The Dangers Of Public Sector Procurement' Over-reliance On Competition

Summary

The recent National Audit Office report on competition

“examines whether government has mechanisms in place to understand and encourage competition in public procurement"

Far from encouraging competition, I believe public sector procurement guidelines should warn buyers against its dangers. In my experience, the negative impacts for citizens outweigh the benefits when competition is used incorrectly or inappropriately. Over-reliance on competition is a common flaw in public procurement around the world. Too many public sector buyers regard competitive tendering as an end in itself, that they have done their job and are immune from criticism if they have obtained at least 3 bids against every tender. That attitude prevents them obtaining value for money (VFM) for citizens. Used poorly, and/or for the wrong type of purchase, competitive procurement will:

1. Delay placing of urgent contracts, causing extra costs that far outweigh the saving on the actual purchase.

2. Introduce insuperable barriers to small suppliers winning government contracts

3. Deter the best firms from bidding for government contracts

4. Force suppliers to cut corners, under pay workers, and reduce service levels

5. Stifle innovation, by pushing buyers to use fixed-bid RFPs when they should use flexible, collaborative sourcing processes

6. Overpay for purchases for which no real competitive market exists

These risks exist in the private sector too, but competent buyers know when and how to use competition effectively. Unfortunately, in my experience public sector buyers around the world are, in general, less able than their private sector peers. Inadequate salaries fail to attract good enough people. Poor leadership and badly designed job descriptions create an obsession with process compliance for its own sake. There is insufficient willingness to request and approve exceptions in the interests of VFM. They believe that using competitive tendering immunizes them from any censure should the procurement turns out to be seriously flawed.

Therefore, any central instruction to increase use of competition in sourcing processes is likely to cause more negative effects that good ones, unless there is first:

a) General upgrading of the calibre and pay of public sector buyers

b) Clear guidelines on when and how to use competition

c) An agile governance process for approving exceptions

d) A Government-wide Procurement Centre Of Excellence function to monitor use of competition, disseminate best practice, and identify fraud and/ or profiteering.

e) Better sourcing and procurement technology to streamline processes, automate tasks, and monitor purchases for warning signs of fraud, waste, or profligacy.

Duncan Jones’ Credentials

I have recently retired from a career in Finance and IT. For the last 16 years I have studied procurement best practices as a Vice President with Forrester Research, including working with many large organizations in both private and public sectors. While at Forrester I published thought leading research on procurement technology trends, supplier management best practices, and on how Procurement can better address their organization’s ESG priorities.

Negative consequences of inappropriate use of competition

The NAO report focuses on the benefits, but largely overlooks the negative side-effects.

Delays In Placing Of Urgent Contracts

Sometimes a need is so urgent that there isn't time to solicit bids from multiple suppliers. Best practise is to create panels of trusted suppliers with framework contracts so that end users can get what they need quickly and safely. There should be competition around getting approved into the panel and also retaining 's ones place on the panel by consistently delivering value for money customer experience etc. Individual procurements could be from each panel member in turn or by seeing which panel member responds first to a request for help. Some public criticism of overuse of framework contracts in the public sector but I believe that is misguided. There should, however, be more monitoring of performance against framework call offs to weed out suppliers who fail to deliver adequate value for money and/ or customer experience.

One example from my experience was a US city procurement department that needed help urgently with a negotiation with a large software company. I could have saved that client millions of dollars but they were unable to buy my expertise without first running a competitive process to get bids from other consultants, which they did not have time to do. That process would at best have saved a few $1000 by using a cheaper less able consultant. Instead they wasted taxpayers’ money by paying the software company more than they needed to.

Of course the COVID PPE scandal shows the risks of rushed procurement but competition wouldn't have been a panacea to that problem. Indeed firms that intended to supply substandard equipment and those that did not intend to supply anything at all would still have won contracts as low bidders.

Recommendation: Insist on quick, efficient governance processes to approve non-competitive awards due to an Urgency justification. Submissions for approval should explain not only why there isn’t time for a competitive bidding process, but also how the buyer has validated the chosen supplier, checked that the price represents VFM, and mitigated any risks, such as failure to deliver as contracted.

Barriers to small firms

Bidding on government contracts is expensive. Small firms can only risk investing in a bidding process if they believe they have a good chance of winning a contract at an adequate margin. If buyers invite too many bidders or, worse, publish open tenders that allow anyone to bid, the chances of winning and contract margin are too low. Many small firms that might have been good choices will decline to bid. Others will stop pursuing public sector work due to bad experiences on earlier overly competitive sourcing processes.

Recommendation: Guidelines for use of competition should explicitly encourage buyers to limit the number of bidders when they are sourcing contracts that they hope to place with small local firms. Open tenders should be avoided if possible, except for very light, easy to complete RFIs for selecting a short list of bidders that will be asked for more detailed response.

Deterring best firms from bidding

The same economics of bidding costs, chance of winning, and likely margin apply also to larger firms. In the technology sector, where I have a lot of experience, many of the best vendors told me they wouldn't bid on most public sector contracts for this reason. They don't trust public sector buyers to be able to distinguish the best bidders. They expect poorer firms to undercut their price. They therefore focus on private sector business where they can make a higher margin in return for delivering outstanding value within a long-term trusted partner, preferred source commercial relationship. Public sector buyers therefore get left with inferior firms who are more desperate for work.

Worse, there are insufficient penalties levied on these poorer firms for underdelivering. It's hard for a buyer in one part of government to exclude a supplier that has a bad track record elsewhere in government. Mediocre firms continue to win new business which discourages superior providers from trying to compete against them.

