Recession breeds new rules and a new approach to procurement

The recession and the need for public sector budget cuts have uncovered a twin track for procurement policy in the UK.  There is a clear need to cut public sector expenditure – of that we can be in no doubt both in terms of the unit cost of supplies and services.  This cause has been championed by the joint NAO and Audit Commission Report from May 2010, which set out the results of a review into the benefits of collaborative procurement across the public sector.  In contrast we have seen a number of reports and a good deal of discussion from public bodies the length and breadth of the country as to how public spend can be used in a way that supports sustainable business and from that jobs and economic activity in their area.  Both points of view are valid but on the face of it irreconcilable.   

Perhaps this can be characterised as the view of the economist who sees the need for the public sector to operate like any good business and seeks to eliminate unnecessary cost from the supply chain however that is delivered.  This is good business housekeeping – standardising specifications and seeking out economies of scale.  Against this stands the views of those amongst our society who are tasked with preserving the well being of their area and managing the consequences of the downturn.  It is likely that the twin tracks are not mutually exclusive.    Whatever the starting point for an individual authority and whether you favour the use of national frameworks or bespoke procurements there is a further dimension that cannot be ignored by those tasked with buying goods and services of use in public bodies. 

The level of business failure is up. The cost to the public sector of replacing a service provider is high - both in terms of securing interim service arrangement and also the costs of a new procurement.   That cost is best avoided both for suppliers and for the public sector.  What is the appropriate response from the public sector in the quest to secure service providers who will stay the distance and be around to provide services on the last day of the contract as well as the first? 

None of us have a crystal ball but we do need to review our contracting processes and contract terms to make sure they are up to the job.  So, here is the Shepherd and Wedderburn ‘five-point-plan’ to manage procurements and monitor contracts in a proactive way.

  1. It is routine practice to check bidders' financial and economic standing at the start of the procurement process.  This is one of the drawbacks of framework agreements.  Once your framework suppliers are in place it is not possible to check on their financial performance as you go through the life of the framework.  The last few years have shown quite clearly that a healthy viable business may not remain so from year to year.  The award criteria legitimate for a call off from a framework are restricted to those set out in Regulation 30 of the Public Procurement regulations as proper award criteria.  So in making a decision as to whether or not to use an existing framework it would be wise to consider the viability of those included on the framework.  If you are procuring from scratch, it is tempting to ramp up the financial thresholds to identify stronger organisations to deal with in the first instance. However, the consequences of that may not be what are intended. As most organisations have experienced a drop in performance against the usual measures you may attract a reduced pool of bidders. This restricts competition and also might fail to attract smaller local based players. Public bodies must consider the policy objectives of their procurements before heading off down a particular track.   Financial thresholds must remain appropriate and relevant to the particular procurement.  At the end of the day all available financial information is historic to a greater or lesser extent.
  2. Consider the financial information alongside the technical analysis of capacity and capability.  Is the business performing in terms of its existing contracts?  If you are using the restricted procedure you have scope to use selection criteria beyond those set out in Regulation 24.  Use that ability to seek out strong businesses that have a track record of delivery in the field that you are procuring.  It is vital that the financial and technical elements of the PQQ are assessed together and not as standalone elements.  You are more likely to identify a credible pool of bidders if the information works together.  It is one thing having the balance sheets of a top flight corporate but if that corporate is venturing into new areas because it wants to increase the business opportunities open to it you need to understand what financial support is available to the part of the business you are dealing with to manage out service failures and deliver contracts.
  3. Consider the requirement for Parent Company Guarantees and performance bonds.  Bonds can add to the cost of procurement but it does provide a cash sum to manage the consequences of contractual failure.  It can be worth it in certain cases.  If you are relying on a PCG, make sure its terms clearly identify the covenant of the parent, contain a mechanism for tracking that covenant and a prohibition of material changes to the structure or business of the parent that would negate the value of the PCG.   The value of a PGC is linked to the fortunes of the parent but all too often procurement professionals place too much value on the existence of a PCG and not enough on the continued existence of the parent or the value of its covenant.
  4. Review your contract requirements in terms of monitoring and service failure.  It is far better to identify and manage issues early when they are simply performance issues and not large financial penalties or termination issues.  The public sector should be seeking to support supply partners by standing by your commitments to prompt payment.   Financially penalising a company which is facing financial challenges can be counterproductive so make sure that whilst you are properly protected the focus is in maintaining delivery and addressing the root causes of failure.  Whilst reducing a supplier's profit through financial penalties is often a very good way of getting their attention – in a world where the profit margins of many businesses have been cut to the bone it might be time to rethink the strategy and focus on mechanisms that identify issues early and give everyone a proper opportunity to work them through.
  5. Proactively monitor the contract in terms of delivery but also the fortunes of your service delivery partner.  Challenge them in relation to issues beyond your contract to assess and consider the impact on your own situation.  In other words manage your service relationships and don't wait for problems to manifest themselves as termination triggers in your contract. 

Procurement policy will come and go and those public bodies that secure benefits from the central procurement supplies - across some or all of their categories of supplies and services - should be encouraged to do that.  Those who seek to secure the biggest bang for their procurement buck in terms of sustainable and economically active communities can also learn lessons about how to do that effectively and efficiently.  No matter where the starting point is, we must all take care to ensure that the partners we chose are there for the duration of the commitment and help us to avoid the further duplication of procurement costs by having to re-tender services early as a result of contractor failure.

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