Destroying competition

Competitiive bidding lies at the heart of most procurement strategies. In the case of the public sector, it is foundational to  public procurement regulations.

But there is a problem: in many industries, levels of competition are declining and IACCM’s recent cross-jurisdictional study of government procurement found this to be a common theme across the public sector. Without sufficient competiton, does the entire philosophy that underpins current bid and award processes need to be revisited?

What has gone wrong?

There are many factors at play, but fundamentally it is clear that aggressive procurement strategies may yield short-term gain, but ultimately they undermine competition. Globalization created the illusion of endless choice and continuous price reduction. Buyers dispensed with supplier loyalty. They imposed lower prices and increased the levels of supplier risk. Even when agreements were signed, the contract often imposed onerous price reviews and suppliers faced the constant threat of a new bidding round.

In order to survive, suppliers were caught in a curious syndrome. In order to cut operational costs, they had to outsource more and more of their core activities, so while at one level they were trying to resist customer demands, at another they were imposing similar demands on their suppliers. Over time, this has led in many cases to extensive industry consolidation.

Risk transfer is another major issue, especially for the public sector. Once again, governments operate on the principle that they cannot accept ‘sovereign risk’ and therefore seek to impose heavy performance burdens onto their suppliers. In the days when most transactions were for relatively standard products, such risks were manageable. Today, many contracts are for complicated – often highly customized – products and services, where levels of uncertainty are far greater. An inflexible approach to procurement and subsequent contract management means that an increasing number of suppliers simply choose not to bid. Those who do engage face heightened possibilities that they will lose money and emerge with a damaged reputation. Ironically, the fault for failure is rarely clear-cut, so the risk terms that the contract sought to impose are rarely enforceable.

The way ahead

There is still a school of thought within some procurement groups (and politicians) that all the problems are due to greedy or dishonest suppliers. Fortunately, that attitude is declining and there is a growing recognition that supplier selection and management processes require significant reform. As always, revised contract terms seem to be low on the list, but at least conversations have started.

Ultimately, we need a fresh approach from both buyers and sellers. Organizations must work together to reduce the many costs sssociated with today’s highly inefficient trading relationships. Procurement practices and Sales incentives require significant reform. Performance – and related data architectures – must shift focus to monitor and measure outputs and outcomes.

These steps and more lie at the heart of a new IACCM study and report on the commercial practices that must replace the flawed theories of endless competition that have driven us to the challenges we now face.