“The public sector has significant influence on private sector contracting. Many innovative terms and contracting methods have seen their beginnings in public procurement – examples range from ‘termination for convenience’ through to public-private partnerships”, Gregg Barrett, Director of Cylon Technology, recently told SmartProcurement.
Yet for all the innovation, the popular image of public procurement remains one of bureaucracy, inefficiency and under-performing contracts. Within private sector firms, negotiators dealing with government or public agencies are generally viewed as having ‘drawn the short straw’. They are typically not the top performers, since room for creativity or imagination is seen as limited. Public sector processes are not just moribund, but they stifle win-win relationships.
In the words of one analyst: “A benchmark I did on ‘Supply Management in the Public Sector’ found that cost reductions ranked way down on the bottom of the list of priorities for governmental procurement agencies. Instead, these folks were still more concerned with complying with existing procurement regulations and meeting the demands of internal customers”. The analyst continued by making the point that the processes they protect are often inefficient and the demands of internal customers far too frequently driven by short-term political priorities. “As for benchmarking… Few of them do it. Therefore, this always comes back to bite them when some governmental watchdog agency is tasked to look into procurement practices”.
This makes the following questions arise: Are we dealing here with issues of perception, or are we dealing with issues of fact? Also, is there some awful inevitability in public sector contracting that leads to sub-optimised relationship performance?
A 2007 International Association for Contract and Commercial Management (IACCM) Survey on public procurement practices in the European Union (EU), highlighted the following characteristics of the contractual relationship environment:
- Complexity and speed of change are increasingly features of modern contract relationships;
- Rigid rules undermine cooperation and trust;
- Successful organisations need flexible relationships supported by responsive governance frameworks; and
- Superior commitment management is about capability and accountability, not about ownership and bureaucracy.
Needless to say public procurement practices were not aligned to this environment, instead observations on contractual relationships in public procurement:
- Mostly executed using traditional contracting models with Service Level Agreements (SLAs) and a legal focus;
- Objectives appear to be focused on control (less perceived risk, ability to apportion / avoid blame);
- High failure rates (40%-80%, when measured against expectations);
- Process discourages collaboration;
- Limited potential for raising performance, proposing innovation; and
- Frequent negative impact on third party advisors.
Findings from the RAND Europe Report
The results of the above survey have been used as a key part of a recent ‘Working Report’ released by RAND Europe, an independent think tank whose mission it is to help improve policy and decision making through research and analysis.
The report, titled Evaluating Public Procurement: a Platform for Discussion, identifies and analyses weaknesses in public procurement practices in Europe, with a particular focus on information and communication technology (ICT) procurement. It also provides some insightful and useful recommendations on how to improve the public procurement process to the mutual benefit of suppliers, the authorities and the public at large.
“The report is useful reading for anyone concerned about the financial considerations in contracting, as it highlights key issues in terms of cost and risk allocation for potential suppliers in participating in public sector projects. Based on extensive reviews of results from the literature and new research, as well as key informant interviews, the report highlights that public procurement is slower, up to twice as costly, and less profitable than private sector procurement. Given that the public sector is by far the largest purchaser of goods and services in the EU (approximately 16% of EU Gross Domestic Product), the public procurement process has significant influence over the development of a single market and the promotion of competition and innovation. However, the report confirms the tendency of current public procurement practices throughout the EU to defeat established policy objectives”, Barrett continued.
The report states that “an excessive and rigid focus on public procurement contract cost minimisation and risk transfer undermines the Single Market. The main problem is behaviour rather than rules, and modernisation is required.”
The report further finds that “at present, aborted contracts and drawn-out procurement processes impose additional and unnecessary costs on the taxpayer. Richard Abbott, of the UK Office of Government Commerce’s Director of Procurement Programmes, admitted at least £8 billion a year was being wasted through weak procurement practices”.
Some of the causes for poor performance in current public procurement practices, which RAND suggests in its report, include:
- Lack of contracting authority accountability, management experience and continuity;
- Failure to specify requirements in appropriate terms and sufficient detail;
- Poor understanding of the complexity of requirements and procurement procedures, and the implications;
- Lack of involvement of the end-users of the services concerned;
- Lack of oversight by the authorities of project costs and progress; and
- Inability (shared with many private ICT procurers) to identify the strategic value of contracts.
It is also about transparency…duh!!!
Not surprisingly transparency is highlighted throughout the report, specifically:
“Transparency still needs to increase in the future in order to improve market performance in public procurement markets… Transparent and predictable procurement procedures improve economic efficiency by promoting competition amongst domestic and foreign suppliers. They can also contribute to fostering private investment by lowering risk, because transparency and predictability of market mechanism are crucial factors influencing business decision on how and where to invest and generate value add. Transparency also enhances the competitiveness of local producers by establishing a market-launch base which is especially good for SMMEs. Stronger competition brings down costs, improves quality and delivery terms, and fosters the introduction of innovations”.
“While ‘bailouts’, ‘nationalisation’ and ‘stimulus’ are terms of our time, we should carefully consider the findings of the RAND Report as well as those prior. At the very least the findings of these reports highlight reasons for concern where goes the Public Sector and its practices. The truth of the matter is that the Public Sector has had ample information on the problems and possible solutions for sometime now, yet the question remains…what is the hold up? There are no longer any excuses, we know what needs to be done…start doing it”, Barrett concluded.
Article submitted by Gregg Barrett, Director of Cylon Technology. Gregg is also a member of the IACCM (International Association for Contract and Commercial Management) Global Advisory Board and a member of the Executive of the FSCMA (Federation of Supply Chain Management Associations).