The Seven Deadly Sins

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Annual public expenditure in the UK is now well over €780bn. Just under a quarter of that sum is spent on procuring goods and services from the private sector. What’s more this expenditure is not just spent on commodity supplies. Large elements of public service delivery are contracted out to private and third sector organisations. In this environment, the quality of public sector procurement needs to be on a par with that of policy development, for which the UK civil service is rightly famous. Yet, whilst there are islands of excellence, all too often public sector procurement falls short of best practice.

To make the best use of the funds available in delivering excellent services to citizens and in the pursuit of value for money for the taxpayer, we believe there are sevencommon errors that public sector procurement needs to guard against.

1. Procurement, not compliance
It is critical to the maintenance of public trust that procurement processes are seen to be open and transparent. Yet all too often in their keenness to comply with procurement legislation, procurement staff can loose sight of the real purpose of the procurement. Too much time can be spent ‘complying with procurement law’ and making sure the process is open. While important, this must be balanced with the central objective of finding the right contractor with the right skills. Following the guidelines to the letter it will not in itself ensure that the best supplier is chosen for the job in-hand. Equally important to consider is the level of complexity of the procurement processes. The current system of public-sector procurement often imposes a considerable burden ofbureaucracy on businesses which can also create excessive bid costs for suppliers. These often have to be built in to the bid price and in many cases dissuade businesses from even attempting to secure contracts. Far too many small and medium-sized enterprises think it’s not worth their while even filling in the forms.

2. It’s not bureaucracy, it’s there to help
Historically, many procurements were conducted directly by users themselves. But in professionalising the procurement process dedicated procurement functions have been set up to help – such as the UK government’s procurement arm, However the working relationship between these functions and the ultimate end users of products and services is not always as good as it could be.

Procurement functions need to work on fully understanding users’ needs and on providing valuable insight into how to secure the best suppliers and to achieve the best value for money. Users need to recognise that the procurement function is not just an inconvenient bureaucracy but rather that it can be a source of useful advice and help maximise the effectiveness of their spending.

In the best organisations the procurement function works hand-in-glove with product and service users in a spirit of mutual respect.
3. Forms can’t replace good old fashioned talking
To get the best value public sector customers must ensure that suppliers fully understand their wants and needs. But this has to go both ways. The public sector customer also needs to be clear about their suppliers’ offerings and let suppliers influence how tenders are shaped so they can respond in the best way possible. It’s about making sure you have a clear picture from both sides. It is very difficult to achieve this through the static and impersonal process of exchanging PQQs, ITTs and bid documents.

There is sometimes an erroneous perception that such communication is ‘unfair’ and against the rules. Yet in many cases there are incumbent suppliers who are better able than potential new providers to interpret and respond to bid documents. This is not because they necessarily have a better solution but merely because their direct knowledge of the situation allows them to hit the buyers ‘hot buttons’ more easily. This can tend to lock in incumbents to the detriment of innovation and competitive pressures.

Public sector procurement organisations are increasingly using the new Negotiated Dialogue procurement route, and this should be further encouraged. But even more important is to develop an ongoing dialogue outside of specific procurements.

Engaging key leaders in the customer organisation, not just the supplier management function within procurement can make all the difference. Given the role that private bodies have in the delivery of public services, today senior managers need to have the same kind of relationship with their supply base as they do with theheads of their internal departments.

4. Recognise what makes a supplier tick
Buyers need to understand how particular suppliers make profits, along with the economic dynamics of supply markets. Otherwise, the process of getting the best suppliers to bid and driving competitive pressures could be ineffective.
Procurement functions need to add value to their internal customers. One way is to help end users think through how to structure procurements and indeed how to determine what to procure. Don’t forget the ideal outcome is to create an ongoing competitive market that will spur suppliers to strive for excellence in delivery, not just in the sales process alone.

Commercial terms must be appropriate to the competitive dynamics. Expecting unreasonable risk transfer will only deter important suppliers and encourage a very combatitive working relationship. Performance incentives must be balanced. They need to be strong enough to drive the right outcomes, but if they are too tight, then the supplier may focus on identifying why their customer is failing to meet their side of the bargain, distracting attention from their own inability to meet service level agreements.

5. Customers sometimes need to attract suppliers too
Competition is not just something suppliers do for business. The best companies think equally hard about which customers they want to serve. If procurement organisations try to drive supplier margins below the market rate some good suppliers will be deterred from bidding.

Procurements sometimes ask for explicit information on supplier profit levels. Profit information can be used as assessment criteria to guard against ‘excessive profits’. In these circumstances successful organisations with strong profits are not always seen as the best ones to do business with. Yet, in an efficient market, the more profitable companies are likely to be those that are the best at what they do, the most efficient and the one that provides the best customer service.

Where supply markets are not competitive there is a stronger case for making such considerations. But a better approach is to think more carefully about what is being procured and to seek to influence the contestability of the market, either through the sourcing strategy or through the Competition Commission.

When there is an efficient market there is a market price and the best deal will be achieved by establishing clear requirements and shared expectations so that suppliers can make informed bids and buyers can asses the qualitative aspects of bids effectively.

6. Failing to build collaborative flexible relationships
Having a contract doesn’t mean your relationship has to be ‘contractual’. The best contract forms an ongoing approach to contract and supplier management and sets up methods for continuous improvement and joint problem solving. The best outcomes for citizens, especially in the highly dynamic environment which prevails today, will come from establishing highly collaborative relationships with suppliers where both parties constantly seek to refine their ways of joint working, to improve performance and meet evolving requirements.

7. Privatising the faults of the public sector whilst losing the public sector ethos
For a significant number of UK companies the bulk of their business comes from the public sector. Indeed many of them only came into being as a result of the recent trend towards public sector outsourcing. In many cases their staff have been TUPE’d (Transfer of Undertakings [Protection of Employment] Regulations) over from the public sector. But all too often their services are being supplied on long-term contracts. They can appear very nimble when contracts are being tendered but very unmotivated in service delivery once the contract is won. Addressing these issues is never going to be easy.

The goal is to bring together the public sector ethos for serving the citizen with the private sector habit of innovation and efficiency that is driven by competition. Instead we frequently get the caricature of public sector inertia and low morale coupled with driving shareholder profits at the expense of the citizen. This state of affairs has led many in the public sector to conclude that the profit motive of the private sector is at fundamental odds with the ethic of serving the public.

Yet this doesn’t need to be the case. Of course the private sector is motivated by profit. But this is not due to some intrinsic moral failing. Rather it is simply that those companies that pay insufficient attention to delivering their services profitably will soon go out of business. More importantly this motivation can easily be turned to the public sector’s advantage. As Adam Smith put it, ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’

But this only works if the public sector makes an effort to understand the private sector’s motivation and align incentives. Companies like Toyota outsource complex and mission critical elements of their delivery chain to other companies. If these were delivered poorly they would immediately damage Toyota’s ability to deliver sound products and services to its customers. They outsource these critical elements confidently because of their deep understanding of their suppliers and their development of solid collaborative relationships.

Despite these ongoing challenges we believe world class procurement could be on the horizon. To deliver excellent services to citizens and achieve value for money for the taxpayer, our advice is to start with the seven common errors that public sector procurement needs to guard against.

  •  Alastair James is consulting partner for public sector efficiency at Deloitte
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