, , ,

Always Check Those Invoices!

The US Government Department of Justice recently issued a news release.  

“Booz Allen Hamilton Holding Corporation has agreed to pay the United States $377,453,150 to resolve allegations that it violated the False Claims Act by improperly billing commercial and international costs to its government contracts. Booz Allen, which is headquartered in McLean, Virginia, provides a range of management, consulting, and engineering services to the Government, as well as commercial and international customers”.

I do love the precision of the final $150 on that number! Couldn’t they have rounded it slightly?

The accusation was that between 2011 and 2021, the consulting firm charged costs to its government contracts and subcontracts that should instead have been billed to its commercial and international contracts. That particularly applied to some indirect costs. So the government was allegedly paying for activities and services that had nothing to do with the work the firm was actually doing for government organisations.

Now allocating overheads can be a tricky issue, as many of us know. And Booz Allen issued a statement, as you might expect.

“Booz Allen has always believed it acted lawfully and responsibly. It decided to settle this civil inquiry for pragmatic business reasons to avoid the delay, uncertainty, and expense of protracted litigation. The company did not want to engage in what likely would have been a years-long court fight with its largest client, the U.S. government, on an immensely complex matter. The company fully cooperated with the government and is pleased to move forward.”

So there is no admitting liability or guilt here. I can understand why the firm does not want a long, expensive fight – on the other hand, if you were 100% sure of your position, many firms would choose to take it further rather than handing over quite such a large amount of cash.

The most amazing element of this story is this. The investigation was sparked by a whistleblower, a former Booz Allen employee, Sarah Feinberg, who tipped off the authorities about the alleged misconduct from 2011 to 2021. And now she will receive no less than $69,828,832 as a thanks (it’s that precision again…)  

$69.8 million!  Good grief, I’m going to have a good think now about every firm I’ve ever worked for and whether they might have done anything “naughty” in their dealings with the US government …  

The moral of thee story is simple. Check your billing from professional service firms. I once took on a senior interim commercial/procurement role in government with an organisation that had around 100 consultants from one firm working on its major programme. That was £500K A WEEK we were paying this firm (it better be nameless…)  

I took a look at the invoices – incredibly there was no contract manager for this contract – and found that amongst other things, we were being billed for the senior partner’s assistant. The partner was only working about a day a week on our project, but we appeared to be paying a grand a day, every day, for his PA. We were also billed for the whole day for the whole team when I knew they had stopped work at lunchtime for their office Christmas Party! “An unfortunate error” I was told.  I saved £50K with one phone call there…

Of course, if you can structure any professional services assignment on a fixed price basis, most of these issues are avoided. That approach is usually – although not always – better for the buyer and actually arguably for the provider too. That is another question in this Booz Allen example. Why was so much government work being done on what sounds like a pretty loose “time and materials” basis?

/0 Comments/by

Don’t Be a “Bad Negotitor”

As it is the holiday season, here is a short extract from my Bad Buying book rather than a fresh article – taken from the chapter on negotiation.

Nothing Else Matters   

While this is not a “how to negotiate” textbook, let’s just run through a few basics, in the spirit of avoiding failure.  We talked about the BATNA concept earlier, and that broadens out into the importance of planning before face-to-face negotiation. Understand the market, your own situation (including your BATNA) and the other party’s situation too. In addition to that, here are three more vital points to consider; they are relevant to anyone who has to conduct business (or indeed personal) negotiation of any kind.

Don’t take it personally – in business negotiations, don’t get hung up on the people involved, your personal pride or status (as in my Charlie Hurley story).  Look on this as two parties coming together to solve a business problem; i.e. reaching a satisfactory agreement for the purchase. You can be tough, but you should never be personally abusive or insulting. And in business, very few negotiations are pure one-off bartering. It’s not like buying a carpet in the souk, where you will never see the trader again in your life. In business, you tend to work with people after the contract is agreed, and you may well need their support at some point. If you called their CEO a “fu****g idiot” during the negotiation, you can guess how they will respond if you need their help later!

