independent commissioning:

• Agreeing the Independent quota and WoCC with theregulator has an impact on the structure and dynamics ofthe Independent sector, particularly at a genre level. TheBBC conducted a comprehensive exercise – the ContentSupply Review – to understand the ability of the market tomeet certain levels of programming volume as well as theability to offer competitive prices. Given the pace at whichthe Independent sector is changing, we believe that asimilar exercise should be conducted reasonably frequently.

• Tariffs have a big impact on prices paid for Independentcommissions. This is not to say that prices are wrong butthe existence of tariffs means, at a practical level, thatcompetition is based upon ideas and not prices (within theconstraints of the regulatory environment). This has thepotential to give rise to less value for money unless tariffranges are reviewed on a timely basis, particularly in light of the growth of digital multi-channel viewing and thecorresponding decrease in the proportion of viewingaccounted for by first screening.

8.20 The RQIV framework was announced in Building PublicValue, which was published in June 2004. We have seenevidence that the framework and four key measures form partof the annual strategy and planning process, and that targetsare set at an overall channel portfolio level.

8.21 However, while the framework has undoubtedly beencommunicated to the employees engaged in commissioningfrom the Independent sector – and forms part of the currentvocabulary – it is only recently that much use has been madeof the framework for reporting and there would appear to befurther use that could be made of it in coming years.

8.22 Having such a cascaded framework in place would aiddecision-making or, at the very least, help demonstrate theextent to which the BBC is delivering value for moneyimprovements in its commissioning activities.

Our recommendations8.23 As part of its application of the aggregate 50 per cent

in-house guarantee at the genre level, the BBC must haveregard for the Independent market structure and its ability to continue to deliver value for money. This is particularlyrelevant in the context of the BBC’s own plans to strengthenits supply base in the regions.

8.24 Tariff levels should be regularly monitored and reviewed.As the digital landscape evolves and the proportion of allviewing for a programme accounted for by first window falls,the BBC must ensure that in keeping tariffs constant in realterms, it does not engage in a continual and growing transferof value to the Independents.

8.25 The RQIV framework should be extended so that it can beapplied to the reporting of activity throughout theorganisation. Departmental and genre performance andoutput measures should be, so far as is practicable,categorised within Reach, Quality, Impact or Value for money.

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Our recommendations8.32 We have identified a number of areas in which small

improvements could be made:

• Increased consideration of joint development opportunitieswith Independents, particularly around the exploitation ofnew media.

• Tracking and monitoring the progress of ideas through thecommissioning process – preferably through a shareddatabase accessible to personnel across different genres,thereby reducing the risk of duplication.

• All data should be held on a central database or networkfrom which different personnel can run reports or extractdata. This will also reduce the risk of data losses.

• Signed copies of all Programme Production Agreementsand commissioning specifications should be scanned andstored electronically. This will reduce the need to searcharchived files for supporting documentation.

• Review the appropriateness of the P4A database as asystem for storing completion documents.

• Capture the data that will form part of the Ofcomperformance reporting at appropriate times in order tomake the process of preparing the report more efficient.

• Introduction of self-assessment for compliance monitoring,for example, periodically asking staff involved in thecommissioning process to formally confirm that they havecomplied with all requirements.

8.33 In addition, the growth in the importance of secondary,international and new media rights means these must beconsidered a higher priority than has been the case hitherto.We note that 360º commissioning marks an attempt to takesuch rights more into account when negotiating. The BBCmust also ensure that it follows this positive step with similarinitiatives in revenue assurance to make sure that royaltiesaccruing are monitored and collected.

8.34 The Terms of Trade give Independents a real incentive to takethe lead on rights exploitation – and, while it continues toenjoy a share of revenues through PACT agreements, the BBCmay benefit from such attention to rights from theIndependent sector. Therefore the BBC should take a proactive role in encouraging such initiatives fromIndependents, and seek to maximise returns. Optimisingrevenue streams from its content will help the BBC continueto deliver high-quality programming in the future, at a costthat will deliver value for money for Licence Fee payers.

The commissioning process

Our findings8.26 The BBC has communicated the structure of its

commissioning teams and the timetable and process forcommissioning programmes. This process is intended to applyequally to In-house producers and Independents and isdocumented in some detail on the BBC’s commissioningwebsite.

8.27 Our work has found that the commissioning process isexecuted in a broadly consistent manner across the BBC,following a path through development, negotiation, creation ofa Commissioning Specification and sign-off for thecommission by the Programme Finance Committee. Variationswithin that framework reflect the nuances of commissioningby each genre, and represent a practical response to differentsituations.

8.28 Built into the framework are a number of checks and balances– procedural and sign-off – that are aligned with value formoney objectives. The process and commissions themselvesare not homogeneous enough to make a strict controlsenvironment appropriate.

8.29 Therefore, the BBC has adopted a ‘control principles’approach in which individual commissioners are given somepersonal autonomy while adhering to the overarchingprinciples. We believe this is a sensible approach to take.

8.30 We have tested these controls through both corroborativeenquiry and sample testing and have not found any materialexceptions or deviations to the control principles.

8.31 We note, however, that while much has been done toimprove the documentation and audit trail with regard toIndependent commissioning, this is not yet as well developedfor In-house productions. To some extent this is because thenature of ‘contracting’ with In-house producers does notrequire the same level of documentation as for third parties.Nonetheless, we believe that there is some scope forimprovement in this area.

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