Recommendation: Public sector organisations should be encouraged to build a few long term strategic relationships with trusted partners. Contract awards in the appropriate category to these partners should be allowed with minimal or no competition provided, and this is crucial, that there is rigorous, comprehensive post contract performance monitoring. Performance scores should be visible to other public sector buyers. Guidelines should explicitly insist that evaluation criteria include bidders’ track record delivering similar services to other public sector organisations. Serial underperformers should lose their Trusted Partner status or, in extreme cases be disqualified from winning further contracts.

Forcing suppliers to cut corners

Competitive bidding often results in the winner’s curse – the successful bidder is the one who has most underestimated what it will take to deliver the project. When it finds that it is unable to deliver what it promised it will either take shortcuts, such as allocating cheaper, less skilled staff on the project, or walk away from it altogether (The CSC/ Isoft/ NHS scandal is one such example). Alternatively, the winner will be a low quality supplier who is desperate for work, and is therefore willing to buy the business, hoping to recoup loses via subsequent change requests.

Lowest price does not mean best VFM. The social care industry is one example of the dangers of excessive competition. Too many providers have cut prices not by investing in technology or being exceptionally efficient but instead by driving down pay and conditions for employees. This has lead to huge recruitment problems for the industry and a national crisis. Providers have felt forced to cut corners on service delivery, meaning taxpayers don't get the care they need, which in turn creates problems for the NHS.

Recommendation: guidelines on competition should therefore recommend that buyers include strict requirements for acceptable treatment of employees, provide adequate profit margin to fund ongoing investment in technology, and options to quickly cancel contracts and transfer them to alternative providers if the supplier fails to meet required service levels. Due diligence processes should check that low bidders have fully understood the requirements and will be able to achieve adequate margins from the contract.

Stifle innovation

Too many public sector buyers try to turn every user need into a fixed bid RFP. They waste time creating detailed specifications that are inevitably incorrect, because the users don't know what they really need until much later in the project. Projects overrun due to expensive change requests as users learn more about the problems that the new solution must fix.

The private sector has moved significantly away from fixed bid projects towards agile processes, in which an initial minimum viable product (MVP) is refined through subsequent phases based on user feedback and telemetry. You can't source agile projects using fixed bid RFP's. Best practice includes innovation workshops, in which bidders demonstrate their capabilities and help users develop ideas for the MVP. There are various commercial models for agile projects. They can be tough for traditional procurement professionals to accept, but they are proven to deliver better outcomes than either fixed price contracts or open-ended time-and-materials ones.

Recommendation: Guidelines should encourage organisations to create category strategies that specify where they will usually use alternative sourcing methods to competitive tendering. Guidelines could even suggest some categories for which fixed bid rfps are not usually recommended, such as complex technology projects. Performance monitoring should not look at the overall percentage of contracts awarded through competitive processes with the assumption that a higher percentage is better. Instead it should focus on the percentage of contracts sourced in line with the published category strategy.

Overpaying, When There Isn’t A Competitive Market

Reliance on competition for its own sake often causes public sector buyers to think they've done their job when they get three or more bids for a product or service, even if those bids are all virtually identical. Soliciting multiple bids is pointless if there is insufficient competition to provide leverage. Buyers must use other techniques to ensure that they are getting good value for money. However, the proposed guidelines exhorting buyers to use competition more frequently will deter them from using these other techniques. Rather than spend time justifying them later to second-guessing auditors who don’t really understand procurement best practices, they’ll merely go through the motions of getting multiple bids. They’ll get a tick in the box for having used “competition” and no questions will be asked. Which option do you expect an underpaid, underqualified, overworked buyer to take?

For example in major renewals of software contracts, there is usually only one credible supplier - the original publisher (excluding a few markets in which third party support providers exist). There is no way to play one supplier off against another when there is only one viable bidder but that doesn't mean you lack negotiation leverage. There are other things that you can use as bargaining chips, such as altering the timing of the renewal or expanding it to include other products that you don’t currently use. I've seen many public sector buyers eschew these techniques and instead rely solely on getting three renewal quotes from resellers – all of which were virtually identical because the reseller’s margin has negligible impact on the overall price. No-one will ever know how much taxpayers’ money they wasted.

Recommendation: guidelines should make it clear that competition is one way to achieve the goal of value for money and not an end in itself. Governance processes should check whether large contracts achieved VFM. Guidelines should also encourage buyers to get expert consulting assistance for contracts such as software purchases and renewals that require specialist skills and knowledge. Note that these specialist procurement service providers often work on a results-based contract so their services cost less than nothing.

Competition Isn’t A Panacea Against Corruption And Cronyism

Contracts placed without a competitive bidding process can be warning signs for corruption or cronyism such as the PPE VIP lane. However it doesn't prevent these problems, and the negative consequences of competition for its own sake outweigh the benefits, as I have explained above. There are better ways to combat the corruption that has been so pervasive under the current government. I suggested some in my submission to the public consultation around the new procurement bill. My recommendations include:

? Suppliers should be responsible for declaring all interests, rather than the buyer having to discover them. Government organizations should be able to cancel contracts and claim damages from the supplier and the connected person if they discover previously undisclosed interests, even several years post-contract.

? All public sector procurement departments should make appropriate use of the latest AI-powered technology to spot possible corruption and cronyism, such as by finding possibly undisclosed connections and highlighting unusual patters of buyer behaviour.

? Governance processes should use alternative ways to check prices’ reasonableness in uncompetitive purchases, such as market benchmarking or should-cost modelling.