Be creative – the classic task in negotiation courses is to ask two people to share an orange “fairly”. They end up halving it, of course. But if one really wants the orange for the zest (which comes from the skin) and the other wants the juice… then both can have, in effect, the whole orange. Understand what the other party really wants and think about options and creative ideas for the negotiation. One trick is to find aspects that the other party values more than you, that you can trade for benefits you do care about. For instance,  suppliers often value highly your endorsement or being able to use your organisation as a reference when they’re trying to win other contracts. That costs you nothing – but has a value to them. You can trade that for a longer warranty period, better payment terms, maybe even a price reduction. Or if your organisation is cash-rich, very prompt payment may be worth a lot to a cash-starved supplier.

Try to be objective – determining what is a “fair price” is rarely easy. But if you have evidence, your negotiation will be smoother and more successful. “Your price is too high” might work fine as a negotiation stance. But “I’ve benchmarked your price against two databases, done my own analysis of what I think it costs to make this product, and I’ve got prices from two competitors. I do want to work with you, but all of that suggests you are still 20% above a fair market price” is much more powerful.

Negotiation is a fascinating topic, and as well as the classic books, I’d recommend looking at the latest thinking in behavioural psychology from Nobel Prize winner Daniel Kahneman and others, in books such as Thinking Fast and Slow[1]. Their work has increased understanding of how issues such as priming and anchoring affect our negotiations.  I was taught years ago that the first offer in a negotiation could set the tone – so if a realistic price might be around £100, offering just £50 might reset the seller’s expectations. I always had my doubts about this, as you can look stupid if you make a really unfeasibly low offer. But the psychology of “priming effects” suggests there may well be something in this tactic after all, if used appropriately.

[1] https://www.penguin.co.uk/books/563/56314/thinking–fast-and-slow/9780141033570.html

/0 Comments/by
, ,

Support to Disadvantaged Suppliers Attracts Fraudsters

Programmes to support minority owned businesses, smaller firms, social enterprises and the like via public sector procurement have become increasingly popular over recent years in many countries. The Social Value Act in the UK in 2012 made this sort of action more prevalent in the UK, but the USA is probably where such schemes are longest established.

However, the irony is that the more successful such programmes are in terms of actually directing spend towards such suppliers, the greater the temptation for fraud and corruption to spring up. Genuine firms that need support might lose out to unscrupulous criminals and conmen/women.

One mechanism for that is basically using what we might call “non-value for money” evaluation criteria to award contracts to a supplier that doesn’t really deserve them. That can lead to distortion in the selection of winning bidders. “This firm’s bid wasn’t the cheapest but they are a small firm / owned by a women / promise to employ lots of disabled local people. That gave them lots of marks for “social value” in the bid evaluation”.  What isn’t made public is that the firm is also owned by the budget holder or decision maker’s sister-in-law.

The other quite common fraud is where a firm is apparently owned by a person or people who qualify as a “minority” but in fact, control rests with non-minority owners. We have seen that a lot in the USA and also in countries such as South Africa which have had schemes to give preference to black-owned businesses in public procurement.  I gave several examples of this in the Bad Buying book from both of those countries.

But this is still going on – a recent report in the Chicago Tribune highlighted a current case. It is not clear yet which of those two mechanisms is suspected here; is it disguised ownership or the use of minority programmes to favour a firm for improper reasons?  But federal prosecutors are “investigating possible minority-contracting fraud involving a series of Chicago government contracts worth hundreds of millions of dollars, including many with ties to a clout-heavy trucking and recycling company owner, according to sources and documents obtained by the Tribune”.

James Bracken and his wide Kelly own several companies engaged in construction, waste management and transportation. Investigators have asked city agencies for copies of bid documents and more relating to several contracts and for information relating to the city’s women and minority owned “set aside” programmes.

The programmes started in 1990 with the aim of awarding at least 25% of the total value of all city contracts to minority businesses and 5% to women-owned operations. But there have been accusations of fraud from the beginning. Company owners, chasing multimillion-dollar contracts, have put up phony “frontpeople” to get certified as minority or women-owned. Another route is to claim that a high percentage of work will got to minority subcontractors. In my experience, that is the sort of claim that rarely gets checked once a contract is operational!

A lot of this comes down to procurement carrying out the appropriate due diligence and checking out firms at the bidding stage, managing contracts well once they are operational, and of course keeping an eye out for conflicts of interest and other potential drivers of corruption. It is a constant battle between the forces of good (procurement, usually) and evil (certain dodgy potential suppliers and general low-life scum!)

/0 Comments/by

2022 – How Was It For You, CIPS?

