Walter Stark is principal of Reassign an independent procurement consultancy based in Melbourne Australia. Reassign is a firm of former career salespeople now working with financial decision makers to improve their businesses through the optimisation of the procurement function.
Post GFC, international procurement became a welcome contributor to corporate profits revelling in the upcycle it has long aspired to. Populated by a growing army of graduate practitioners and led by senior executives with a seat at the table, procurement is full of prize fighter self-importance. If you’re in doubt about that, just ask them! But be sure to also ask their supplier counterparts and soon the old adage ‘self-praise is no praise at all’ might come to mind.
Despite the veneer, procurement maturity is still very much under question, notably in the indirect space. Direct fares better, but people involved in the acquisition of organisational goods and services continue to make fundamental mistakes, particularly when dealing with anything that’s not straightforward.
Evidence of this exists in two essential components;
- The Interpretation of Value
- Bid Evaluation
First let’s consider what things look like from the standpoint of interested observers from the inside and the outside. For this we cite a prominent Government watchdog’s survey of people involved in procurement, including suppliers, all of whom responded with a surprising degree of cynicism.
In a June 2016 survey, the Independent Broad-based Anti-Corruption Commission (IBAC) in the State of Victoria Australia reported that corruption is perceived to be rife in public sector procurement. The four main segments identified to be a problem by those who have worked in these areas are shown in Figure 1.
Including Construction, which is concerned mainly with direct procurement, the perception of corruption in the procurement process is at face value, disturbing. These are big numbers, and whilst they represent perceptions and not actual instances of corruption, at very least they point to ingrained mistrust in the application of the rules.
The report states that (Government) agencies must be able to attract quality bids from the best suppliers of goods and services in order to provide best value for money.
In IBAC’s view “...corruption can undermine a procurement process by causing suppliers to alter their approach to government procurement, to the detriment of the public interest. This could include seeking favourable treatment, inappropriately offering or being pressured to provide gifts and benefits, or simply deciding not to bid for work because of lack of confidence in the soundness of the procurement process” It goes on to say that procurement is vulnerable to corruption at various stages including the bidding process, the selection of service providers, deliveries, payments and contract management.
Is Procurement Really Corrupt..?
Our view derived from eight years’ experience working in procurement and as sales executives for the preceding three decades, is that observers and participants are not witnessing endemic corruption but rather the misguided practices of operatives at all levels who follow largely subjective and highly interpretative processes that are wide open to personal prejudice. Couple this with the absence of procedural scrutiny (audits happen after the fact and can be manipulated) and many decisions are driven purely by self-interest. From the outside this certainly smacks of corruption, but from what we see inside, it is better characterised as dangerous complacency. Any way you cut it, this is not good for business.
Getting back to the two essential components Value and Bid Evaluations;
The Victorian Government’s primary procurement policy directive is the consideration of Value for Money which it describes as “A balanced judgement of a range of financial and non-financial factors, taking into account the mix of quality, cost and resources; fitness for purpose; total cost of ownership; and risk” This aspiration goes largely unfulfilled because it may not be compatible with Government’s own policies and procedures and is therefore not immune from unscrupulous interpretation. The danger is that true value-based offers can be ignored resulting in the perception of corruption.
Value is difficult to express, even more difficult to objectively evaluate. To optimise value, countries like Japan limit the use of formal requests for Tender and Proposals in their procurement methods. Outcomes are planned, suppliers are partnered and commercial arrangements are agreed between mature buyers and equally mature sellers. This way, value can be derived for both parties. Here value is not buyer centric, it is shared proportionately with the supplier in much the same way that risk is borne by both.
Why is the Perception of Corruption so Prevalent?
Imagine being a prospective supplier watching a tender unfold where you ‘know’ what you have offered is unlikely to be beaten. When you’re told that your competitor provided better value, given how poorly most procurement teams communicate, it’s not going to sound good. So, when you consider how you lost the business with the best response, a logical conclusion is that a corrupt decision must have been made. This is a non-sequitur. We have observed a more probable and slightly less sinister reason than blatant corruption - commercial immaturity. Faced with complexity beyond their abilities, procurement people tend to seek out easier, safer (albeit incorrect) decisions that, subject to scrutiny, are difficult to justify. Compound this with poor supplier communications and the avoidance of tough conversations, and you can start to appreciate what is actually happening.
Evaluations come in many shapes and sizes with prescribed methods for arriving at the right decision. In determining outcomes in commodity supply categories, organisations often do have the ability to evaluate, but in the absence of clear evaluable pricing and when asked to interpret ‘Value’ and not only price, the task becomes much more demanding.
We recently observed a number of senior stakeholders trying to agree on weighting certain response criteria prior to a Tender evaluation. The group was considering the value of Corporate Social Responsibility in the overall outcome. Following a long and emphatic discussion about the importance of CSR, it was deemed ‘very’ important, then amazingly only 5% of the available score was apportioned. Given that CSR had very little opportunity to influence the outcome, this was nonsensical. The group then went on to quickly allocate 50% of the available score to price. The message to suppliers; good luck submitting the best price if you’ve invested heavily in CSR !
Outcomes are certainly being reached, but in truth they are no more than cost-based determinations masquerading as ‘Best Value’ decisions. A common approach in the public sector which avoids the issue of value, is to set up supplier panels. This appeals to the lower ranks of procurement who get a significant, if slightly restricted, choice yet retain the authority to select suppliers without even considering value.
What do the Experts Say?
Information provided by CIPS on the subject of value for money in evaluations states; “A challenge of Best Value is to develop marketplaces to take advantage of contemporary advances in relationship thinking and e-commerce. Stakeholders, such as suppliers and service providers, need to embrace other issues like equal opportunities, e-commerce, true partnering and economic development of a local area, in order to support Best Value”
This is one of many points designed to educate the Procurement function by urging it to incorporate these factors into evaluations. Really? How can this stuff be properly assessed and by whom..? The reality is that the more elaborate the description of value, the harder it becomes to evaluate. Not only does the complexity of evaluations (even when supported by expert advice) fuel poor practice, it evidently leaves potential suppliers confused and unsatisfied about how decisions are made and worse, why they were not selected, which can be construed as corruption. Add to this poor and sometimes non-existent post-tender interviews and it is understandable that so many respond negatively when surveyed.
What can be Done about the Perception of Corruption?
The unpleasant reality is that if the overwhelming majority of participants and onlookers perceive widespread corruption, they see us in the procurement community as corrupt. We must therefore ensure that processes are workable, well communicated and trustworthy. Above all we must be diligent in recognising and preventing immature or reckless actions in our own ranks that fuel the fire of perception.
In and of itself, corruption is not a prosecutable offence, but in procurement it’s an unwelcome indictment that persists despite the strict policy framework surrounding this highly regulated environment. As foreboding as the statistics would have us believe, our considered opinion is that corruption, the elephant in the procurement room, is a baby one.
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