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Public sector contracting: failing the public interest

June 7, 2018

The Premier of New South Wales is just the latest politician to espouse the cause of collaboration. Faced by high-profile lawsuits and massive cost overruns, Gladys Berejiklian this week pledged ‘to take a different approach to big infrastructure projects’.

IACCM’s unique multi-jurisdictional research has confirmed that, all around the world, business and governments are suffering from strained relationships, poor results, reputational damage, an erosion of public trust. Yet they continue to engage in adversarial procurement methods, driven by outdated policies that focus on the lowest price and a distorted view of competitive markets. The public sector deludes itself that these approaches are somehow in the public interest, despite all evidence to the contrary. How many times do we have to deal with delays, cost overruns, sub-standard service delivery and suppliers driven out of business? Why aren’t we instead measuring public procurement’s contribution to economic value, social benefit, wealth creation and ethical impact?

The answer is in large part because politicians and senior government officials have no understanding of the impact of today’s procurement policies; and their private sector counter-parts, while calling for change, mostly do so without any specificity around what that change should be. Indeed, the sad truth is that those private sector leaders are in fact using many of the same procurement approaches – or worse – within their own business.

Change is not beyond our grasp

Changing this is not simple, but it is quite clear what needs to be done. First and foremost, the traditional thinking of policy makers and their enforcers in finance, law departments and procurement must be challenged. We are using outdated theories to manage trading relationships that are now dynamic and highly interdependent. Ignorance is not a good excuse.

A story in today’s Financial Times is a wonderful illustration of the problem and the possibilities. It relates to the global market for vanilla, a commodity currently in short supply and therefore subject to a price boom. A few far-sighted corporate leaders have grasped the point that current supply chain management theories are counter-productive from both an economic and social perspective. Procurement practises such as ‘commoditization’ and ‘aggregation’ pay no attention to anything beyond maximizing short-term bargaining power and minimizing input cost. The idea of truly understanding and collaborating with the supply base is alien to this way of thinking. These leaders are instead focusing on better understanding ways to develop sustainable markets and to protect supply by protecting suppliers.

To do this, they have recognized the need to explore the entire supply network and ensure the elimination of those intermediaries who bring no value and are simply exploiting producers. The result is overall lower cost, but for the producers themselves a much higher level of return and security. Contracts in this environment are not about lowest price, enforced renegotiation and arbitrary termination rights; they are instead about developing an ethical and sustainable market which delivers economic benefit to all participants.

Generating a new approach

What would this mean if it were extended to public procurement? First, it would force a rethink of policy in areas such as market engagement and selection criteria. Second, it would bring an end to the nonsense of risk transfer and the myth that the public sector cannot accept risk. Third, it would eliminate lowest price selection methods and instead require the exploration and understanding of value – both short and longer term. Fourth, there would be a true focus on the role of procurement practises in delivering on ethics and social value. And finally, there would be new contracting models and training to implement these collaborative values.

Politicians and public servants should be at the forefront of driving change in trading policies and practises. It is encouraging that several are now working with IACCM to undertake reform, but this is a small minority. For others, it is time to move beyond platitudes and statements of intent. The public interest demands new approaches to the formation and management of contracts so that they consistently deliver against social needs and ensure public procurement truly does operate in the public interest.

 

2 Comments
  1. Tim as usual so true. Better quantifiable results for both buyer and seller can be contracted when we focus on best value, not lowest price that meets a minimum criteria.

  2. Johnny Mikkelsen permalink

    Excellent article and I can only agree to the content. The lack of proper understanding of how to engage the market through a business model that focus of value creation is unfortunately missing far too often. I have written a couple of articles covering the same topics and there Are much to be gained through adapting features such as partnerships, relationship management and better business model understanding.
    Regards
    Johnny Mikkelsen

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