Not Just Defensibility
I was sitting in a probity briefing recently and it occurred to me that the briefing focused entirely on the defensibility of the process and “staying out of court” aspects, but probity breaches go far beyond the few ugly incidents of litigation, you don’t have to find yourself in court to suffer loss and the resultant damage to reputation. Working in the procurement space, we have all witnessed rigged, skewed and compromised procurement processes, some more sophisticated than others. Sometimes the business doesn’t even realise they have rigged the process and they think they are being innovative or driving good outcomes. Whether it is through subtly biased specifications, selection of uncompetitive suppliers, or strongly skewed scoring to make a favorite float to the top; removing equity from a competitive process doesn’t just harm the unsuccessful tenderers. Further, we may witness the contract managers and executives defending their “information sharing” with providers as relationship management and development of the partnership. But do these actions really benefit the organisation and the same question has to be asked, what is the real cost of these behaviours?
“…the loss of competitive tension will severely limit the ability of your organisation to achieve good value for money…”
All of these actions damage the evenness of the playing field for vendors vying for the opportunity. This is the core cost, the loss of competitive tension will severely limit the ability of your organisation to achieve good value for money. If a supplier knows they have a sure thing, they will not put forward their best bid and they will go on to be difficult to manage. Worse than that, the organisation may well gain a reputation within the market of being biased and unfair. How do you know if there is a problem? If a specification is released and vendors make contact to ask if there is an incumbent, then you know you have a serious problem. Even worse is if the specification template includes a notice that there is an incumbent, this indicates a long-term embedded weakness in market perception of practices. It is pretty much guaranteed that the other non-incumbent offerors will either put a poor quality offer in or not offer at all.
Now I’m not saying there isn’t a case of retention of good suppliers and a well-managed long-term partnership can absolutely result in strengthening an organisation, but be wary that you aren’t fooling yourself. These partnerships still need to be tested regularly and deeply, by far the easiest way to do so is through effective and competitive procurement processes.
So clearly the Canadian Government is $40 million worse off plus their own legal fees, but is the issue more extensive than this sizable sum. If an organisation has a culture of circumventing competitive processes and unhealthy relationships with the contracted suppliers, then there are going to be many hidden costs in conducting business. First is the high probability that suppliers are not offering their best options in product, services or price. Even with informed purchasers, the likelihood of achieving the best value for money outcome is limited as the current supplier becomes that “standard” by which all others are measured, and where you have limited capacity to assess the market outside of the relationship, you end up measuring a suppliers performance against their own historic performance. Historic data becomes meaningless as it is weighed toward the incumbent with repeat business. The result is limited variations in the data restricting the organisation’s access to valid comparisons, and frequently, poor performance is forgiven or ignored as the customer will take on the larger portion of the blame for failures.
Once a supplier, or a limited group of suppliers, has been around long enough, the quality and level of detail in the invitation documents slides as the business assumes the market knows as much about the requirements as the incumbent. This in turn further reduces the competitiveness of the process, as new suppliers will either fail to understand the requirements resulting in equally poor responses or no responses from new suppliers at all.
Allowing the integrity of a procurement process to be weakened or breached will place the outcome at risk of failing to meet the most critical objectives. It will also reduce opportunities to identify new suppliers and approaches, therefore reducing opportunity for innovation and efficiency gains. The damage increases significantly where the process establishes a long-term contract or a poorly conceived, constructed and delivered standing offer arrangement or pre-qualified panel.
So what can be done to mitigate the risk? First we must attempt to understand what caused integrity failure. In the book, “Freakanomics” the authors discuss extensively the incentives that drive behaviour, and this is where we need to start looking if we are to fix the issue. What is driving the organisation, or the individuals within the organisation, to maintain poor procurement practice’s?
Risk Mitigation
The most common reasons touted are risk aversion and lack of capacity to change. Customers become “comfortable” with what they know, and rather than risk change and upsetting the status quo, they will do what ever it takes to maintain continuity. These are of course self-fulfilling prophecies, if you give repeat business to one supplier then the risk and effort associated with moving away from the supplier grows over time. Often the performance of the supplier will either gradually degrade, or if you are lucky, gradually improve, but even gradual improvement won’t keep the organisation relevant in a rapidly changing world.
Poor KPI’s
Another area for consideration is the misalignment between the performance measures of the decision makers and the core objectives of effective procurement. More often than not managers are measured more on meeting timelines and incremental improvement (i.e. not failing). These are more reliably achieved when you retain the same suppliers, where price creep, if it is even noticed, can be explained away with changes in economic environment.
We always do it like…
The most concerning cause of this issue is ignorance or laziness, where those involved in the procurement are not sufficiently trained or have become complacent in their roles, no longer caring if they are eking the last ounce of value out of the deal. This may not necessarily be the fault of the individuals, you would need to review the training, policies and succession planning models in place to determine the root cause. Depending on how endemic this issue has become, the fix could range from simple motivational approaches through to restructures and replacement.
The good news
So if the process is poor and the market knows it, then why do you still have submissions from vendors who know they have little chance of winning. There are a few potential drivers, the sales team may have a KPI that they must respond to n opportunities each month; maybe they are just being good suppliers in the hope that they will be noticed; most likely though is that most sales people are eternal optimists, as anyone who has worked in production planning and had to review their sales forecasts can attest. This is great news as it means the issue can be rectified in a surprisingly short period of time and Organisations can see significant savings within a couple of months of implementing good procurement practices. Oddly enough, most vendors will appreciate the implementation of genuinely competitive processes, even the ones who were previously benefiting from the poor practices, as they then have some control over whether they can win the opportunities, and in the case of vendors dealing with public sector, vendors do not want to be implicated in improper dealings.
Check out my other articles for more ideas on building and maintaining genuine competitive tension and how to write good specifications and criteria to drive more desirable outcomes.
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