The Chartered Institute of Procurement and Supply (CIPS) has had a troubled couple of years. We saw major arguments about changes to governance, then implementation of a new Oracle technology platform to manage membership, exam bookings, events – pretty much everything really – has been a disaster. The CEO, Malcolm Harrison, left at the end of March in circumstances that weren’t altogether happy, I understand. The Institute did manage to publish its accounts on time, and you can now examine the document on the Charities Commission website here. They run up to October 31st, 2022, so we’re already two-thirds of the way though the subsequent financial year.

The headlines – CIPS Group turnover in FY22 was £30.2 million with net income of £2.4 million before investments and pension scheme movements. The turnover was below budget expectations, but still represents an increase 11% above FY21, and operating profit was above budget despite the revenue shortfall. Reserves were down on plan but not dangerously low.  

There are a number of wider points of interest in the report. I liked the focus on volunteers; I don’t think I have ever seen information provided before on number of volunteers, where they are and so on. The report is pretty honest about the problems caused by the system failure; there is talk of staff having to go above and beyond to keep the show on the road, workarounds and more.  But the report makes this claim.

“A programme is now in place to resolve the issues with the platform and to remove all workarounds. However the impacts have been significant with membership, exam bookings, revenue and profits all being negatively impacted.”  But clearly the issues were not resolved by the end of March when Harrison went – I’m not convinced all is sorted even now in July.   

But there is no simple number provided in terms of what the programme has cost or what more it might still cost to get the platform up and running.  However, there is a table that gives figures for “Intangible Fixed Assets. “Assets under development” stood at £4.9 million in November 21 and a further £2.6 million was spent in 2022. The assets under development were “brought into use” during 2022 – if all of this was the new platform, that means some £7.5 million had been spent by November 22.

Maybe some of this was other development though, but it is not clear. I was told a while ago that the budget was in the £5-6 million area so this would represent a major overspend by last November, with more since then. We’ll have to see what the number is in this year’s accounts, and maybe next year’s too! But it seems quite possible that CIPS will end up spending the best part of £10 million.

There have been other impacts too driven by these problems. MCIPS membership is down some 700 on the year, and the blame for that is put at the door of the system. Examinations revenue was up, although there was also mention of system issues there, so maybe it should have been even better. Some of the impact is not really financial but still matters. Talking to a Fellow the other day, it is clear that the issues have made even organising basic events much more difficult. The Fellows group has been one of the success stories of recent years; it would be a shame if it lost momentum simply because of a technical issue.

Looking at those membership numbers, and where revenue comes from, I think it is fair to say that CIPS is no longer primarily a membership organisation. Its two “core businesses” are student education and examinations; and corporate training and development. In terms of the latter, CIPS does not say how much of that revenue comes now from NGOs, governments and charities who provide grants to CIPS to help develop procurement in the developing world. The Bill Gates Foundation is mentioned, and the work in the health system in Africa sounds very worthwhile. Such revenue is not reliable year after year of course, but my feeling is once you get a decent reputation, there are a lot of funds out there for delivering these “good works”.

But 17,000 MCIPS members means membership fee revenue of around £4 million, only some 13% of total revenues. And it is hard to see that growing much, to be honest. As I’ve said before, so much of what used to be the CIPS membership proposition is now replicated by other organisations, from Procurious to the Sustainable Procurement Pledge, by tech and consulting firms or even by individual “influencers” in the profession, who together provide a huge among of insight, IP, networking opportunities and more – free of charge. Why pay CIPS if that is what you value?

So – wild idea – maybe CIPS should make membership free?

You would still need to do the exams or go through a rigorous non-examination route to get your MCIPS, but the “affiliate” status could be developed further for those who don’t want that. And just think how much more the CIPS membership list would be “worth” if it was five times the size it is now!  CIPS also needs to get better at working with software firms, consultancies etc – there is a lot more potential revenue there if CIPS gets its act together. But an expanded membership list would be a huge benefit.  And the credibility CIPS has in terms of winning corporate work or NGO and charity funded projects would also be far greater with more members.

The alternative is for MCIPS numbers to stagnate at best, and the organisation becomes that training and education body as I suggested earlier, with more and more focus on Africa and the Middle East  in the main.  But there are issues with the overseas approach too; the US was a disaster last year, losing over £230K after revenues fell and costs rose quite dramatically.  I’m also not totally sure about the ethics of doing so much work in Saudi Arabia. I guess our government and our football clubs don’t worry too much about that so there is no reason why CIPS should. 

