Don’t let your procurement hit the buffers

By on 29/01/2018
Carillion ballast levelling equipment: the firm recently sank, with ‘optimism bias’ amongst its contracts teams apparently a significant factor (Image courtesy: Chris McKenna).

In the wake of the collapse of the UK’s huge contractor Carillion, new concerns are being raised about the weaknesses in public procurement and contracting. Former senior supplier manager James Johns, who spent 25 years bidding for government contracts on the other side of the fence, spills the beans on how to get the best out of the private sector

There’s a logical fallacy into which it’s easy to fall when looking at anything that’s broken: to assume that everything was perfect, right up to the point where it failed.

We talk about things having “gone wrong”, as though some unpredictable and malign force blew an otherwise faultless plan off course. But things are never quite this simple. In many complex systems, including the procurement of outsourced public services, the roots of failure are often baked in from the early stages: a budget set too low; risks not fully explored; too-tight timescales set to suit the electoral cycle; or a supplier hungry for revenue low-balling a price to satisfy short-term investor pressures.

Experienced project leaders will be familiar with optimism bias: the tendency to underestimate the complexity (for which read cost, risk or time) of an endeavour, and to overestimate the benefits that will be delivered. This is a malaise which is particularly common in government, largely because the goldfish bowl of public, parliamentary and media scrutiny and the tit-for-tat of political exchange create pressures on teams to operate within a ‘good news’ culture. As a result, overly positive reports are communicated upwards and wholly-green dashboards are presented at programme boards – right up to the point where a project has failed.

This dynamic was clearly visible in the UK’s handling of its massive Universal Credit benefits reform programme, as explained by former UK Department of Work and Pensions permanent secretary Sir Robert Devereux in our recent interview.

Of course, not every procurement or project fails. But no-one notices a clean window: only the dirty ones attract attention. And things do go wrong often enough for the perception that failure is commonplace to have become a real barrier to transformation in government, making people reluctant to embark on projects and ensuring that press and politicians are constantly looking for the next failure.

The important thing to recognise is that the successes are not unfathomable anomalies. As the UK’s National Audit Office observed more than ten years ago in its report Delivering Successful IT-enabled Business Change, “A favourable outcome is not a matter of luck, but is the result of sound judgement.”

The NAO went on to set out three characteristics of successful projects. First, high levels of engagement by senior decision makers in the organisations concerned (both client and supplier); second, purchasing organisations’ understanding of what they need to do to be an “intelligent client”; and third, purchasers understanding the importance of determining at the outset what benefits they aim to achieve and, importantly, how programmes and projects can be actively managed to ensure these benefits are optimised.

There is no stage of a project where these characteristics are more important than at the point where responsibility for delivery is contractually ceded to a supplier. And needless to say, there are no circumstances in which a successful outcome in a procurement should lead to your supplier going bust – leaving the government to pick up the pieces whilst other contractors review their prices lest they go the same way. The goal must be for the initiative to be positive for both parties.

So how can buyers do a better job of this? Having spent more than 25 years working for suppliers to the public sector, including as part of teams bidding for contracts of every size and shape in the UK and abroad, these are my seven tips on how government organisations can maximise their chances of success when engaging with private sector contractors.

1. Recognise that competition is a two-way street.

As a purchaser, it’s nice to have a handful of companies vying for your business. Who doesn’t like to be the centre of attention? And individual members of your suppliers’ teams may well be personally committed to the successful delivery of your project (either intellectually, or at least through their incentive schemes).

But to your suppliers’ managers, your procurement is just one of a number in which they could choose to invest their pursuit budgets and assign their presentable staff. It’s always worthwhile working out how you can make it easy for them to believe that your procurement (and the resulting contract) is a better bet than the guy down the street’s. Pride comes before a fall.

2. Help suppliers feed their beast.

Just as you will almost certainly be operating inside a pre-defined change management process mandated by your organisation, your suppliers’ teams will be operating inside a pre-defined sales lifecycle mandated by theirs. There may well be things that they need to do to sustain their involvement in your procurement which seem unimportant to you.

For example, building relationships with your operational colleagues, executives and ministers. You may not expect (or want) these groups to be involved in the mechanics of your procurement decision. But it’s worth recognising that a supplier team that can’t demonstrate it is gaining traction with the stakeholders they’ve identified as being key to winning and delivering the contract is not likely to be indulged by their sales management for very long. And nor will you be practicing the second of the NAO’s characteristics for a successful outcome – to be an intelligent client – if you insist that the only contact a bidder can have with your organisation is via the procurement team’s electronic mailbox.

Newcomers to public procurement should avoid the temptation to indulge in “stunt-flying” – adopting novel constructs that defy the well-established norms of commercial management (Image courtesy: Frank Kovalchek).

 

3. Avoid stunt flying.

Because of the habit that civil service organisations occasionally adopt of not employing specialists where specialists are required, it’s not unheard of to find someone in charge of a project who, whilst eager and bright, has never done it before. This, together with the layman’s perception that government projects are endemically prone to failure, sometimes leads to such managers believing that the route to success can be found through some previously untried novel process or commercial construct. This sort of ‘stunt flying’ should be avoided at all costs.

That’s not to say there isn’t room for innovation in public procurement. But it’s nearly 140 years since the UK’s Royal Institution of British Architects first standardised construction contracts, creating ‘RIBA Forms’ to take the task out of the hands of Chancery Pleaders: legal practitioners who specialised in the production of intricately drafted bespoke contracts. Since then, a body of recognised commercial practice has been created.

If the outcomes you are pursuing rely on something untried, then it’s worth looking again both at whether the outcomes are realistic, and whether you’ve applied the right expertise to designing the commercial solution. Projects delivered using new commercial models are like pancakes. Best to regard the first one as a throwaway.

4. Understand that value for money is an equation.

Put simply, it’s value divided by money. Not every bid will be priced the same, and not every bid will deliver the same outcome. It’s pretty easy to measure money, but much more difficult to measure value – particularly outside the commercial world, in which a well-established lexicon of accounting terms is used to assess the impact of a change.

Although a lot of academic research has explored ways of measuring public value, much of it uses qualitative measurements. If you don’t have a financially-based business case for your programme, then you need to properly understand how each bid differs in the value it will deliver. Otherwise, since many procurement marking schemes put a significant emphasis on price as an award criteria, it’s almost certain you will end up awarding on the basis of lowest cost rather than best value – or ‘Most Economically Advantageous Tender’, in EU procurement-speak. If you award to the lowest of, say, five bidders, it follows that you are choosing an outlier; someone who has incorrectly estimated the cost of delivering what you specified.

5. Ultimately, risk always stays with the buyer.

It might seem odd for an article about outsourcing, which is predicated on transferring risk to the private sector, to suggest that it can’t be done. And I’m not saying that suppliers don’t take risks, or don’t bear the consequences when those risks materialise. Many supplier staff work on the frontline of public services, and are subject to the same risk of verbal or physical assault as other public servants. Supplier staff sometimes work in theatres of war. In the cut-throat world of suppliers, managers are more likely to get fired as the result of a delivery failure (particularly if it leads to financial loss) than their public sector peers. Even supplier executives risk reputational harm when they are held to account for problems and pilloried in parliamentary committees (though admittedly, few end up in poverty as a result).

However, at the end of the day, whilst a supplier and its shareholders can be made to suffer when things go wrong, it’s their customers who are always left with the responsibility to deliver to the public.

In this context, it’s important for buyers not to make the mistake of assuming that because a particular risk has been contractually offset to a supplier, they need not concern themselves with the likelihood of that risk materialising. Putting in place a mechanism to monitor such risks, and plans to keep the show on the road should they derail delivery, is one of the most important responsibilities of an intelligent client.

6. Focus on Impedance Matching

Engineers will understand that impedance matching is the practice of designing two connected systems to maximise the transfer of power between them. In an outsourcing contract, this is another of the key tasks facing an intelligent client, and can be achieved in a number of ways.

First, by ensuring that good management systems are in place so that both parties are working from ‘one source of truth’ about the financial and operational performance being delivered; this prevents each side from having to create their own systems and reduces time wasted on disagreement.

Second, by aligning processes and organisational models across the contractual boundary to make collaboration as easy as possible: common methodologies, working environments, locations, IT platforms and tools, and the avoidance of duplicated roles, can all help ease the integration of supplier-provided functions into an end-to-end service.

This is particularly easy to get wrong in ‘first-generation’ contracts, which often involve outsourcing a public sector team to a supplier: whilst the supplier delivers its contractually-obligated productivity improvements, it’s common for another client team to grow back at the ‘stump’ where the public sector staff used to sit – as when a gecko loses its limb. The financial benefits of outsourcing cannot be realised if, for whatever reason, the client organisation simply recruits more staff to watch what their former colleagues are doing and mark their homework.

The Mythical Man Month, Fred Brooks seminal work on project management, offers many lessons for those in public sector procurement.

7. If something looks too good to be true, it’s probably too good to be true.

The final lesson I want to share is really one of common sense. Behavioural economics teaches us that the way humans make choices is not always as rational as we might think. Suppliers put significant investment into techniques which, whilst not underhand or deceitful, are designed to maximise the chance that their proposal is the one that is chosen. And when buying on behalf of the taxpayer, it’s understandable if the pressure to protect the public purse means that irrational decisions sometimes slip through the net. As a buyer, you should always be wary of a bid which looks too good to be true.

Here it’s worth drawing on the wisdom of legendary software engineer Fred Brooks, who authored the seminal book on project management, The Mythical Man-Month. Brooks observed that “an omelette, promised in two minutes, may appear to be progressing nicely. But when it has not set in two minutes, the customer has two choices: wait or eat it raw.”

So you may receive a bid from a supplier that seems to have come up with an innovative approach and whose price is lower and timescale shorter than the competition. But they might just have not understood the question. It’s your job as a procurement leader to avoid having to serve raw omelettes to your colleagues, your ministers and most importantly, the public.

About James Johns

James Johns is a consultant, strategist and digital policy advisor with more than 28 years' experience helping government organisations to make more effective use of technology. He began his career in the National Health Service and the IT services company Xansa, before spending fifteen years in a range of roles at Hewlett Packard. From 2007 to 2014 he was Director of Strategy for the firm's UK public sector business and more recently was HP's Director of Corporate Affairs for the UK & Ireland. James is a Visiting Senior Research Fellow in the Policy Institute at King's College London and an advisor to the World Economic Forum's National Digital Policy Network.

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