In summary; CIPS had a difficult year, but to be clear, it is not about to go bust. However, the new system has cost millions more than planned and has caused other problems. Some of the overseas operations also look problematical. There is a new Chair and a new CEO (who has solid IT and procurement experience but has never run a business or a P&L before) just getting their feet under the table.  Core membership is static or declining, but education and training activities are going pretty well, with grant funded work in particular showing a lot of potential.

I gave up my membership last year after the governance shambles – but I wish the Institute well and hope 2023 proves a better year than 2022. I suspect some innovative thinking is necessary though.

/0 Comments/by
,

Why Isn’t Competition Working in the UK Petrol Market?

Why are prices so high in many countries, including the UK? Global forces and events are part of it, but there is increasing evidence that firms providing goods and services are increasing profit margins at the expense of the consumer. This week’s report on petrol prices in the UK from the Competition and Markets Authority (CMA) was an example of this. Calculations show that margins have increased over the last three years and we are all being ripped off to the tune of some 6p per litre. Competition was “not working as well as it should be” said the CMA.

But surely, in a dynamic, capitalist society, excess profits leads to new market entrants, who compete on price and undercut the current providers, whilst still making an adequate return?  The economists would agree that this is the case – but only in a perfect market. And you need certain conditions for that, including that it must be reasonably easy for new entrants to establish themselves.

That is the problem here and in many other markets. For a number of reasons, there are so many things we all buy where we just don’t see real, strong competition, because it is almost impossible for new entrants to break into a market.  Look at petrol retailing. Finding new sites and getting planning permission would be a nightmare. The capital cost of building the premises would be huge, with all the legislation (quite rightly) around petrol storage and handling adding to the burden.

Look at how difficult it has proved for new retail banks to break into a market still dominated by firms that have been around for centuries – even though most consumers don’t rate those providers very highly.  We haven’t had any new supermarket chains in the UK for some 30 years now since Aldi and Lidl (who were already long established elsewhere) started here. Again, the barriers to entry, from planning issues to up-front cost, as well as the financial power of the incumbent firms, all make it very tough.

So we have the cost of entering a market, legislative burdens and incumbent power as key barriers to entry. Geography is another; I’m not going to drive another 10km each way to buy slightly cheaper petrol, and lose all my “savings” on the extra mileage!

But particularly when we come back to corporate procurement, some of the market dominance we see has been caused in apart by the actions of customers and indeed of procurement professionals. I gave five examples of the ways in which this happens in terms of corporate procurement in the Bad Buying book. Here are the first two.

1. Buyers aggressively aggregate their own spend, believing they’ll get better deals if they offer bigger contracts – until in some industries, only the largest can meet our needs. Buyers might insist that suppliers must service every office or factory across the US, or Europe. Smaller firms and start-ups, who often offer real innovation, flexibility and service, are shut out of the market.
Buyers assume economies of scale, that “bigger is better” and bigger deals mean lower prices. But that is not necessarily true; the price curve may flatten after a certain volume, with further increases in volume not generating any further price reduction. There are even cases where you  see dis-economies of scale – the buyer pays more as the they spend more.


2. Buyers value consistency above innovation and experimentation. At times, you should value tried and tested solutions over exciting new ideas. “Ladies and gentlemen, welcome to the flight, this is the very first plane to be fitted with an exciting new automatic pilot system, and we will be turning it on once we’re airborne”.  You might not want to hear that!
But take caution too far, and you help create markets dominated by a few large suppliers, with increased risk of buyers suffering from dependence. That’s relevant in private firms and perhaps more so in government, where risk aversion from employees and politicians means companies get into dominant positions because buyers “know” they’re a safe choice. That doesn’t always work out – Serco and Capita seemed to be safe for major UK government work, until both ran into severe financial difficulties. More willingness to engage with other initially smaller suppliers over the years could have created a more dynamic market.

Whilst we may not be able to do anything much personally about the supermarkets dominance of the petrol (and groceries) markets, we can take actions to mitigate the risk that we accidentally help to create monopolies or oligopolies in our business (procurement) lives. We should aways be thinking about how we can contribute to dynamic, competitive markets, with new entrants regularly arriving to put pressure on established firms. That’s the healthy situation that we should hope for and work towards where we can.

/0 Comments/by